SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended December 31, 1997 Commission file number 0-1375 FARMER BROS. CO. California 95-0725980 State of Incorporation Federal ID Number 20333 S. Normandie Avenue, Torrance, California 90502 Registrant's Address Zip (310) 787-5200 Registrant's telephone number Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Number of shares of Common Stock outstanding: 1,926,414 as of December 31, 1997. PAGE 1 OF 9 PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Dollars in thousands, except per share data) FARMER BROS. CO. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the three months For the six months ended December 31, ended December 31, 1997 1996 1997 1996 Net sales $64,062 $57,460 $123,559 $110,245 Cost of goods sold 27,901 25,954 58,072 51,323 36,161 31,506 65,487 58,922 Selling expense 20,628 20,743 40,383 40,924 General and administrative expenses 2,156 2,130 4,075 3,648 22,784 22,873 44,458 44,572 Income from operations 13,377 8,633 21,029 14,350 Other income: Dividend income 664 659 1,322 1,345 Interest income 1,971 1,694 3,813 3,138 Other, net 206 261 519 401 2,841 2,614 5,654 4,884 Income before taxes 16,218 11,247 26,683 19,234 Income taxes 6,436 4,413 10,673 7,741 Net income $ 9,782 $ 6,834 $ 16,010 $ 11,493 Net income per share $5.08 $3.55 $8.31 $5.97 The accompanying notes are an integral part of these financial statements. FARMER BROS. CO. CONSOLIDATED BALANCE SHEETS (Unaudited) December 31, June 30, 1997 1997 ASSETS Current assets: Cash and cash equivalents $ 17,183 $ 34,174 Short term investments 104,447 77,791 Accounts and notes receivable, net 22,024 18,401 Inventories 35,707 35,176 Income tax receivable 97 2,216 Deferred income taxes 1,804 1,804 Prepaid expenses and other 1,520 784 Total current assets 182,782 170,346 Property, plant and equipment, net 30,841 32,526 Notes receivable 2,977 2,977 Long term investments, net 57,394 51,341 Other assets 18,623 18,035 Deferred taxes 1,465 1,624 Total assets $294,082 $276,849 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,440 $ 7,510 Accrued payroll expenses 4,462 4,247 Other 7,347 4,623 Total current liabilities 19,249 16,380 Accrued postretirement benefits 15,065 14,347 Commitments and contingencies - - Shareholders' equity: Common stock, $1.00 par value, authorized 3,000,000 shares; issued and outstanding 1,926,414 shares 1,926 1,926 Additional paid-in capital 568 568 Retained earnings 256,509 242,907 Investment valuation allowance 765 721 Total shareholders' equity 259,768 246,122 Total liabilities and shareholders' equity $294,082 $276,849 The accompanying notes are an integral part of these financial statements. FARMER BROS. CO. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the six months ended December 31, 1997 1996 Cash flows from operating activities: Net Income $ 16,010 $ 11,493 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,679 2,858 Other (35) (60) Net loss on investments (279) (128) Change in assets and liabilities: Accounts and notes receivable (2,592) 1,177 Inventories (531) 1,867 Income tax receivable 2,119 1,000 Prepaid expenses and other assets (1,346) (504) Accounts payable (69) 4,304 Accrued payroll expenses and other liabilities 2,938 (263) Other long term liabilities 718 536 Total adjustments $ 3,602 $ 10,787 Net cash provided by operating activities $ 19,612 $ 22,280 The accompanying notes are an integral part of these financial statements. FARMER BROS. CO CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited) For the six months ended December 31, 1997 1996 Net cash provided by operating activities: $ 19,612 $22,280 Cash flows from investing activities: Purchases of property, plant and equipment (1,026) (2,527) Proceeds from sales of property, plant and equipment 88 92 Purchases of investments (187,662) (195,863) Proceeds from sales of investments 155,436 194,900 Notes issued (1,052) - Notes repaid 21 20 Net cash (used in) investing activities (34,195) (3,378) Cash flows from financing activities: Dividends paid (2,408) (2,312) Net cash used in financing activities (2,408) (2,312) Net (decrease) increase in cash and cash equivalents (16,991) 16,590 Cash and cash equivalents at beginning of year 34,174 28,165 Cash and cash equivalents at end of quarter $17,183 $44,755 Supplemental disclosure of cash flow information: Income tax payments $ 5,830 $ 8,196 The accompanying notes are an integral part of these financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) A. Unaudited Financial Statements The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. It is Management's opinion that all adjustments of a normal recurring nature necessary for a fair statement of the results of operations for the interim periods have been made. B. Investments The Company hedges interest rate risk in its portfolio of preferred stock. Deferred losses associated with the hedge are $2,639,000 and $1,081,000 at December 31, 1997 and June 30, 1997, respectively. (In thousands) Gross Gross Unrealized Unrealized Fair December 31, 1997 Cost Loss Gain Value Current Assets Commercial Paper $ 34,802 - 261 $ 35,063 U.S. Government Obligations 69,548 (178) 14 69,384 $104,350 (178) 275 $104,447 Non-Current Assets U.S. Government Obligations $ 13,139 (172) - $ 12,967 Other debt 1,695 (43) - 1,652 Preferred stocks 35,537 (29) 4,181 39,689 Liquid asset fund and other 3,373 (316) 29 3,086 $ 53,744 (560) 4,210 $ 57,394 (In thousands) Gross Gross Unrealized Unrealized Fair June 30, 1997 Cost Loss Gain Value Current Assets Commercial Paper $ 14,814 - 129 $ 14,943 U.S. Government Obligations 63,059 (211) - 62,848 $ 77,873 (211) 129 $ 77,791 Non-Current Assets U.S. Government Obligations $ 10,453 (169) - $ 10,284 Preferred stocks 36,816 (22) 2,574 39,368 Liquid asset fund and other 1,689 - - 1,689 $ 48,958 (191) 2,574 $ 51,341 B. Investments, CONTINUED The contractual maturities of debt securities classified as current and non- current available for sale are as follows: (In thousands) Fair Value Maturities 12/31/97 06/30/97 Within 1 year $104,447 $ 77,791 After 1 year through 5 years 14,619 10,284 $119,066 $ 88,075 Gross realized gain from available for sale securities were $279,000 and $128,000 at December 31, 1997 and 1996, respectively. C. Inventories (In thousands) Processed Unprocessed Total December 31, 1997 Coffee $ 3,979 $ 8,984 $12,963 Allied products 10,100 5,361 15,461 Coffee brewing equipment 2,404 4,879 7,283 $16,483 $19,224 $35,707 June 30, 1997 Coffee $ 3,564 $10,024 $13,588 Allied products 10,551 3,794 14,345 Coffee brewing equipment 2,310 4,933 7,243 $16,425 $18,751 $35,176 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Higher green coffee costs and the resulting higher sales prices of roast coffee continue to effect Registrant's operating results. Improved gross profit in the most recent quarter signals a return to more normal profit margins during fiscal 1998. The Company makes every effort to provide competitive product pricing, and even with stable operating expenses it is not known whether such operating margins can be maintained. Net sales for the second quarter of fiscal 1998 increased 11% to $64,062,000 from $57,460,000 in the same quarter of the prior fiscal year. Net sales for the first half of fiscal 1998 increased 12% to $123,559,000 from $110,245,000 in the first half of fiscal 1997. Gross profit in the second quarter increased 15% to $36,161,000 or 56% of sales, as compared to $31,506,000, or 55% of sales, in the same quarter of fiscal 1997. Gross profit for the first half of fiscal 1998 increased 11% to $65,487,000 from $58,922,000 during the same period of the prior fiscal year. Operating expenses decreased 1% to $22,784,000 in the second quarter of fiscal 1998 as compared to $22,873,000 in the second quarter of fiscal 1997. Operating expenses for the first half of fiscal 1998 decreased to $44,458,000 from $44,572,000 during the same period of fiscal 1997. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, CONTINUED Income after taxes for the three months ended December 31, 1997, reached $9,782,000, or $5.08 per share, as compared to $6,228,000, or $3.23 per share, in the first quarter of fiscal 1998 and $6,834,000, or $3.55 per share, in the same quarter of fiscal 1997. Net income for the first half of fiscal 1998 reached $16,010,000, or $8.31 per share, as compared to $11,493,000, or $5.97 per share, in the first six months of fiscal 1997. Quarterly Summary of Results (In thousands) 12/31/96 03/31/97 06/30/97 09/30/97 12/31/97 Net sales 57,460 55,336 59,221 59,497 64,062 Gross profit 31,506 21,896 29,974 29,326 36,161 Operating income 8,633 (71) 2,510 7,652 13,377 Net income 6,834 1,595 3,602 6,228 9,782 (As a percentage of sales) 12/31/96 03/31/97 06/30/97 09/30/97 12/31/97 Net sales 100.00 100.00 100.00 100.00 100.00 Gross profit 54.83 39.57 45.55 49.29 56.45 Operating income 15.02 (.13) 4.24 12.86 20.88 Net income 11.89 2.88 6.08 10.47 10.05 (In dollars) 12/31/96 03/31/97 06/30/97 09/30/97 12/31/97 EPS 3.55 .83 1.86 3.23 5.08 PART II OTHER INFORMATION Item 1. Legal proceedings. not applicable. Item 2. Changes in securities. none. Item 3. Defaults upon senior securities. none. Item 4. Submission of matters to a vote of security holders. The Annual Meeting of Shareholders of Farmer Bros. Co. was held on December 2, 1997. Holders of the Company's common stock were entitled to one vote per share of common stock held. Six directors were elected at the meeting, each to serve for the coming year and until any successors are elected and qualify. The following persons were elected as directors: Roy F. Farmer, Roy E. Farmer, Catherine E. Crowe, Lewis A. Coffman, Guenter W. Berger and John M. Anglin. There were 1,677,818 shares for election and 11,000 shares against. PART II OTHER INFORMATION, (CONTINUED) The proposal to appoint Ernst & Young LLP as the independent accountants for the Company for the year ended June 30, 1998 was approved with 1,688,379 shares in favor of the resolution, 211 shares against and 228 shares abstaining. Item 5. Other information. none. Item 6. Exhibits and reports on Form 8-K. (a) Exhibits. (2) Plan of acquisition, reorganization, arrangement, liquidation or succession not applicable. (4) Instruments defining the rights of security holders, including indentures. not applicable. (11) Statement re computation of per share earnings. not applicable. (15) Letter re unaudited interim financial information. not applicable. (18) Letter re change in accounting principles. not applicable. (19) Report furnished to security holders not applicable. (22) Published report regarding matters submitted to vote of security holders. not applicable. (23) Consents of experts and counsel. not applicable. (24) Power of attorney. not applicable. (27) Financial Data Schedule See attached Form EX-27. (99) Additional exhibits. not applicable. (b) Reports on Form 8-K none. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: February 11, 1998 FARMER BROS. CO. (Registrant) John E. Simmons John E. Simmons Treasurer and Chief Financial Officer