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 March 31, 1998 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 March 31, 1998. 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 nine months ended March 31, ended March 31, 1998 1997 1998 1997 Net sales $58,951 $55,336 $182,510 $165,581 Cost of goods sold 26,702 33,440 84,774 84,763 32,249 21,896 97,736 80,818 Selling expense 20,264 20,114 60,647 61,038 General and administrative expenses 1,918 1,853 5,993 5,501 22,182 21,967 66,640 66,539 Income from operations 10,067 (71) 31,096 14,279 Other income: Dividend income 637 633 1,959 1,978 Interest income 2,066 1,685 5,879 4,823 Other, net 597 550 1,116 951 3,300 2,868 8,954 7,752 Income before taxes 13,367 2,797 40,050 22,031 Income taxes 5,347 1,202 16,020 8,943 Net income $ 8,020 $ 1,595 $ 24,030 $ 13,088 Net income per share $4.16 $.83 $12.47 $6.79 The accompanying notes are an integral part of these financial statements. FARMER BROS. CO. CONSOLIDATED BALANCE SHEETS (Unaudited) March 31, June 30, 1998 1997 ASSETS Current assets: Cash and cash equivalents $ 11,040 $ 34,174 Short term investments 112,814 77,791 Accounts and notes receivable, net 19,184 18,401 Inventories 36,962 35,176 Income tax receivable 97 2,216 Deferred income taxes 1,804 1,804 Prepaid expenses and other 1,433 784 Total current assets 183,334 170,346 Property, plant and equipment, net 30,803 32,526 Notes receivable 2,977 2,977 Long term investments, net 59,774 51,341 Other assets 19,006 18,035 Deferred taxes 1,376 1,624 Total assets $297,270 $276,849 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,830 $ 7,510 Accrued payroll expenses 4,739 4,247 Other 5,552 4,623 Total current liabilities 15,121 16,380 Accrued postretirement benefits 15,416 14,347 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 263,278 242,907 Investment valuation allowance 961 721 Total shareholders' equity 266,733 246,122 Total liabilities and shareholders' equity $297,270 $276,849 The accompanying notes are an integral part of these financial statements. FARMER BROS. CO. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the nine months ended March 31, 1998 1997 Cash flows from operating activities: Net Income $ 24,030 $ 13,088 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 3,634 3,370 Other (87) (80) Net (gain) on investments (751) (521) Change in assets and liabilities: Accounts and notes receivable 796 (935) Inventories (1,786) 1,709 Income tax receivable 2,119 1,000 Prepaid expenses and other assets (1,661) (3,573) Accounts payable (2,679) 7,590 Accrued payroll expenses and other liabilities 1,421 (188) Other long term liabilities 1,069 743 Total adjustments 2,075 9,115 Net cash provided by operating activities $ 26,105 $ 22,203 The accompanying notes are an integral part of these financial statements. FARMER BROS. CO CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited) For the nine months ended March 31, 1998 1997 Net cash provided by operating activities: $ 26,105 $ 22,203 Cash flows from investing activities: Purchases of property, plant and equipment (1,935) (3,299) Proceeds from sales of property, plant and equipment 150 134 Purchases of investments (329,455) (303,503) Proceeds from sales of investments 287,240 320,028 Notes issued (1,608) - Notes repaid 29 30 Net cash (used in)provided by investing activities (45,579) 13,390 Cash flows from financing activities: Dividends paid (3,660) (3,467) Net cash used in financing activities (3,660) (3,467) Net increase (decrease) in cash and cash equivalents (23,134) 32,126 Cash and cash equivalents at beginning of period 34,174 28,165 Cash and cash equivalents at end of quarter $ 11,040 $ 60,291 Supplemental disclosure of cash flow information: Income tax payments $ 13,042 $ 12,507 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 March 31, 1998 and June 30, 1997, respectively. (In thousands) Gross Gross Unrealized Unrealized Fair March 31, 1998 Cost Loss Gain Value Current Assets Commercial Paper $ 76,180 490 $ 76,670 U.S. Government Obligations 36,187 (44) 1 36,144 $112,367 (44) 491 $112,814 Non-Current Assets U.S. Government Obligations $ 14,445 (123) 1 $ 14,323 Other debt 1,695 (51) - 1,644 Preferred stocks 36,624 (66) 3,618 40,176 Liquid asset fund and other 3,541 - 90 3,631 $ 56,305 (240) 3,709 $ 59,774 (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: Fair Value Maturities 03/31/98 06/30/97 (In thousands) Within 1 year $112,814 $ 77,791 After 1 year through 5 years 15,967 10,284 $128,781 $ 88,075 Gross realized gain from available for sale securities were $751,000 and $521,000 at March 31, 1998 and 1997, respectively. C. Inventories (In thousands) Processed Unprocessed Total March 31, 1998 Coffee $ 3,926 $ 9,114 $13,040 Allied products 11,012 5,650 16,662 Coffee brewing equipment 2,378 4,882 7,260 $17,316 $19,646 $36,962 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 Green coffee continues its volatile price fluctuaions. During the third quarter of fiscal 1997 the cost of green coffee increased by more than 60%. During the same quarter of fiscal 1998, the cost of green coffee declined about 11%. Higher roast coffee prices and improved profit margins in the most recent quarter, and indeed for fiscal 1998, should be considered together with price action of fiscal 1997. When green coffee costs rise, Registrant is often unable to maintain profit margins even with higher sales prices of roast coffee. A declining market for green cofee allows return of margins to more normal levels. There is no assurance, however that current margins can be maintained. Competitive forces tend to make price competition a reality and the frost season in coffee growing areas in Brazil begins near the end of May and continues through July, introducing additional volatility into green coffee prices. Net sales for the third quarter of fiscal 1998 increased 6.5% to $58,951,000 from $55,336,000 in the same quarter in the prior fiscal year. Net sales for the first nine months of fiscal 1998 increased 10.2% to $182,510,000 from $165,581,000 in the same period of fiscal 1997. Gross profit in the third quarter increased 47.3% to $32,249,000 or 54.7% of sales, compared to $21,896,000 or 39.6% of sales in fiscal 1997. Operating expenses increased 1% to $22,182,000 in the third quarter as compared to $21,967,000 in the same period of the prior fiscal year. Income after taxes for the three months ended March 31, 1998, reached $8,020,000, or Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued $4.16 per share, as compared to $1,595,000 or $0.83 per share in the same quarter of fiscal 1997. Nine month income for fiscal 1998 reached $24,030,000 or $12.47 per share as compared to $13,088,000 or $6.79 per share in the same period of the prior year. Quarterly Summary of Results (in thousands of dollars) 03/31/97 06/30/97 09/30/97 12/31/97 03/31/98 Net sales 55,336 59,221 59,497 64,062 58,951 Gross profit 21,896 26,974 29,326 36,161 32,249 Operating income (71) 2,510 7,652 13,377 10,067 Net income 1,595 3,602 6,228 9,782 8,020 (as a percentage of sales) 03/31/97 06/30/97 09/30/97 12/31/97 03/31/98 Net sales 100.00 100.00 100.00 100.00 100.00 Gross profit 39.57 45.55 49.29 56.45 54.70 Operating income (.13) 4.24 12.86 20.88 17.08 Net income 2.88 6.08 10.47 10.05 13.60 (in dollars) 03/31/97 06/30/97 09/30/97 12/31/97 03/31/98 EPS .83 1.86 3.23 5.08 4.16 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 none. security holders. 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. PART II OTHER INFORMATION, (CONTINUED) (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 not applicable. 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: May 14, 1998 FARMER BROS. CO. (Registrant) John E. Simmons John E. Simmons Treasurer and Chief Financial Officer