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 September 30, 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 September
30, 1998.
PAGE 1 OF 11
<PAGE>
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
ended September 30,
1998 1997
Net sales $54,035 $59,497
Cost of goods sold 22,920 30,171
31,115 29,326
Selling expense 19,914 19,755
General and administrative
expenses 1,880 1,919
21,794 21,674
Income from operations 9,321 7,652
Other income:
Dividend income 605 658
Interest income 2,239 1,842
Other, net 400 313
3,244 2,813
Income before taxes 12,565 10,465
Income taxes 5,026 4,237
Net income $ 7,539 $ 6,228
Net income per common share $3.91 $3.23
Weighted average
shares outstanding 1,926,414 1,926,414
The accompanying notes are an integral part of these financial statements.
<PAGE>
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, June 30,
1998 1998
ASSETS
Current assets:
Cash and cash equivalents $ 14,744 $ 6,800
Short term investments 139,844 128,004
Accounts and notes receivable, net 18,048 18,006
Inventories 37,068 38,067
Income tax receivable 229 649
Deferred income taxes 2,776 2,776
Prepaid expenses and other 699 526
Total current assets 213,408 194,828
Property, plant and equipment, net 30,513 30,551
Notes receivable 3,988 3,988
Long term investments, net 45,466 55,801
Other assets 19,789 19,527
Deferred taxes 2,860 2,317
Total assets $316,024 $307,012
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,608 $ 5,605
Accrued payroll expenses 4,485 4,876
Other 10,384 5,678
Total current liabilities 19,477 16,159
Accrued postretirement benefits 16,349 15,941
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 277,586 271,395
Accumulated other comprehensive income 118 1,023
Total shareholders' equity 280,198 274,912
Total liabilities and
shareholders' equity $316,024 $307,012
The accompanying notes are an integral part of these financial statements.
<PAGE>
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months
ended September 30,
1998 1997
Cash flows from operating
activities:
Net Income $ 7,539 $ 6,228
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 1,403 1,347
Deferred income taxes (23) (24)
Net (gain) on investments (285) (167)
Changes in assets and
liabilities:
Accounts and notes receivable (51) (74)
Inventories 999 332
Income tax receivable 420 2,119
Prepaid expenses and other assets (455) (382)
Accounts payable (997) 1,609
Accrued payroll expenses
and other liabilities 4,315 2,083
Other long term liabilities 408 356
Total adjustments 5,734 7,199
Net cash provided by operating
activities $ 13,273 $ 13,427
The accompanying notes are an integral part of these financial statements.
<PAGE>
FARMER BROS. CO
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(Unaudited)
For the three months
ended September 30,
1998 1997
Net cash provided by operating
activities: $ 13,273 $ 13,427
Cash flows from investing
activities:
Purchases of property, plant
and equipment (1,350) (339)
Proceeds from sales of property,
plant and equipment 28 72
Purchases of investments (161,413) ( 83,646)
Proceeds from sales of
investments 158,745 61,073
Notes issued 54 -
Notes repaid 63 10
Net cash used in
investing activities (3,981) (22,830)
Cash flows from financing
activities:
Dividends paid (1,348) (1,156)
Net cash used in financing
activities (1,348) (1,156)
Net increase (decrease) in cash
and cash equivalents 7,944 (10,559)
Cash and cash equivalents at
beginning of period 6,800 34,174
Cash and cash equivalents at
end of quarter $ 14,744 $ 23,615
Supplemental disclosure of
cash flow information:
Income tax payments $ 54 $ 29
The accompanying notes are an integral part of these financial statements.
<PAGE>
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
presentation of the financial position of the Company and the results of
operations and cash flows 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 $3,314,000 and $2,600,000 at
September 30 and June 30, 1998, respectively.
(In thousands) Gross Gross
Unrealized Unrealized Fair
September 30, 1998 Cost Loss Gain Value
Current Assets
Commercial Paper $ 98,803 - 568 $ 99,371
U.S. Government
Obligations 40,473 (27) 27 $ 40,473
$139,276 (27) 595 $139,844
Non-Current Assets
Municipal debt $ 1,695 (26) - $ 1,669
Preferred stocks 36,412 (251) 3,299 39,460
Liquid asset fund
and other 5,285 (1,000) 52 4,337
$43,392 (1,277) 3,351 $45,466
(In thousands) Gross Gross
Unrealized Unrealized Fair
June 30, 1998 Cost Loss Gain Value
Current Assets
Commercial Paper $ 95,838 - 594 $ 96,432
U.S. Government
Obligations 31,608 (36) - 31,572
$127,446 (36) 594 $128,004
Non-Current Assets
U.S. Government
Obligations $ 9,725 (151) - $ 9,574
Municipal debt 1,695 (11) - 1,684
Preferred stocks 36,504 (52) 3,978 40,430
Liquid asset fund
and other 4,067 - 46 4,113
$ 51,991 (214) 4,024 $ 55,801
<PAGE>
B. Investments, CONTINUED
The contractual maturities of debt securities classified as current and non-
current available for sale are as follows:
Fair Value
Maturities 09/30/98 06/30/98
(In thousands)
Within 1 year $139,844 $128,004
After 1 year through 5 years 1,669 11,258
$141,513 $139,262
Gross realized gains from available for sale securities were $830,000 and
$255,000 at September 30, 1998 and 1997, respectively.
C. Inventories
(In thousands) Processed Unprocessed Total
September 30, 1998
Coffee $ 3,244 $10,642 $13,886
Allied products 12,223 4,348 16,571
Coffee brewing equipment 1,982 4,629 6,611
$17,449 $19,619 $37,068
June 30, 1998
Coffee $ 4,119 $10,406 $ 14,525
Allied products 12,025 5,079 17,104
Coffee brewing equipment 2,191 4,247 6,438
$18,335 $19,732 $ 38,067
D. Comprehensive Income
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS 130) "Reporting Comprehensive Income". SFAS 130
requires disclosure of total non-stockholder changes in equity in interim
periods and additional disclosures of the components of non-stockholder
changes in equity on an annual basis. Total non-stockholder changes in
equity includes all changes in equity during a period except those
resulting from investments by and distributions to shareholders.
For the three months
(In thousands) ended September 30,
1998 1997
Net income $7,539 $6,228
Unrealized investment gains (losses), net (905) 156
Total comprehensive income $6,634 $6,384
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Registrant's financial condition is substantially the same as at its most
recent fiscal year end. The volatile market for green coffee always has an
effect on operating results. The lower cost of green coffee in the current
period has resulted in lower roast coffee prices. Gross profit margins in
the current period have been consistent, but sales volume continues to
decline. Registrant has been able to stabilize operating expenses.
Net sales for the first quarter of fiscal 1999 decreased 9% to $54,035,000
from $59,497,000 in the same quarter of fiscal 1998. Gross profit
increased 6% during the first quarter of fiscal 1998 to $31,115,000 or 58%
of sales, as compared to $29,326,000 or 49% of sales, in the same quarter
of the prior fiscal year.
Operating expenses, composed of selling and general and administrative
expenses, reached $21,794,000 in the most recent quarter, compared to
$21,674,000 in the same quarter of fiscal 1998. Other income increased 15%
to $3,244,000 in the first quarter of fiscal 1999 as compared to $2,813,000
in the same quarter of the prior fiscal year, primarily the result of
higher interest income.
Income before taxes increased 20% to $12,565,000 or 23% of sales, in the
first quarter of the 1999 fiscal year as compared to $10,465,000 or 18% of
sales in the same quarter of fiscal 1998. Net income for the first quarter
of fiscal 1999 increased 21% to $7,539,000 or $3.91 per common share, from
$6,228,000 or $3.23 per common share, recorded in the first quarter of
fiscal 1998.
Quarterly Summary of Results
(In thousands of dollars)
09/30/97 12/31/97 03/31/98 06/30/98 09/30/98
Net sales 59,497 64,062 58,951 57,582 54,035
Gross profit 29,326 36,161 32,249 34,388 31,115
Operating income 7,652 13,377 10,067 9,859 9,321
Net income 6,228 9,782 8,020 9,370 7,539
(As a percentage of sales)
09/30/97 12/31/97 03/31/98 06/30/98 09/30/98
Net sales 100.00 100.00 100.00 100.00 100.00
Gross profit 49.29 56.45 54.70 59.72 57.58
Operating income 12.86 20.88 17.08 17.12 17.25
Net income 10.47 10.05 13.60 16.27 13.95
(In dollars)
09/30/97 12/31/97 03/31/98 06/30/98 09/30/98
EPS 3.23 5.08 4.16 4.86 3.91
Year 2000 Issues
There have been no material changes from the fiscal year end.
Item 2a. Market Risk Disclosures
Financial Markets
Securities are recorded at fair value and unrealized gains or losses have
been recorded as a separate component of shareholders equity. The Company
maintains two distinct portfolios of securities, both portfolios are
classified as available for sale.
The Company's portfolio of investment grade money market instruments
includes bankers acceptances, discount commercial paper, federal agency
issues and treasury securities. As of September 30, 1998, over 98% of
these funds were invested in instruments with maturities shorter than one
year. The remaining balance matures during fiscal 2000. This portfolio's
interest rate risk is unhedged. Its average maturity is approximately 90
days and a 100 basis point move in the Fed Funds Rate would not have a
material effect on Registrant's results of operations.
The Company is exposed to market value risk arising from changes in
interest rates on its portfolio of preferred securities. The Company
reviews the interest rate sensitivity of these securities and (a) enters
into "short positions" in futures contracts on U.S. Treasury securities or
(b) holds put options on such futures contracts in order to reduce the
impact of certain interest rate changes on such preferred stocks.
Specifically, the Company attempts to manage the risk arising from changes
in the general level of interest rates. The Company does not transact in
futures contracts or put options for speculative purposes.
The following table demonstrates the impact of varying interest rate
changes based on the preferred stock holdings, futures and options
positions, and market yield and price relationships at September 30, 1998.
This table is predicated on an instantaneous change in the general level of
interest rates and assumes predictable relationships between the prices of
preferred securities holdings, the yields on U.S. Treasury securities, and
related futures and options.
Interest Rate Changes
(In thousands)
Market Value of Change in Market
Preferred Futures and Total Value of Total
Securities Options Portfolio Portfolio
- -200 basis points $47,617.7 $ 0.0 $47,617.7 $ 4,534.5
("b.p.")
- -100 b.p. 45,448.5 0.4 45,448.9 2,365.7
Unchanged 42,890.0 193.2 43,083.2 -
+100 b.p. 39,906.6 2,212.4 42,119.0 (964.2)
+200 b.p. 36,829.0 5,121.7 41,950.7 (1,132.5)
The number and type of futures and options contracts entered into depends
on, among other items, the specific maturity and issuer redemption
provisions for each preferred security held, the slope of the Treasury
yield curve, the expected volatility of Treasury yields, and the costs of
using futures and/or options. At September 30, 1998 and 1997 the hedge
consisted entirely of put options on the U.S. Treasury Bond futures
contract.
<PAGE>
Item 2a. Market Risk Disclosures, (CONTINUED)
Commodity Price Changes
The Company is exposed to commodity price risk arising from changes in the
market price of green coffee. Registrant prices its inventory on the LIFO
basis. In the normal course of business, the Company enters into commodity
purchase agreements with suppliers, and futures contracts to hedge exposure
to inventory price fluctuations. The Company does not transact in futures
contracts or put options for speculative purposes.
The following table demonstrates the impact of changes in the price of
green coffee on inventory and hedge instruments at September 30, 1998. It
assumes an immediate change in the price of green coffee, and the
demonstrable relationship between the price of green coffee and the
valuations of coffee index futures and put options and relevant commodity
purchase agreements at September 30, 1998.
Commodity Risk Disclosure
(In thousands)
September 30, 1998
Market Value of Change in
Coffee Cost Coffee Futures Market
Change Inventory & Options Total Value
- - 20% $13,886 $ 748 $14,634 $ 554
unchanged 13,886 194 14,080 -
+ 20% 13,886 (360) 13,526 (554)
At September 30, 1998 the hedge consisted mainly of commodity futures and
commodity purchase agreements with maturities shorter than three months.
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.
<PAGE>
PART II OTHER INFORMATION (CONTINUED)
(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
Registrant filed a report reporting
a change in accountant. April 14, 1997.
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: November 13, 1998 FARMER BROS. CO.
(Registrant)
John E. Simmons
John E. Simmons
Treasurer and
Chief Financial Officer
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