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, 1999
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: 1,870,754 as of September
30, 1999.
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,
1999 1998
Net sales $53,068 $54,035
Cost of goods sold 20,298 22,920
32,770 31,115
Selling expense 19,930 19,914
General and administrative expenses 1,991 1,880
21,921 21,794
Income from operations 10,849 9,321
Other income:
Dividend income 615 605
Interest income 2,270 2,239
Other, net (254) 400
2,631 3,244
Income before taxes 13,480 12,565
Income taxes 5,392 5,026
Net income $ 8,088 $ 7,539
Earnings per common share $4.32 $3.91
Weighted average shares outstanding 1,870,754 1,926,414
Dividends declared per share $0.75 $0.70
The accompanying notes are an integral part of these financial statements.
<PAGE>
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, June 30,
1999 1999
ASSETS
Current assets:
Cash and cash equivalents $ 2,681 $ 4,403
Short term investments 114,490 122,203
Accounts and notes receivable, net 17,801 18,199
Inventories 34,830 33,675
Income tax receivable - 249
Deferred income taxes 2,391 2,391
Prepaid expenses 754 429
Total current assets 172,947 181,549
Property, plant and equipment, net 33,842 31,543
Notes receivable 3,884 3,884
Long term investments 96,370 81,760
Other assets 21,905 21,382
Deferred income taxes 4,981 4,718
Total assets $333,929 $324,836
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,711 $ 4,786
Accrued payroll expenses 4,526 5,388
Other 11,057 5,744
Total current liabilities 18,294 15,918
Accrued postretirement benefits 18,123 17,707
Other long term liabilities 3,500 3,500
21,623 21,207
Commitments and contingencies - -
Shareholders' equity:
Common stock, $1.00 par value,
authorized 3,000,000 shares; issued
issued 1,926,414 and outstanding
1,870,754 in 1999 1,871 1,871
Additional paid-in capital 3,164 3,164
Retained earnings 289,874 283,191
Accumulated other comprehensive income (897) (515)
Total shareholders' equity 294,012 287,711
Total liabilities and shareholders' equity $333,929 $324,836
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,
1999 1998
Cash flows from operating activities:
Net income $ 8,088 $ 7,539
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,423 1,403
Other (37) (23)
Net loss (gain) on investments 364 (285)
Changes in assets and liabilities:
Accounts and notes receivable 359 (51)
Inventories (1,155) 999
Income tax receivable 249 420
Prepaid expenses and other assets (866) (455)
Accounts payable (2,075) (997)
Accrued payroll expenses and other
liabilities 4,451 4,315
Accrued postretirement benefits 416 408
Total adjustments 3,129 5,734
Net cash provided by operating activities $ 11,217 $ 13,273
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,
1999 1998
Net cash provided by operating activities: $ 11,217 $ 13,273
Cash flows from investing activities:
Purchases of property, plant and
equipment (3,717) (1,350)
Proceeds from sales of property, plant
and equipment 52 28
Purchases of investments (98,827) (161,413)
Proceeds from sales of investments 90,920 158,745
Notes issued - (54)
Notes repaid 39 63
Net cash used in investing activities (11,533) (3,981)
Cash flows from financing activities:
Dividends paid (1,406) (1,348)
Net cash used in financing activities (1,406) (1,348)
Net (decrease) increase in cash and cash
equivalents (1,722) 7,944
Cash and cash equivalents at beginning
of year 4,403 6,800
Cash and cash equivalents at end of year $ 2,681 $ 14,744
Supplemental disclosure of
cash flow information:
Income tax payments $ 62 $ 54
The accompanying notes are an integral part of these financial statements.
<PAGE>
Notes to Consolidated Financial Statements (Unaudited)
Note 1. 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.
Note 2. Investments
The Company hedges interest rate risk in its portfolio of preferred stock.
Deferred losses associated with the hedge are $568,000 and $923,000 at
September 30 and June 30, 1999, respectively.
(In thousands) Gross Gross
Unrealized Unrealized Fair
September 30, 1999 Cost Loss Gain Value
Current Assets
Commercial Paper $ 1,931 - - $ 1,931
U.S. Government
Obligations 112,620 (72) 11 112,559
$114,551 (73) 11 $114,490
Non-Current Assets
U.S. Government
Obligations $ 49,931 (734) - $ 49,197
Municipal debt 1,695 (25) - 1,670
Preferred stocks 36,812 (989) 1,587 37,410
Corporate Bonds 5,117 (649) - 4,468
Liquid asset fund
and other 3,598 - 27 3,625
$ 97,153 ($2,397) 1,614 $ 96,370
(In thousands) Gross Gross
Unrealized Unrealized Fair
June 30, 1999 Cost Loss Gain Value
Current Assets
Commercial Paper $ 11,895 - 27 $ 11,922
U.S. Government
Obligations 110,368 (126) 39 110,281
$122,263 (126) 66 $122,203
Non-Current Assets
U.S. Government
Obligations $ 35,015 (842) - $ 34,173
Municipal debt 1,695 (8) 2,049 1,687
Preferred stocks 37,538 (548) - 39,039
Corporate bonds 5,075 (461) - 4,614
Liquid asset fund
and other 2,247 - - 2,247
$ 81,570 (1,859) 2,049 $ 81,760
<PAGE>
Note 2. Investments (Continued)
The contractual maturities of debt securities classified as current and non-
current available for sale are as follows:
Fair Value
Maturities 09/30/99 06/30/99
(In thousands)
Within 1 year $114,490 $122,203
After 1 year through 5 years 50,867 35,860
$165,357 $158,063
Gross realized gains and losses from available for sale securities were
$234,000 and $830,000 at September 30, 1999 and 1998, respectively.
Note 3. Inventories
(In thousands) Processed Unprocessed Total
September 30, 1999
Coffee $ 4,081 $ 9,127 $13,208
Allied products 9,515 5,320 14,835
Coffee brewing equipment 1,926 4,861 6,787
$15,522 $19,308 $34,830
June 30, 1999
Coffee $ 3,619 $ 9,314 $ 12,933
Allied products 11,078 3,424 14,502
Coffee brewing equipment 2,258 3,982 6,240
$16,955 $16,720 $ 33,675
Note 4. 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,
1999 1998
Net income $ 8,088 $ 7,539
Unrealized investment gains (losses), net (382) (905)
Total comprehensive income $ 7,706 $ 6,634
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Operating trends discussed in the Form 10-K for fiscal 1999 have continued
through the first quarter of fiscal 2000. Roast coffee prices and sales
volume have decreased as compared to the same quarter of the prior fiscal
year, but profit margins have improved. Green coffee prices recently
spiked sharply upward on weather concerns in Brazilian coffee growing
regions. It is too soon to know whether such concerns will be realized.
Net sales for the first quarter of fiscal 2000 decreased to $53,068,000
from $54,035,000 in the same quarter of fiscal 1999. Gross profit
increased 5% during the first quarter of fiscal 1999 to $32,770,000 or 62%
of sales, as compared to $31,115,000 or 58% of sales, in the same quarter
of the prior fiscal year as a result of lower green coffee costs.
Operating expenses, composed of selling and general and administrative
expenses, reached $21,921,000 in the most recent quarter, compared to
$21,794,000 in the same quarter of fiscal 1999. Other income decreased 19%
to $2,631,000 in the first quarter of fiscal 2000 as compared to $3,244,000
in the same quarter of the prior fiscal year, primarily because of net
investment losses in the preferred stock portfolio.
Income before taxes increased 7% to $13,480,000 or 25% of sales, in the
first quarter of the 2000 fiscal year as compared to $12,565,000 or 23% of
sales in the same quarter of fiscal 1999. Net income for the first quarter
of fiscal 2000 increased 7% to $8,088,000 or $4.32 per common share, from
$7,539,000 or $3.91 per common share, recorded in the first quarter of
fiscal 1999.
Quarterly Summary of Results
(In thousands of dollars)
09/30/98 12/31/98 03/31/99 06/30/99 09/30/99
Net sales 54,035 58,408 55,207 53,921 53,068
Gross profit 31,115 32,095 35,153 33,374 32,770
Operating income 9,321 10,345 12,144 4,960 10,849
Net income 7,539 7,905 9,159 4,262 8,088
(As a percentage of sales)
09/30/98 12/31/98 03/31/99 06/30/99 09/30/99
Net sales 100.00 100.00 100.00 100.00 100.00
Gross profit 57.58 54.95 63.67 61.89 61.75
Operating income 17.25 17.71 22.00 9.20 20.44
Net income 13.95 13.53 16.59 7.90 15.24
(In dollars)
09/30/98 12/31/98 03/31/99 06/30/99 09/30/99
Net income per share 3.91 4.10 4.83 2.29 4.32
Year 2000 Issues
There have been no material changes from the fiscal year end.
<PAGE>
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, 1999, over 65% of
these funds were invested in instruments with maturities shorter than one
year. The remaining balance matures during fiscal 2001 and 2002. This
portfolio's interest rate risk is unhedged. Its average maturity is
approximately 250 days and a 100 basis point move in the Fed Funds Rate is
illustrated in the following table.
Interest Rate Changes
(In thousands)
Change in Market
Market Value of September 30, 1999 Value of Fixed
Fixed Income Investments Income Investments
- -100 b.p. $170,511 $1,673
unchanged $168,838 -
+100 b.p. $167,165 ($1,673)
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, 1999.
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 September 30, 1999 Change in Market
Preferred Futures and Total Value of Total
Securities Options Portfolio Portfolio
- -200 basis points $48,400.2 $ 0.0 $48,400.2 $ 4,858.1
("b.p.")
- -100 b.p. 45,432.0 36.8 45,468.8 1,926.7
Unchanged 42,005.6 1,536.5 43,542.1 -
+100 b.p. 38,614.2 4,736.4 43,350.6 (191.5)
+200 b.p. 35,498.1 8,034.0 43,532.1 (10.0)
<PAGE>
Market Risk Disclosures, (Continued)
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, 1999 and 1998 the hedge
consisted entirely of put options on the U.S. Treasury Bond futures
contract.
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, 1999. 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, 1999.
Commodity Risk Disclosure
(In thousands)
Market Value of
September 30,1999 Change in
Coffee Cost Coffee Futures Market
Change Inventory & Options Total Value
- - 10% $13,208,000 ($1,000) $13,207,000 $173,000
unchanged $13,208,000 ($174,000) $13,034,000 -
+ 10% $13,208,000 ($347,000) $12,861,000 ($123,000)
At September 30, 1999 the hedge consisted mainly of commodity futures 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.
<PAGE>
PART II OTHER INFORMATION (Continued)
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.
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 15, 1999 FARMER BROS. CO.
(Registrant)
John E. Simmons
John E. Simmons
Treasurer and
Chief Financial Officer
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