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, 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 December 31,
1998.
PAGE 1 OF 11
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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,
1998 1997 1998 1997
Net sales $58,408 $64,062 $112,443 $123,559
Cost of goods sold 26,313 27,901 49,233 58,072
32,095 36,161 63,210 65,487
Selling expense 19,836 20,628 39,750 40,383
General and administrative
expenses 1,914 2,156 3,794 4,075
21,750 22,784 43,544 44,458
Income from operations 10,345 13,377 19,666 21,029
Other income (expense):
Dividend income 582 664 1,187 1,322
Interest income 2,290 1,971 4,529 3,813
Other, net (42) 206 358 519
2,830 2,841 6,074 5,654
Income before taxes 13,175 16,218 25,740 26,683
Income taxes 5,270 6,436 10,296 10,673
Net income $ 7,905 $ 9,782 $ 15,444 $ 16,010
Net income per common share $4.10 $5.08 $8.02 $8.31
Weighted average shares
outstanding 1,926,414 1,926,414
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 30,
1998 1998
ASSETS
Current assets:
Cash and cash equivalents $ 8,823 $ 6,800
Short term investments 149,116 128,004
Accounts and notes receivable, net 20,320 18,006
Inventories 35,619 38,067
Income tax receivable 196 649
Deferred income taxes 2,776 2,776
Prepaid expenses and other 580 526
Total current assets 217,430 194,828
Property, plant and equipment, net 30,344 30,551
Notes receivable 3,988 3,988
Long term investments, net 45,401 55,801
Other assets 20,385 19,527
Deferred taxes 3,354 2,317
Total assets $320,902 $307,012
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,318 $ 5,605
Accrued payroll expenses 3,631 4,876
Other 5,107 5,678
Total current liabilities 18,056 16,159
Accrued postretirement benefits 16,828 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 284,142 271,395
Accumulated other comprehensive
income (loss) (618) 1,023
Total shareholders' equity 286,018 274,912
Total liabilities and
shareholders' equity $320,902 $307,012
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months
ended December 31,
1998 1997
Cash flows from operating
activities:
Net Income $ 15,444 $ 16,010
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 2,770 2,679
Other (55) (35)
Net loss on investments (158) (279)
Change in assets and
liabilities:
Accounts and notes
receivable (2,349) (2,592)
Inventories 2,448 (531)
Income tax receivable 453 2,119
Prepaid expenses and other
assets (952) (1,346)
Accounts payable 3,712 (69)
Accrued payroll expenses
and other liabilities (1,816) 2,938
Other long term liabilities 887 718
Total adjustments $ 4,940 $ 3,602
Net cash provided by operating
activities $ 20,384 $ 19,612
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
FARMER BROS. CO
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(Unaudited)
For the six months
ended December 31,
1998 1997
Net cash provided by operating
activities: $ 20,384 $ 19,612
Cash flows from investing
activities:
Purchases of property, plant
and equipment (2,528) (1,026)
Proceeds from sales of property,
plant and equipment 62 88
Purchases of investments (325,859) (187,662)
Proceeds from sales of
investments 312,627 155,436
Notes issued (54) (1,052)
Notes repaid 88 21
Net cash used in investing
activities (15,664) (34,195)
Cash flows from financing
activities:
Dividends paid (2,697) (2,408)
Net cash used in financing
activities (2,697) (2,408)
Net increase (decrease) in cash
and cash equivalents 2,023 (16,991)
Cash and cash equivalents at
beginning of year 6,800 34,174
Cash and cash equivalents at
end of quarter $8,823 $17,183
Supplemental disclosure of
cash flow information:
Income tax payments $ 10,504 $ 5,830
The accompanying notes are an integral part of these financial statements.
5
<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
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, 1998 and June 30, 1998, respectively.
(In thousands) Gross Gross
Unrealized Unrealized Fair
December 31, 1998 Cost Loss Gain Value
Current Assets
Commercial Paper $ 61,926 (9) - $ 61,917
U.S. Government
Obligations 87,214 ( 32) 17 87,199
$149,140 ( 41) 17 $149,116
Non-Current Assets
Municipal debt 1,695 (11) - 1,684
Preferred stocks 36,713 (524) 2,917 39,106
Liquid asset fund
and other 4,821 (273) 63 4,611
$ 43,229 (808) 2,980 $ 45,401
(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
6
<PAGE>
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 12/31/98 06/30/98
Within 1 year $149,116 $128,004
After 1 year through 5 years 1,684 11,258
$150,800 $139,262
Gross realized gains from available for sale securities were $979,000 and
$535,000 at December 31, 1998 and 1997, respectively.
C. Inventories
(In thousands) Processed Unprocessed Total
December 31, 1998
Coffee $ 3,672 $10,281 $13,953
Allied products 11,480 3,927 15,407
Coffee brewing equipment 1,998 4,261 6,259
$17,150 $18,469 $35,619
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 For the six months
(In thousands) ended December 31, ended December 31,
1998 1997 1998 1997
Net income $7,905 $9,782 $15,444 $16,010
Unrealized investment
gains (losses), net (736) (112) (1,641) ( 45)
Total comprehensive income $7,169 $9,670 $13,803 $16,055
7
<paga>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Fluctuating green coffee costs continue to effect Registrant's operating
results. Competitive roast coffee prices have pressured profit margins,
even with lower green coffee costs. The Company makes every effort to
provide competitive product pricing, and it is not known whether such
operating margins can be maintained.
Net sales for the second quarter of fiscal 1999 decreased 9% to $58,408,000
from $64,062,000 in the same quarter of the prior fiscal year. Net sales
for the first half of fiscal 1999 decreased 9% to $112,443,000 from
$123,559,000 in the first half of fiscal 1998. Gross profit in the second
quarter decreased 11% to $32,095,000 or 55% of sales, as compared to
$36,161,000, or 56% of sales, in the same quarter of fiscal 1998. Gross
profit for the first half of fiscal 1999 decreased 3% to $63,210,000 from
$65,487,000 during the same period of the prior fiscal year. Operating
expenses decreased 5% to $21,750,000 in the second quarter of fiscal 1999
as compared to $22,784,000 in the second quarter of fiscal 1998. Operating
expenses for the first half of fiscal 1999 decreased 2% to $43,544,000 from
$44,458,000 during the same period of fiscal 1998.
Income after taxes for the three months ended December 31, 1998, reached
$7,905,000, or $4.10 per share, as compared to $7,539,000, or $3.91 per
share, in the first quarter of fiscal 1999 and $9,782,000, or $5.08 per
share, in the same quarter of fiscal 1998. Net income for the first half
of fiscal 1999 reached $15,444,000, or $8.02 per share, as compared to
$16,010,000, or $8.31 per share, in the first six months of fiscal 1998.
Quarterly Summary of Results
(In thousands)
12/31/97 03/31/98 06/30/98 09/30/98 12/31/98
Net sales 64,062 58,951 57,582 54,035 58,408
Gross profit 36,161 32,249 34,388 31,115 32,095
Operating income 13,377 10,067 9,859 9,321 10,345
Net income 9,782 8,020 9,370 7,539 7,905
(As a percentage of sales)
12/31/97 03/31/98 06/30/98 09/30/98 12/31/98
Net sales 100.00 100.00 100.00 100.00 100.00
Gross profit 56.45 54.70 59.72 57.58 54.95
Operating income 20.88 17.08 17.12 17.25 17.71
Net income 10.05 13.60 16.27 13.95 13.53
(In dollars)
12/31/97 03/31/98 06/30/98 09/30/98 12/31/98
EPS 5.08 4.16 4.86 3.91 4.10
Year 2000 Issues
There have been no material changes from the fiscal year end.
8
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 December 31, 1998, over 93% 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 60
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 December 31, 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 $16,576.7 $(1,480.9) $15,095.8 $2,437.2
("b.p.")
- -100 b.p. 44,414.3 (667.4) 43,746.9 1,088.3
Unchanged 41,775.6 883.0 42,658.6 0.0
+100 b.p. 38,678.5 3,727.9 42,406.4 (252.2)
+200 b.p. 35,591.6 6,536.2 42,127.8 (530.8)
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 December 31, 1998 and 1997 the hedge
consisted entirely of put options on the U.S. Treasury Bond futures
contract.
9
<PAGE>
Item 3 Quantitative and Qualitative Disclosures about Market Risk
(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 December 31, 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 December 31, 1998, and does not take into account
fluctuations of inventory levels and futures and options activity.
Commodity Risk Disclosure
(In thousands)
December 31, 1998
Market Value of Change in
Coffee Cost Coffee Futures Market
Change Inventory & Options Total Value
- - 10% $13,953,000 $ 977,000 $14,930,000 $1,423,000
unchanged 13,953,000 (446,000) 13,507,000 -
+ 10% 13,953,000 (1,869,000) 12,084,000 (1,423,000)
At December 31, 1998 the hedge consisted of commodity futures and commodity
purchase agreements.
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 November 30, 1998. 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
1,750,960 shares for election and 10,150 shares against.
10
<PAGE>
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, 1999
was approved with 1,759,302 shares in favor of the
resolution, 401 shares against and 1,415 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 12, 1999 FARMER BROS. CO.
(Registrant)
John E. Simmons
John E. Simmons
Treasurer and
Chief Financial Officer
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