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, 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: 1,854,793 as of March 31,
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 For the nine months
ended March 31, ended March 31,
1999 1998 1999 1998
Net sales $55,207 $58,951 $167,650 $182,510
Cost of goods sold 20,054 26,702 69,287 84,774
35,153 32,249 98,363 97,736
Selling expense 20,817 20,264 60,567 60,647
General and administrative
expenses 2,192 1,918 5,986 5,993
23,009 22,182 66,553 66,640
Income from operations 12,144 10,067 31,810 31,096
Other income:
Dividend income 605 637 1,792 1,959
Interest income 2,153 2,066 6,682 5,879
Other, net 363 597 721 1,116
3,121 3,300 9,195 8,954
Income before taxes 15,265 13,367 41,005 40,050
Income taxes 6,106 5,347 16,402 16,020
Net income $ 9,159 $ 8,020 $ 24,603 $ 24,030
Net income per common share $4.83 $4.16 $12.84 $12.47
Weighted average shares
outstanding 1,897,444 1,926,414 1,916,757 1,926,414
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, June 30,
1999 1998
ASSETS
Current assets:
Cash and cash equivalents $ 19,405 $ 6,800
Short term investments 109,529 128,004
Accounts and notes receivable, net 20,083 18,006
Inventories 33,847 38,067
Income tax receivable 196 649
Deferred income taxes 2,776 2,776
Prepaid expenses and other 1,530 526
Total current assets 187,366 194,828
Property, plant and equipment, net 30,486 30,551
Notes receivable 3,988 3,988
Long term investments, net 71,720 55,801
Other assets 21,025 19,527
Deferred taxes 3,231 2,317
Total assets $317,816 $307,012
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,750 $ 5,605
Accrued payroll expenses 4,621 4,876
Other 6,830 5,678
Total current liabilities 18,201 16,159
Accrued postretirement benefits 17,263 15,941
Shareholders' equity:
Common stock, $1.00 par value,
authorized 3,000,000 shares;
issued 1,926,414 and
outstanding 1,854,793 shares 1999
and 1,926,414 in 1998 1,855 1,926
Additional paid-in capital 547 568
Retained earnings 280,228 271,395
Accumulated other comprehensive
(loss) income (278) 1,023
Total shareholders' equity 282,352 274,912
Total liabilities and
shareholders' equity $317,816 $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 nine months
ended March 31,
1999 1998
Cash flows from operating
activities:
Net income $ 24,603 $ 24,030
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 3,988 3,634
Other (89) (87)
Net loss on investments (398) (751)
Change in assets and liabilities:
Accounts and notes receivable (2,142) 796
Inventories 4,221 (1,786)
Income tax receivable 453 2,119
Prepaid expenses and other assets (2,564) (1,661)
Accounts payable 1,144 (2,679)
Accrued payroll expenses
and other liabilities 898 1,421
Other long term liabilities 1,322 1,069
Total adjustments 6,833 2,075
Net cash provided by operating
activities $ 31,436 $ 26,105
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 nine months
ended March 31,
1999 1998
Net cash provided by operating
activities: $ 31,436 $ 26,105
Cash flows from investing
activities:
Purchases of property, plant
and equipment (3,889) (1,935)
Proceeds from sales of property,
plant and equipment 118 150
Purchases of investments (486,817) (329,455)
Proceeds from sales of
investments 487,556 287,240
Notes issued (54) (1,608)
Notes repaid 117 29
Net cash used in
investing activities (2,969) (45,579)
Cash flows from financing
activities:
Dividends paid (4,045) (3,660)
Purchase of common stock (11,817) -
Net cash used in financing
activities 15,862 (3,660)
Net increase (decrease) in cash
and cash equivalents 12,605 (23,134)
Cash and cash equivalents at
beginning of period 6,800 34,174
Cash and cash equivalents at
end of quarter $ 19,405 $ 11,040
Supplemental disclosure of
cash flow information:
Income tax payments $ 14,991 $ 13,042
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 $2,039,000 and $1,081,000 at
March 31, 1999 and June 30, 1998, respectively.
(In thousands) Gross Gross
Unrealized Unrealized Fair
March 31, 1999 Cost Loss Gain Value
Current Assets
Commercial Paper $ 34,567 (1) - $ 34,566
U.S. Government
Obligations 74,974 (23) 12 74,963
$109,541 (24) 12 $109,529
Non-Current Assets
U.S. Government
Obligations $ 25,000 (367) - 24,633
Municipal debt 1,695 (27) - 1,668
Preferred stocks 35,537 (321) 2,565 37,781
Corporate bonds 5,075 (254) 10 4,831
Liquid asset fund
and other 2,491 - 316 2,807
$ 69,798 (969) 2,891 $ 71,720
(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
Corporate bonds 1,878 - 46 1,924
Liquid asset fund
and other 2,189 - - 2,189
$ 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:
Fair Value
Maturities 03/31/99 06/30/98
(In thousands)
Within 1 year $109,529 $128,004
After 1 year through 5 years 26,301 11,258
After 5 years through 10 years - -
After 10 years 4,831 1,924
$140,661 $141,186
Gross realized gains from available for sale securities were $1,881,000 and
$1,788,000 at March 31, 1999 and 1998, respectively.
C. Inventories
(In thousands) Processed Unprocessed Total
March 31, 1999
Coffee $ 3,950 $ 9,952 $13,902
Allied products 9,430 4,124 13,554
Coffee brewing equipment 2,130 4,261 6,391
$15,510 18,337 $33,847
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 nine months
(In thousands) ended March 31, ended March 31,
1999 1998 1999 1998
Net income $9,159 $8,020 $24,603 $24,030
Unrealized investment
gains (losses), net 340 196 (1,301) 241
Total comprehensive income $9,499 $8,216 $23,302 $24,271
7
E. Common Stock
On February 23, 1999, a subsidiary of the Company purchased 71,621 shares
of the Company's common stock. Upon consolidation, the shares are not
considered issued and outstanding, and have been excluded in the weighted
average shares outstanding calculation since the date of purchase.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Green coffee price fluctuations continue to have a pronounced effect on
Registrant's operating results. The cost of green coffee declined during
the third quarter, with a corresponding decrease in the selling price of
roast coffee. It is not possible to predict the direction or duration of
price fluctuations. Lower green coffee costs generally result in lower
roast coffee prices, but unlike some industries, the price change is not
immediate, nor is the elasticity of price changes the same in both up and
down markets. Registrant cautions against using past history to predict
future results; this is especially so as the Brazilian frost season (June
September) approaches.
Net sales for the third quarter of fiscal 1999 decreased 6.4% to
$55,207,000 from $58,951,000 in the same quarter in the prior fiscal year.
Net sales for the first nine months of fiscal 1999 decreased 8.1% to
$167,650,000 from $182,510,000 in the same period of fiscal 1998. Gross
profit in the third quarter increased 9.0% to $35,153,000 or 63.7% of
sales, compared to $32,249,000 or 54.7% of sales in fiscal 1998. Operating
expenses increased 3.7% to $23,009,000 in the third quarter as compared to
$22,182,000 in the same period of the prior fiscal year. Income after
taxes for the three months ended March 31, 1999, reached $9,159,000, or
$4.83 per share, as compared to $8,020,000 or $4.16 per share in the same
quarter of fiscal 1998. Nine month income for fiscal 1999 increased 2.4%
to $24,603,000 or $12.84 per share as compared to $24,030,000 or $12.47
per share in the same period of the prior year.
Quarterly Summary of Results
(In thousands)
03/31/98 06/30/98 09/30/98 12/31/98 03/31/99
Net sales 58,951 57,582 54,035 58,408 55,207
Gross profit 32,249 34,388 31,115 32,095 35,153
Operating income 10,067 9,859 9,321 10,345 12,144
Net income 8,020 9,370 7,539 7,905 9,159
(As a percentage of sales)
03/31/98 06/30/98 09/30/98 12/31/98 03/31/99
Net sales 100.00 100.00 100.00 100.00 100.00
Gross profit 54.70 59.72 57.58 54.95 63.67
Operating income 17.08 17.12 17.25 17.71 22.00
Net income 13.60 16.27 13.95 13.53 16.59
(In dollars)
03/31/98 06/30/98 09/30/98 12/31/98 03/31/99
EPS 4.16 4.86 3.91 4.10 4.83
8
<PAGE>
Year 2000 Issues
There have been no material changes from the fiscal year end. Conversion
costs remain immaterial. System conversions are proceeding as anticipated.
The effected systems are expected to be operational by year end.
Evaluation of conditions continues, but no unanticipated problems have yet
arise.
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 March 31, 1999, over 80% of these
funds were invested in instruments with maturities shorter than one year.
The remaining balance matures in fiscal 2002. This portfolio's interest
rate risk is unhedged. Its average maturity is approximately 120 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 holdings of preferred stock and securities, futures
and options positions, and market yield and price relationships at March
31, 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 at March 31, 1999 Change in Market
Preferred Futures and Total Value of Total
Securities Options Portfolio Portfolio
- -200 basis points $48,367.0 $0.0 $48,367.0 $4,503.2
("b.p.")
- -100 b.p. 45,658.2 30.7 45,688.9 1,825.1
Unchanged 42,612.6 1,489.5 44,102.1 0.0
+100 b.p. 38,973.2 4,707.5 43,680.6 (183.2)
+200 b.p. 35,738.7 7,881.8 43,620.6 (243.3)
9
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
(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 March 31, 1999 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 March 31, 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 March 31, 1999, and does not take into account
fluctuations of inventory levels and futures and options activity.
Commodity Risk Disclosure
(In thousands)
March 31, 1999
Market Value of Change in
Coffee Cost Coffee Futures Market
Change Inventory & Options Total Value
- - 10% $13,902,000 $ 44,000 $13,946,000 $127,000
unchanged 13,902,000 (83,000) 13,819,000 -
+ 10% 13,902,000 (210,000) 13,692,000 ($127,000)
At March 31, 1999 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 none.
security holders.
Item 5. Other information. none.
10
<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.
(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, 1999 FARMER BROS. CO.
(Registrant)
John E. Simmons
John E. Simmons
Treasurer and
Chief Financial Officer
11
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