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, 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 requirement for the past 90 days. YES [X] NO [ ]
Number of shares of Common Stock outstanding: 1,851,039 as of December 31,
1999.
PAGE 1 OF 11
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,
1999 1998 1999 1998
Net sales $56,303 $58,408 $109,371 $112,443
Cost of goods sold 23,400 26,313 43,698 49,233
32,903 32,095 65,673 63,210
Selling expense 20,230 19,836 40,160 39,750
General and administrative
expenses 2,214 1,914 4,205 3,794
22,444 21,750 44,365 43,544
Income from operations 10,459 10,345 21,308 19,666
Other income (expense):
Dividend income 654 582 1,269 1,187
Interest income 2,384 2,290 4,654 4,529
Other, net 363 (42) 109 358
3,401 2,830 6,032 6,074
Income before taxes 13,860 13,175 27,340 25,740
Income taxes 5,544 5,270 10,936 10,296
Net income $ 8,316 $ 7,905 $ 16,404 $ 15,444
Earnings per common share $4.45 $4.10 $8.77 $8.02
Weighted average shares
outstanding 1,870,134 1,926,414 1,870,444 1,926,414
Dividends declared per
common share $0.75 $0.70 $1.50 $1.40
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 30,
1999 1999
ASSETS
Current assets:
Cash and cash equivalents $ 9,948 $ 4,403
Short term investments 94,972 122,203
Accounts and notes receivable, net 21,676 18,199
Inventories 33,680 33,675
Income tax receivable - 249
Deferred income taxes 2,391 2,391
Prepaid expenses 931 429
Total current assets 163,598 181,549
Property, plant and equipment, net 36,213 31,543
Notes receivable 3,884 3,884
Long term investments, net 105,806 81,760
Other assets 22,475 21,382
Deferred income taxes 5,724 4,718
Total assets $337,700 $324,836
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,096 $ 4,786
Accrued payroll expenses 5,156 5,388
Other 6,681 5,744
Total current liabilities 18,933 15,918
Accrued postretirement benefits 18,512 17,707
Other long term liabilities 3,500 3,500
22,012 21,207
Commitments and contingencies - -
Shareholders' equity:
Common stock, $1.00 par value,
authorized 3,000,000 shares;
issued 1,926,414 and outstanding
1,851,039 shares at December 31, 1999
and 1,870,754 shares at June 30, 1999 1,851 1,871
Additional paid-in capital 3,131 3,164
Retained earnings 293,680 283,191
Accumulated other comprehensive (loss) (1,907) (515)
Total shareholders' equity 296,755 287,711
Total liabilities and
shareholders' equity $337,700 $324,836
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months
ended December 31,
1999 1998
Cash flows from operating activities:
Net Income $ 16,404 $ 15,444
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 2,872 2,770
Other 43 (55)
Net loss (gain) on investments 182 (158)
Changes in assets and liabilities:
Accounts and notes receivable (3,545) (2,349)
Inventories (5) 2,448
Income tax receivable 249 453
Prepaid expenses and other assets (1,633) (952)
Accounts payable 2,310 3,712
Accrued payroll expenses and
other liabilities 705 (1,816)
Accrued postretirement benefits 805 887
Total adjustments $ 1,983 $ 4,940
Net cash provided by operating activities $ 18,387 $ 20,384
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(Unaudited)
For the six months
ended December 31,
1999 1998
Net cash provided by operating activities: $ 18,387 $ 20,384
Cash flows from investing activities:
Purchases of property, plant
and equipment (7,722) (2,528)
Proceeds from sales of property,
plant and equipment 176 62
Purchases of investments (162,031) (325,859)
Proceeds from sales of investments 162,636 312,627
Notes issued - (54)
Notes repaid 68 88
Net cash used in investing activities (6,873) (15,664)
Cash flows from financing activities:
Dividends paid (2,809) (2,697)
Purchase of common stock (3,160) -
Net cash used in financing activities (5,969) (2,697)
Net increase in cash and cash equivalents 5,545 2,023
Cash and cash equivalents at beginning of
year 4,403 6,800
Cash and cash equivalents at end of
quarter $ 9,948 $ 8,823
Supplemental disclosure of cash flow
information:
Income tax payments $ 9,993 $ 10,504
The accompanying notes are an integral part of these financial statements.
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
statement of the results of operations for the interim periods have been
made.
Note 2. Investments
The Company hedges interest rate risk in its portfolio of preferred stock.
Deferred gains and losses associated with the hedge are $265,000 and
($923,000) at December 31, 1999 and June 30, 1999, respectively.
Gross Gross
(In thousands) Unrealized Unrealized Fair
December 31, 1999 Cost Loss Gain Value
Current Assets
Commercial Paper $ - - - -
U.S. Government
Obligations 95,283 (311) - $
94,972
$ 95,283 (311) - $ 94,972
Non-Current Assets
U.S. Government
Obligations 59,892 (1,373) - 58,519
Municipal debt 1,695 (9) - 1,686
Preferred stocks 38,967 (2,228) 803 37,542
Corporate bonds 3,083 (341) 4 2,746
Liquid asset fund
and other 4,304 - 1,009 5,313
$107,941 (3,951) 1,816 $105,806
Gross Gross
(In thousands) 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) - 1,687
Preferred stocks 37,538 (548) 2,049 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
The contractual maturities of debt securities classified as current and non-
current available for sale are as follows:
Maturities Fair Value
(In thousands)
12/31/99 06/30/99
Within 1 year $ 94,972 $122,203
After 1 year through 5 years 60,205 35,860
$155,177 $158,063
Gross realized gains and losses from available for sale securities were
$714,000 and $(897,000) at December 31, 1999, respectively, and $979,000
and $(821,000) at December 31, 1998, respectively.
Note 3. Inventories
(In thousands) Processed Unprocessed Total
December 31, 1999
Coffee $ 3,822 $ 9,220 $13,042
Allied products 9,041 4,940 13,981
Coffee brewing equipment 1,823 4,834 6,657
$14,686 $18,994 $33,680
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 For the six months
ended December 31, ended December 31,
(In thousands) 1999 1998 1999 1998
Net income $ 8,316 $ 7,905 $16,404 $15,444
Unrealized investment gains
(losses), net (1,010) (736) (1,392) (1,641)
Total comprehensive income $ 7,306 $ 7,169 $15,012 $13,803
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Net sales for the second quarter of fiscal 2000 decreased 4% to $56,303,000
from $58,408,000 in the same quarter of the prior fiscal year and net sales
for the first half of fiscal 2000 decreased 3% to $109,371,000 from
$112,443,000 in the first half of fiscal 1999. Decreased roast coffee
sales volume and lower roast coffee prices offset increased sales of allied
products and combined with lower green coffee costs resulted in increased
gross profit. Second quarter gross profit increased 3% to $32,903,000 or
58% of sales, as compared to $32,095,000, or 55% of sales, in the same
quarter of fiscal 1999. Gross profit for the first half of fiscal 2000
increased 4% to $65,673,000 or 60% of sales from $63,210,000 or 56% of
sales during the same period of fiscal 1999.
Operating expenses increased 3% to $22,444,000 in the second quarter of
fiscal 2000 as compared to $21,750,000 in the second quarter of fiscal
1999. Operating expenses for the first half of fiscal 1999 increased 2% to
$44,365,000 from $43,544,000 during the same period of fiscal 1999.
Income after taxes for the second quarter of fiscal 2000 reached
$8,316,000, or $4.45 per share, as compared to $8,088,000, or $4.32 per
share, in the first quarter of fiscal 2000 and $7,905,000, or $4.10 per
share, in the same quarter of fiscal 1999. Net income for the first half
of fiscal 2000 reached $16,404,000, or $8.77 per share, as compared to
$15,444,000, or $8.02 per share, in the first six months of fiscal 1999.
QUARTERLY SUMMARY OF RESULTS
(In thousands of dollars)
12/31/98 03/31/99 06/30/99 09/30/99 12/31/99
Net sales 58,408 55,207 53,921 53,068 56,303
Gross profit 32,095 35,153 33,374 32,770 32,903
Operating income 10,345 12,144 4,960 10,849 10,459
Net income 7,905 9,159 4,262 8,088 8,316
(As a percentage of sales)
12/31/98 03/31/99 06/30/99 09/30/99 12/31/99
Net sales 100.00 100.00 100.00 100.00 100.00
Gross profit 54.95 63.67 61.89 61.75 58.44
Operating income 17.71 22.00 9.20 20.44 18.58
Net income 13.53 16.59 7.90 15.24 14.77
(In dollars)
12/31/98 03/31/99 06/30/99 09/30/99 12/31/99
EPS 4.10 4.83 2.29 4.32 4.45
Employee Stock Ownership Plan
On December 21, 1999, Registrant filed a Form 8-K in which the Company
announced that it established an employee stock ownership plan (ESOP)
effective January 1, 2000. This plan provides the Registrant with a
flexible means of acquiring Company stock from any source. In addition to
providing existing employees with a long-term incentive plan, the ESOP also
helps make the Company's compensation package more competitive in a tight
labor market and it provides all shareholders with a source of liquidity.
The plan will initially be established as a leveraged ESOP and the Company
will be the initial lender. The Company expects to make the necessary
investment in this program to purchase up to 300,000 shares of Company
stock at times and in increments compatible with other corporate
objectives. Approximately 77,500 shares, owned by a subsidiary, have been
acquired for this purpose and Registrant expects to make additional share
contributions either through open market purchases and negotiated purchase
transactions or by issuing new shares to the ESOP.
Year 2000 Issues
During this early part of year 2000, Registrant has not realized any
material effect of year 2000 issues. It is to early to conclude that no
further issues need be addressed, and the Company is proceeding with its
business plan.
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 December 31, 1999, over 40% of these
funds were invested in instruments with maturities shorter than three
months. The remaining balance matures during fiscal 2001 and 2002. This
portfolio's interest rate risk is unhedged. Its average maturity is
approximately 255 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 December 31, 1999 Value of Fixed
Fixed Income Investments Income Investments
- -100 b.p. $164,632 1,590
unchanged $163,042 -
+100 b.p. $161,452 (1,590)
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 contract 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 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 December 31, 1999 Change in Market
Preferred Futures and Total Value of Total
Securities Options Portfolio Portfolio
- -200 basis points $47,252.4 $0.9 $47,253.3 $4,624.3
("b.p.")
- -100 b.p 43,898.7 179.5 44,078.2 1,449.2
Unchanged 40,378.2 2,250.8 42,629.0 0.0
+100 b.p. 37,037.1 5,638.8 42,675.9 46.9
+200 b.p. 34,023.8 8,501.3 42,525.1 (104.0)
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 cure, the expected volatility of Treasury yields, and the costs of
using futures and/or options. At December 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 inventory and hedge instruments at December 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 December 31, 1999, and does not take into account
fluctuations of inventory levels and futures and options activity.
Commodity Risk Disclosure
(In thousands)
Market Value of
Coffee Cost Coffee December 31, 1999 Change in
Change Inventory Futures & Options Total Market Value
- -10% $13,042 $ 2,046 $15,088 $ 1,683
unchanged $13,042 $ 363 $13,405 -
+10% $13,042 $(1,320) $11,722 $(1,683)
At December 31, 1999 the hedge consisted 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
security holders. none.
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 computations 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 December 21, 1999.
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 14, 2000 FARMER BROS. CO.
(Registrant)
John E. Simmons
John E. Simmons
Treasurer and
Chief Financial Officer
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