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, 2000
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
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: 1,845,904 as of March 31,
2000.
PAGE 1 OF 12
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Dollars in thousands, except per share data)
FARMER BROS. CO.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
For the three months For the nine months
ended March 31, ended March 31,
2000 1999 2000 1999
Net sales $ 56,354 $ 55,207 $165,725 $167,650
Cost of goods sold 18,124 20,054 61,822 69,287
38,230 35,153 103,903 98,363
Selling expense 21,053 20,187 61,213 60,567
General and administrative
expenses 3,264 2,192 7,469 5,986
24,317 23,009 68,682 66,553
Income from operations 13,913 12,144 35,221 31,810
Other income:
Dividend income 719 605 1,988 1,792
Interest income 2,604 2,153 7,258 6,682
Other, net 253 363 362 721
3,576 3,121 9,608 9,195
Income before taxes 17,489 15,265 44,829 41,005
Income taxes 7,125 6,106 18,061 16,402
Net income $ 10,364 $ 9,159 $ 26,768 $ 24,603
Earnings per common share $5.60 $4.83 $14.37 $12.84
Weighted average shares
outstanding 1,848,350 1,897,444 1,863,035 1,916,757
Dividends declared per
common share $0.75 $0.70 $2.25 $2.10
The accompanying notes are an integral part of these financial statements.
<PAGE>
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, June 30,
2000 1999
ASSETS
Current assets:
Cash and cash equivalents $ 18,966 $ 4,403
Short term investments 67,827 122,203
Accounts and notes receivable, net 18,491 18,199
Inventories 35,180 33,675
Income tax receivable - 249
Deferred income taxes 2,391 2,391
Prepaid expenses 502 429
Total current assets 143,357 181,549
Property, plant and equipment, net 37,120 31,543
Notes receivable 3,884 3,884
Long term investments, net 133,263 81,760
Other assets 23,046 21,382
Deferred income taxes 5,907 4,718
Total assets $346,577 $324,836
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,655 $ 4,786
Accrued payroll expenses 4,465 5,388
Other 8,634 5,744
Total current liabilities 19,754 15,918
Accrued postretirement benefits 18,839 17,707
Other long term liabilities 3,500 3,500
22,339 21,207
Commitments and contingencies - -
Shareholders' equity:
Common stock, $1.00 par value,
authorized 3,000,000 shares;
issued 1,926,414 and outstanding
1,845,904 shares at March 31, 2000
and 1,870,754 shares at June 30, 1999 1,846 1,871
Additional paid-in capital 3,121 3,164
Unearned ESOP shares (13,146) -
Retained earnings 315,015 283,191
Accumulated other comprehensive loss (2,352) (515)
Total shareholders' equity 304,484 287,711
Total liabilities and
shareholders' equity $346,577 $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 nine months
ended March 31,
2000 1999
Cash flows from operating activities:
Net income $ 26,768 $ 24,603
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 4,240 3,988
Other 678 (89)
Net loss (gain) on investments 450 (398)
Changes in assets and liabilities:
Accounts and notes receivable (393) (2,142)
Inventories (1,505) 4,221
Income tax receivable 249 453
Prepaid expenses and other assets (1,794) (2,564)
Accounts payable 1,869 1,144
Accrued payroll expenses and
other liabilities 1,967 898
Accrued postretirement benefits 1,132 1,322
Total adjustments 6,893 6,833
Net cash provided by operating activities $ 33,661 $ 31,436
The accompanying notes are an integral part of these financial statements.
<PAGE>
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(Unaudited)
For the nine months
ended March 31,
2000 1999
Net cash provided by operating activities: $ 33,661 $ 31,436
Cash flows from investing activities:
Purchases of property, plant and equipment (11,138) (3,889)
Proceeds from sales of property, plant
and equipment 700 118
Purchases of investments (224,639) (486,817)
Proceeds from sales of investments 224,037 487,556
Notes issued - (54)
Notes repaid 101 117
Net cash used in investing activities (10,939) (2,969)
Cash flows from financing activities:
Dividends paid (4,197) (4,045)
Purchase of common stock (3,962) (11,817)
Net cash (used in) provided by
financing activities (8,159) 15,862
Net increase in cash and cash equivalents 14,563 12,605
Cash and cash equivalents at
beginning of period 4,403 6,800
Cash and cash equivalents at
end of period $ 18,966 $ 19,405
Supplemental disclosure of cash flow
information:
Income tax payments $ 15,085 $ 14,991
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
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 ($1,088,000) and
$923,000 at March 31, 2000 and June 30, 1999, respectively.
Gross Gross
(In thousands) Unrealized Unrealized Fair
March 30, 2000 Cost Loss Gains Value
Current Assets
Commercial paper $ 11,271 (4) - $ 11,267
U.S. Government
obligations 57,182 (624) 2 56,560
$ 68,453 (628) 2 $ 67,827
Non-Current Assets
U.S. Government
obligations $ 82,107 (1,466) 2 $ 80,643
Municipal debt 1,695 (50) - 1,669
Preferred stock 43,475 (1,736) 1,387 43,126
Corporate bonds 7,171 (241) - 6,906
Other 2,121 (1,202) - 919
$136,569 $(4,695) $ 1,389 $133,263
Gross Gross
(In thousands) Unrealized Unrealized Fair
June 30, 1999 Cost Loss Gains 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 stock 37,538 (548) 2,049 39,039
Corporate bonds 5,075 (461) - 4,614
Other 2,247 - - 2,247
$ 81,570 (1,859) 2,049 $ 81,760
<PAGE>
The contractual maturities of debt securities classified as current and non-
current available for sale are as follows:
Maturities Fair Value
(In thousands) 03/31/00 06/30/99
Within 1 year $ 67,827 $122,203
After 1 year through 5 years 87,288 35,860
$155,115 $158,063
Gross realized gains and losses from available for sale securities were
$609,000 and ($1,059,000) at March 31, 2000, and $1,881,000 and
($1,483,000) at March 31, 1999, respectively.
Note 3. Inventories
(In thousands) Processed Unprocessed Total
March 31, 2000
Coffee $ 3,965 $ 9,116 $13,081
Allied products 11,722 3,644 15,366
Coffee equipment 1,856 4,877 6,733
$17,543 $17,637 $35,180
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. Employee Stock Ownership Plan
On January 1, 2000, the Company established the Farmer Bros. Co. Employee
Stock Ownership Plan (ESOP) to provide benefits to all employees. The
Board of Directors has authorized a loan of up to $50,000,000 to the ESOP
to purchase up to 300,000 shares, secured by the stock purchased. The loan
will be repaid from the Company's discretionary plan contributions over a
fifteen year term at a variable rate of interest, 7.65% at March 31, 2000.
On March 31, 2000 the ESOP had an outstanding loan balance of $13,368,000
and had purchased 81,875 shares of the Company's common stock.
Shares purchased with the loan proceeds are held by the plan trustee for
allocation among the participants as the loan is repaid. The unencumbered
shares are allocated to participants using a compensation-based formula.
Subject to vesting requirements, allocated shares are owned by
participants, and shares are held by the plan trustee until the participant
retires.
The Company reports compensation expense equal to the average market price
of shares allocated to participants or to be released from collateral
during the plan year. The cost of shares purchased by the ESOP which have
not been committed to be released or allocated to participants are shown as
<PAGE>
a contra-equity account "Unearned ESOP shares" and are excluded from earnings
per share calculations. During the fiscal quarter ending March 31, 2000,
the Company recorded $223,000 of compensation expense related to the ESOP
for the plan year ending December 31, 2000.
The ESOP shares as of March 31 are as follows:
Allocated shares -
Committed to be released shares 1,365
Unallocated shares 80,510
Total ESOP shares 81,875
Fair value of unearned ESOP shares $13,368,000
Note 5. Comprehensive Income
The following table presents the Company's comprehensive income for the
three and nine month periods ended March 31.
For the three months For the nine months
ended March 31 ended March 31
(In thousands) 2000 1999 2000 1999
Net income $10,364 $ 9,159 $26,768 $24,603
Unrealized investment gains
(losses), net (445) 340 (1,837) (1,301)
Total comprehensive income $ 9,919 $ 9,499 $24,931 $23,302
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Net sales for the third quarter of fiscal 2000 increased 2% to $56,354,000
as compared to $55,207,000 in the same quarter of the prior fiscal year, as
a result of increased allied product sales. Fiscal 2000 year to date net
sales decreased 1% to $165,725,000 from $167,650,000 in the same period of
fiscal 1999. This decrease is primarily the result of lower roast coffee
sales volume partially offset by increased allied product sales.
Lower green coffee costs during the most recent fiscal quarter resulted in
an 9% increase in gross profit to $38,230,000 from $35,153,000 in the prior
fiscal year, and fiscal year to date gross profit increased 6% to
$103,903,000 as compared to $98,363,000 in the first nine months of fiscal
1999.
Operating expenses increased 6% to $24,317,000 in the third quarter of
fiscal 2000 from $23,009,000 in the same quarter of the prior fiscal year
and operating expenses for the first three quarters of fiscal 2000
increased 3% to $68,682,000 from $66,553,000 in the same period of the
prior fiscal year. This increase is primarily from increases in employee
benefit expenses (payroll, medical costs, ESOP and retirement benefits),
offset by lower costs of coffee brewing equipment.
<PAGE>
Net income for the third quarter of fiscal 2000 reached $10,364,000, or
$5.60 per share, as compared to $9,159,000, or $4.83 per share, in the same
quarter of fiscal 1999. Net income for the first three quarters of fiscal
2000 reached $26,768,000, or $14.37 per share, as compared to $24,603,000,
or $12.84 per share, in the same period of fiscal 1999.
QUARTERLY SUMMARY OF RESULTS
(In thousands of dollars)
03/31/99 06/30/99 09/30/99 12/30/99 03/31/00
Net sales 55,207 53,921 53,068 56,303 56,354
Gross profit 35,153 33,374 32,770 32,903 38,230
Operating income 12,144 4,960 10,849 10,459 13,913
Net income 9,159 4,262 8,088 8,316 10,364
(As a percentage of sales)
03/31/99 06/30/99 09/30/99 12/30/99 03/31/00
Net sales 100.00 100.00 100.00 100.00 100.00
Gross profit 63.67 61.89 61.75 58.44 67.84
Operating income 22.00 9.20 20.44 18.58 24.69
Net income 16.59 7.90 15.24 14.77 18.39
(In dollars)
03/31/99 06/30/99 09/30/99 12/30/99 03/31/00
EPS 4.83 2.29 4.32 4.45 5.60
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 other comprehensive income. 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, 2000, over 20% of these
funds were invested in instruments with maturities shorter than three
months, which are included in cash equivalents. The remaining balance
matures during fiscal 2001 and 2002. This portfolio's interest rate risk
is unhedged. Its average maturity is approximately 287 days and a 100
basis point move in the Fed Funds Rate is illustrated in the following
table.
<PAGE>
Interest Rate Changes
(In thousands)
Change in Market
Market Value of March 31, 2000 Value of Fixed
Fixed Income Investments Income Investments
- -100 b.p. $165,005 $ 1,634
unchanged $163,371 $ 0
+100 b.p. $161,737 $ (1,634)
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 at March 31, 2000.
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, 2000 Change in Market
Preferred Futures and Total Value of Total
Securities Options Portfolio Portfolio
- -200 basis points $52,098.5 - $52,098.5 $6,662.6
("b.p.")
- -100 b.p. 48,842.6 1.2 48,843.9 3,407.9
Unchanged 45,142.2 293.7 45,435.9 -
+100 b.p. 41,434.3 2,855.8 44,290.1 (1,145.8)
+200 b.p. 37,977.3 6,114.4 44,091.7 (1,344.2)
The number and type of futures and options contracts entered into depends
on 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, 2000 the hedge consisted entirely of put
options on the U.S. Treasury Bond futures contract.
<PAGE>
Commodity Price Changes
The Company is exposed to commodity price risk arising from changes in the
market price of green coffee. The Company 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 March 31, 2000. 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, 2000, 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 March 31, 2000 Change in
Change Inventory Futures & Options Totals Market Value
- -10% $13,081 $ 363 $13,444 $ 546
unchanged 13,081 (183) 12,898 0
+10% 13,081 (729) 12,352 (546)
At March 31, 2000 the hedge consisted of commodity futures with maturities
shorter than three months.
PART II OTHER INFORMATION
Item 1. Legal proceedings. not applicable.
Item 2. Change 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,
<PAGE>
arrangement, liquidation or succession. not applicable.
(4) Instruments defining the rights of
security holders, including identures. 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: May 12, 2000 FARMER BROS. CO.
John E. Simmons
John E. Simmons
Treasurer and
Chief Financial Officer
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