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, 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
(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 September
30, 2000.
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
ended September 30,
2000 1999
Net sales $52,015 $53,068
Cost of goods sold 19,712 20,298
32,303 32,770
Selling expense 19,981 19,930
General and administrative expenses 2,864 1,991
22,845 21,921
Income from operations 9,458 10,849
Other income:
Dividend income 758 615
Interest income 2,991 2,270
Other, net (129) (254)
3,620 2,631
Income before taxes 13,078 13,480
Income taxes 5,167 5,392
Income before cumulative
effect of accounting change 7,911 8,088
Cumulative effect of
accounting change,
net of income taxes (310) -
Net income $ 7,601 $ 8,088
Income per common share:
Before cumulative effect of
accounting change $ 4.30 $4.32
Cumulative effect of accounting change (0.17) -
Net income per share $4.13 $4.32
Weighted average shares outstanding 1,842,301 1,840,754
Dividends declared per share $0.80 $0.75
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, June 30,
2000 2000
ASSETS
Current assets:
Cash and cash equivalents $ 14,838 $ 15,504
Short term investments 224,115 114,346
Accounts and notes receivable, net 17,158 18,494
Inventories 36,131 36,770
Income tax receivable 1,340 1,340
Deferred income taxes 1,224 1,224
Prepaid expenses 584 882
Total current assets 295,390 188,560
Property, plant and equipment, net 39,587 38,741
Notes receivable 3,081 3,081
Long term investments - 94,243
Other assets 24,606 23,975
Deferred income taxes 3,104 4,867
Total assets $365,768 $353,467
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,585 $ 5,921
Accrued payroll expenses 4,689 5,953
Other 9,861 5,092
Total current liabilities 20,135 16,966
Accrued postretirement benefits 19,516 19,198
Other long term liabilities 4,190 4,190
23,706 23,388
Commitments and contingencies - -
Shareholders' equity:
Common stock, $1.00 par value, authorized
3,000,000 shares; 1,926,414 shares
issued and outstanding 1,926 1,926
Additional paid-in capital 16,388 16,359
Retained earnings 317,278 311,153
Unearned ESOP shares (13,665) (13,679)
Accumulated other comprehensive income - (2,646)
Total shareholders' equity 321,927 313,113
Total liabilities and shareholders' equity $365,768 $353,467
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months
ended September 30,
2000 1999
Cash flows from operating activities:
Net income $ 7,601 $ 8,088
Adjustments to reconcile net income to
net cash provided by operating activities:
Cumulative effect of accounting changes 310 -
Depreciation 1,345 1,423
Deferred income taxes 1,763 -
Loss on sales of assets (24) (37)
ESOP Contribution expense 268 -
Net loss (gain) on investments 234 364
Net unrealized loss on investments
reclassified as trading 2,336 -
Change in assets and liabilities:
Investments classified as trading (15,759) -
Accounts and notes receivable 1,312 359
Inventories 639 (1,155)
Income tax receivable - 249
Prepaid expenses and other assets (351) (866)
Accounts payable (336) (2,075)
Accrued payroll and expenses and other
Liabilities 3,505 4,451
Other long term liabilities 318 416
Total adjustments (4,440) 3,129
Net cash provided by operating activities $ 3,161 $ 11,217
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(Unaudited)
For the three months
ended September 30,
2000 1999
Net cash provided by operating activities: $ 3,161 $ 11,217
Cash flows from investing activities:
Purchases of property, plant and equipment (2,184) (3,717)
Proceeds from sales of property, plant
and equipment 34 52
Purchases of investments - (98,827)
Proceeds from sales of investments - 90,920
Notes repaid 24 39
Net cash used in investing activities (2,126) (11,533)
Cash flows from financing activities:
Dividends paid (1,476) (1,406)
ESOP loan (225) -
Net cash used in financing activities (1,701) (1,406)
Net decrease in cash and
cash equivalents (666) (1,722)
Cash and cash equivalents at beginning
of period 15,504 4,403
Cash and cash equivalents at end of period $14,838 $ 2,681
Supplemental disclosure of
cash flow information:
Income tax payments $ 53 $ 62
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 our 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.
The results of operations in the three month period ended September 30,
2000 are not necessarily indicative of the results that may be expected in
the fiscal year ending June 30, 2001.
Note 2. Summary Significant Accounting Policies
Derivatives
In June 1998 the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended
by Statements 137 and 138. The Statement requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives are either offset against the change in fair
value of assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change
in fair value is immediately recognized in earnings. The adoption of
Statement No. 133, as amended, on July 1, 2000, resulted in a cumulative
effect of an accounting change of $515,000 being recognized in the
Statement of Net Income, net of taxes, and a corresponding credit in other
comprehensive income.
The Company purchases various derivative instruments as investments or to
create natural economic hedges of its interest rate risk and commodity
price risk. At September 30, 2000 derivative instruments are not
designated as accounting hedges as defined by Statement 133. The fair
value of derivative instruments is based upon broker quotes.
Investments, consisting of marketable debt and equity securities and money
market instruments, are held for trading purposes and are stated at fair
value. Gains and losses, both realized and unrealized, are included in
other income and expense
Note 3 Investments
On July 1, 2000 the Company transferred all of its investments classified
as "available for sale" at June 30, 2000 into the "trading" category.
Accordingly, the Company recognized the accumulated unrealized loss of
$3,894,000 in the consolidated statement of net income for the period
ended September 30, 2000 as other income and a corresponding amount in
other comprehensive income for the period ended September 30, 2000.
The following is a summary of trading investments at September 30, 2000.
(in thousands)
Fair Value
Corporate debt $ 58,485
U.S. Treasury obligations 46,483
U.S. Agency obligations 71,380
Preferred stock 46,732
Futures, options and other
derivative investments 1,035
$224,115
Net unrealized holding gains on trading securities included in earnings is
$1,813,000 at September 30, 2000.
Note 4. Inventories
(In thousands)
Processed Unprocessed Total
September 30, 2000
Coffee $ 4,103 $ 9,225 $13,328
Allied products 11,433 4,737 16,170
Coffee brewing equipment 1,933 4,700 6,633
$17,469 $18,662 $36,131
June 30, 2000
Coffee $ 4,007 $ 9,239 $13,246
Allied products 11,922 5,210 17,132
Coffee brewing equipment 2,034 4,358 6,392
$17,963 $18,807 $36,770
Note 5. Employee Stock Ownership Plan
During the three month period ended September 30, 2000 the Company loaned
the ESOP $225,000 which the ESOP used to purchase additional shares, and
the Company charged $268,000 to compensation expense related to the ESOP.
The difference between cost and fair market value of committed to be
released shares is recorded as additional paid-in capital.
The ESOP shares as of September 30, 2000 are as follows:
Allocated shares -
Committed to be released shares 4,392
Unallocated shares 83,783
Total ESOP shares 87,875
Note 6. Comprehensive Income
For the three months
(In thousands) ended September 30,
2000 1999
Net income $ 7,601 $8,088
Unrealized investment gains (losses), net 2,646 (382)
Total comprehensive income $10,247 $7,706
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Operating trends discussed in the Form 10-K for fiscal 2000 have continued
into the first quarter of fiscal 2001. Green coffee costs during the
first quarter of fiscal 2001 have decreased slightly since the June 30,
2000 year end and are lower than green coffee costs during the first
quarter of fiscal 2000. Gross profit margins have remained strong, but it
is not clear whether these margins can be sustained.
Net sales for the first quarter of fiscal 2001 decreased 2% to $52,015,000
as compared to $53,068,000 in the same quarter of fiscal 2000 and 4% as
compared to $54,035,000 in the same quarter of fiscal 1999. Gross profit
decreased 1% to $32,303,000 as compared to $32,770,000 in the same quarter
of fiscal 2000 and increased 4% as compared to $31,115,000 in the same
quarter of fiscal 1999.
Operating expenses in the first quarter of fiscal 2001, consisting of
selling and general and administrative expenses, increased 4% to
$22,845,000 as compared to $21,921,000 in the same quarter of fiscal 2000,
and increased 5% as compared to $21,794,000 in the same quarter of fiscal
1999. The increase is primarily attributed to salaries and other
compensation related expenses.
On July 1, 2000 we adopted the Financial Accounting Standards Board (FASB)
Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended by Statements 137 and 138. The statement
requires the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not designated as hedges must be
adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of
derivatives are either offset against the change in fair value of assets,
liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The adoption of Statement No. 133 and
138 on July 1, 2000 resulted in $3,894,000 recognized in "Other expense,"
and $515,000 recognized as the "Cumulative effect of accounting change",
adjusted for income taxes. The after tax cumulative effect adjustment of
$310,000 represents approximately $0.17 per share.
Net income before the cumulative effect of accounting change decreased 6%
to $7,911,000, or $4.30 per share, as compared to $8,088,000 or $4.32 per
share and increased 1% as compared to $7,539,000 or $3.91 per share and
increased 1% as compared to $7,539,000 or $3.91 per share in the same
periods of fiscal 2000 and 1999, respectively.
Quarterly Summary of Results
(In thousands of dollars)
09/30/99 12/31/99 03/31/00 06/30/00 09/30/00
Net sales 53,068 56,303 56,354 52,963 52,015
Gross profit 32,770 32,903 38,230 37,816 32,303
Operating income 10,849 10,459 13,913 13,744 9,458
Net income 8,088 8,316 10,364 10,808 7,601
As a percentage of sales
09/30/99 12/31/99 03/31/00 06/30/00 09/30/00
Net sales 100.00 100.00 100.00 100.00 100.00
Gross profit 61.75 58.44 67.84 71.40 62.10
Operating income 20.44 18.58 24.69 25.95 18.18
Net income 15.24 14.77 18.39 20.41 14.61
In dollars
09/30/99 12/31/99 03/31/00 06/30/00 09/30/00
Net income per share 4.32 4.45 5.60 5.85 4.13
Market Risk Disclosures
Financial Markets
Our portfolio of investment grade money market instruments includes
bankers acceptances, discount commercial paper, medium term notes and
federal agency and treasury securities. As of September 30, 2000, over
48% of these funds were invested in instruments with maturities shorter
than one hundred eighty one days. The portfolio's interest rate risk is
not hedged. Its average maturity is approximately 241 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, 2000 Value of Fixed
Fixed Income Investments Income Investments
-100 b.p. $187,350 $1,855
unchanged 185,495 -
+100 b.p. 183,640 (1,855)
We are exposed to market value risk arising from changes in interest rates
on our portfolio of preferred stock. We review the interest rate
sensitivity of these securities and (a) enter into "short positions" in
futures contracts on U.S. Treasury securities or (b) hold put options on
such futures contracts in order to reduce the impact of certain interest
rate changes on such preferred stock. Specifically, we attempt to manage
the risk arising from changes in the general level of interest rates.
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, 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 stock holdings, the yields on U.S. Treasury securities, and
related futures and options.
Interest Rate Changes
(In thousands)
Market Value of September 30, 2000 Change in Market
Preferred Futures & Total Value of Total
Stock Options Portfolio Portfolio
-200 basis points $52,148.8 $0.0 $52,148.8 $6,021.6
("b.p.")
-100 b.p. 48,901.3 19.5 48,920.8 2,793.6
Unchanged 45,089.3 1,037.9 46,127.2 0.0
+100 b.p. 41,259.6 4,479.7 45,739.3 (388.0)
+200 b.p. 37,726.1 7,713.8 45,439.9 (687.3)
The number and type of future and option contracts entered into depends
on, among other items, the specific maturity and issuer redemption
provisions for each preferred stock 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, 2000 and 1999 the derivatives
consisted entirely of put options on a U.S. Treasury Bond futures
contract.
Commodity Price Changes
We are exposed to commodity price risk arising from changes in the market
price of green coffee. We price our inventory on the LIFO basis. In the
normal course of business, we enter into commodity purchase agreements
with suppliers and we purchase green coffee contracts.
The following table demonstrates the impact of changes in the price of
green coffee on inventory and green coffee contracts at September 30,
2000. It assumes an immediate change in the price of green coffee, and
the valuations of coffee index futures and put options and relevant
commodity purchase agreements at September 30, 2000.
Commodity Risk Disclosure
(In thousands)
Market Value of
Coffee Cost Coffee September 30, 2000 Change in Market Value
Change Inventory Futures & Options Totals Derivatives Inventory
-10% $11,995 $393,000 $12,388 $ 395 $(1,333)
unchanged 13,328 (2,000) 13,326 - -
+10% 14,661 (397,000) 14,264 (395) 1,333
At September 30, 2000 the derivatives 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 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 right of security
holders, including indentures. not applicable.
(11) Statement re computation of per share
earning. 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 13, 2000 Farmer Bros. Co.
(Registrant)
/s/John E. Simmons
John E. Simmons
Treasurer and
Chief Financial Officer
