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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period from July 1, 2002 to September 30, 2002.
Commission File Number: 0-1375
FARMER BROS. CO.
(Exact name of registrant as specified in its charter)
California 95-0725980
(State of Incorporation) (IRS Employer Identification
Number)
20333 S. Normandie Avenue, Torrance, California 90502
(Address of principal executive offices) (Zip Code)
(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,
2002.
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,
2002 2001
Net sales $50,389 $49,400
Cost of goods sold 18,857 16,831
31,532 32,569
Selling expense 20,744 20,359
General and administrative expenses 3,434 2,924
24,178 23,283
Income from operations 7,354 9,286
Other income:
Dividend income 857 811
Interest income 1,287 2,489
Other, net (379) 140
1,765 3,440
Income before taxes 9,119 12,726
Income taxes 3,511 4,963
Net income $ 5,608 $ 7,763
Net income per share $3.03 $4.21
Weighted average shares outstanding 1,851,197 1,844,961
Dividends declared per share $0.90 $0.85
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, June 30,
2002 2002
ASSETS
Current assets:
Cash and cash equivalents $ 7,750 $ 7,047
Short term investments 288,005 285,540
Accounts and notes receivable, net 16,099 14,004
Inventories 36,801 37,361
Income tax receivable - 2,553
Deferred income taxes 1,188 1,188
Prepaid expenses 1,813 741
Total current assets 351,656 348,434
Property, plant and equipment, net 38,329 38,572
Notes receivable 224 224
Other assets 27,805 27,622
Deferred income taxes 2,672 2,672
Total assets $420,686 $417,524
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,994 $ 4,827
Accrued payroll expenses 5,047 6,407
Other 5,911 5,025
Total current liabilities 14,952 16,259
Accrued postretirement benefits 23,186 22,726
Other long term liabilities 5,486 5,486
43,624 44,471
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 17,888 17,627
Retained earnings 369,666 365,725
Unearned ESOP shares (12,418) (12,225)
Total shareholders' equity 377,062 373,053
Total liabilities and shareholders' equity $420,686 $417,524
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,
2002 2001
Cash flows from operating activities:
Net income $ 5,608 $ 7,763
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,376 1,372
Loss on sales of assets (75) (33)
ESOP Compensation expense 799 581
Net (gain) or loss on investments (509) 120
Change in assets and liabilities:
Short term investments (1,956) 33,745
Accounts and notes receivable (2,111) 851
Inventories 560 (523)
Income tax receivable 2,553 2,042
Prepaid expenses and other assets (1,255) (208)
Accounts payable (833) (3,199)
Accrued payroll and expenses and other
liabilities (474) 1,244
Accrued postretirement benefits 460 487
Total adjustments (1,465) 36,479
Net cash provided by operating activities $ 4,143 $ 44,242
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,
2002 2001
Net cash provided by operating activities: $ 4,143 $ 44,242
Cash flows from investing activities:
Purchases of property, plant and equipment (1,151) (995)
Proceeds from sales of property, plant
and equipment 93 78
Notes repaid 16 21
Net cash used in investing activities ( 1,042) ( 896)
Cash flows from financing activities:
Dividends paid ( 1,667) (1,572)
ESOP contributions (731) _
Net cash used in financing activities (2,398) (1,572)
Net increase in cash and cash equivalents 703 41,774
Cash and cash equivalents at beginning
of period 7,047 19,362
Cash and cash equivalents at end of period $ 7,750 $ 61,136
Supplemental disclosure of
cash flow information:
Income tax payments $ 20 $ 40
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 generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended
September 30, 2002 are not necessarily indicative of the results that may be
expected for the year ended June 30, 2003.
The balance sheet at June 30, 2002 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Farmer Bros Co. annual report on Form 10-K
for the year ended June 30, 2002.
Note 2. Investments
Investments are as follows (in thousands):
September 30, June 30,
2002 2002
Trading securities at fair value
Corporate debt $ - $ 18,863
U.S. Treasury obligations 213,947 184,756
U.S. Agency obligations 20,056 26,983
Preferred stock 47,910 48,873
Other fixed income 5,150 5,181
Futures, options and other
derivative investments 942 884
$288,005 $285,540
Note 3. Inventories
(In thousands)
September 30, 2002
Processed Unprocessed Total
Coffee $ 3,192 $10,752 $13,944
Allied products 12,056 4,926 16,982
Coffee brewing equipment 2,235 3,340 5,875
$17,483 $19,318 $36,801
June 30, 2002
Processed Unprocessed Total
Coffee $ 3,438 $10,393 $13,831
Allied products 12,482 5,116 17,598
Coffee brewing equipment 2,528 3,404 5,932
$18,448 $18,913 $37,361
Interim LIFO Calculations
An actual valuation of inventory under the LIFO method can be made only
at the end of each year based on the inventory levels and costs at that
time. Accordingly, interim LIFO calculations must necessarily be based
on management's estimates of expected year-end inventory levels and costs.
Because these are subject to many forces beyond management's control,
interim results are subject to the final year-end LIFO inventory valuation.
Note 4. Recently Issued Accounting Standards
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which supercedes SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 144 addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of
and is effective for fiscal years beginning after December 15, 2001. SFAS
retains certain fundamental provisions of SFAS No. 121 including recognition
and measurement of the impairment of long-lived assets to be held and used
and measurement of long-lived assets to be disposed of by sale. The adoption
of this standard, effective July 1, 2002, had no material effect on the
Company.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting for Exit
or Disposal Activities". SFAS 146 addresses significant issues regarding
the recognition, measurement, and reporting of costs that are associated
with exit and disposal activities, including restructuring activities that
are currently accounted for under Emerging Issues Task Force ("EITF") Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The scope of SFAS 146 also includes costs related to
terminating a contract that is not a capital lease and termination benefits
that employees who are involuntarily terminated receive under the terms of
a one-time benefit arrangement that is not an ongoing benefit arrangement
or an individual deferred-compensation contract. SFAS 146 will be effective
for exit or disposal activities that are initiated after December 31, 2002
but early application is encouraged. The provisions of EITF Issue No. 94-3
shall continue to apply for an exit activity initiated under an exit plan
that met the criteria of EITF Issue No. 94-3 prior to the adoption of SFAS
146. Adopting the provisions of SFAS 146 will change, on a prospective
basis, the timing of when restructuring charges are recorded from a
commitment date approach to when the liability is incurred.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Financial Condition
There have been no material changes in the Company's liquidity or financial
condition since the year ended June 30, 2002.
(in thousands) September 30, June 30,
2002 2002
Current assets $351,656 $348,434
Current liabilities 14,952 $ 16,259
Working capital $336,704 $332,175
Total assets $420,686 $417,524
All present and future liquidity needs are expected to be met by internal
sources. The Company tries not to rely on banks or other third parties for
its working capital and other liquidity needs. Our operations are often
affected by the green coffee market. At present the cost of green coffee has
increased more than 40% over costs at the end of fiscal 2002. The market is
volatile and green coffee prices could continue to climb requiring a
substantial additional investment in inventory by the Company merely to
maintain its existing level of business operations.
In 2000 the board of directors authorized an initial loan to the ESOP of up to
$50,000,000 for the purchase of Company stock. As of October 15, 2002 the
Company has loaned $29,795,000 for the purchase of approximately 140,000 shares
of stock. The Company has plans to purchase improved properties for certain of
its branch warehouse locations, and where buildings are not available, has
purchased land and developed the property itself. At the present time the
Company is in escrow on a parcel of land in Chico, California.
Results of Operations
Most operating trends discussed in the Form 10-K for fiscal 2002 have
continued into the first quarter of fiscal 2003. Green coffee costs during
the first quarter of fiscal 2003 have increased 17% since the June 30, 2002
year end. Rumors of drought in Brazil have fueled a speculative increase in
green coffee costs, pushing current green coffee prices to levels more than
40% higher than those at June 30, 2002.
Net sales for the first quarter of fiscal 2003 increased 2% to $50,389,000 as
compared to $49,400,000 in the same quarter of fiscal 2002 but declined
slightly as compared to $50,404,000 in the quarter ended June 30, 2002. The
apparent increase in sales in the current fiscal quarter reflects both a
reduced sales level in the same quarter of the 2002 fiscal year, resulting from
the September 11 disaster, and an increase in allied products sales in fiscal
2003. Gross profit decreased 3% to $31,532,000 as compared to $32,569,000 in
the same quarter of fiscal 2001 and decreased 6% as compared to $33,401,000 in
the quarter ended June 30, 2002, due to the increased cost of green coffee in
the current quarter.
Operating expenses in the first quarter of fiscal 2003, consisting of selling
and general and administrative expenses, increased 4% to $24,178,000 as
compared to $23,283,000 in the same quarter of fiscal 2002. The increase is
primarily attributed to increases in employee related expenses.
Other income in the first quarter of fiscal 2003 decreased 49% to $1,765,000
from $3,440,000 in the first quarter of fiscal 2002. Interest earned decreased
48% to $1,287,000 as compared to $2,489,000 in the quarters ended September
30, 2002 and 2001, respectively, as the result of lower interest rates during
fiscal 2003.
As the result of the above mentioned factors, net income for the first quarter
of fiscal 2003 decreased 28% to $5,608,000, or $3.03 per share, as compared to
$7,763,000 or $4.21 per share for the first quarter of fiscal 2002.
Quarterly Summary of Results (in thousands of dollars):
9/30/01 12/30/01 3/31/02 6/30/02 9/30/02
Net sales $49,400 $54,755 $51,298 $50,404 $50,389
Gross profit 32,569 37,337 34,786 33,401 31,532
Income from operations 9,286 11,891 9,843 7,190 7,354
Net income 7,763 9,733 6,406 6,667 5,608
Net income per common share $4.21 $5.27 $3.47 $3.60 $3.03
Forward Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q regarding
The risks, circumstances and financial trends that may affect our future
operating results, financial position and cash flows may be forward-looking
statements within the meaning of federal securities laws. These statements
are based on management's current expectations, assumptions, estimates and
observations about our business and are subject to risks and uncertainties.
As a result, actual results could materially differ from the forward looking
statements contained herein. These forward looking statements can be
identified by the use of words like "expects," "plans," "believes,"
"intends," "will," "assumes" and other words of similar meanings. These and
other similar words can be identified by the fact that they do not relate
solely to historical or current facts. While we believe our assumptions are
reasonable, we caution that it is impossible to predict the impact of such
factors which could cause actual results to differ materially from predicted
results. We intend these forward-looking statements to speak only at the
time of this report and do not undertake to update or revise these
projections as more information becomes available. For these statements, we
claim the protection of the safe harbor for forward-looking statements
provided by the Private Securities Litigation Reform Act of 1995.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Financial Markets
We are exposed to market value risk arising from changes in interest rates on
our securities portfolio. Our portfolio of investment grade money market
instruments includes discount commercial paper, medium term notes, federal
agency issues and treasury securities. As of September 30, 2002 over 39% of
these funds were invested in instruments with maturities shorter than 90 days.
This portfolio's interest rate risk is not hedged and its average maturity is
approximately 145 days. A 100 basis point increase in the general level of
interest rates would result in a change in the market value of the portfolio
of approximately ($2,441,000).
Our portfolio of preferred securities includes investments in derivatives that
provide a natural economic hedge of interest rate risk. 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 stocks. Specifically, we attempt to
manage the risk arising from changes in the general level of interest rates.
We do 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 September 30, 2002. 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 September 30, 2002 Change in Market
Preferred Futures & Total Value of Total
Stock Options Portfolio Portfolio
- -150 basis points
("b.p.") $51,955 $2 $51,957 $3,376
- -100 b.p. 51,062 25 51,087 2,506
Unchanged 47,911 671 48,581 0
+100 b.p. 44,000 3,703 47,703 (878)
+150 b.p. 42,027 5,832 47,859 (722)
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.
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, 2002. 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, 2002.
Commodity Risk Disclosure
(In thousands)
Market Value of
Coffee Cost Coffee September 30, 2002 Change in Market Value
Change Inventory Futures & Options Totals Derivatives Inventory
-10% $12,550 $514 $13,064 $734 ($1,395)
unchanged 13,945 (220) 13,725 - -
10% 15,340 (954) 14,386 (734) 1,395
At September 30, 2002 the derivatives consisted mainly of commodity futures
with maturities shorter than four months.
Item 4 Controls & Procedures
Based on our most recent evaluation in September, 2002, we have found (a) no
significant deficiencies in the design or operation of internal controls which
could adversely affect our ability to record, process, summarize and report
financial data; and (b) no fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls. No significant changes in the Company's internal controls
or in other factors that could significantly affect these controls have
occurred subsequent to the September, 2002, evaluation.
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. none.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter
Ended September 30, 2002.
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.
Farmer Bros. Co.
Date: November 12, 2002 /s/ John E. Simmons
John E. Simmons
Treasurer and Chief Financial Officer
CERTIFICATIONS
I, John E. Simmons, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Farmer Bros. Co.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ John E. Simmons
John E. Simmons
Chief Financial Officer
I, Roy F. Farmer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Farmer Bros. Co.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Roy F. Farmer
Roy F. Farmer
Chairman and CEO