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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTRLY PERIOD ENDED SEPTEMBER 30, 2004 OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO __________
Commission file number: 0-1375
FARMER BROS. CO.
(exact name of registrant as specified in its charter)
Delaware 95-0725980
(State of Incorporation) (I.R.S. Employer Identification No.)
20333 South Normandie Avenue, Torrance, California 90502
(address of principal executive offices) (Zip Code)
(310)787-5200
(Registrant's telephone number, including area code)
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [ ]
On November 5, 2004 Registrant had 16,075,080 shares outstanding of its
common stock, par value $1.00 per share, which is the registrant's only class
of common stock.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Dollars in thousands, except share and per share
data)
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the three months
ended September 30,
2004 2003
Net sales $46,708 $45,665
Cost of goods sold 17,469 16,033
Gross profit 29,239 29,632
Selling expense 21,827 22,317
General and administrative expense 6,410 6,258
Operating expenses 28,237 28,575
Income from operations 1,002 1,057
Other income:
Dividend income 869 802
Interest income 476 651
Other, net 85 1,572
1,430 3,025
Income before taxes 2,432 4,082
Income taxes 935 1,571
Net income $1,497 $2,511
Net income per share $0.11 $0.14
Weighted average shares outstanding 13,560,800 17,829,280
Dividends declared per share $0.10 $0.09
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
2004 2004
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $15,985 $21,807
Short term investments 182,417 176,903
Accounts and notes receivable, net 14,831 14,565
Inventories 34,918 35,579
Income tax receivable - -
Deferred income taxes 775 408
Prepaid expenses 1,949 2,683
Total current assets $250,875 $252,720
Property, plant and equipment, net 43,056 42,300
Notes receivable 143 143
Other assets 21,515 21,609
Deferred income taxes 1,099 1,099
Total assets $316,688 $317,871
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $7,717 $9,589
Accrued payroll expenses 5,251 6,999
Other 4,864 4,601
Total current liabilities $17,832 $21,189
Accrued postretirement benefits $27,487 $26,984
Total Liabilities $45,319 $48,173
Commitments and contingencies
Shareholders' equity:
Common stock, $1.00 par value,
authorized 20,000,000 shares; $16,075 $16,075
16,075,080 issued and outstanding
Additional paid-in capital 32,300 32,248
Retained earnings 283,803 283,654
Unearned ESOP shares (60,072) (61,542)
Less accumulated comprehensive loss (737) (737)
Total shareholders' equity $271,369 $269,698
Total liabilities and
shareholders' equity $316,688 $317,871
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,
2004 2003
Cash flows from operating activities:
Net income $1,497 $2,511
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 1,894 1,745
Loss on sales of assets (11) (30)
ESOP compensation expense 1,522 1,217
Net loss on investments ( 75) (1,508)
Change in assets and liabilities:
Short term investments (5,440) 8,632
Accounts and notes receivable (277) 969
Inventories 661 97
Income tax receivable 408 1,540
Prepaid expenses and other assets 828 865
Accounts payable (1,872) 966
Accrued payroll and expenses and other (1,485) (1,960)
Accrued postretirement benefits 503 136
Other long term liabilities - 411
Total adjustments (3,344) 13,080
Net cash (used in) provided by
Operating activities ($1,847) $15,591
Cash flows from investing activities:
Purchases of property, plant and equipment (2,678) (1,864)
Proceeds from sales of property, plant
and equipment 39 30
Notes repaid 11 10
Net cash used in investing activities (2,628) (1,824)
Cash flows from financing activities:
Dividends paid (1,347) (1,699)
Cash used in financing activities (1,347) (1,699)
Net (decrease) increase in cash and
Cash equivalents (5,822) 12,068
Cash and cash equivalents at beginning of period 21,807 19,961
Cash and cash equivalents at end of period $15,985 $32,029
Supplemental disclosure of cash flow information:
Income tax payments $155 $32
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, 2004 are not necessarily indicative of the results that may be expected for
the year ended June 30, 2005.
The balance sheet at June 30, 2004 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, 2004.
Per share amounts included in the accompanying consolidated financial
statements and in the notes to the consolidated financial statements have been
retroactively adjusted for all periods presented to reflect a ten-for one stock
split in May 2004.
Note 2. Investments
Investments are as follows (in thousands):
September 30, June 30,
2004 2004
Trading securities at fair value
U.S. Treasury obligations $124,472 $119,528
Preferred stock 58,481 56,037
Futures, options and other
derivative investments (536) 1,338
$182,417 $176,903
Note 3. Inventories
(in thousands)
September 30, 2004
Processed Unprocessed Total
Coffee $ 2,849 $10,767 $13,616
Allied products 11,085 4,328 15,413
Coffee brewing equipment 2,278 3,611 5,889
$16,212 $18,706 $34,918
June 30, 2004
Processed Unprocessed Total
Coffee $ 3,034 $10,736 $13,770
Allied products 11,800 3,665 15,465
Coffee brewing equipment 2,341 4,003 6,344
$17,175 $18,404 $35,579
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. Pension Plans
The Company has a contributory defined benefit pension plan for all employees
not covered under a collective bargaining agreement and a non-contributory
defined benefit plan for certain hourly employees covered under a collective
bargaining agreement. The net periodic pension costs for the defined benefit
plans were as follows:
Components of Net Periodic Benefit Cost
(in thousands)
Three months ended September 30
2004 2003
Service cost $529 $594
Interest cost 1,071 988
Expected return on plan assets (1,559) (1,362)
Amortization of transition obligation (asset) 0 0
Amortization of prior service cost 46 62
Amortization of net (gain) loss 18 336
Net periodic benefit cost $105 $2,621
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, 2004.
(in thousands) September 30, June 30,
2004 2004
Current assets $250,875 $252,720
Current liabilities 17,832 $ 21,189
Working capital $233,043 $231,531
Total assets $316,688 $317,871
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. There have been no changes in
the needs or commitments described in the Company's Annual Report on Form 10-K.
Results of Operations
The operating trends discussed in the Form 10-K for fiscal 2004 have continued
into the first quarter of fiscal 2005. Net sales showed limited improvement
and increased 2% in the first quarter of fiscal 2005 to $46,708,000 as compared
to $45,665,000 in the same quarter of fiscal 2004. Gross profit decreased 2% to
$29,239,000 in the fiscal quarter ended September 30, 2004 as compared to
$29,632,000 in the same quarter of fiscal 2004. The average cost of green
coffee during the first quarter of fiscal 2005 has decreased 3% as compared to
the average cost of green coffee during the quarter ended June 30, 2004, but
costs are 16% higher than the average cost of green coffee for the fiscal
quarter ended September 30, 2003.
Operating expenses, consisting of selling and general and administrative
expenses, decreased 1% in the first quarter of fiscal 2005 to $28,237,000 as
compared to $28,575,000 in the same quarter of fiscal 2004.
Other income in the first quarter of fiscal 2005 decreased 53% to $1,430,000
from $3,025,000 in the first quarter of fiscal 2004. Interest rate and green
coffee market volatility can cause fluctuations in other income. Gross realized
gains and losses at September 30, 2004 were $931,000 and ($1,746,000),
respectively, as compared to $4,362,000 and ($19,000), respectively, in the
same quarter of the prior fiscal year. Net unrealized gains (losses) at
September 30, 2004 were $740,000 as compared to ($2,835,000) at September 30,
2003.
As the result of the above mentioned factors, net income for the first quarter
of fiscal 2005 decreased 44% to $1,497,000 or $0.11 per share, as compared to
$2,511,000, or $0.14 per share, for the first quarter of fiscal 2004.
Quarterly Summary of Results (in thousands of dollars):
9/30/03 12/31/03 3/31/04 6/30/04 9/30/04
Net sales $45,665 $51,511 $49,069 $47,344 $46,708
Gross profit $29,632 $32,573 $30,581 $29,398 $29,239
Income from operations $1,057 $3,124 $743 ($1,161) $1,002
Net income $2,511 $2,565 $5,603 $2,008 $1,497
Net income per common share $0.14 $0.15 $0.42 $0.11 $0.11
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, 2004 over 56% 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 84 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 $1,200,000.
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, 2004. 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 September 30, 2004 Change in Market
Preferred Futures & Total Value of Total
Stock Options Portfolio Portfolio
- -150 basis points
("b.p.") $64,571 $0 $64,571 $5,006
- -100 b.p. 63,097 14 63,111 3,545
Unchanged 58,464 1,101 59,566 0
+100 b.p. 52,982 5,754 58,736 ( 830)
+150 b.p. 50,303 8,482 58,785 ( 781)
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, 2004. 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, 2004.
Commodity Risk Disclosure
(In thousands)
Market Value of
Coffee Cost Coffee Futures Change in Market Value
Change Inventory & Options Totals Derivatives Inventory
-20% $10,900 $5,552 $16,452 $5,551 ($2,716)
unchanged 13,616 1,198 14,814 - -
20% 16,300 (4,353) 11,947 (5,551) 2,684
At September 30, 2004 the derivatives consisted mainly of commodity futures
with maturities shorter than four months.
Item 4 Controls & Procedures
As of the end of the period covered by this report, the Chief Executive Officer
and Chief Financial Officer evaluated the Company's disclosure control and
procedures pursuant to Exchange Act Rule 13a-14 and 15d-14. They have
concluded that the Company's disclosure controls and procedures are effective
in ensuring that all material information required to be filed in this
quarterly report has been made known to them in a timely fashion. In addition,
there have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal control
over financial reporting.
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.
31.1 Certification of Chief Executive Officer (Section 302 of Sarbanes-Oxley
Act of 2002) (filed herewith)
31.2 Certificate of Chief Financial Officer (Section 302 of Sarbanes-Oxley
Act of 2002) (filed herewith)
32.1 Certificate of Chief Executive Officer (Section 906 of Sarbanes-Oxley
Act of 2002) (furnished herewith)
32.2 Certification of Chief Financial Officer (Section 906 of Sarbanes-Oxley
Act of 2002) (furnished herewith)
(b) Reports on Form 8-K.
A Form 8-K dated August 3, 2004 and filed with the Commission on August 4,
2004, to announce the retirement of Kenneth R. Carson, Vice President of
Sales, and the appointment of Michael J. King as his replacement.
A Form 8-K dated August 17, 2004 and filed with the Commission on August 18,
2004, to announce the appointment of Kenneth R. Carson, retired Vice President
of Sales, to the Board of Directors.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
FARMER BROS. CO.
/s/ Roy E. Farmer
Roy E. Farmer, President and Chief Executive Officer and Director
(principal executive officer)
Date: November 8, 2004
/s/ John E. Simmons
John E. Simmons, Treasurer and Chief Financial Officer
(principal financial and accounting officer)
Date: November 8, 2004