SECURITIES AND EXCHANGE COMMISSION FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 2001 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: 1,926,414 as of March 31, 2001. PAGE 1 OF 11 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, 2001 2000 2001 2000 Net sales $ 54,814 $ 56,354 $164,624 $165,725 Cost of goods sold 18,401 18,124 57,277 61,822 36,413 38,230 107,347 103,903 Selling expense 21,310 21,053 62,544 61,213 General and administrative expenses 3,221 3,264 8,699 7,469 24,531 24,317 71,243 68,682 Income from operations 11,882 13,913 36,104 35,221 Other income: Dividend income 770 719 2,274 1,988 Interest income 3,204 2,604 9,404 7,258 Other, net 331 253 997 362 4,305 3,576 12,675 9,608 Income before taxes 16,187 17,489 48,779 44,829 Income taxes 6,394 7,125 19,268 18,061 Income before cumulative effect of accounting change 9,793 10,364 29,511 26,768 Cumulative effect of accounting change, net of income taxes - - (310) - Net income $ 9,793 $ 10,364 $ 29,201 $ 26,768 Income per common share: Before cumulative effect of accounting change $5.32 $5.60 $16.02 $14.37 Cumulative effect of accounting change - - (.17) - Net income per share $5.32 $5.60 $15.85 $14.37 Weighted average shares outstanding 1,843,497 1,848,350 1,842,868 1,863,035 Dividends declared per common share $0.80 $0.75 $2.40 $2.25 The accompanying notes are an integral part of these financial statements. FARMER BROS. CO. CONSOLIDATED BALANCE SHEETS (Unaudited) March 31, June 30, 2001 2000 Current assets: Cash and cash equivalents $ 5,930 $ 15,504 Short term investments 249,687 114,346 Accounts and notes receivable, net 16,678 18,494 Inventories 35,606 36,770 Income tax receivable 1,340 1,340 Deferred income taxes 1,224 1,224 Prepaid expenses 842 882 Total current assets 311,307 188,560 Property, plant and equipment, net 38,826 38,741 Notes receivable 3,161 3,081 Long term investments - 94,243 Other assets 25,880 23,975 Deferred income taxes 3,104 4,867 Total assets $382,278 $353,467 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,602 $ 5,921 Accrued payroll expenses 4,611 5,953 Other 5,495 5,092 Total current liabilities 16,708 16,966 Accrued postretirement benefits 20,356 19,198 Other long term liabilities 4,190 4,190 24,546 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 16,491 16,359 Retained earnings 335,933 311,153 Unearned ESOP shares (13,326) (13,679) Accumulated other comprehensive income - (2,646) Total shareholders' equity 341,024 313,113 Total liabilities and shareholders' equity $382,278 $353,467 The accompanying notes are an integral part of these financial statements. FARMER BROS. CO. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the nine months ended March 31, 2001 2000 Cash flows from operating activities: Net income $ 29,201 $ 26,768 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Cumulative effect of accounting change 310 - Depreciation 4,092 4,240 Deferred income taxes 1,763 - (Gain) loss on sales of assets (99) 678 ESOP contribution expense 875 - Net loss on investments 645 450 Net unrealized loss on investments reclassified as trading 2,337 - Change in assets and liabilities: Investments classified as trading (41,743) - Accounts and notes receivable 1,534 (393) Inventories 1,164 (1,505) Income tax receivable - 249 Prepaid expenses and other assets (1,906) (1,794) Accounts payable 681 1,869 Accrued payroll and expenses and other liabilities (939) 1,967 Other long term liabilities 1,158 1,132 Total adjustments (30,128) 6,893 Net cash (used in) provided by operating activities ($927) $33,661 The accompanying notes are an integral part of these financial statements. FARMER BROS. CO. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited) For the nine months ended March 31, 2001 2000 Net cash (used in) provided by operating activities: ($927) $ 33,661 Cash flows from investing activities: Purchases of property, plant and equipment (4,205) (11,138) Proceeds from sales of property, plant and equipment 167 700 Purchases of investments - (224,639) Proceeds from sales of investments - 224,037 Notes issued (78) - Notes repaid 280 101 Net cash used in investing activities (3,836) (10,939) Cash flows from financing activities: Dividends paid (4,421) (4,197) Purchase of common stock - (3,962) ESOP loan (390) - Net cash (used in) financing activities (4,811) (8,159) Net (decrease) increase in cash and cash equivalents (9,574) 14,563 Cash and cash equivalents at beginning of period 15,504 4,403 Cash and cash equivalents at end of period $ 5,930 $ 18,966 Supplemental disclosure of cash flow information: Income tax payments $18,459 $ 15,085 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 accounting principles generally accepted in the United States 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 nine month period ended March 31, 2001 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 March 31, 2001 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 March 31, 2001. (In thousands) Fair Value Corporate debt $100,021 U.S. Treasury obligations 37,307 U.S. Agency obligations 57,683 Preferred stock 45,653 Other fixed income 8,010 Futures, options and other and derivative investments 1,013 $249,687 Net unrealized holding gains on trading securities included in earnings is $402,000 at March 31, 2001. Note 4. Inventories (In thousands) Processed Unprocessed Total March 31, 2001 Coffee $ 3,917 $ 9,334 $13,251 Allied products 12,305 4,380 16,685 Coffee brewing equipment 1,865 3,805 5,670 $18,087 $17,519 $35,606 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 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 5. Employee Stock Ownership Plan During the three month and nine month periods ended March 31, 2001 the Company charged $281,000 and $815,000, respectively, 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 March 31, 2001 are as follows: Allocated shares 5,858 Committed to be released shares 1,481 Unallocated shares 81,436 Total ESOP shares 88,775 Note 6. Comprehensive Income (In thousands) For the three months For the nine months ended March 31, ended March 31, 2001 2000 2001 2000 Net income $ 9,793 $10,364 $29,201 $26,768 Unrealized investment gains (losses), net - (445) 2,646 (1,837) Total comprehensive income $ 9,793 $ 9,919 $31,847 $24,931 Item 2. Management's Discussion and Analysis Financial Condition There have been no material changes in the Company's financial condition since the year ended June 30, 2000. On July 1, 2000 the Company transferred all of its investments classified as "available for sale" at June 30, 2000 into the "trading" category. As a result there is in an increase in current assets and working capital which now include assets previously classified as "non-current". March 31, June 30, 2001 2000 Current assets $311,307 $188,560 Current liabilities 16,708 16,966 Working capital 294,599 171,594 Quick ratio 16.30:1 8.74:1 Total assets $382,278 $353,467 Results of Operations Net sales for the third quarter of fiscal 2001 decreased 2.7% to $54,814,000 as compared to $56,354,000 in the same quarter of fiscal 2000 and 0.7% as compared to $55,207,000 in the same quarter of fiscal 1999. Net sales for the nine months of fiscal 2001 declined 0.7% to $164,624,000 as compared to $165,725,000 in the same period of the prior fiscal year. Although sales of allied products have grown, continued decreases in the sales volume of roast coffee result in an overall decrease in sales. Volatility in the green coffee market and a general decline in the cost of green coffee in the current fiscal year has allowed us to maintain strong profit margins on coffee products. Gross profit in the most recent quarter decreased 4.7% to $36,413,000 as compared to $38,230,000 in the same quarter of fiscal 2000 and increased 3.5% as compared to $35,153,000 in the same quarter of fiscal 1999. Gross profit for fiscal 2001 to date increased 3.3% to $107,347,000, or 65.2% of sales, as compared to $103,903,000, or 62.7% of sales, in the same period of fiscal 2000. Operating expenses, consisting of selling and general and administrative expenses, increased 0.9% to $24,531,000 in the third quarter of fiscal 2001, as compared to $24,317,000 in the same quarter of fiscal 2000, and increased 6.6% as compared to $23,009,000 in the same quarter of fiscal 1999. Operating expenses for the first nine months of the current fiscal year increased 3.7% to $71,243,000 from $68,682,000 in the same period of the 1999 fiscal year, and 7.0% as compared to $66,553,000 in the same period of fiscal 1999. The increases are primarily compensation related, with higher product delivery costs (including the cost of gasoline and diesel) and increased coffee brewing equipment expenses. Other income for the quarter ended March 31, 2001 increased 20.4% to $4,305,000 as compared to $3,576,000 in the same quarter of the prior fiscal year, and increased 31.9% to $12,675,000 in the first three quarters of fiscal 2001 as compared to $9,608,000 in the same period of the prior fiscal year. Higher interest rates during the first two quarters of the current fiscal year resulted in favorable comparisons with the prior year. 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 for the third quarter of fiscal 2001 reached $9,793,000, or $5.32 per share, as compared to $10,364,000, or $5.60 per share, in the third quarter of fiscal 2000 and $9,159,000, or $4.83 per share, in the same quarter of fiscal 1999. Net income for the first nine months of fiscal 2001 increased 9.1% to $29,201,000, or $15.85 per share, as compared to $26,768,000 or $14.37 per share in fiscal 2000. Quarterly Summary of Results (In thousands of dollars) 03/31/00 06/30/00 09/30/00 12/31/00 03/31/01 Net sales 56,354 52,963 52,015 57,795 54,814 Gross profit 38,230 37,816 32,303 38,631 36,413 Operating income 13,913 13,744 9,458 14,764 11,882 Net income 10,364 10,808 7,601 11,807 9,793 As a percentage of sales 03/31/00 06/30/00 09/30/00 12/31/00 03/31/01 Net sales 100.00 100.00 100.00 100.00 100.00 Gross profit 67.84 71.40 62.10 66.84 66.43 Operating income 24.69 25.95 18.18 25.55 21.68 Net income 18.39 20.41 14.61 20.43 17.87 In dollars 03/31/00 06/30/00 09/30/00 12/31/00 03/31/01 Net income per share 5.60 5.85 4.13 6.40 5.32 Item 3. Quantitative and Qualitative Disclosures About Market Risk 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 March 31, 2001, over 75% of these funds were invested in instruments with maturities shorter than one hundred eighty days. The portfolio's interest rate risk is not hedged. Its average maturity is approximately 130 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 March 31, 2001 Value of Fixed Fixed Income Investments Income Investments - -100 b.p. $205,053 $2,032 unchanged 203,021 - +100 b.p. 200,989 (2,032) 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 March 31, 2001. 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 March 31, 2001 Change in Market Preferred Futures & Total Value of Total Stock Options Portfolio Portfolio - -200 Basis points $52,253.8 $0.0 $52,253.8 $5,645.1 ("b.p.") - -100 b.p. 49,373.1 16.5 49,389.6 2,780.9 Unchanged 45,653.0 955.7 46,608.7 - +100 b.p. 41,800.2 4,622.3 46,422.5 (186.2) +200 b.p. 38,187.9 8,087.3 46,275.2 (333.5) 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 March 31, 2001 and 2000 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 March 31, 2001. 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 March 31, 2001. Commodity Risk Disclosure (In thousands) Market Value of Coffee Cost Coffee March 31, 2001 Change in Market Value Change Inventory Futures & Options Totals Derivatives Inventory - -10% $11,926 $102 $12,028 $45 ($1,325) unchanged 13,251 57 13,308 - - +10% 14,576 12 14,588 (45) 1,325 At March 31, 2001 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. 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, 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. 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: May 10, 2001 FARMER BROS. CO. /s/ John E. Simmons Treasurer and Chief Financial Officer