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, 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 (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, 2001. 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, 2001 2000 Net sales $49,400 $52,015 Cost of goods sold 16,831 19,712 32,569 32,303 Selling expense 20,359 19,981 General and administrative expenses 2,924 2,864 23,283 22,845 Income from operations 9,286 9,458 Other income: Dividend income 811 758 Interest income 2,489 2,991 Other, net 140 (129) 3,440 3,620 Income before taxes 12,726 13,078 Income taxes 4,963 5,167 Income before cumulative effect of accounting change 7,763 7,911 Cumulative effect of accounting change, net of income taxes - (310) Net income $7,763 $7,601 Income per common share: Before cumulative effect of accounting change $4.21 $4.30 Cumulative effect of accounting change ($0.17) Net income per share $4.21 $4.13 * Weighted average shares outstanding 1,844,961 1,842,301 Dividends declared per share $0.85 $0.80 The accompanying notes are an integral part of these financial statements. FARMER BROS. CO. CONSOLIDATED BALANCE SHEETS (Unaudited) September 30, June 30, 2001 2001 ASSETS Current assets: Cash and cash equivalents $61,136 $19,362 Short term investments 209,953 243,818 Accounts and notes receivable, net 14,454 15,326 Inventories 36,303 35,780 Income tax receivable 949 2,991 Deferred income taxes 1,092 1,092 Prepaid expenses 287 510 Total current assets 324,174 318,879 Property, plant and equipment, net 38,672 39,094 Notes receivable 2,727 2,727 Other assets 26,863 26,432 Deferred income taxes 3,263 3,263 Total assets $395,699 $390,395 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $1,954 $5,153 Accrued payroll expenses 5,270 6,421 Other 8,476 6,081 Total current liabilities 15,700 17,655 Accrued postretirement benefits 21,287 20,800 Other long term liabilities 4,892 4,892 26,179 25,692 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 16,806 16,629 Retained earnings 347,625 341,434 Unearned ESOP shares (12,537) (12,941) Total shareholders' equity 353,820 347,048 Total liabilities and shareholders' equity $395,699 $390,395 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, 2001 2000 Cash flows from operating activities: Net income $7,763 $7,601 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of accounting changes 310 Depreciation 1,372 1,345 Deferred income taxes 1,763 Loss on sales of assets (33) (24) ESOP Compensation expense 581 268 Net loss on investments 120 Net unrealized loss on investments reclassified as trading 2,336 Change in assets and liabilities: Short term investments 33,745 (15,759) Accounts and notes receivable 851 1,312 Inventories (523) 639 Income tax receivable 2,042 - Prepaid expenses and other assets (208) 351 Accounts payable (3,199) 336 Accrued payroll and expenses and other liabilities 1,244 3,505 Accrued postretirement benefits 487 318 Total adjustments 36,479 4,440 Net cash provided by operating activities $44,242 $3,161 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, 2001 2000 Net cash provided by operating activities: $44,242 $3,161 Cash flows from investing activities: Purchases of property, plant and equipment (995) (2,184) Proceeds from sales of property, plant and equipment 78 34 Notes repaid 21 24 Net cash used in investing activities (896) (2,126) Cash flows from financing activities: Dividends paid (1,572) (1,476) ESOP contributions - (225) Net cash used in financing activities (1,572) (1,701) Net increase (decrease) in cash and cash equivalents 41,774 (666) Cash and cash equivalents at beginning of period 19,362 15,504 Cash and cash equivalents at end of period $61,136 $14,838 Supplemental disclosure of cash flow information: Income tax payments $40 $53 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 generally accepted accounting principles 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, 2001 are not necessarily indicative of the results that may be expected for the year ended June 30, 2002. The balance sheet at June 30, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles 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, 2001. Note 2. Investments The following is a summary of trading investments (in thousands): Net Gain September 30, 2001 Cost or Loss Fair Value Trading Securities Corporate debt $ 81,546 $ 61 $ 81,607 U.S. Treasury obligations 33,379 472 33,851 U.S. Agency obligations 42,556 270 42,826 Preferred stock 46,918 917 47,835 Other fixed income 3,014 5 3,019 Futures, options and other derivative investments 1,390 (575) 815 $208,803 $1,150 $209,953 Net Gain June 30, 2001 Cost or Loss Fair Value Trading Securities Corporate debt $ 85,035 $ 80 $ 85,115 U.S. Treasury obligations 71,030 188 71,218 U.S. Agency obligations 31,852 106 31,958 Preferred stock 46,256 (2) 46,254 Other fixed income 8,014 (3) 8,011 Futures, options and other derivative investments 1,262 - 1,262 $243,449 $369 $243,818 Note 3. Inventories (In thousands) September 30, 2001 Processed Unprocessed Total Coffee $3,509 $ 9,284 $12,793 Allied products 12,879 5,262 18,141 Coffee brewing equipment 1,894 3,475 5,369 $18,282 $18,021 $36,303 June 30, 2001 Processed Unprocessed Total Coffee $ 4,120 $ 8,752 $12,872 Allied products 13,847 3,980 17,827 Coffee brewing equipment 2,201 2,880 5,081 $20,168 $15,612 $35,780 Note 4. Comprehensive Income (In thousands) For the three months ended September 30, 2001 2000 Net income $7,763 $ 7,601 Unrealized investment gains, net - 2,646 Total comprehensive income $7,763 $10,247 As a result of the Company's adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by Statements 137 and 138, the Company transferred all of its investments classified as "available for sale" at June 30, 2000 into the "trading" category on July 1, 2000, and accordingly has no unrealized investment gains or losses subsequent to adoption. Management's Discussion and Analysis of Financial Condition and Results of Operations Operating trends discussed in the Form 10-K for fiscal 2001 have continued into the first quarter of fiscal 2002. Sales continue to show the effect of the economic slow down as consumers seem to be limiting their spending in restaurants. Green coffee costs during the first quarter of fiscal 2002 have decreased 7% since the June 30, 2001 year end and are 44% lower than green coffee costs during the first quarter of fiscal 2001. The resulting gross profit comparison is favorable, with gross profit on coffee products increasing to 66% of sales in the first quarter of fiscal 2002 as compared to 62% of sales in the same quarter of the prior fiscal year. Net sales for the first quarter of fiscal 2002 decreased 5% to $49,400,000 as compared to $52,015,000 in the same quarter of fiscal 2001 and 3% as compared to $50,807,000 in the quarter ended June 30, 2001. Gross profit increased 1% to $32,569,000 as compared to $32,303,000 in the same quarter of fiscal 2001 and decreased 4% as compared to $34,053,000 in the quarter ended June 30, 2001. Operating expenses in the first quarter of fiscal 2002, consisting of selling and general and administrative expenses, increased 2% to $23,283,000 as compared to $22,845,000 in the same quarter of fiscal 2001. The increase is primarily attributed to increases in employee benefit expenses, including the ESOP, medical expenses and insurance costs. Other income in the first quarter of fiscal 2002 decreased 5% to $3,440,000 from $3,620,000 in the first quarter of fiscal 2001. The decrease in other income in the most recent quarter is primarily the result of the decrease in investment returns on securities in the quarter. Upon adoption of SFAS 133, 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. A declining interest rate market in the first quarter of fiscal 2001 resulted in realized and unrealized gains on securities of approximately $100,000 and $3,500,000, respectively, in that quarter as compared to realized losses and unrealized gains on securities of approximately $(850,000) and $780,000, respectively, in the quarter ended September 30, 2001. Interest earned decreased to $2,489,000 as compared to $2,991,000 in the quarters ended September 30, 2001 and 2000, respectively. Net income before the cumulative effect of accounting change decreased 2% to $7,763,000, or $4.21 per share, as compared to $7,911,000 or $4.30 per share in fiscal 2001. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities-An Amendment of FASB Statement 133." The adoption of Statement Nos. 133 and 138 on July 1, 2001 resulted in a cumulative effect of an accounting change of $515,000 ($310,000 net of taxes) being recognized in the Statement of Net Income. Net income increased 2% to $7,763,000, or $4.21 or share, as compared to $7,601,000 or $4.13 per share in fiscal 2001. Quarterly Summary of Results (in thousands of dollars): 9/30/00 12/30/00 3/31/01 6/30/01 9/30/01 Net sales $52,015 $57,795 $54,814 $50,807 $49,400 Gross profit 32,303 38,631 36,413 34,053 32,569 Income from operations 9,458 14,764 11,882 6,011 9,286 Income before cumulative effect adjustment 7,911 11,807 9,793 6,977 7,763 Net income 7,601 11,807 9,793 6,977 7,763 Income per share before cumulative effect adjustment $4.30 $6.40 $5.32 $3.77 $4.21 Net income per share $4.13 $6.40 $5.32 $3.77 $4.21 Market Risk Disclosures 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, 2001 over 50% 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 160 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 ($2,160,000). 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, 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 securities holdings, the yields on U.S. Treasury securities and related futures and options. Interest Rate Changes (In thousands) Market Value of September 30, 2001 Change in Market Preferred Futures & Total Value of Total Stock Options Portfolio Portfolio - -200 basis points ("b.p.") $54,813 $0 $54,813 $6,106 - -100 b.p. 51,817 8 51,825 3,118 Unchanged 47,835 873 48,707 0 +100 b.p. 43,870 4,650 48,519 (188) +200 b.p. 40,115 8,181 48,295 (412) 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, 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 September 30, 2001. Commodity Risk Disclosure (In thousands) Market Value of Coffee Cost Coffee September 30, 2001 Change in Market Value Change Inventory Futures & Options Totals Derivatives Inventory - -10% $11,514 $ 12 $11,526 $ 69 $(1,279) unchanged 12,793 (57) 12,736 - - +10% 14,072 (126) 13,946 ( 69) 1,279 At September 30, 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. 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 9, 2001 Farmer Bros. Co. (Registrant) /s/ John E. Simmons John E. Simmons Treasurer and Chief Financial Officer Page 11