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 December 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 (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 December 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 STATEMENTS OF INCOME (Unaudited) For the three months For the six months ended December 31, ended December 31, 2001 2000 2001 2000 Net sales $54,755 $57,795 $104,155 $109,810 Cost of goods sold 17,418 19,164 34,249 38,876 37,337 38,631 69,906 70,934 Selling expense 22,064 21,253 42,423 41,234 General and administrative expenses 3,382 2,614 6,306 5,478 25,446 23,867 48,729 46,712 Income from operations 11,891 14,764 21,177 24,222 Other income: Dividend income 793 746 1,604 1,504 Interest income 1,922 3,209 4,411 6,200 Other, net 1,350 795 1,490 666 4,065 4,750 7,505 8,370 Income before taxes 15,956 19,514 28,682 32,592 Income taxes 6,223 7,707 11,186 12,874 Income before cumulative effect of accounting change 9,733 11,807 17,496 19,718 Cumulative effect of accounting change, net of income taxes - - - (310) Net income $9,733 $11,807 $17,496 $19,408 Income per common share: Before cumulative effect of accounting change $5.27 $6.40 $9.47 $10.70 Cumulative effect of accounting change - - - (0.17) Net income per share $5.27 $6.40 $9.47 $10.53 Weighted average shares outstanding 1,847,445 1,842,807 1,847,348 1,842,554 Dividends declared per share $0.85 $0.80 $1.70 $1.60 The accompanying notes are an integral part of these financial statements. FARMER BROS. CO. CONSOLIDATED BALANCE SHEETS (Unaudited) December 31, June 30, 2001 2000 ASSETS Current assets: Cash and cash equivalents $64,700 $19,362 Short term investments 214,379 243,818 Accounts and notes receivable, net 15,778 15,326 Inventories 36,537 35,780 Income tax receivable - 2,991 Deferred income taxes 1,092 1,092 Prepaid expenses 783 510 Total current assets 333,269 318,879 Property, plant and equipment, net 38,582 39,094 Notes receivable 285 2,727 Other assets 27,217 26,432 Deferred income taxes 3,263 3,263 Total assets $402,616 $390,395 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $1,636 $5,153 Accrued payroll expenses 6,336 6,421 Other 6,136 6,081 Total current liabilities 14,108 17,655 Accrued postretirement benefits 21,772 20,800 Other long term liabilities 4,892 4,892 26,664 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 16,960 16,629 Retained earnings 355,793 341,434 Unearned ESOP shares (12,835) (12,941) Total shareholders' equity 361,844 347,048 Total liabilities and shareholders' equity $402,616 $390,395 The accompanying notes are an integral part of these financial statements. FARMER BROS. CO. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the six months Ended December 31, 2001 2000 Cash flows from operating activities: Net income $17,496 $19,408 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of accounting change - 310 Depreciation 2,759 2,717 Deferred income taxes - 1,763 Gain on sales of assets (100) (19) ESOP compensation expense 1,138 549 Net loss (gain) on investments 1,154 (462) Net unrealized loss on investments reclassified as trading - 2,336 Change in assets and liabilities: Short term investments 28,285 (15,030) Accounts and notes receivable (508) (1,352) Inventories (757) 811 Income tax receivable 2,991 - Prepaid expenses and other assets (1,058) (897) Accounts payable (3,517) 350 Accrued payroll expenses and other Current liabilities (30) 2,520 Accrued post retirement benefits 972 736 Total adjustments 31,329 (5,668) Net cash provided by operating activities $48,825 $13,740 The accompanying notes are an integral part of these financial statements. FARMER BROS. CO CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited) For the six months Ended December 31, 2001 2000 Net cash provided by operating activities: $48,825 $13,740 Cash flows from investing activities: Purchases of property, plant (2,301) (3,517) and equipment Proceeds from sales of property, plant and equipment 154 79 Notes issued (35) (78) Notes repaid 2,533 36 Net cash provided by (used in) 351 (3,480) investing activities Cash flows from financing activities: Dividends paid (3,137) (2,947) ESOP contributions (701) (390) Net cash used in financing activities (3,838) (3,337) Net increase in cash and cash equivalents 45,338 6,923 Cash and cash equivalents at beginning of period 19,362 15,504 Cash and cash equivalents at end of period $64,700 $22,427 Supplemental disclosure of cash flow information: Income tax payments $7,732 $10,257 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 accounting principles generally accepted in the United States 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 six month period ended December 31, 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 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, 2001. Note 2. Investments The following is a summary of trading investments (in thousands): Net Gain December 31, 2001 Cost or Loss Fair Value Corporate debt $ 75,532 $ 53 $ 75,585 U.S. Treasury obligations 45,843 395 46,238 U.S. Agency obligations 36,051 81 36,132 Preferred stock 45,706 1,164 46,870 Other fixed income 8,250 (18) 8,232 Futures, options and other derivative investments 1,681 (359) 1,322 $213,063 $1,316 $214,379 Net Gain June 30, 2001 Cost or Loss Fair Value 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) December 31, 2001 Processed Unprocessed Total Coffee $ 3,842 $10,241 $14,083 Allied products 12,123 5,109 17,232 Coffee brewing equipment 1,998 3,224 5,222 $17,963 $18,574 $36,537 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 For the six months ended December 31, ended December 31, 2001 2000 2001 2000 Net income $9,733 $11,807 $17,496 $19,408 Unrealized investment gains, net - - - 2,646 Total comprehensive income $9,733 $11,807 $17,496 $22,054 Management's Discussion and Analysis of Financial Condition and Results of Operations Net sales for the second quarter of fiscal 2002 increased 10.8% to $54,755,000 as compared to $49,400,000 in the first quarter of fiscal 2002 as the public began to return to restaurants after the September 11 disaster, but decreased 5.3% as compared to $57,795,000 in the second quarter of fiscal 2001 primarily due to a 6% decrease in roast coffee sales in the current quarter as compared to the same quarter of fiscal 2001. Although the average cost of green coffee has declined 36% in the 12 months ended December 31, 2001, gross profit has not similarly improved because of the reduced sales volume. Gross profit decreased 3% to $37,337,000 as compared to $38,631,000 in the same quarter of fiscal 2001 and increased 15% as compared to $32,569,000 in the first quarter of fiscal 2002. Gross profit for the first half of fiscal 2001 decreased 1% to $69,906,000 as compared to $70,934,000 in the same period of the prior fiscal year. Operating expenses, consisting of selling and general and administrative expenses, increased 7% to $25,446,000 in the second quarter of fiscal 2002 as compared to $23,867,000 in the second quarter of fiscal 2001, and increased 4% to $48,729,000 in the first half of fiscal 2002 as compared to $46,712,000 in the first six months of fiscal 2001. This increase is primarily attributed to compensation related expenses, including salary increases, the cost of the ESOP, increases in employee medical claims, and employee retirement plan costs. 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 December 31, 2000 as other income. During the first half of fiscal 2001, the Company had realized and unrealized gains (losses) on securities of approximately $709,000 and $(247,000), respectively, as compared to realized gains on securities of approximately $207,000 and $947,000, respectively, in the same period of fiscal 2002. Lower interest rates in the current fiscal year have resulted in a lesser amount of interest earned. Interest earned decreased 40% to $1,922,000 as compared to $3,209,000 in the quarter ended December 31, 2001 and 2000, respectively, and decreased 29% to $4,411,000 as compared to $6,200,000 for the first six months of fiscal 2002 and 2001, respectively. 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 for the second quarter of fiscal 2002 decreased 18% to $9,733,000, or $5.27 per share, as compared to $11,807,000, or $6.40 per share, in the second quarter of fiscal 2001, but decreased 11% to $17,496,000, or $9.47 per share, as compared to $19,408,000, or $10.53 per share in the first six months of fiscal 2002 and 2001, respectively. Quarterly Summary of Results (In thousands of dollars) 12/30/00 3/31/01 6/30/01 9/30/01 12/31/01 Net sales $57,795 $54,814 $50,807 $49,400 $54,755 Gross profit 38,631 36,413 34,053 32,569 37,337 Income from operations 14,764 11,882 6,011 9,286 11,891 Net income 11,807 9,793 6,977 7,763 9,733 Net income per share $6.40 $5.32 $3.77 $4.21 $5.27 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 December 31, 2001 over 60% 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 140 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 ($2,140,000). 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 December 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 securities holdings, the yields on U.S. Treasury securities and related futures and options. Market Value of December 31, 2001 Preferred Futures & Total Value of Total Stock Options Portfolio Portfolio - -200 basis points $53,667 $0 $53,667 $5,656 ("b.p.") - -100 b.p. 50,744 37 50,781 2,770 Unchanged 46,870 1,140 48,010 0 +100 b.p. 42,967 4,844 47,811 -199 +200 b.p. 39,296 8,389 47,685 -325 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 December 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 December 31, 2001. Commodity Risk Disclosure (In thousands) Market Value of Coffee Cost Coffee December 31, 2001 Change in Market Value Change Inventory Futures & Options Totals Derivatives Inventory -10% $12,675 $104 $12,779 $285 ($1,408) unchanged 14,083 (181) 13,902 - - 10% 15,491 (466) 15,025 (285) 1,408 At December 31, 2001 the derivatives consisted mainly of commodity futures and commodity purchase agreements with maturities shorter than three months. PART II OTHER INFORMATION Item 4. Submission of matters to a vote of security holders. The Annual Meeting of Shareholders of Farmer Bros. Co. was held on November 26, 2001. Holders of the Company's common stock were entitled to one vote per share of common stock held. Six directors were elected at the meeting, each to serve for the coming year and until any successors are elected and qualify. The following persons were elected as directors: Roy F. Farmer, Roy E. Farmer, John H. Merrell, Lewis A. Coffman, Guenter W. Berger and John M. Anglin. The approval of the restatement and amendment of the Company's Articles of Incorporation was approved by the affirmative vote of 1,587,928 shares in favor, 121 shares against and 91 shares abstaining. The proposal to appoint Ernst & Young LLP as the independent accountants for the Company for the year ended June 30, 2002 was approved with 1,530,919 shares for, 526 shares against and 46,695 shares abstaining. 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: January 30, 2002 Farmer Bros. Co. (Registrant) /s/ John E. Simmons John E. Simmons Treasurer and Chief Financial Officer