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 March 31, 2002 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 March 31, 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 For the nine months ended March 31, ended March 31, 2002 2001 2002 2001 Net sales $51,298 $54,814 $155,453 $164,624 Cost of goods sold 16,512 18,401 50,761 57,277 34,786 36,413 104,692 107,347 Selling expense 21,753 21,310 64,176 62,544 General and administrative expenses 3,190 3,221 9,496 8,699 24,943 24,531 73,672 71,243 Income from operations 9,843 11,882 31,020 36,104 Other income: Dividend income 802 770 2,406 2,274 Interest income 1,540 3,204 5,951 9,404 Other, net (1,683) 331 (193) 997 659 4,305 8,164 12,675 Income before taxes 10,502 16,187 39,184 48,779 Income taxes 4,096 6,394 15,282 19,268 Income before cumulative effect of accounting cha 6,406 9,793 23,902 29,511 Cumulative effect of accounting change, net of income taxes - - - (310) Net income $6,406 $9,793 $23,902 $29,201 Income per common share: Before cumulative effect of accounting change $3.47 $5.32 $12.95 $16.02 Cumulative effect of accounting change - - - ($0.17) Net income per share $3.47 $5.32 $12.95 $15.85 Weighted average shares outstanding 1,846,388 1,843,497 1,845,501 1,842,868 Dividends declared per Share $0.85 $0.80 $2.55 $2.40 The accompanying notes are an integral part of these financial statements. FARMER BROS. CO. CONSOLIDATED BALANCE SHEETS (Unaudited) March 31, June 30, 2002 2001 ASSETS Current assets: Cash and cash equivalents $55,571 $19,362 Short term investments 226,880 243,818 Accounts and notes receivable, net 14,281 15,326 Inventories 36,190 35,780 Income tax receivable 1,783 2,991 Deferred income taxes 1,092 1,092 Prepaid expenses 897 510 Total current assets 336,694 318,879 Property, plant and equipment, net 38,649 39,094 Notes receivable 285 2,727 Other assets 27,402 26,432 Deferred income taxes 3,263 3,263 Total assets $406,293 $390,395 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $2,128 $5,153 Accrued payroll expenses 4,402 6,421 Other 5,578 6,081 Total current liabilities 12,108 17,655 Accrued postretirement benefits 22,243 20,800 Other long term liabilities 4,892 4,892 27,135 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 17,165 16,629 Retained earnings 360,629 341,434 Unearned ESOP shares (12,670) (12,941) Total shareholders' equity 367,050 347,048 Total liabilities and shareholders' equity $406,293 $390,395 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, 2002 2001 Cash flows from operating activities: Net income $23,902 $29,201 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of accounting change - 310 Depreciation 4,126 4,092 Deferred income taxes - 1,763 Gain on sales of assets (200) (99) ESOP compensation expense 1,622 875 Net loss (gain) on investments 654 (645) Net unrealized loss on investments reclassified as trading - 2,337 Change in assets and liabilities: Short term investments 16,284 (40,453) Accounts and notes receivable 897 1,534 Inventories (410) 1,164 Income tax receivable 1,208 - Prepaid expenses and other assets (1,358) (1,906) Accounts payable (3,025) 681 Accrued payroll expenses and other current liabilities (2,522) (939) Accrued post retirement benefits 1,443 1,158 Total adjustments 18,719 (30,128) Net cash provided by (used in) operating activities $42,621 ($927) 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, 2002 2001 Net cash provided by operating activities: $42,621 ($927) Cash flows from investing activities: Purchases of property, plant and equipment (3,735) (4,205) Proceeds from sales of property, plant and equipment 254 167 Notes issued (35) (78) Notes repaid 2,625 280 Net cash (used in) investing activities (891) (3,836) Cash flows from financing activities: Dividends paid (4,706) (4,421) ESOP contributions (815) (390) Net cash used in financing activities (5,521) (4,811) Net increase in cash and cash equivalents 36,209 (9,574) Cash and cash equivalents at beginning of period 19,362 15,504 Cash and cash equivalents at end of period 55,571 5,930 Supplemental disclosure of cash flow information: Income tax payments $14,095 $18,459 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 nine month period ended March 31, 2002 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 March 31, 2002 Cost or Loss Fair Value Corporate debt $ 39,707 $ 30 $ 39,737 U.S. Treasury obligations 99,030 162 99,192 U.S. Agency obligations 30,000 (103) 29,897 Preferred stock 48,377 (182) 48,195 Other fixed income 8,208 (24) 8,184 Futures, options and other derivative investments 1,427 248 1,675 $226,749 $ 131 $226,880 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) March 31, 2002 Processed Unprocessed Total Coffee $ 3,676 $10,683 $14,359 Allied products 11,790 4,956 16,746 Coffee brewing equipment 2,074 3,011 5,085 $17,540 $18,650 $36,190 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 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. Comprehensive Income (In thousands) For the three months For the nine months ended March 31, ended March 31, 2002 2001 2002 2001 Net income $6,406 $9,793 $23,902 $29,201 Unrealized investment gains, net - - - 2,646 Total comprehensive income $6,406 $9,793 $23,902 $31,847 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, 2001. March 31, June 30, 2002 2001 Current assets $336,694 $318,879 Current liabilities 12,108 17,655 Working capital $324,586 $311,224 Total assets $406,293 $390,395 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 is comparatively low; but the market is volatile and green coffee prices could climb without warning requiring a substantial additional investment in inventory merely to maintain its existing level of business operations. The board of directors has authorized financing of an initial loan to the ESOP of up to $30,000,000 for the purchase of company 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 present the company is completing the development of a branch warehouse in Victorville, CA. The company continues to seek out friendly acquisitions in its lines of business throughout the country. There are no acquisitions pending at this time. Results of Operations Net sales for the third quarter of fiscal 2002 decreased 6.4% to $51,298,000 as compared to $54,814,000 in the same period of fiscal 2001. Sales in the first 9 months of fiscal 2002 decreased 5.6% to $155,453,000 as compared to $164,624,000 in the first 9 months of fiscal 2001. We believe that continued weakness in the economy has affected our customers. Reportedly, business travel and entertainment have been reduced by the recession, and individuals have reduced their discretionary spending in restaurants which the Company believes accounts for most of the decrease in sales volume in the first three quarters of fiscal 2002 as compared to the same period of the prior fiscal year. Cost of goods sold decreased 10.3% to $16,512,000, or 32% of sales in the quarter ended March 31, 2002 from $18,401,000 or 34% of sales in the same quarter of fiscal 2001. Cost of goods sold decreased 11.4% to $50,761,000 or 33% of sales in the first three quarters of fiscal 2002 as compared to $57,277,000 or 35% of sales in the same period of fiscal 2001. The average cost of green coffee has continued to decline through the current fiscal year, and at March 31, 2002 is approximately 22% below the March 31, 2001 cost. Gross profit decreased 4.5% to $34,786,000 or 68% of sales for the fiscal quarter just ended as compared to $36,413,000, or 66% of sales, in the same period of fiscal 2001. Gross profit for the 2002 fiscal year to date decreased 2.4% to $104,692,000 or 67% of sales as compared to $107,347,000 or 65% of sales in the same period of fiscal 2001. Selling and General and Administrative Expenses (Operating Expenses) increased 1.7% to $24,943,000 or 49% of sales in the quarter ended March 31, 2002 as compared to $24,531,000 or 45% of sales in the comparable quarter of the prior fiscal year. Similarly, year to date Operating Expenses increased 3.4% to $73,672,000 or 47% of sales in fiscal 2002 as compared to $71,243,000 or 43% of sales in fiscal 2001. This increase is primarily the result of higher pension costs ($1,000,000), ESOP expenses ($800,000) and employee medical expenses ($700,000). 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. 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. Other income decreased 84.7% in the three months ended March 31, 2002 to $659,000 from $4,305,000 in the like period of the prior fiscal year. Other income for the nine months ended March 31, 2002 decreased 35.6% to $8,164,000 as compared to $12,675,000 in the same period of the prior fiscal year. This decline is primarily the result of reduced interest income ($1,664,000 for the quarter and $3,453,000 year to date as compared to the results from similar periods of the prior fiscal year) in addition to both realized and unrealized losses on investments and interest rate futures and options ($1,990,000 for the quarter and $1,297,000 year to date as compared to the results from similar periods of the prior fiscal year). This is a consequence of lower interest rates. During the first nine months of fiscal 2002, the Company had realized and unrealized gains (losses) on securities of approximately $(416,000) and $(238,000), respectively, as compared to realized and unrealized gains (losses) on securities of approximately $(1,559,000) and $1,475,000, respectively, in the same period of fiscal 2001. Lower interest rates in the current fiscal year have resulted in a lesser amount of interest earned. Interest earned decreased 52% to $1,540,000 as compared to $3,204,000 in the quarters ended March 31, 2002 and 2001, respectively, and decreased 37% to $5,951,000 as compared to $9,404,000 for the first nine months of fiscal 2002 and 2001, respectively. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," and in August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company does not believe that the implementation of these standards will have a significant effect on the financial statements. Quarterly Summary of Results (In thousands of dollars) 3/31/01 6/30/01 9/30/01 12/31/01 3/31/02 Net sales $54,814 $50,807 $49,400 $54,755 $51,298 Gross profit 36,413 34,053 32,569 37,337 34,786 Income from operations 11,882 6,011 9,286 11,891 9,843 Net income 9,793 6,977 7,763 9,733 6,406 Net income per share $5.32 $3.78 $4.21 $5.27 $3.47 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 March 31, 2002 over 45% 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 ($2,130,000). 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 March 31, 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 March 31, 2002 Change in Market Preferred Futures & Total Value of Total Stock Options Portfolio Portfolio - -200 basis points $55,948 $1 $55,949 $5,551 ("b.p.") - -100 b.p. 52,377 162 52,539 2,142 Unchanged 48,195 2,203 50,398 0 +100 b.p. 44,030 6,119 50,149 -249 +200 b.p. 40,176 9,495 49,671 -727 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 March 31, 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 March 31, 2002. Commodity Risk Disclosure (In thousands) Market Value of Coffee Cost Coffee March 31, 2002 Change in Market Value Change Inventory Futures & Options Totals Derivatives Inventory -10% $12,923 $581 $13,504 $716 ($1,436) unchanged 14,359 (135) 14,224 - - 10% 15,795 (851) 14,944 (716) 1,436 At March 31, 2002 the derivatives consisted mainly of commodity futures and commodity purchase agreements with maturities shorter than three months. PART II OTHER INFORMATION 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, 2002 Farmer Bros. Co. (Registrant) /s/ John E. Simmons John E. Simmons Treasurer and Chief Financial Officer