Forum for Shareholders of Farmer Bros. Co.

Forum Home Page

2007 Conclusion

Forum activities relating to Farmer Bros. Co. were suspended in 2007, following the second year of new management.

Farmer Bros. Home Page


Farmer Bros. Reference


Forum Report: Performance Issues Raised in Company's Form 10-K Annual Report

(September 13, 2004)

----- Original Message -----
Sent: Monday, September 13, 2004 8:50 PM
Subject: Form 10-K annual report filed this afternoon

Farmer Bros. filed its SEC Form 10-K annual report for its fiscal year ending June 30, 2004 late this afternoon.
A quick review of the report shows continuing performance deterioration.  Management provides a more elaborate explanation of declining revenue, in a section copied below.  (A comparison of this year's Exhibit 99 list of operating locations with last year's list shows no eliminations or additions of sales facilities.)  Although not stated in the management discussion of results, Note 12 of the financial statements shows that continuing margin declines finally resulted in an actual operating loss for the 4th quarter, showing a negative $1.16 million, compared with a positive $3.2 million operating income for last year's 4th quarter.  The company generated a net profit, though, as a result of its investment portfolio income.  
Addressing the "information management systems" project, paragraph #2 in the "Liquidity and Capital Resources" section reports that $13.9 million has been spent to date and that it may cost more than an additional $7 million to complete the project in 2005, totaling about $21 million.  It should be noted that the Form 10-K/A report filed on October 30, 2003, less than a year ago, stated that $4.8 million had been spent in 2003 and management expected to spend $3 million more to complete the project in 2004, for a total of only $8 million.  There had been a hint of budget overruns in a management speech at the February 23, 2004 shareholders meeting, when it was reported that $10 million had been spent so far and that the project would continue for another year.
Please let me know if you have questions or comments on any other information presented in the report.
Gary Lutin
Lutin & Company
575 Madison Avenue, 10th Floor
New York, New York 10022
Tel: 212-605-0335
Fax: 212-605-0325

                             Washington, D.C.  20549
                                    FORM 10-K

                       THE SECURITIES EXCHANGE ACT OF 1934
                     For the fiscal year ended June 30, 2004
                        Commission file number:    0-1375

                                 FARMER BROS. CO.
Results of Operations
Years ended June 30, 2004 and 2003
Net sales in fiscal 2004 decreased $7,969,000, or 4%, to $193,589,000 from
$201,558,000 in fiscal 2003.  This includes a decrease in coffee brewing
equipment sales during fiscal 2004 of $3.9 million.
Our sales force has persisted in its efforts throughout this recession.  We
expect better results as the economy begins to improve.  Some improvement has
been noted.  Comparing fourth quarter 2004 to fourth quarter 2003, two of our
ten selling divisions had sales declines of less than 1% and one, in the
Mississippi Valley, had a 2.6% sales increase.  Some trade reports as well as
published operating results from some restaurant operators seem to indicate
that restaurant sales have improved.  The National Restaurant Association has
forecasted that industry sales will increase 4.4% for calendar 2004.  A trade
publication, The Restaurant News, reports that restaurant sales in the first
four months of calendar 2004 were 3.4 percent higher than during the same
period of calendar 2003.  We have not kept pace with this trend but we note
that regional results often do not reflect national averages.  Our California
operations, representing our largest marketing area, continue to show limited
Consumer sentiment and spending patterns are not enhanced by rising commodity
prices (leading to higher grocery store and menu prices), record high gasoline
prices (which can have an emotional effect on discretionary spending), and
uncertainty about job stability, terrorism and the Iraq war (which can lead to
just staying home).
Cost of goods sold in fiscal 2004 increased 1% to $71,405,000, or 37% of
sales, as compared to $70,662,000, or 35% of sales, in 2003.  The average cost
of green coffee throughout fiscal 2004 has exceeded that of fiscal 2003 by
15%.  Through price adjustments we were, on average, able to maintain margins
for the current year, although shrinking gross profit margins were experienced
during the last half of the fiscal year.  Selling and General & Administrative
Expenses in 2004 increased 11% to $118,421,000 from $107,008,000 in fiscal
This increase is primarily attributed to costs associated with employee
benefits, including actuarially derived pension and retiree medical costs, the
cost of the ESOP, legal expenses, including those related to a stockholder
lawsuit during 2004 and reincorporation in Delaware, and our multiyear program
to update our information systems as well as the direct costs of our
Sarbanes-Oxley Act of 2002 ("SOX") compliance work related to Section 404.

                         2004     2003
Employee benefits       $14,104  $11,578
ESOP                      6,298    4,637
Legal expenses            2,267      650
IT project expenses       3,400      698
SOX compliance              360        0
  total                 $26,429  $17,563

As a result of these factors, operating income in 2004 decreased 83% to
$3,763,000 from $23,888,000 in the prior fiscal year.


The Forum is open to all Farmer Bros. shareholders, whether institutional or individual, and to professionals concerned with their investment decisions.  Its purpose is to provide shareholders with access to information and a free exchange of views on issues relating to their evaluations of alternatives.  As stated in the Forum's Conditions of Participation, participants are expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

There is no charge for participation.  Franklin Mutual Advisers, LLC, the manager of funds owning approximately 12.6% of Farmer Bros. shares, provided initial sponsorship for the Forum and arranged for it to be chaired by Gary Lutin.  Continuing support and guidance of the Forum is provided by an Advisory Panel of actively interested shareholders.

For additional information or to be included in an email distribution list, send an inquiry to