ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF
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
improvement.
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
2003.
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.