Willamette Valley Vineyards, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited results; comparisons are with the corresponding 2016 periods. The company produces and sells wine through direct-to-consumer channels and distributors.
Financial performance
| Metric | Three months ended June 30, 2017 | Six months ended June 30, 2017 |
|---|---|---|
| Net sales | $5.31 million, up 14.5% | $9.76 million, up 10.7% |
| Gross profit / margin | $3.19 million / 60.0%, versus 63.0% | $5.93 million / 60.7%, versus 62.6% |
| Operating income | $1.06 million | $1.56 million |
| Net income | $593,501, up 24.4% | $908,630, down 5.8% |
| Income attributable to common shareholders; EPS after preferred dividends | $461,668; $0.09 per share | $644,965; $0.13 per share |
- Second-quarter sales growth reflected higher direct sales, including tasting room, wine club, hospitality and kitchen sales, and increased distributor sales. First-half sales rose in both channels. Produced wine case sales increased 0.8% in the first half to approximately 65,081 cases.
- Cost of sales rose 23.9% in Q2 and 16.2% in the first half, faster than sales. Gross profit increased in both periods, but margins contracted.
- The company recorded bulk-wine inventory write-downs of $112,599 in Q2 and $188,517 in the first half, reducing reported gross margin by approximately 2.1 and 2.0 percentage points, respectively. The wine did not meet company quality standards; some was sold below carrying cost and some disposed of.
- SG&A increased 1.6% in Q2 and 10.5% in the first half. The first-half increase included higher sales staffing, incentives, demonstrations and travel, as well as facility maintenance and long-term planning costs. Interest expense increased 70.3% in Q2 and 51.3% in the first half, reflecting additional borrowing and property-related debt.
Cash flow, liquidity and debt
- Cash was $10.00 million at June 30, up from $5.71 million at December 31, 2016. First-half operating cash flow was $1.53 million; investing cash outflow was $1.96 million; financing cash inflow was $4.73 million.
- First-half investment outlays included $1.44 million for property and equipment and $569,178 for vineyard development. Financing included $2.67 million of long-term debt proceeds and $2.91 million of preferred-stock investor deposits recorded as a liability pending issuance; those shares were issued effective July 1, 2017.
- Working capital was $16.2 million and the current ratio 3.31 at June 30, compared with $16.4 million and 5.59 at year-end. The company had $2.0 million available and undrawn under its renewed line of credit, which runs through July 31, 2018; it reported compliance with the facility’s financial covenants.
- Total long-term debt, including current maturities and excluding debt issuance costs, was $7.43 million, versus $4.87 million at year-end. The company refinanced three Farm Credit Services loans and had seller-financed notes for land purchases. Management said operating cash flow and available credit should meet foreseeable short- and long-term needs.
Material changes, outlook and risks
- Management is pursuing strategic growth through property purchases, debt refinancing and Series A redeemable preferred-stock issuance. It cautioned that near-term results may be negatively affected by preferred dividends, planning and development, and other growth costs.
- Direct sales are generally more profitable than distributor sales. Wine club membership increased by approximately 163 net members, or 2.4%, to 6,877 during the first half. Management believes preferred shareholders may also become customers, while noting their discounts may reduce wine-club sign-ups.
- No specific revenue or earnings guidance was provided. The filing states that interim results are not necessarily indicative of full-year results.
- Risks identified include financing availability, grape supply and quality, weather or disease, competition, distributor relationships, consumer demand for premium wine, and regulatory or broader economic conditions. The company said its previously disclosed risk factors had not materially changed.
- Long-term grape-purchase contracts run through the 2019 harvest and may require purchases of qualifying grapes up to approximately $1.5 million per year; minimum payments depend on the quantity meeting quality standards. A planned asset purchase for approximately $142,000 was scheduled to close in January 2018, with two contracts to be assumed.
- Management described ordinary-course litigation as not expected to materially affect the company, while noting outcomes cannot be predicted with certainty. No off-balance-sheet arrangements were reported. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether subsequent results show recovery in gross margin after the bulk-wine write-downs and continued growth in both sales channels.
- How property and vineyard investments, refinancing and seller-financed purchases affect debt service, interest expense and liquidity.
- The final accounting and terms for preferred shares issued July 1, including dividends and the effect on earnings attributable to common shareholders.
- Progress on the planned January 2018 asset purchase and the continuing grape-purchase commitments.
- Whether the company’s stated expectation that cash flow and available credit will meet foreseeable needs remains supportable.