Willamette Valley Vineyards, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; filed August 11, 2016. The company produces and sells wine through direct-to-consumer and distributor channels. Interim results are unaudited and are not necessarily indicative of full-year results.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $4.64 million, down 1.7% year over year | $8.82 million, up 2.2% |
| Gross profit / margin | $2.92 million / 63.0%, versus $2.76 million / 58.5% | $5.52 million / 62.6%, versus $5.06 million / 58.7% |
| Income from operations | $828,204, versus $844,884 | $1.57 million, versus $1.34 million |
| Net income | $477,172, down 6.5% | $965,062, up 17.1% |
| Income applicable to common shareholders | $362,481, versus $510,231 | $771,476, versus $824,469 |
| Basic and diluted EPS after preferred dividends | $0.07, versus $0.10 | $0.15, versus $0.17 |
Management attributed stronger first-half gross profit mainly to higher-margin wine vintages and improved core retail and distributor sales. Higher SG&A partly offset this, increasing 9.5% in Q2 and 6.3% for the first half. Preferred dividends reduced earnings attributable to common shareholders.
Cash flow, liquidity and debt
- Six-month operating cash flow was $1.20 million, compared with $1.43 million in 2015. Investing used $2.12 million, primarily for property, equipment and vineyard development; financing provided $3.43 million, principally from preferred-stock issuance.
- Cash and cash equivalents were $6.53 million at June 30, up from $4.01 million at year-end 2015. An additional $1.27 million was restricted for preferred-stock subscriptions and escrow, with a corresponding liability.
- Working capital was $16.7 million and the current ratio was 6.41:1, compared with $14.0 million and 4.43:1 at December 31, 2015.
- Farm Credit long-term debt was $5.00 million, down from $5.17 million at year-end; an additional $245,417 farmland installment note is due April 1, 2017. The $2.0 million bank line was undrawn, and the company reported covenant compliance.
Material changes and business developments
- Q2 sales declined modestly despite increased distributor sales and core retail sales; lower bulk and miscellaneous sales more than offset those gains. First-half sales increased, with produced-wine case volume up 10.5% to approximately 65,116 cases.
- The company purchased about 53 acres, including 25 plantable acres, for future vineyard development, and acquired an option to purchase about 17 acres in the Dundee Hills AVA. Management said owned vineyards should help control cost and quality and reduce grape-supply risk.
- The company sold approximately $3.995 million of preferred stock in the first half. The Series A shares are non-voting, carry dividends of $0.22 per share when declared, and rank senior to common stock. Management said preferred-dividend expense may weigh on EPS until the proceeds are invested and generate returns.
- Wine-club membership increased by approximately 43 net members, or 0.7%, to 6,413. Management noted preferred shareholders receive enhanced discounts and may affect wine-club sign-ups, while potentially representing a longer-term customer base.
Outlook, risks and unusual items
- Management expected operating cash flow and available credit to fund operations and anticipated capital requirements for at least 12 months. No quantified earnings or revenue guidance was provided.
- Identified risks include financing availability for growth, grape supply and quality, weather and disease, competition, distributor relationships, consumer spending and demand for premium wine, and regulation. The company said risk factors had not materially changed from its 2015 Form 10-K.
- In July 2016, the board revised the CEO’s 2016 bonus formula and awarded a one-time $100,000 bonus; it said it would evaluate the bonus structure for 2017.
- Management said ordinary-course legal proceedings were not expected to materially affect the company, though outcomes cannot be predicted. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Reconcile the filing’s inconsistent descriptions of bulk-wine sales: the segment table and results discussion indicate 2015 bulk sales did not recur in 2016, while an overview passage appears to state the reverse. This affects interpretation of year-over-year sales comparisons.
- Confirm preferred-stock issuance, subsequent issuance timing, outstanding shares, dividend accruals and intended use of proceeds; the filing notes escrowed subscription proceeds were released in July.
- Assess whether vineyard and other capital spending can produce returns sufficient to offset preferred dividends and ongoing debt service.
- Track direct-to-consumer and distributor sales, margins, inventory and grape-supply conditions; management did not provide quantified forward guidance.