Willamette Valley Vineyards, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. The company produces and sells wine through direct-to-consumer channels and distributors. Direct sales include tasting rooms and the Wine Club.
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $3.69 million | $3.61 million | $6.67 million | $6.65 million |
| Gross profit | $2.24 million | $2.14 million | $3.96 million | $3.90 million |
| Gross margin | 60.7% | 59.4% | 59.5% | 58.6% |
| Income from operations | $760,000 | $885,000 | $1.01 million | $1.37 million |
| Net income | $547,000 | $521,000 | $721,000 | $818,000 |
| Basic EPS | $0.11 | $0.11 | $0.15 | $0.17 |
Q2 net income rose 4.9%, while first-half net income fell 11.8%. First-half operating cash flow was $1.17 million, versus $612,000 a year earlier. Investing activities used $2.05 million, primarily for winery and hospitality facilities and vineyard development; financing provided $348,000. Cash declined to $409,000 from $946,000 at year-end 2013.
At June 30, working capital was $9.5 million and the current ratio was 6.68:1. Total long-term debt, including current maturities, was approximately $5.66 million, down from $5.82 million at December 31, 2013. The $2 million revolving facility had no borrowings, was renewed in July 2014 for two years, and was fully available; the company reported compliance with its financial covenants. Management said operating cash flow and available credit should meet foreseeable needs.
Changes and operating drivers
- First-half sales were nearly flat, but wine cases sold fell 9.4% to approximately 47,551. Management attributed lower distributor sales to large chain-retailer orders in 2013 that did not recur.
- Direct sales increased $587,000 in the first half, partly offsetting a $572,000 decline in distributor sales. Wine Club membership grew by approximately 439 net members, or 9.5%.
- Higher direct-sales mix supported gross margin improvement. However, SG&A rose 16.9% in the first half to $2.95 million, reflecting staffing and selling costs and start-up expenses for the remodeled Hospitality Center. First-half operating income consequently declined.
- The Hospitality Center remodel and expansion was completed June 1, 2014. The project included hospitality, tasting, kitchen and barrel-storage improvements; management expects it to support direct sales and customer engagement.
Outlook, risks and unusual items
- The filing provides no quantified revenue, earnings or margin guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- A March production accident spilled approximately 29,000 gallons of bulk wine. Insurance-related other income was $180,035 for the first half, including a final $88,792 payment recorded as a June 30 receivable. No further claim payments were due. This nonrecurring benefit supported reported earnings.
- Management cited risks including financing availability, adequate grape supply and quality, weather and disease, operating performance, competition, distributor relationships, regulation and economic conditions.
- The company reported ordinary-course legal proceedings and said unrecorded liabilities were not expected to materially affect its financial position or results. It was evaluating the impact of the new revenue-recognition standard and had not selected a transition method.
Important facts for investors to verify
- Whether direct-to-consumer growth can continue to offset lower distributor volume, and whether the expanded Hospitality Center generates sufficient incremental sales.
- How much of first-half earnings and operating cash flow depended on the wine-spill insurance settlement, and the underlying trend excluding that benefit.
- Whether elevated SG&A and capital spending moderate, and how the reduced cash balance evolves relative to debt service and planned investment.
- Grape supply, quality, weather and disease exposure, as well as continued compliance with credit-facility covenants.