Willamette Valley Vineyards, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; interim financial statements are unaudited. The company produces and sells its wines through direct-to-consumer and distributor channels. Following completion of the Bacchus in-state distribution wind-down on June 30, 2012, the company reports one operating segment.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Sales | $3.156 million | $3.423 million | $8.730 million | $9.021 million |
| Gross profit | $1.792 million | $1.885 million | $5.105 million | $5.034 million |
| Gross margin | 56.8% | 55.1% | Approximately 58.5% | Approximately 55.8% |
| Operating income | $581,000 | $821,000 | $1.519 million | $1.666 million |
| Income from continuing operations | $273,000 | $498,000 | $823,000 | $931,000 |
| Net income | $268,000 | $373,000 | $672,000 | $574,000 |
Q3 sales declined 7.8%, while nine-month sales declined 3.2%. Q3 net income fell 28.2%; nine-month net income rose 17.0%, reflecting substantially smaller losses from discontinued operations despite lower continuing-operations income. Nine-month discontinued-operations loss was $152,000 versus $357,000 in 2011.
Cash flow and liquidity: For the first nine months, continuing-operations operating cash flow was $1.794 million, investing cash outflow was $1.044 million, and financing cash outflow was $392,000. Cash from discontinued operations was $708,000, largely from liquidating purchased-wine inventory. Cash increased to $4.478 million from $3.411 million at December 31, 2011. Working capital was $12.9 million and the current ratio was 8.03:1.
Debt and capital: Total long-term debt, including current maturities, was $4.077 million, down from $4.209 million at year-end. The company had no balance on its $2 million Umpqua Bank credit line and reported full availability and covenant compliance; the facility matures in June 2013. It repurchased 74,527 shares for $260,000 during the nine months, with $240,245 remaining under the $500,000 authorization.
Material changes and management commentary
- Q3 sales were affected by the prior-year quarter’s approximately $250,000 initial stocking order to the new Oregon distributor and the shift from self-distribution to distributor sales. Management also cited lower national sales, partly offset by 14.0% growth in retail sales, driven mainly by tasting-room and wine-club activity.
- Produced-wine volume declined 7.8% in Q3 and 15.0% for the nine months. Management attributed the reduction mainly to lower in-state case sales and discontinuing lower-margin, non-branded wines; it said this supported brand positioning and margins.
- Q3 gross margin improved 1.7 percentage points, which management attributed to a greater retail-sales mix and lower distributor depletion allowances, partly offset by channel-mix effects. Q3 SG&A increased 13.8% to $1.211 million, primarily from sales spending associated with the distribution transition and national placements.
- Interest expense rose 67.4% to $86,180 in Q3. Management expected quarterly interest expense of approximately $66,000 in future quarters, based on then-current debt and rates.
Outlook, risks, and unusual items
Management stated that operating cash flow and available credit facilities should be sufficient for foreseeable short- and long-term needs. The filing gives no sales or earnings guidance. Risks identified include financing availability, adequate high-quality grape supply, operational execution, competition, distributor relationships, adverse weather, grape disease or reduced yields, regulation, and broader industry and economic conditions. Grape purchase contracts for the 2012 harvest were to be accrued when grapes were received in October; no grape-contract liability was recorded at September 30. Management said any unrecorded liability from ordinary-course legal proceedings was not likely to materially affect liquidity, financial condition, or results.
The Bacchus wind-down is reported as discontinued operations; prior-period comparisons include reclassifications. Management cautioned that interim results are not necessarily indicative of full-year results. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported. The company reported no market-risk disclosures for the period.
Important facts for investors to verify
- How the distributor transition and discontinuation of non-branded wines affect ongoing sales volume, revenue mix, and margins after the prior-year stocking-order comparison rolls off.
- Whether retail and wine-club growth can offset lower distributor and in-state sales, and whether increased selling costs translate into sustained placements.
- Grape availability, harvest yields, and costs, including the timing and amount of 2012 grape-contract accruals.
- Credit-line renewal or refinancing before its June 2013 maturity, continued covenant compliance, and debt-service costs.
- Cash generation and the remaining stock-repurchase authorization relative to capital spending and operating needs.