Willamette Valley Vineyards, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; interim financial statements are unaudited. The company produces and sells wine through retail, wholesale and distributor channels, with reporting segments of Produced Wine and Bacchus Distribution.
Financial performance
| Metric | Q3 2011 | Nine months 2011 | Comparable 2010 |
|---|---|---|---|
| Net sales | $4.345 million | $11.760 million | $4.600 million; $12.249 million |
| Gross profit / margin | $2.090 million / 48.1% | $5.739 million / 48.8% | $1.971 million / 42.8%; $5.297 million / 43.2% |
| Operating income | $617,295 | $1.063 million | $332,238; $322,749 |
| Net income | $373,407 | $574,138 | $171,345; $111,288 |
| Basic EPS | $0.08 | $0.12 | $0.04; $0.02 |
| Operating cash flow | $1.872 million | $1.393 million for nine months |
Quarterly net sales fell 5.6% and nine-month sales fell 4.0%. Net income increased 117.9% for the quarter and 415.9% year to date. Management attributed improved earnings primarily to higher produced-wine gross margins and lower selling, general and administrative expenses. SG&A declined 10.1% in Q3 and 6.0% year to date.
Liquidity, debt and investment
- September 30 cash was $2.904 million, versus $1.519 million at December 31, 2010. Working capital was $12.8 million, with a 7.63:1 current ratio.
- Nine-month cash flows: operating +$1.872 million, investing -$1.444 million and financing +$958,000. Investing outflows increased mainly because property and equipment spending rose to $1.412 million.
- Total debt, including current maturities, was $4.256 million, versus $3.279 million at year-end 2010. A new $1.4 million Farm Credit Services loan was obtained; the notes state it funds Turner facility improvements. The filing also describes the borrowing as supporting debt retirement, land, equipment and facility improvements.
- No borrowings were outstanding on the $2 million Umpqua Bank credit line, which matured in June 2012; the company reported full availability and compliance with its financial covenants.
- Property and equipment net book value rose to $7.160 million from $6.244 million. Inventory declined to $9.500 million from $10.712 million.
Business changes, outlook and risks
- Under a seven-year exclusive distribution agreement beginning September 1, 2011, Young’s Market distributes the company’s Willamette Valley Vineyards and Griffin Creek wines in Washington and most Oregon counties. Bacchus Fine Wines continues to handle other portfolio brands, but the company expects to discontinue its wholesale operations by year-end.
- Case volume declined 9.8% in Q3 and 4.4% for the first nine months. Management reported continued declines in purchased-brand distribution and improving produced-wine margins. It provided no quantified earnings or revenue guidance, but said operating cash flow and available credit should meet foreseeable needs.
- On November 2, 2011, the board authorized repurchases of up to $200,000 of common stock through April 1, 2012, subject to market conditions.
- Risks identified include financing availability, grape supply and quality, weather or disease, operating performance, competition, distributor relationships, regulation and broader economic conditions. The 2011 harvest grape commitments were to be accrued when grapes were received, typically in October.
- The company reported no market-risk disclosures, no defaults on senior securities, and no material expected effect from pending legal matters. Management concluded disclosure controls and internal control over financial reporting were effective; it stated that a previously identified material weakness was remediated in 2010.
Important facts for investors to verify
- Whether Bacchus wholesale operations were discontinued as planned and how the Young’s Market arrangement affected sales, margins and distribution reach.
- Use of the $1.4 million loan proceeds and subsequent debt balances, especially given the filing’s differing descriptions of the loan’s purpose.
- Execution of the authorized stock repurchases and the effect of planned capital spending on cash and credit-line needs.
- Harvest grape costs and supply, and whether the improved produced-wine margins and lower SG&A were sustainable.
- The filing cautions that nine-month results are not necessarily indicative of full-year results; it provides no specific forecast.