WILLAMETTE VALLEY VINEYARDS INC quarterly report, Q1 FY2018

Willamette Valley Vineyards, Inc. — Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018. Unaudited results compared with Q1 2017; balance-sheet figures compared with December 31, 2017.

Financial performance

MetricQ1 2018Q1 2017 / comparison
Net sales$4.53 million$4.45 million; up 1.8%
Gross profit / margin$2.89 million / 63.8%$2.74 million / 61.6%
SG&A$2.42 million$2.24 million; up 8.0%
Operating income$472,344$503,127
Net income$330,454$315,130; up 4.9%
Income applicable to common shareholders$75,561; $0.02 per share$183,297; $0.04 per share
Operating cash flow$(1.34) million$352,243
Cash and cash equivalents$11.16 million$13.78 million at Dec. 31, 2017
  • Wine cases sold fell 2.7% to approximately 28,832, although revenue increased. Management attributed the revenue gain mainly to higher direct-to-consumer and distributor sales.
  • Direct sales generated $1.55 million in revenue and $175,219 contribution margin, versus $1.49 million and $267,503 a year earlier. Distributor sales generated $2.98 million and $1.28 million contribution margin, versus $2.96 million and $1.14 million.
  • Cash used in operations was primarily associated with purchased-grape payments. Investing cash outflow was $1.26 million, mainly for property and equipment; financing cash outflow was $8,907.
  • Working capital was $23.8 million and the current ratio was 6.62:1, compared with $24.0 million and 4.73:1 at year-end.
  • Farm Credit Services and Toyota debt totaled $7.14 million, including current maturities and excluding debt issuance costs. Separate property-purchase notes totaled approximately $1.74 million. The $2 million Umpqua line of credit had no outstanding balance; the company reported covenant compliance.

Material changes and notable items

  • Gross margin improved, primarily because a $75,918 bulk-wine inventory write-down in Q1 2017 did not recur. SG&A increased 8.0%, including higher selling costs for retail staffing and incentives; operating income consequently declined.
  • Net income rose, but common-shareholder income fell 58.8%, as accrued preferred dividends increased to $254,893 from $131,833. The company reported 4.63 million preferred shares outstanding with a $19.49 million liquidation preference at March 31.
  • The company adopted the new revenue-recognition standard in Q1 2018 using the modified prospective method and said the impact was not material. It was still evaluating the forthcoming lease-accounting standard.
  • Preferred-stock subscriptions of $236,824 were received and recorded as a current liability pending share issuance effective April 1, 2018.

Outlook, risks and contingencies

  • No quantified revenue or earnings guidance was provided. Management said strategic property purchases, development, preferred-stock activity and related costs are expected to weigh on near-term results. It believed operating cash flow and available credit would meet foreseeable needs.
  • Management cited risks including financing availability, high-quality grape supply, weather, grape disease or quality, competition, distributor relationships, consumer demand and regulatory decisions. It cautioned that Q1 results are not necessarily indicative of full-year results.
  • A long-term grape-purchase agreement runs through the 2023 harvest; its payment range cannot be quantified because amounts depend on grape availability, quality and company needs. Management did not expect pending legal matters to have a material adverse effect, while noting outcomes cannot be predicted.
  • The filing’s statements of operations report a Q1 tax provision of $122,744. The MD&A gives a different figure ($118,718) while stating a year-over-year decrease of $59,011; the narrative amount does not reconcile with the financial statements.

Important facts for investors to verify

  • Confirm the tax-provision discrepancy between the statements and MD&A.
  • Track whether operating cash flow recovers after the grape-payment outflow and whether cash continues to decline with capital spending.
  • Monitor direct-sales contribution margin, case volumes and SG&A growth, given weaker direct-sales contribution and lower unit sales.
  • Review preferred-stock issuance, accrued dividends and the resulting claim ahead of common shareholders.
  • Check renewal or replacement of the Umpqua credit facility, which was scheduled to renew by July 31, 2018, and progress on property-development spending.