Willamette Valley Vineyards, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. The interim financial statements are unaudited. The company sells wine through direct-to-consumer channels and third-party distributors.
Financial performance
| Metric | Three months 2015 | Three months 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $4.245 million | $4.046 million | $12.878 million | $10.711 million |
| Gross profit | $2.636 million | $2.500 million | $7.700 million | $6.462 million |
| Gross margin | 62.1% | 61.8% | 59.8% | 60.3% |
| Operating income | $747,000 | $973,000 | $2.090 million | $1.981 million |
| Net income | $454,000 | $574,000 | $1.279 million | $1.295 million |
| Basic earnings per share | $0.09 | $0.12 | $0.26 | $0.27 |
- Third-quarter sales grew 4.9%; nine-month sales grew 20.2%. For the nine months, direct sales rose $1.436 million and distributor sales rose $730,000. Direct sales increased 38.7%, while distributor sales increased 10.4%.
- Gross profit increased 5.5% for the quarter and 19.1% year to date. SG&A rose 23.7% in the quarter and 25.2% year to date, reflecting selling costs, staffing, and depreciation related to the Hospitality Center and increased sales promotion.
- Net income decreased 20.9% for the quarter and 1.3% year to date. Quarterly results were affected by lower distributor sales and a $142,972 inventory write-down; year-to-date other income was lower because 2014 included insurance proceeds.
- Wine cases sold increased 14.5% year to date, to approximately 87,765. Wine Club membership increased by 679 net members, or 11.9%, to 6,394.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $1.959 million, versus $2.208 million in 2014. Investing cash outflow was $2.734 million, mainly for property, equipment, and vineyard development. Financing cash inflow was $450,000; cash and cash equivalents declined $325,000 to $195,000.
- At September 30, 2015, working capital was $9.4 million and the current ratio was 2.56:1, compared with $9.8 million and 4.63:1 at year-end 2014. Current assets included $3.038 million in restricted cash associated with preferred-stock subscriptions; that cash was not freely available at quarter-end.
- Farm Credit Services debt totaled $5.257 million, down from $5.502 million at year-end 2014. A new, non-interest-bearing land-purchase note was $490,834, with installments due in 2016 and 2017. The $2 million revolving credit facility was undrawn, and the company reported covenant compliance.
- Management stated that operating cash flow and available credit facilities should meet foreseeable short- and long-term needs.
Significant developments, outlook, and risks
- The company commenced a public offering of Series A Redeemable Preferred Stock in August, with up to 1,445,783 shares and aggregate offering proceeds capped at $6 million. The non-voting shares rank senior to common stock and carry dividends of $0.22 per share when declared. At quarter-end, $3.038 million of proceeds and subscriptions was recorded as restricted cash with a corresponding liability; proceeds were released and the preferred stock issued in October. The stock began Nasdaq trading as WVVIP on November 2, 2015.
- The company repurchased 36,481 common shares for $250,000 during the quarter, using the full authorization then available. In November, the board approved a further plan to repurchase up to $250,000.
- No specific financial guidance was provided. Management emphasized growing direct sales through the Hospitality Center and Wine Club. Results are seasonal and interim performance is not necessarily indicative of full-year results.
- Disclosed risks include financing growth, grape supply and quality, weather and disease, competition, distributor relationships, regulation, and general market conditions. The company also highlighted potential securities-law liabilities and litigation costs relating to the unusual preferred-stock offering. Management said ordinary-course legal proceedings were not expected to have a material effect.
- Prior-year other income included $180,035 of insurance proceeds related to a 2014 wine spill; no comparable proceeds were recorded in 2015. Controls and procedures were reported effective, with no material change in internal control during the quarter.
Key facts for investors to verify
- Whether direct-sales growth and Wine Club expansion can offset higher selling and operating costs, and whether distributor sales remain resilient.
- The drivers and potential recurrence of the $142,972 inventory write-down, and the inventory valuation assumptions for wine held in aging and production.
- Preferred-stock offering terms, dividend declarations, redemption provisions, proceeds and related costs, and the effect of the senior security on common shareholders.
- Liquidity after capital spending and stock repurchases, including the availability and covenant conditions of the undrawn credit line.
- Future grape supply, crop quality, weather, and other agricultural risks that could affect production and margins.