Willamette Valley Vineyards, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless stated otherwise. The company sells its wines through distributors and direct-to-consumer channels. In-state distribution operations were discontinued in 2012 and are reported separately.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Net sales | $3.042 million | $2.723 million; up 11.7% |
| Gross profit / margin | $1.757 million / 57.8% | $1.613 million / 59.3% |
| Operating income | $489,000 | $453,000 |
| Income from continuing operations | $297,000 | $282,000; up 5.3% |
| Net income | $297,000; $0.06 per share | $186,000; $0.04 per share |
| Cash from continuing operations | $(43,000) | $353,000 |
| Cash and cash equivalents | $3.741 million | $4.553 million at Dec. 31, 2012 |
| Total debt, including current portion | $3.989 million | $4.026 million at Dec. 31, 2012 |
Cost of sales rose 15.8% to $1.285 million, faster than sales, and gross margin declined 1.5 percentage points. Selling, general and administrative expenses increased 9.3% to $1.268 million. Interest expense increased 51.7% to $59,000. The effective estimated combined tax rate was 41.1%, compared with 38.0%.
Working capital was $12.5 million and the current ratio was 7.85:1 at March 31, versus $12.9 million and 6.43:1 at year-end. Cash used in investing activities was $715,000, primarily for winery/hospitality center improvements and vineyard development; financing activities used $63,000. The cash balance fell by $812,000 during the quarter.
Material changes and management commentary
- Sales increased by $319,000. Distributor sales rose 9.7% and retail sales rose 22.5%; management attributed growth to higher wine sales, increased sales efforts, and lower distributor depletion allowances.
- Produced-wine volume increased 9.0% to approximately 23,349 cases. The company bottled approximately 26,035 cases.
- Continuing-operations income rose 5.3%; reported net income rose 59.1%, primarily because Q1 2012 included a $95,000 after-tax loss from discontinued operations. Bacchus reported no sales in Q1 2013 versus $482,000 in Q1 2012.
- Management attributed lower gross margin to higher wine production costs, and higher SG&A to increased retail labor and national-sales travel.
Outlook, financing, and risks
- Construction on the winery Hospitality Center remodel and expansion began in February. The approved project cost is up to $4.5 million; completion is expected during 2013. Management expects the project to support future direct-to-consumer growth. Funding is expected from up to $2.0 million of Farm Credit Services borrowing and existing cash.
- A new fixed-rate 4.75% construction loan, maturing in 2028, had $15,000 drawn at quarter-end, with $1.985 million available. Existing Farm Credit Services loans carry fixed rates from 4.75% to 6.70% and mature from 2024 to 2028.
- The $2.0 million Umpqua Bank revolving line had no balance outstanding at quarter-end. It matured in June 2013; the filing does not state whether it was subsequently renewed. The company reported covenant compliance and said it expected operating cash flow and available credit to meet foreseeable needs.
- Management identified risks including financing availability, supply and quality of grapes, weather and disease, operational performance, competition, distributor relationships, regulation, and general economic and industry conditions. The filing provides no numerical full-year guidance.
- The company recognized $35,715 of quarterly revenue from the Young’s Market distribution agreement. The remaining receivable was $500,000; scheduled payments total $250,000 annually for four years, while the $1 million payment total is recognized over the agreement’s seven-year term.
- Management said ordinary-course legal proceedings were not expected to result in unrecorded liabilities material to liquidity, financial condition, or results. No market-risk disclosures were reported.
Important facts for investors to verify
- Whether the Umpqua credit facility was renewed at its June 2013 maturity and whether borrowing-base or covenant terms changed.
- Hospitality Center project spending, final cost, drawdown of the construction loan, and completion timing.
- Whether sales growth and direct-to-consumer momentum continued, and whether production-cost pressures continued to reduce gross margin.
- Cash generation and working-capital trends, particularly the effect of paying down grapes payable and other current liabilities.
- The collection schedule for the remaining Young’s Market receivable and the agreement’s ongoing revenue recognition.
- The filing’s interim results are unaudited and management cautions that Q1 results are not necessarily indicative of full-year performance.