Business context and reporting period
Willamette Valley Vineyards, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The company sells its produced wines through retail, direct, in-state wholesale and out-of-state channels; it also distributes purchased wines and glassware through Bacchus Fine Wines.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $3.790 million | $4.095 million | $7.415 million | $7.649 million |
| Gross profit | $1.910 million | $1.858 million | $3.649 million | $3.327 million |
| Operating income (loss) | $353,050 | $263,267 | $445,784 | $(9,490) |
| Net income (loss) | $172,369 | $128,287 | $200,731 | $(60,057) |
| Basic EPS | $0.04 | $0.03 | $0.04 | $(0.01) |
- Q2 gross margin was 50.4%, up from 45.4%; six-month gross margin was 49.2%, up from 43.5%. Management attributed the improvement to lower costs for produced and purchased wines.
- Q2 net sales declined 7.5% year over year; six-month net sales declined 3.1%. In Q2, in-state sales fell 13.7%, direct sales fell 5.0%, and out-of-state distributor sales fell 2.0%.
- Q2 selling, general and administrative expense declined 2.4% to $1.557 million. It represented 41.1% of net sales, versus 38.9% a year earlier, reflecting the lower revenue base.
- Six-month operating cash flow was $899,506, versus $606,602. Investing used $593,946, mainly reflecting higher property and equipment spending; financing used $25,657. Cash increased to $1.799 million from $1.519 million at year-end.
- At June 30, working capital was $11.7 million and the current ratio was 7.82:1. Total long-term debt, including current maturities, was $3.272 million; no amount was drawn on the $2.0 million revolving credit line.
Changes, outlook and risks
- On August 1, 2011, the company entered a seven-year exclusive distribution agreement with Young’s Market, effective September 1, covering its Willamette Valley Vineyards and Griffin Creek wines in Washington and most Oregon counties. Bacchus will stop distributing the company’s wines but continue promoting them and distributing other brands.
- A $1.4 million long-term loan secured during Q2 was still in construction-loan phase at June 30 and was scheduled to convert to permanent debt in October 2011; proceeds are intended for land, equipment and winery improvements.
- Management said operating cash flow and available credit were expected to meet foreseeable short- and long-term needs. The company was in compliance with its credit covenants at June 30; the line of credit matures in June 2012. No formal earnings or revenue guidance was provided. Management cautioned that interim results may not indicate full-year results.
- Risks identified include financing availability, grape supply and quality, weather, disease, operational performance, competition, distributor relationships, regulation and broader economic conditions. 2011 grape contracts were in place, with costs to be accrued when grapes are received, typically in October.
- Ordinary-course legal proceedings were disclosed; management did not expect any unrecorded liability to materially affect liquidity, financial condition or results. Management reported disclosure controls and internal controls over financial reporting as effective and stated that a previously identified material weakness had been remediated in 2010.
Important facts for investors to verify
- Whether Young’s Market distribution replaces lost Bacchus sales and improves the company’s sales trend and margins.
- Conversion, terms and repayment obligations of the $1.4 million construction loan, and the availability and renewal terms of the credit line.
- Whether improved gross margins persist despite continued sales declines, particularly in Bacchus and in-state sales.
- Harvest grape availability, quality and related cash requirements, alongside planned capital spending.
- That reported cash-flow improvements and covenant compliance continue; the filing reports no market-risk disclosures but identifies material business and operating uncertainties.