Business context and reporting period
Willamette Valley Vineyards, Inc. produces and sells wine through direct-to-consumer channels and distributors. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021; comparisons are with the same periods in 2020.
Key financial results
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $7.64 million, up 10.5% | $22.36 million, up 17.6% |
| Gross profit / margin | $4.46 million / 58.4% (61.0% in 2020) | $13.09 million / 58.6% (61.2% in 2020) |
| Operating income | $0.69 million, down from $1.30 million | $2.41 million, down from $3.33 million |
| Net income | $0.46 million, down 49.1% | $1.66 million, down 28.1% |
| Income applicable to common shareholders; EPS | $95,120; $0.02 | $573,214; $0.12 |
| Operating cash flow | Not presented separately | $3.77 million, versus $2.91 million |
Sales growth reflected stronger direct sales and distributor sales. Cases sold increased 11.1% year over year in the nine-month period, to 145,153. Direct sales generated $8.80 million of nine-month revenue, up from $6.80 million; distributor sales were $13.55 million, up from $12.21 million.
Cash and cash equivalents were $13.89 million at September 30, 2021, versus $14.00 million at year-end 2020. Current assets were $34.59 million and current liabilities $10.66 million; the company reported working capital of $23.9 million and a current ratio of 3.25:1. Investing cash outflow was $6.87 million, primarily for construction and vineyard development; financing cash inflow was $2.99 million, mainly from preferred-stock-related proceeds.
Farm Credit Services debt totaled $5.65 million, including current maturities, and the Dundee Hills property installment note was $1.32 million. There were no borrowings under the $2.0 million revolving credit line, renewed through July 31, 2023; the company reported compliance with debt covenants. Operating lease liabilities totaled $4.66 million. The filing states that cash flow and available credit are expected to meet short-term needs.
Material changes versus prior comparable periods
- Gross margin fell 2.6 percentage points in both the quarter and year-to-date period, which management attributed mainly to higher-cost 2020 vintages sold in 2021 and product mix.
- Operating expenses rose 29.2% in the quarter and 28.7% year to date. Management cited more tasting-room operating days and related labor costs; higher maintenance, professional fees and compensation also contributed.
- Net income declined despite higher sales and gross profit, as increased operating expenses more than offset gross-profit growth. Common-shareholder income fell more sharply because preferred dividends increased with the larger preferred-stock base.
- Capital spending increased: property and equipment additions were $6.36 million, compared with $3.42 million in the first nine months of 2020. Cash declined by $0.11 million over the period.
Outlook, risks and unusual items
The company provided no quantitative earnings or revenue guidance. Management expects near-term results to be affected by preferred dividends, strategic planning and development, and other growth-related costs. A new Dundee tasting room and winery is estimated to cost approximately $15.6 million; construction restarted after a pandemic-related pause, and approximately $8.7 million had been incurred by September 30, 2021. Funding is expected from cash on hand and preferred-stock offerings.
COVID-19 and potential renewed restrictions remain sources of uncertainty, including possible effects on tasting-room and hospitality sales, consumer spending, staffing and grape suppliers. Other stated risks include grape availability and quality, adverse weather, smoke or disease, competition, distributor relationships, and financing for growth. Management reported no significant supply-chain disruption to date. Long-term grape-purchase commitments have variable amounts dependent on crop availability and quality. Ordinary-course litigation was not expected to materially affect the company, though outcomes cannot be predicted.
Preferred stock outstanding increased to 6,564,923 shares, with a $28.33 million liquidation preference at quarter-end. Accrued preferred dividends for the first nine months were $1.08 million. The company may redeem outstanding preferred shares after June 1, 2021, but is not obligated to do so. Investor deposits for preferred stock were reported as a $2.90 million current liability. The company reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether sales growth can translate into improved operating income as margins and operating costs remain under pressure.
- The timing, final cost and funding plan for the Dundee project, including the extent of future preferred-stock financing.
- Preferred-stock issuance, dividend accruals, redemption terms and their continuing effect on income available to common shareholders.
- Whether cash generation and available credit remain sufficient for capital spending and long-term funding needs amid COVID-19, grape-supply and market uncertainties.