Willamette Valley Vineyards, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited financial statements; comparative periods are 2018. The company produces and sells wine through direct-to-consumer and distributor channels.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $6.76 million | $5.46 million | $17.55 million | $15.81 million |
| Gross profit | $4.06 million | $3.54 million | $10.84 million | $10.15 million |
| Gross margin | 60.1% | 64.9% | 61.8% | 64.2% |
| Operating income | $1.27 million | $0.97 million | $2.44 million | $2.62 million |
| Net income | $0.85 million | $0.64 million | $1.64 million | $1.78 million |
| Income applicable to common shareholders | $0.60 million | $0.39 million | $0.87 million | $1.01 million |
| Earnings per common share, after preferred dividends | $0.12 | $0.08 | $0.18 | $0.20 |
- Q3 sales rose 23.8%, chiefly from a $1.25 million increase in distributor sales; direct sales increased $49,535. Nine-month sales rose 11.0%, with distributor sales up $1.51 million and direct sales up $221,544.
- Cost of sales grew faster than sales: 40.4% in Q3 and 18.5% for the nine-month period. Management attributed this to higher volume and more expensive newly released vintages. Gross margin declined 4.8 percentage points in Q3 and 2.4 points year to date.
- Operating expenses increased 8.6% in Q3 and 11.7% year to date, reflecting higher selling costs, staffing, marketing, shipping, professional fees, and development and brand-protection work.
- Q3 net income increased 32.8%; nine-month net income decreased 7.7%. The year-to-date decline reflected operating expenses rising more than gross profit. Preferred dividends were $256,452 in Q3 and $769,357 for the nine months.
Cash flow, balance sheet, and liquidity
- For the nine months, operating cash flow was $2.10 million, investing cash outflow was $3.82 million, and financing cash outflow was $0.51 million. Cash declined $2.23 million to $7.51 million from $9.74 million at December 31, 2018, mainly due to vineyard development and property and equipment investment.
- At September 30, 2019, working capital was $21.8 million and the current ratio was 5.84:1. Current assets were $26.29 million and current liabilities were $4.50 million.
- Total assets were $66.61 million, compared with $61.48 million at year-end 2018. Inventories were $16.53 million, including $9.76 million of finished goods; finished goods increased from $6.98 million at year-end.
- Farm Credit Services and Toyota debt, net of issuance costs and including current maturities, was reported as $6.37 million. The separate Dundee Hills property installment note was $1.49 million. The $2.0 million Umpqua revolving facility was undrawn, renewed through July 2021, and available in full; the company reported compliance with its covenants.
- Operating lease liabilities totaled approximately $4.94 million. Adoption of the new lease accounting standard added about $5.0 million of right-of-use assets and corresponding liabilities, materially affecting the balance sheet but having minimal direct impact on earnings and cash flows.
Changes, outlook, and risks
- Wine cases sold increased 9.4% year over year for the first nine months, to approximately 111,778, primarily from distributor growth. Direct-to-consumer wine club membership increased by 145 net members, or 1.9%, to 7,653.
- The company began construction in July 2019 on a Bernau Estate tasting room expected to cost approximately $13.1 million and be mostly completed in fiscal 2020. Approximately $1.5 million had been spent by September 30; planned funding includes cash and debt and/or equity financing.
- A retail wine facility in Folsom, California, was expected to begin operating under lease in Q4 2019. Management said growth initiatives and related costs were expected to weigh on near-term financial results. No specific earnings or revenue guidance was provided.
- Management believes operating cash flow, available credit, and potential additional debt or equity financing will meet foreseeable needs. This assessment depends in part on access to financing and successful execution of planned growth projects.
- Key disclosed business risks include grape availability and quality, adverse weather or disease, competition, distributor relationships, consumer spending and demand for premium wine, and regulatory changes. A long-term grape supply agreement runs through the 2023 harvest, but minimum and maximum payments cannot be determined from the filing.
- Management stated ordinary-course litigation was not expected to materially affect the company, while noting outcomes cannot be predicted. The filing reported no material change to the risk factors in the 2018 Form 10-K.
Most important facts for investors to verify
- Whether sales growth, particularly distributor growth, continues and whether direct-to-consumer membership and sales improve.
- Whether higher vintage costs and operating expenses continue to pressure gross margins and year-to-date profitability.
- The Bernau Estate project’s final cost, funding mix, schedule, and effect on cash and leverage; also confirm the timing and economics of the Folsom facility.
- Cash generation, debt service, covenant compliance, and continued availability of the undrawn credit line as capital spending proceeds.
- Future grape supply, quality, and pricing exposure under the long-term purchase agreement.