Business context and reporting period
Willamette Valley Vineyards, Inc. produces and sells wine through direct-to-consumer channels, including tasting rooms and its wine club, and through distributors. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017; balance-sheet comparisons are with December 31, 2016.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net sales | $5.14 million, up 8.5% from 2016 | $14.91 million, up 9.9% |
| Gross profit / margin | $3.38 million / 65.7%, versus $3.04 million / 64.1% | $9.31 million / 62.5%, versus $8.56 million / 63.1% |
| Income from operations | $1.10 million, versus $994,303 | $2.66 million, versus $2.56 million |
| Net income | $624,583, up 4.1% | $1.53 million, down 2.0% |
| Income attributable to common shareholders, after preferred dividends | $427,996, down 8.5%; diluted and basic EPS $0.09 | $1.07 million, down 13.4%; diluted and basic EPS $0.21 |
SG&A rose 11.5% in the quarter and 10.9% for the nine-month period. Interest expense increased 78.8% and 60.3%, respectively, primarily due to new property-related borrowing and 2017 refinancing. The company sold approximately 98,383 cases of wine in the first nine months, up 3.4%; management attributed the increase primarily to distributor sales.
For the nine months, operating cash flow was $2.45 million, investing cash outflow was $3.04 million, and financing cash inflow was $7.89 million. Cash increased to $13.01 million from $5.71 million at year-end, supported principally by debt and preferred-stock proceeds. Capital spending included $2.29 million for property and equipment and $795,456 for vineyard development.
Liquidity, debt, and balance sheet
At September 30, working capital was $20.4 million and the current ratio was 4.09:1, compared with $16.4 million and 5.59:1 at December 31, 2016. The company had $7.33 million of long-term debt, including current maturities and excluding debt issuance costs, versus $4.87 million at year-end. It also reported $1.91 million of notes payable, principally associated with 2017 farmland and property purchases. The $2 million revolving credit facility had no borrowings; the company reported covenant compliance and full availability. Total assets were $55.89 million, up from $44.87 million.
Material changes, outlook, and risks
- Quarterly sales growth reflected increases in both direct and distributor sales. Management attributed higher direct sales primarily to tasting-room, hospitality, and kitchen sales. Nine-month sales rose in both channels.
- Quarterly gross margin improved, but nine-month gross margin declined 0.6 percentage points. Selling costs increased with staffing, incentives, shipping, demonstrations, and travel; general and administrative costs also rose for the nine-month period.
- Preferred-stock dividends reduced income available to common shareholders despite higher quarterly net income. Preferred-stock sales also raised cash; $1.71 million of third-quarter proceeds was recorded as a liability pending issuance effective October 1.
- Management said it is pursuing strategic growth through property purchases, debt refinancing, and preferred-stock issuance, and expects near-term results to be negatively affected by preferred dividends, planning and development, and other growth costs. It stated that operating cash flow and existing credit facilities should meet foreseeable needs. No quantified earnings or revenue guidance was provided.
- Risks identified include financing availability, adequate high-quality grape supply, weather, grape disease or quality, competition, distributor relationships, consumer spending and demand for premium wine, and regulation. Management said risk factors had not materially changed from its 2016 Form 10-K.
- A long-term grape-purchase agreement runs through the 2023 harvest; amounts are not quantifiable because they depend on grape needs, availability, and quality. A May 2017 asset purchase of approximately $142,000 was scheduled to close in January 2018. Management said ordinary-course litigation was not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Whether sales growth and case-volume gains persist, particularly across direct and distributor channels, and how channel mix affects margins.
- Whether higher selling, development, and financing costs continue to outpace operating profit growth; assess the effect of preferred dividends on common-shareholder returns.
- Debt balances, repayment terms, refinancing benefits, and continued compliance with credit-facility covenants, alongside the company’s property and vineyard investment plans.
- Future grape availability, quality, and purchase costs, as well as the execution and financial effects of the planned asset acquisition.
- The filing reports planned adoption of the new revenue standard in the first quarter of 2018, which management expected not to have a material effect; it was still evaluating the effect of the new lease standard.