Willamette Valley Vineyards, Inc. — Q1 2014 Form 10-Q
Business and period: Oregon-based wine producer selling through direct-to-consumer channels, including tasting rooms and its Wine Club, and wholesale distributors. Unaudited results cover the three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise noted.
Financial results
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net sales | $2.972 million | $3.042 million; down 2.3% |
| Gross profit / margin | $1.722 million / 57.9% | $1.757 million / 57.8% |
| SG&A | $1.473 million | $1.268 million; up 16.2% |
| Operating income | $248,735 | $488,704 |
| Net income | $174,915 | $296,593; down 41.0% |
| Basic and diluted EPS | $0.04 | $0.06 |
| Cash from operating activities | $(399,028) | $(43,237) |
| Cash used in investing activities | $(957,806) | $(714,924) |
| Cash from / (used in) financing activities | $601,908 | $(62,766) |
Gross profit margin was essentially flat year over year. Direct-sales revenue increased 16.0% to $943,651, while distributor sales declined 9.0% to $2.028 million. Direct-sales contribution margin was $181,511 versus $220,871; distributor contribution margin was $725,046 versus $864,528.
Liquidity, debt and investment
- Cash was $190,757 at March 31, down from $945,683 at December 31, 2013; an additional $450,000 was restricted. Management attributed the cash decline primarily to capital improvements.
- Working capital was $9.1 million, with a current ratio of 4.54:1, compared with $9.8 million and 4.57:1 at year-end.
- The company drew $644,424 on its $2.0 million Umpqua Bank asset-based line; $1,355,576 remained available. The line carried a 3.25% rate, matured in June 2014, and the company reported compliance with its covenants at quarter-end.
- Long-term debt, including current maturities, totaled $5.738 million, versus $5.817 million at December 31, 2013. The outstanding line of credit is additional borrowing.
- Investing cash outflows included $883,318 of property and equipment additions and $74,488 of vineyard development costs. Construction on the Hospitality Center remodel and expansion was substantially completed in April 2014.
Material changes and management commentary
- Wine cases sold fell 7.0% to approximately 21,704. Management attributed lower distributor volume partly to severe weather in key markets and the absence of a large California-chain sale made in 2013.
- Direct sales benefited from Wine Club growth and increased kitchen and hospitality sales tied to the remodeled center. Wine Club membership increased by approximately 273 in the quarter.
- SG&A rose $205,296, primarily from staffing and selling costs associated with the increased retail focus and Hospitality Center start-up and operations. Management identified these costs as the primary reason for lower operating and net income.
- Interest expense increased 11.2% to $65,996, mainly due to debt associated with the Hospitality Center and barrel cellar projects.
- Management expects cost of sales to rise over the next several years as lower-yield vintages are released. It believes operating cash flow and available credit facilities will meet foreseeable needs; this is forward-looking and not a guarantee.
Risks, contingencies and unusual items
- Forward-looking results are subject to risks including financing availability, grape supply and quality, weather, disease, competition, distributor relationships, regulatory decisions, and broader market and economic conditions.
- The $450,000 restricted balance relates to the Hospitality Center project; the company estimated it would obtain access after final expenditure certification, expected by May 31, 2014.
- Approximately 75 cases of prepaid “futures” were included in cases sold, but revenue is deferred until shipment; related selling costs are recognized when incurred.
- Other income included $98,468 in Q1 2014, including $35,715 of revenue recognized under the Young’s Market distribution agreement. The filing does not clearly identify the full composition of other income.
- The company reported ordinary-course legal proceedings and believed any unrecorded liability was unlikely to materially affect liquidity, financial condition, or results. No material market-risk disclosure was reported.
Important facts for investors to verify
- Whether the June 2014 line-of-credit maturity was renewed or refinanced, and the subsequent status of covenant compliance.
- Whether Hospitality Center completion, final lender certification, and release of the $450,000 restricted cash occurred as expected.
- Whether direct-sales growth can offset distributor weakness and the higher selling and operating cost base.
- The timing and margin impact of lower-yield vintages and the company’s ability to sustain adequate grape supply and quality.
- Subsequent cash generation and capital spending, given negative operating cash flow and the decline in unrestricted cash during the quarter.