Willamette Valley Vineyards, Inc. — Q2 2013 Form 10-Q
Business context and period: The filing covers the quarter and six months ended June 30, 2013, compared with the corresponding 2012 periods. The company sells wine through distributors and direct-to-consumer channels. Its Bacchus in-state distribution division was wound down in 2012 and is reported as discontinued operations.
Financial performance
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Net sales | $3.609 million | $2.851 million | $6.651 million | $5.574 million |
| Gross profit | $2.144 million | $1.699 million | $3.901 million | $3.313 million |
| Gross margin | 59.4% | 59.6% | 58.6% | 59.4% |
| Income from operations | $885,197 | $485,334 | $1.374 million | $938,163 |
| Income from continuing operations | $521,125 | $276,461 | $817,718 | $551,099 |
| Net income | $521,125 | $219,912 | $817,718 | $404,168 |
| Basic earnings per share | $0.11 | $0.05 | $0.17 | $0.08 |
- Revenue and sales: Q2 net sales grew 26.6%. Management attributed the increase to distributor sales and direct consumer sales; approximately 29,157 cases of company-produced wine were sold, up 27.9%. For the first half, distributor sales rose 20.0% and retail sales rose 17.3%.
- Costs and margins: Gross profit increased 26.1% in Q2 and 17.7% for the first half. Management attributed lower gross margins to product mix. SG&A rose 3.7% for Q2 and 6.4% for the first half. First-half interest expense increased 50.6%, which the company primarily attributed to the timing of interest expense recognition.
- Cash flow: First-half operating cash flow from continuing operations was $612,421, versus $802,244 in 2012. Investing activities used $1.788 million, including $1.256 million for property and equipment and $574,133 for vineyard development. Financing activities used $164,259. Cash declined by $1.344 million to $3.209 million.
- Liquidity and debt: Working capital was $11.4 million and the current ratio was 6.24:1, compared with $12.9 million and 6.43:1 at year-end 2012. Long-term debt, including its current portion, was $3.938 million; the company also had $5,250 drawn on its $2 million revolving credit facility, with $1.995 million available. The company reported compliance with credit covenants.
- Balance sheet and investment: Total assets were $25.785 million, including $8.661 million of inventory. Property and equipment increased to $9.788 million, with construction in progress of $2.723 million.
Changes, outlook, and risks
- Q2 net income increased 137.0%; continuing-operations income increased 88.5%. The comparison also benefited from no discontinued-operations loss in 2013, versus an after-tax loss of $56,549 in Q2 2012. First-half discontinued-operations loss was also zero, versus $146,931 in 2012.
- In February 2013, construction began on a winery Hospitality Center remodel and expansion, approved for a total project cost of up to $4.5 million. A $2 million Farm Credit Services loan was secured to partially fund it; management expected to use the remaining available borrowing during 2013 and expected construction completion in 2013. The balance of project costs was to be funded from cash reserves. Management expects the project to support future direct-to-consumer sales.
- The company stated that operating cash flow and existing credit facilities should meet foreseeable needs. No specific earnings or revenue guidance was provided.
- Forward-looking risks include financing availability, high-quality grape supply and weather or disease impacts, operating performance, competition, distributor relations, regulation, and general industry and economic conditions. Management said pending legal matters were not expected to have a material effect on liquidity, financial condition, or results.
- The company repurchased 12,094 shares during Q2 for $55,103; $114,982 remained authorized and unspent under its repurchase plan.
Important facts for investors to verify
- Whether distributor and direct-to-consumer sales growth continues and how product mix affects gross margins.
- Final project cost, timing, financing drawdown, and expected returns from the Hospitality Center expansion.
- Cash needs for capital spending and vineyard development, alongside debt service and the company’s available credit.
- The effect of grape supply, weather, disease, competition, and distributor performance on future results.
- How the Young’s Market distribution agreement’s remaining receivable and deferred revenue are collected and recognized.