Willamette Valley Vineyards, Inc. — Q1 2012 Form 10-Q
Business and period: The filing covers the three months ended March 31, 2012, compared with Q1 2011. The company produces and sells its own wines and operates Bacchus Fine Wines, an in-state distributor of purchased wines and glassware. It is winding down Bacchus and transitioning distribution of its produced wines to Young’s Market.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $3.205 million | $3.626 million |
| Gross profit / margin | $1.603 million / 50.0% | $1.739 million / 48.0% |
| Operating income | $299,056 | $92,734 |
| Net income | $186,365 | $28,362 |
| Basic and diluted EPS | $0.04 | $0.01 |
| Cash from operations | $660,255 | $137,137 |
Sales fell 11.6%; gross profit declined 7.8%, while gross margin improved 2.0 percentage points. SG&A decreased 20.8% to $1.304 million, helping lift operating income and net income. Net margin was approximately 5.8%, versus 0.8% a year earlier.
Produced Wine generated $2.723 million in sales and $1.613 million gross profit, a 59.3% margin (53.8% in Q1 2011). Bacchus Distribution sales were $482,107 and it recorded a $10,434 gross loss, versus $267,394 gross profit a year earlier. Total cases sold declined 15.4% to approximately 26,694.
Liquidity, cash flow and debt
- Cash was $3.777 million at March 31, 2012, up from $3.411 million at December 31, 2011. Operating cash flow was $660,255; investing activities used $216,936, principally for capital expenditures; financing activities used $77,191, including debt repayment and share repurchases.
- Working capital was $13.0 million and the current ratio was 8.71:1, compared with $12.9 million and 8.11:1 at year-end 2011.
- Total debt, including current maturities, was $4.160 million, down from $4.209 million at year-end. The $2.0 million Umpqua Bank line of credit was undrawn and fully available; it matured in June 2012. The company reported compliance with its financial covenants.
Material changes, outlook and risks
- Management attributed lower sales primarily to Bacchus’s planned wind-down and the transition to a third-party distributor. Purchased-wine sales are expected to keep declining; Bacchus wholesale operations were expected to end by the close of Q2 2012. Management cited lower regulatory, staffing and logistics costs and improved margins as expected benefits.
- Management said operating cash flow and available credit should meet foreseeable needs. The filing gives no specific earnings or revenue guidance and cautions that Q1 results are not necessarily indicative of full-year results.
- Risks identified include financing availability, grape supply and quality, weather and disease, operational performance, competition, distributor relationships, regulation and general economic conditions. Grape contracts for the 2012 harvest were in place; amounts would be accrued when grapes were received, typically in October.
- Ordinary-course legal proceedings were disclosed; management did not expect unrecorded liabilities to materially affect liquidity, financial condition or results. No market-risk disclosures were reported. Management assessed disclosure controls and internal control over financial reporting as effective.
Important facts for investors to verify
- Confirm renewal or replacement of the $2.0 million credit facility, which had a June 2012 maturity.
- Track the Bacchus exit, distributor transition, and resulting effects on sales, gross margin and operating costs.
- Reconcile the share-repurchase disclosures: the notes report 8,722 shares repurchased through March 31, while the issuer-purchase table reports 7,922 shares for Q1; the filing also describes the authorization as running through April 1, 2012.
- Assess the sustainability of improved produced-wine margins and the effect of harvest yields, grape costs and inventory levels.