Willamette Valley Vineyards, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; interim financial statements are unaudited. The company sells wine through direct-to-consumer and distributor channels. Management cautions that interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Three months 2014 | Three months 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $4.05 million | $3.04 million | $10.71 million | $9.69 million |
| Gross profit | $2.50 million | $1.76 million | $6.46 million | $5.66 million |
| Gross margin | 61.8% | 57.8% | 60.3% | 58.4% |
| Operating income | $973,000 | $419,000 | $1.98 million | $1.79 million |
| Net income | $574,000 | $232,000 | $1.30 million | $1.05 million |
| Basic EPS | $0.12 | $0.05 | $0.27 | $0.22 |
For the three-month period, sales rose 32.9% and net income 147.3% year over year. For nine months, sales rose 10.5% and net income 23.4%. Higher direct-to-consumer sales, which carry better margins, contributed to gross-margin expansion. Q3 distributor sales also benefited from large chain orders and order timing. Nine-month selling, general and administrative expense increased 15.9% to $4.48 million, primarily with retail and Hospitality Center staffing and operations; interest expense increased 12.9% to $209,000.
- Sales channels: Q3 direct sales were $1.40 million versus $1.02 million; distributor sales were $2.65 million versus $2.02 million. Nine-month direct sales were $3.71 million versus $2.75 million, while distributor sales were $7.00 million versus $6.94 million.
- Operations: Wine cases sold increased 0.9% to approximately 76,624 in the first nine months. Wine Club membership grew by approximately 770 net members, or 16.7%. At September 30, inventory included approximately 92,000 cases of bottled wine and 186,000 gallons of bulk wine.
Cash, liquidity and debt
- Cash was $906,000 at September 30, 2014, down from $946,000 at December 31, 2013. Working capital was $9.7 million and the current ratio was 4.77:1, compared with $9.8 million and 4.57:1 at year-end 2013.
- Nine-month operating cash flow was $2.21 million, versus $1.23 million in 2013. Investing cash use was $2.52 million, mainly for winery/Hospitality Center improvements and vineyard development; financing cash provided was $270,000. Cash declined by $40,000 over the period.
- Total Farm Credit Services debt was $5.58 million, down from $5.81 million at December 31, 2013; the balance-sheet current portion was $324,000. The company had no borrowings on its $2.0 million revolving credit facility, renewed in July 2014 for two years, and reported covenant compliance.
- Total assets were $29.81 million and shareholders’ equity was $20.23 million at September 30, 2014. Property and equipment, net, was $14.77 million.
Outlook, risks and notable items
- Management believes operating cash flow and available credit will be sufficient for foreseeable short- and long-term needs. No specific earnings or revenue guidance is provided.
- The Hospitality Center remodel and expansion was completed June 1, 2014. The project was intended to support direct-to-consumer growth. In October, the company began the process to buy 62 acres of primarily bare land for $496,000, with completion anticipated in November, to expand estate grape production and reduce supply risk.
- A March production-process spill of approximately 29,000 gallons of bulk wine generated $180,035 of net insurance settlement income during the first nine months; the company stated no further payments were due under the claim.
- The final $250,000 payment under the Young’s Market distribution agreement was received in October 2014. The agreement provides exclusive Oregon and Washington distribution rights for seven years.
- Risks cited include financing availability, quality grape supply, weather and disease, competition, distributor relationships, regulation, and broader industry and economic conditions. Management said pending legal matters were not expected to materially affect the company. Disclosure controls were assessed as effective, with no material quarterly change in internal control reported.
Important facts for investors to verify
- Whether sales and margin gains persist, particularly the growth in direct-to-consumer sales and the timing of distributor orders.
- Whether Hospitality Center expansion produces expected sales and operating returns, given increased selling expenses and debt-related interest costs.
- Completion, funding and expected returns of the planned $496,000 vineyard-land purchase.
- Inventory aging and sales pace, grape supply and quality, and the effect of the wine spill on production and future periods.
- Debt-service capacity, covenant compliance and continued availability of the revolving credit facility.