Business context and reporting period
Willamette Valley Vineyards, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The company produces and sells wine through direct-to-consumer channels and distributors. Results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Three months ended June 30, 2022 | Six months ended June 30, 2022 |
|---|---|---|
| Net sales | $8.70 million, down 2.8% year over year | $14.94 million, up 1.5% |
| Gross profit / margin | $4.83 million / 55.5%, versus 57.4% | $8.55 million / 57.2%, versus 58.7% |
| Operating income | $444,443, versus $1.54 million | $308,211, versus $1.71 million |
| Net income | $257,401, versus $1.08 million | $158,459, versus $1.20 million |
| Net income (loss) applicable to common shareholders | $(209,212), or $(0.04) per share | $(774,766), or $(0.16) per share |
For the first half, operating cash flow was negative $979,069, investing cash flow was negative $10.13 million, and financing cash flow was positive $489,755. Cash fell to $3.13 million from $13.75 million at year-end 2021, principally reflecting construction spending, grape-payable payments, and higher inventory. Capital spending on property and equipment was $9.76 million.
At June 30, working capital was $20.0 million and the current ratio was 3.99:1. Total assets were $93.90 million. Farm Credit Services debt was $5.30 million; a separate property installment note had a $1.25 million balance. Operating lease liabilities totaled $9.58 million. The company had no borrowings on its $2.0 million revolving credit line, renewed through July 31, 2023, and reported compliance with debt covenants.
Material changes versus comparable periods
- Second-quarter sales declined as distributor sales fell $929,661, partly offset by $680,571 growth in direct sales. First-half sales rose as direct sales increased $1.33 million, offsetting a $1.10 million distributor-sales decline.
- Gross margins contracted, which management attributed chiefly to higher fruit, packaging, and labor costs and sales-channel and vintage mix. Operating expenses rose 21.7% in Q2 and 19.1% in the first half, largely from higher selling costs, including new-location development.
- Wine case sales for the first half decreased 13.5% to 85,133 cases, primarily due to lower distributor case sales. Direct sales grew, particularly tasting-room sales.
- Preferred-stock dividends accrued were $933,225 for the first half, contributing to a common-shareholder loss despite positive net income. Preferred shares outstanding rose to 8,483,862 from 7,523,539 at year-end 2021.
Outlook, risks, and unusual items
No quantified revenue or earnings guidance was provided. Management expects growth initiatives, preferred-stock dividends, strategic planning, and development costs to weigh on near-term results. The Domaine Willamette tasting room project was expected to cost approximately $15.6 million; approximately $13.6 million had been spent by June 30, 2022. Management said it expects cash from operations and available credit to cover short-term needs, while continuing to evaluate funding for longer-term needs.
Management cited continuing uncertainty from COVID-19 and potential effects on direct sales, as well as risks involving grape availability and quality, weather, smoke and disease, consumer demand, competition, distributor performance, and financing. It reported no significant supply-chain disruptions to date. Long-term grape purchase commitments depend on quantities needed and qualifying grape availability, so minimum or maximum payments could not be determined. Routine legal proceedings were not expected to have a material effect, though outcomes remain uncertain. The company reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether tasting-room growth can offset declining distributor volume and whether recent margin pressure persists.
- Cash needs and funding plans for the Domaine Willamette project and other new locations, given the substantial first-half cash decline.
- Preferred-stock dividend obligations, additional issuance, and their effect on common shareholders; the filing notes a subsequent August 2022 preferred-stock offering supplement.
- Inventory levels, grape and packaging costs, and the timing of new-vintage availability and distributor shipments.
- Potential effects of COVID-19, grape supply and quality, weather and wildfire smoke, and consumer demand on future operating results.