Willamette Valley Vineyards, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. The company produces and sells wine through direct-to-consumer channels, including tasting rooms and its Wine Club, and through distributors. Interim results are unaudited and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $3.91 million | $2.97 million | Up 31.7% |
| Gross profit | $2.30 million | $1.72 million | Up 33.8% |
| Gross margin | 58.9% | 57.9% | Up 1.0 percentage point |
| Operating income | $498,667 | $248,735 | Up $249,932 |
| Net income | $314,238 | $174,915 | Up 79.7% |
| Basic and diluted EPS | $0.06 | $0.04 | Up $0.02 |
| Operating cash flow | $277,225 | ($399,028) | Improved |
| Investing cash flow | ($677,455) | ($957,806) | Lower outflow |
Sales growth reflected increases in both direct sales and distributor sales. Direct sales rose $512,913, including $248,138 of bulk wine sales not present in the prior-year quarter; distributor sales increased $427,709. Wine cases sold increased 22.4% to approximately 26,555. Management attributed improved gross margin primarily to a larger share of higher-margin direct sales.
Selling, general and administrative expenses increased 22.5% to $1.81 million, mainly from selling costs, staffing and depreciation associated with the expanded Hospitality Center and increased marketing. Interest expense rose 16.7% to $77,034. Other income fell to $82,210 from $98,468, partly because Q1 2014 included net insurance-claim income related to a 2014 wine spill. The estimated combined tax rate was 37.6%, versus 37.9%.
Financial position and liquidity
At March 31, 2015, cash was $165,029, down from $519,761 at year-end. Current assets were $11.55 million and current liabilities were $1.72 million; the company reported working capital of $9.8 million and a current ratio of 6.74, compared with 4.63 at December 31, 2014. Operating cash flow was positive, but capital investment and debt payments contributed to a $354,732 net decrease in cash.
Total long-term debt, including the current portion, was $5.42 million, down from $5.50 million at year-end. The $2.0 million Umpqua Bank revolving credit facility had no borrowings outstanding and was fully available; the company reported compliance with its financial covenants. Farm Credit Services loans carry fixed rates of 4.75% to 6.70% and mature from 2024 through 2028. Management said operating cash flow and available credit should meet foreseeable short- and long-term needs.
Business developments, outlook and risks
Wine Club membership increased by approximately 242 net members, or 4.2%, during the quarter. In April 2015, the company purchased approximately 42 acres of undeveloped Walla Walla Valley farmland for $736,250 and obtained an option to buy an additional 45 acres for $433,000, supporting its plan to broaden its ultra-premium wine offerings.
No specific financial guidance was provided. Management highlighted risks including financing availability, adequate high-quality grape supply, operating execution, competition, distributor relationships, adverse weather, grape disease or reduced supply, regulatory decisions, and broader industry and economic conditions. The filing describes ordinary-course legal proceedings and says any unrecorded liability is not expected to materially affect liquidity, financial condition or results. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How durable the sales increase is, particularly growth through large chain retailers and the contribution from one-time bulk wine sales.
- Whether higher direct-to-consumer sales and Wine Club growth continue to support margins, given increased selling and Hospitality Center costs.
- Cash requirements for capital improvements and the Walla Walla land purchase and option, alongside the company’s low cash balance and debt obligations.
- Availability and cost of quality grapes, and exposure to weather, disease, competition and distributor performance.
- The conditions and timing associated with the additional 45-acre purchase option and the expected returns from the vineyard expansion.