Willamette Valley Vineyards, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparative periods ended June 30, 2020. The company produces and sells wine through direct-to-consumer channels and third-party distributors. Results are unaudited.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $8.95 million | $5.57 million | $14.72 million | $12.09 million |
| Gross profit | $5.14 million | $3.50 million | $8.63 million | $7.41 million |
| Gross margin | 57.4% | 62.9% | 58.7% | 61.3% |
| Operating income | $1.54 million | $0.95 million | $1.71 million | $2.03 million |
| Net income | $1.08 million | $0.62 million | $1.20 million | $1.41 million |
| Income applicable to common shareholders, after preferred dividends | $0.72 million | $0.36 million | $0.48 million | $0.89 million |
| EPS after preferred dividends | $0.14 | $0.07 | $0.10 | $0.18 |
Q2 sales rose 60.7%; management attributed growth to distributor sales, including higher chain sales and order timing, and stronger tasting-room, phone and wine-club sales. First-half sales increased 21.7%, with growth in both direct and distributor channels. Wine cases sold increased 18.0% year over year to 98,420.
Despite higher sales, cost of sales increased faster: 84.3% in Q2 and 30.0% in the first half. Management cited sales volume and the mix of sales channels and vintages. Gross margin declined 5.5 percentage points in Q2 and 2.6 points for the first half. First-half operating income and net income fell despite revenue growth; the company cited gross profit and operating-expense changes. Higher accrued preferred dividends also reduced earnings attributable to common shareholders.
Cash flow, liquidity and debt
- For the six months ended June 30, operating cash flow was $2.19 million, investing cash flow was negative $3.41 million, and financing cash flow was $0.34 million. Cash decreased $0.88 million to $13.12 million.
- At June 30, current assets were $32.46 million and current liabilities $5.53 million; reported working capital was $26.9 million and the current ratio was 5.87:1.
- FCS long-term debt totaled $5.76 million, including current maturities, before unamortized issuance costs. A separate property installment note had $1.34 million outstanding. No balance was drawn on the $2.0 million revolving credit line; it was subsequently renewed for two years. The $5.0 million FCS commercial loan commitment was closed in May 2021.
- Operating lease liabilities totaled $4.70 million, including $0.31 million current. The company reported compliance with its debt covenants. It said operating cash flow and available credit facilities should meet short-term needs, while it continues to assess long-term funding needs.
Material developments, outlook and risks
- The Dundee tasting-room and winery project, estimated to cost approximately $14.9 million, restarted after a COVID-related pause. Approximately $7.3 million had been incurred by June 30. The company expects to fund it with cash and preferred-stock offerings.
- The company issued additional redeemable preferred stock during the first half. At June 30, 6.56 million preferred shares were outstanding, with a $27.97 million liquidation preference. Accrued unpaid dividends are added to liquidation preference; after June 1, 2021, the company may redeem all outstanding preferred stock at original issue price plus unpaid dividends and a 3% premium.
- No numerical earnings or revenue guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results and expects near-term results to be affected by preferred dividends, strategic planning, development and other growth-related costs.
- COVID-19 and potential renewed restrictions could affect tasting-room and hospitality demand, employees, suppliers, operations and liquidity. Other cited risks include grape availability and quality, adverse weather, wildfire smoke, disease, consumer spending, competition and distributor relationships. The company said it had not experienced significant supply-chain disruption to date.
- Long-term grape-purchase agreements require annual quantities at predetermined prices, but minimum and maximum commitments cannot be calculated from the filing. Management said ordinary-course legal matters were not expected to have a material adverse effect, though outcomes cannot be predicted.
Key facts for investors to verify
- Whether sales growth can be sustained while restoring gross margins, particularly given channel and vintage mix.
- Project spending, remaining funding requirements and the extent to which preferred-stock issuance and dividends affect common shareholders.
- Future cash generation and liquidity after capital investment, debt service and grape payments; confirm the renewed credit-line availability and terms.
- Effects of COVID-related changes, grape supply and quality, weather and wildfire conditions on production and demand.