Willamette Valley Vineyards, Inc. — Q3 2020 Form 10-Q
Business and period: Oregon wine producer selling through direct-to-consumer and distributor channels. This unaudited report covers the quarter and nine months ended September 30, 2020, compared with the same 2019 periods.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $6.918m | $6.758m | $19.009m | $17.548m |
| Gross profit (margin) | $4.221m (61.0%) | $4.064m (60.1%) | $11.635m (61.2%) | $10.843m (61.8%) |
| Operating income | $1.304m | $1.274m | $3.332m | $2.435m |
| Net income | $0.897m | $0.852m | $2.304m | $1.639m |
| Income applicable to common shareholders | $0.640m | $0.596m | $1.535m | $0.869m |
| EPS after preferred dividends | $0.13 | $0.12 | $0.31 | $0.18 |
- Cash flow, nine months: Operating cash flow was $2.909m; investing outflow was $3.891m; financing inflow was $4.645m. Cash rose $3.663m to $10.713m.
- Liquidity: Working capital was reported as $20.5m and the current ratio as 2.92:1. Current assets were $31.206m and current liabilities $10.679m.
- Debt and funding: The company had no balance on its $2m revolving credit line and reported covenant compliance. It disclosed a $1.406m property installment note and $6.097m of long-term debt (including current maturities, per MD&A). A $5m Farm Credit Services commitment was available but undrawn at filing. Preferred-stock investor deposits of $5.033m were recorded as a current liability pending issuance of shares.
- Capital spending: Nine-month additions to property and equipment were $3.422m, with $0.469m of vineyard development costs. Dundee tasting-room construction was paused in March amid pandemic uncertainty; expected total project cost was approximately $13.5m, with about $4.7m incurred by September 30.
Changes and management commentary
- Q3 sales rose 2.4%; direct sales increased $265,018, partly offset by a $105,254 decline in distributor sales. For the nine months, sales grew 8.3%, led by distributor growth, particularly chain stores. Wine case sales increased 16.2% to 130,705.
- Nine-month net income rose 40.6%, with higher gross profit and lower selling expenses cited as key factors. Nine-month gross margin declined 0.6 percentage points, attributed to a greater share of lower-priced distributor sales.
- Direct sales benefited from phone, internet and brand-ambassador sales; tasting-room restrictions reduced hospitality and kitchen revenue. Distributor sales to restaurants and similar businesses were affected by closures and restrictions.
- Management said operating cash flow and existing credit facilities should cover short-term needs, while it continues to assess long-term funding given COVID-19 uncertainty. The filing provides no quantified earnings or revenue guidance.
Risks, contingencies and unusual items
- COVID-19 restrictions, weaker consumer spending, reduced hospitality demand, employee availability, increased health-related costs and possible supplier disruption could adversely affect sales, liquidity and operations. Curbside pickup and shipping promotions were used to mitigate tasting-room impacts.
- Wildfire smoke may damage grapes or reduce supply. The 2020 regional fires negatively affected some harvests, but the company reported its grape supply was mostly unaffected.
- A long-term grape purchase agreement runs through the 2023 harvest; required purchases depend on annual quantities and grape quality. Management said ordinary-course litigation was not expected to materially affect the company, though outcomes are uncertain.
- The company obtained and returned a $1.655m Paycheck Protection Program loan after securing the $5m commercial loan commitment. It also accrued $0.769m in preferred dividends for the nine months.
Important facts for investors to verify
- Cash-flow figures differ within the filing: the cash-flow statement reports operating cash flow of $2.909m and financing inflow of $4.645m, while MD&A reports $2.902m and $4.651m, respectively.
- Confirm the composition and classification of reported debt, including the separate $1.406m property note and the $6.097m long-term debt figure cited in MD&A.
- Track conversion of the $5.033m preferred-stock deposits from liability to equity, the offering’s remaining capacity, and the company’s future funding needs for Dundee construction.
- Assess the duration of COVID-related operating restrictions and consumer-demand effects, plus wildfire and grape-supply exposure.