Willamette Valley Vineyards, Inc. — Q1 2019 Form 10-Q
Reporting period: Unaudited quarter ended March 31, 2019; comparisons are with the quarter ended March 31, 2018 unless stated otherwise. The company produces and sells wine through direct-to-consumer and distributor channels.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $5.00 million | $4.53 million | Up 10.3% |
| Gross profit | $3.28 million | $2.89 million | Up 13.5% |
| Gross margin | 65.6% | 63.8% | Up 1.8 percentage points |
| Operating income | $564,438 | $472,344 | Up 19.5% |
| Net income | $426,476 | $330,454 | Up 29.1% |
| Income attributable to common shareholders | $170,024 | $75,561 | Up 125.0% |
| Basic EPS after preferred dividends | $0.03 | $0.02 | |
| Operating cash flow | $(657,026) | $(1,338,281) | Cash use decreased |
Sales grew by $466,167: direct sales increased $170,022 and distributor sales increased $296,145. Wine case sales rose 11.1% to approximately 32,030 cases. Cost of sales increased 4.6%; selling, general and administrative expenses rose 12.3%, including a 16.2% increase in sales and marketing expense. Management attributed improved gross margin primarily to product mix.
Direct sales generated $1.72 million in revenue and $302,367 in contribution margin, versus $3.28 million and $1.35 million, respectively, for distributor sales. Direct-to-consumer sales are generally more profitable, according to management.
Balance sheet, liquidity and debt
- Cash was $8.16 million at March 31, 2019, down from $9.74 million at December 31, 2018. Cash decreased by $1.58 million during the quarter.
- Working capital was $23.2 million and the current ratio was 6.85:1. Current assets totaled $27.20 million and current liabilities $3.97 million.
- Investing activities used $662,303, mainly for property and equipment and vineyard development. Financing activities used $260,560, primarily for debt repayment.
- The company reported $6.57 million of long-term debt, including current maturities, owed to Farm Credit Services and Toyota Credit Corporation, before debt issuance costs; it also had a $1.53 million Dundee Hills property installment note. No balance was outstanding on its $2 million revolving credit line, and the company was in compliance with its covenants.
- Adoption of lease accounting resulted in $5.08 million of operating lease liabilities and a $5.03 million right-of-use asset at March 31. The liabilities primarily relate to vineyard land.
Outlook, commentary and risks
- Management said near-term financial results are expected to be negatively affected by accrued preferred dividends, strategic planning and development, and other growth-related costs. It provided no specific numerical earnings or revenue guidance.
- Management believes operating cash flow and available credit facilities will be sufficient for foreseeable short- and long-term needs. A new Willamette Wineworks retail facility in Folsom, California, was expected to begin its lease in the third quarter of 2019.
- Key risks cited include financing growth, obtaining adequate high-quality grapes, weather and disease affecting grape supply or quality, competition, distributor relations, consumer spending and demand for premium wine, and regulatory changes. The company said its risk factors had not materially changed from its 2018 Form 10-K.
- The company has a grape-purchase agreement through the 2023 harvest; payment obligations depend on grape quantities, availability and quality. Management did not expect ordinary-course litigation to materially affect the company, though outcomes cannot be predicted with certainty.
Material changes and unusual items
The company adopted the new lease standard on January 1, 2019 without restating prior periods. It materially increased reported balance-sheet assets and liabilities but had minimal direct impact on the income statement and cash flows. Preferred stock dividends accrued were $256,452 for the quarter and reduce earnings attributable to common shareholders. The filing reports no off-balance-sheet arrangements.
Key facts for investors to verify
- Whether revenue and case-sales growth continue, particularly across direct and distributor channels, and whether gross-margin improvement persists.
- Whether higher sales and marketing expenses and other growth costs affect operating profitability.
- Cash conversion and seasonal working-capital needs, including grape payments and continued investment in vineyards and facilities.
- Debt and lease obligations, credit-line renewal after July 31, 2019, and ongoing covenant compliance.
- Progress, timing and financial impact of the planned Folsom retail facility and other growth initiatives.