Willamette Valley Vineyards, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed August 14, 2019. The company produces and sells wine through direct-to-consumer and distributor channels. Interim results are unaudited and are not necessarily indicative of full-year results.
Financial performance
| Metric | Three months 2019 | Three months 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $5.79 million | $5.82 million | $10.79 million | $10.35 million |
| Gross profit | $3.50 million | $3.72 million | $6.78 million | $6.61 million |
| Gross margin | 60.4% | 63.9% | 62.8% | 63.9% |
| Operating income | $596,431 | $1.18 million | $1.16 million | $1.65 million |
| Net income | $359,911 | $803,255 | $786,387 | $1.13 million |
| Income attributable to common shareholders, after preferred dividends | $103,459 | $546,817 | $273,483 | $622,378 |
| Income per common share, after preferred dividends | $0.02 | $0.11 | $0.06 | $0.13 |
- Q2 sales were down 0.5% year over year; first-half sales increased 4.2%. First-half wine case sales rose 2.1% to approximately 68,997 cases.
- Q2 gross profit fell 6.0%, while first-half gross profit rose 2.5%. Higher costs for recently released 2017-vintage wines contributed to weaker margins.
- Operating expenses increased 14.1% in Q2 and 13.2% in the first half, led by selling costs for staffing, incentives, shipping, demonstrations and marketing; general and administrative costs also rose.
- Net income declined 55.2% for Q2 and 30.6% for the first half. Preferred dividends of $256,452 per quarter reduced first-half income attributable to common shareholders to $273,483.
- Direct sales represented 40.7% of Q2 sales and 37.8% of first-half sales. Distributor sales made up the balance; segment contribution margin was lower year over year in both periods.
Cash flow, liquidity and debt
- First-half operating cash flow was $513,213, investing cash flow was negative $1.62 million, and financing cash flow was negative $383,154. Cash declined by $1.49 million to $8.25 million.
- Investing outflows primarily funded property and equipment and vineyard development. The filing reports $1.27 million of property and equipment additions and $349,362 of vineyard development additions.
- At June 30, cash was $8.25 million, working capital was $22.8 million and the current ratio was 6.82:1. Current assets totaled $26.76 million and current liabilities $3.92 million.
- Debt included a $1.51 million Dundee Hills property note and approximately $6.47 million of long-term debt, including current maturities and net of issuance costs. No balance was drawn on the $2 million revolving credit line, and the company reported covenant compliance.
- Operating lease liabilities totaled approximately $5.02 million. Adoption of the lease accounting standard added approximately $5.0 million of right-of-use assets and lease liabilities; management said the balance-sheet impact was material, with minimal direct effect on operations and cash flows.
Changes, outlook and risks
- Q2 distributor revenue decreased, primarily because the Oregon/Washington distributor did not reorder stocked wine in May and June amid software conversion issues. Direct retail sales, including wine club and kitchen sales, increased, partly offset by lower bulk-wine sales.
- Management attributed lower profits mainly to reduced gross profit and higher selling, general and administrative expenses. It expects near-term financial results to be negatively affected by preferred dividends, strategic planning and development, and other growth-related costs.
- The company is pursuing growth through property purchases and development, direct-to-consumer sales, and hospitality and wine-club expansion. Wine-club membership increased by approximately 211 net members, or 2.8%, to 7,679 during the first half.
- Management stated that operating cash flow and available credit should meet foreseeable short- and long-term needs. No quantitative earnings or revenue guidance was provided.
- After quarter-end, the company renewed its Umpqua Bank credit line through July 31, 2021, at a 5.00% interest rate. The line was undrawn at June 30.
- Key stated risks include financing growth, adequate supply and quality of grapes, weather and disease, competition, distributor relationships, consumer demand and spending, and regulatory changes. Ordinary-course litigation was not expected by management to have a material effect; grape-purchase commitments extend through the 2023 harvest, with payments dependent on supply and quality.
Important facts for investors to verify
- Whether distributor orders recovered after the reported software-conversion disruption.
- Whether 2017-vintage cost increases were temporary and how gross margins develop in subsequent quarters.
- How growth spending, preferred dividends and lease obligations affect cash generation and common-shareholder returns.
- Progress, spending and expected returns on vineyard, property and hospitality projects, including the planned Folsom facility.
- Continued covenant compliance, credit-line availability and the terms and exposure of grape-purchase commitments.