Willamette Valley Vineyards, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. The company produces and sells wine through direct-to-consumer channels and distributors. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $5.46 million | $5.14 million | $15.81 million | $14.91 million |
| Gross profit | $3.54 million | $3.38 million | $10.15 million | $9.31 million |
| Gross margin | 64.9% | 65.7% | 64.2% | 62.5% |
| Operating income | $0.97 million | $1.10 million | $2.62 million | $2.66 million |
| Net income | $0.64 million | $0.62 million | $1.78 million | $1.53 million |
| Income applicable to common shareholders, after preferred dividends | $0.39 million | $0.43 million | $1.01 million | $1.07 million |
| EPS after preferred dividends | $0.08 | $0.09 | $0.20 | $0.21 |
- Revenue and sales mix: Sales increased 6.2% in Q3 and 6.1% year to date. Q3 direct sales were $2.33 million and distributor sales $3.13 million; year-to-date direct sales were $6.24 million and distributor sales $9.58 million. The company sold approximately 102,155 cases in the first nine months, up 3.8% year over year.
- Expenses and earnings: Q3 SG&A rose 12.5% to $2.57 million; nine-month SG&A rose 13.2% to $7.53 million. Management attributed the increases to selling staff and incentives, demonstrations and marketing, a new Walla Walla retail outlet, staffing and professional fees, and development activities. Net income rose year over year, helped by lower income-tax expense, while common-shareholder income fell as preferred dividends increased.
- Cash flow and investment: Nine-month operating cash flow was $1.54 million, versus $2.45 million a year earlier. Investing used $4.45 million, principally for property, equipment and vineyard development; financing provided $0.07 million. Cash declined $2.84 million during the period to $10.94 million.
- Liquidity and debt: Working capital was $22.9 million and the current ratio 5.60:1 at September 30, compared with $24.0 million and 4.73:1 at year-end 2017. The company reported $6.77 million of long-term debt, including current maturities and net of issuance costs, plus $1.70 million of current notes payable. Its $2.0 million revolving credit facility was undrawn; the company reported covenant compliance and availability through July 31, 2019.
- Balance sheet and preferred stock: Total assets were $60.53 million, versus $59.70 million at December 31, 2017. Redeemable preferred stock outstanding was 4.66 million shares, with a $20.12 million liquidation preference. Accrued preferred dividends were $0.77 million year to date, up from $0.46 million in the comparable period.
Material changes versus the prior comparable period
- Gross margin declined 0.8 percentage points in Q3 but improved 1.7 points for the first nine months. SG&A growth exceeded sales growth in both periods, contributing to lower operating income.
- The estimated combined federal and state tax rate fell to 27.2% for Q3 and 27.4% year to date, from 39.0% in each 2017 period. The filing attributes the decrease primarily to the Tax Cuts and Jobs Act.
- Common-shareholder income and EPS decreased despite higher net income, mainly because preferred dividends increased with the number of preferred shares outstanding.
- Cash was lower than at year-end 2017, primarily due to capital investment. Property and equipment additions and vineyard development spending totaled approximately $4.45 million.
Outlook, commentary and risks
- Management is pursuing growth through property purchases, development and preferred-stock financing, and expects these activities to weigh on near-term results through preferred dividends, planning and development expenses, and other growth costs. No quantified earnings or revenue guidance is provided.
- Management believes operating cash flow and available credit will meet foreseeable short- and long-term needs. Wine-club membership increased by approximately 209 net members, or 2.8%, to 7,637 during the first nine months; management noted preferred shareholders may affect wine-club growth but expects them to support longer-term wine purchases.
- Key stated risks include financing availability, high-quality grape supply, weather and disease, competition, distributor relationships, consumer spending and premium-wine demand, and regulatory decisions. The company said its risk factors had not materially changed from its 2017 Form 10-K.
- The seven-year Young’s Market distribution agreement expired September 1, 2018; all related deferred revenue had been recognized by September 30. A five-year lease for a planned Folsom, California wine-and-food outlet runs through March 2023.
- The company disclosed ordinary-course litigation but believes unrecorded liabilities are not likely to materially affect its financial position, results or liquidity; ultimate outcomes remain uncertain. A long-term grape-purchase agreement extends through the 2023 harvest, with amounts dependent on required quantities and qualifying grape availability.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. Adoption of the new lease standard was expected to result in recognition of right-of-use assets and lease liabilities; the overall impact had not yet been determined.
Important facts for investors to verify
- Whether sales growth and case-volume gains continue, particularly across direct and distributor channels, and whether direct-channel growth supports margins.
- Whether elevated SG&A and development costs translate into growth sufficient to improve operating income and cash generation.
- How capital spending, vineyard development and property expansion affect cash, debt and liquidity, including the separately reported notes payable.
- The future amount and effect of preferred dividends, preferred-stock liquidation preference and any potential redemption obligations.
- The financial and operating impact of the expired Young’s Market agreement, the new Folsom lease, and grape-supply commitments.
- Whether actual results differ from management’s outlook in light of grape supply, weather, consumer demand, competition and distributor risks; the filing cautions that interim results are not necessarily indicative of full-year results.