Willamette Valley Vineyards, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; interim financial statements are unaudited. The company sells wine through distributors and direct-to-consumer channels, including tasting rooms and its wine club.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $3.04 million | $3.16 million | $9.69 million | $8.73 million |
| Gross profit / margin | $1.76 million / 57.8% | $1.79 million / 56.8% | $5.66 million / 58.4% | $5.10 million / 58.5% |
| Income from operations | $419,123 | $581,057 | $1.79 million | $1.52 million |
| Net income | $232,066 | $268,228 | $1.05 million | $671,758 |
| Basic and diluted EPS | $0.05 | $0.06 | $0.22 | $0.14 |
Q3 sales fell 3.6%, as distributor sales declined 7.8% ($170,255), partly offset by 6.0% growth in retail sales ($58,039). Management attributed lower distributor sales in part to timing between quarters; direct-sales growth primarily reflected wine club sales. Wine sold was approximately 23,415 cases, down 5.4%. Q3 net income declined 13.5%; higher SG&A, up 10.6%, contributed to lower operating income. For the nine-month period, sales rose 11.6% and net income from continuing operations increased 27.5%, with higher sales partly offset by higher selling expenses. The nine-month gross margin edged down 0.1 percentage point.
Cash flow, balance sheet and liquidity
- For the first nine months, operating cash flow from continuing operations was $1.23 million, versus $1.79 million a year earlier. Investing cash outflow was $4.27 million, chiefly for winery/hospitality improvements and vineyard development. Financing cash flow was positive $173,046; cash and cash equivalents fell $2.86 million to $1.69 million.
- At September 30, cash excludes $1.65 million of restricted cash held by the lender for the Hospitality Center project. The company estimated it could access $326,387 based on qualifying expenditures, subject to contractor lien releases and expenditure certification; $450,000 of loan proceeds was to be withheld until project completion.
- Working capital was $9.4 million and the current ratio 4.04:1, compared with $12.9 million and 6.43:1 at December 31, 2012.
- Total long-term debt, including current maturities, was $5.87 million, up from $4.03 million at year-end. The company had no borrowings under its $2.0 million Umpqua revolving credit line and reported compliance with its covenants. Farm Credit Services debt carries fixed rates of 4.75%–6.70%; the new $2.0 million loan supports the expansion project.
- Capital spending was substantial: property and equipment additions were $3.60 million and vineyard development spending was $704,245. A further $1.04 million of property and equipment purchases was included in accounts payable.
Outlook, commentary and risks
- No specific earnings or revenue guidance was provided. Management expected cash from operations and available credit to meet foreseeable needs. Completion of the Hospitality Center remodel and expansion, approved for up to $4.5 million, was expected during 2013; management said the project should support direct-to-consumer growth. The company funded the balance beyond the $2.0 million loan from existing cash reserves.
- Management noted that lower-yield vintages are expected to increase cost of sales over the next several years. Finished case wine was expected to sell over the following 12–24 months. Wine club membership increased by approximately 390 in Q3.
- Risks cited include financing availability, supply and quality of grapes, operating execution, competition, distributor relationships, adverse weather, grape disease, regulation, and broader industry and economic conditions. The filing says results for the interim periods are not necessarily indicative of full-year results.
- Bacchus Fine Wines, the in-state distribution division, was wound down in June 2012; its remaining purchased-wine and merchandise activity is reported as discontinued operations. No discontinued-operation loss was reported in 2013, versus a $151,606 after-tax loss for the first nine months of 2012.
- The company reported ordinary-course legal proceedings and said any unrecorded liability was not likely to materially affect liquidity, financial condition or results. It reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Whether the Hospitality Center project was completed on schedule and within the approved cost, and when restricted loan proceeds became accessible.
- Whether the Q3 distributor-sales decline was temporary and whether direct-to-consumer growth continued after the quarter.
- How capital spending, accounts payable for equipment, and increased debt affected subsequent cash and liquidity.
- Whether lower-yield vintages, grape supply and costs, and the distribution mix changed margins as management anticipated.
- Whether the company maintained compliance with credit covenants and its stated capacity to fund foreseeable needs.