Willamette Valley Vineyards, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The unaudited results are not necessarily indicative of full-year results. The company produces and sells wines through direct-to-consumer and distributor channels.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $4.742 million | $4.245 million | $13.565 million | $12.878 million |
| Gross profit | $3.041 million | $2.636 million | $8.565 million | $7.700 million |
| Gross margin | 64.1% | 62.1% | 63.1% | 59.8% |
| Operating income | $994,303 | $746,745 | $2.565 million | $2.090 million |
| Net income | $599,811 | $454,256 | $1.565 million | $1.279 million |
| Income applicable to common shareholders | $467,979 | $454,256 | $1.239 million | $1.279 million |
| Basic and diluted EPS after preferred dividends | $0.09 | $0.09 | $0.25 | $0.26 |
- Q3 sales rose 11.7%; nine-month sales rose 5.3%. Management attributed growth to direct retail and distributor sales. Wine cases sold for the nine months increased 8.4% to approximately 95,105.
- Q3 net income increased 32.0% and nine-month net income increased 22.4%. Higher sales and improved margins more than offset higher selling, general and administrative costs.
- SG&A increased 8.3% in Q3 and 7.0% year to date, primarily reflecting retail selling, marketing, and administrative costs. Nine-month cost of sales declined 3.4%.
- Accrued preferred dividends of $131,832 in Q3 and $325,418 year to date limited the benefit to common shareholders; nine-month common income declined 3.1% despite higher net income.
Cash flow, balance sheet and liquidity
- For the nine months, operating cash flow was $2.459 million, investing cash flow was negative $3.142 million, and financing cash flow was positive $4.513 million. Cash increased by $3.830 million to $7.840 million at September 30.
- Capital spending included $2.402 million for property and equipment and $740,183 for vineyard development. Inventory rose to $11.811 million from $10.632 million at year-end, contributing to operating cash use.
- Working capital was $17.8 million, with a 6.33:1 current ratio, compared with $14.0 million and 4.43:1 at December 31, 2015. Total assets were $43.835 million.
- Long-term debt, including its current portion, was $4.914 million, down from $5.173 million at year-end. A separate, non-interest-bearing farmland note had $245,417 outstanding, due April 2017. The $2 million revolving credit facility had no borrowings; the company reported covenant compliance and $2 million available.
- The company raised $5.327 million from preferred-stock issuance during the nine months. At September 30, 2,396,954 preferred shares were outstanding, with an aggregate liquidation preference of $10.273 million. The shares carry dividends at $0.22 per share, when declared.
Changes, outlook and risks
- Direct-to-consumer sales increased in Q3, while nine-month direct sales were slightly lower overall, partly due to a sharp decline in bulk-wine sales; distributor sales increased. Direct sales generally earn higher prices than wholesale sales.
- Improved margins reflected wines released with lower costs following stronger 2014 and 2015 harvests. Management warned that margins on several core wines may fall following the 2016 harvest: a major grape supplier delivered materially fewer grapes than contracted, prompting the company to pursue higher-cost supply alternatives.
- Two 32,000-gallon fermentation tanks installed in September increased production capacity by approximately 27,000 cases. Management also reported wine-club membership of 6,663, up 4.6% over the first nine months.
- No numerical earnings or revenue guidance was provided. Management said operating cash flow and available credit should fund operations and anticipated capital needs for at least 12 months. It expects preferred dividends to weigh on EPS until proceeds are invested in new wineries and generate returns.
- Key stated risks include grape availability and quality, weather and disease, financing for growth, competition, distributor relationships, consumer demand for premium wine, and regulation. Management said risk factors had not materially changed from its 2015 Form 10-K. It considers pending legal matters unlikely to materially affect the company, though outcomes cannot be assured.
- Subsequent events: the company agreed in October to buy approximately 40 acres of vineyard land and entered into agreements for two Walla Walla parcels totaling approximately 37 acres, which were not yet completed. It also identified unusable grapes; in November it reduced inventory by $95,272 and recorded a receivable from the grower. A separate October settlement produced $110,000 net of legal fees, expected to be recorded as other income in Q4.
Important facts for investors to verify
- Whether the 2016 grape-supply shortfall will reduce production, raise costs, or compress margins in future periods.
- How the company plans to deploy preferred-stock proceeds, and the effect of preferred dividends and the $10.273 million liquidation preference on common shareholders.
- Expected purchase costs, funding, and completion status for the announced vineyard-land acquisitions.
- Whether the $95,272 grower receivable is collected and how the Q4 settlement and grape write-down are ultimately reported.
- The continuing adequacy of cash, working capital, and debt-covenant capacity amid vineyard and winery investment.