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WVVI > SEC Filings for WVVI > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for WILLAMETTE VALLEY VINEYARDS INC

Form 10-Q for WILLAMETTE VALLEY VINEYARDS INC


13-Nov-2012

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-Q contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that are based on current expectations, estimates and projections about the Company's business, and beliefs and assumptions made by management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to: availability of financing for growth, availability of adequate supply of high quality grapes, successful performance of internal operations, impact of competition, changes in wine broker or distributor relations or performance, impact of possible adverse weather conditions, impact of reduction in grape quality or supply due to disease, impact of governmental regulatory decisions, and other risks disclosed from time to time in the Company's Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic economic conditions. The forward-looking statements are made as of the date hereof, and, except as otherwise required by law, the Company disclaim any intention or obligation to update or revise any forward-looking statements or to update the reasons why the actual results could differ materially from those projected in the forward-looking statements, whether as a result of new information, future events or otherwise.

Critical Accounting Policies

The foregoing discussion and analysis of the Company's financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted the United States of America. The preparation of these financial statements requires the Company's management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, collection of accounts receivable, valuation of inventories, and amortization of vineyard development costs. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. A description of the Company's critical accounting policies and related judgments and estimates that affect the preparation of the Company's financial statements is set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. Such policies were unchanged during the nine months ended September 30, 2012.


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued

Overview

Net income for the three months ended September 30, 2012 and 2011 was $268,228 and $373,407, respectively, a decrease of $105,179 or 28.2%. This was largely due to the one-time reduction in in-state wine sales from the prior year. Prior year third quarter sales were bolstered by an approximately $250,000 sale of wine to the new Oregon distributor to establish their beginning stock levels, during the final month of self-distribution of produced wines. Overall gross profit for the three months ended September 30, 2012 and 2011 was $1,792,193 and $1,885,445, respectively, a decrease of $93,252 or 4.9%. Gross margin percent for the three months ended September 30, 2012 and 2011 was 56.8% and 55.1%, an increase of 1.7 percentage points. Pre-tax losses on discontinued operations for the three months ended September 30, 2012 and 2011 was $8,060 and $215,627, respectively, a decrease of $207,567 or 96.3%.

Sales for the three months ended September 30, 2012 and 2011 were $3,155,762 and $3,423,496, respectively, a decrease of $267,734 or 7.8%. This is caused by a decrease in national sales of $436,318 or 15.8%, partially offset by an increase in retail sales of $112,350 or 14.0%. A large portion of the decrease in national sales is related to the change in sales channel, switching from in-state self-distribution to retailers to selling to an independent distributor for in-state sales. The average sale price per case to a retailer is higher than the average sale price per case to a wholesaler. Prior year third quarter national sales were also supported by the large initial sale of wine to the new Oregon distributor.

The Company sold approximately 24,751 and 26,835 cases of produced wine during the three months ended September 30, 2012 and 2011, respectively, a decrease of 2,084 cases or 7.8%. The Company sold approximately 69,375 and 81,658 cases of produced wine during the nine months ended September 30, 2012 and 2011, respectively, a decrease of 12,283 cases or 15.0%. The decrease in produced wine sales was primarily the result of reduced in-state case sales, largely caused by Management's decision to discontinue the sale of Company-produced, non-branded wines. Management believes their decision to discontinue these lower-margin products has resulted in a significant strengthening of the Company's brand position, and has strengthened overall margins.

Management determined as of June 30, 2012, the wind-down of the Bacchus Distribution activity was substantially complete. Bacchus distribution activity has been reclassified as discontinued operations. In-state sales of produced wines, formerly sold through the Bacchus Distribution, are now sold through the distributor as part of National Sales activities. Therefore, the prior year comparative information presented in the financials includes in-state produced wine sales activities with National Sales activities.

The Company generated $0.06 and $0.08 in basic earnings per share during the three months ended September 30, 2012 and 2011, respectively, a decrease of $0.02 or 25.0%.

The Company has an asset-based loan agreement (the "line of credit") with Umpqua Bank that allows it to borrow up to $2,000,000. There was no balance outstanding on the line of credit as of September 30, 2012.

The winery bottled approximately 21,857 cases during the three months ended September 30, 2012.

Willamette Valley Vineyards continues to receive positive recognition through national competitions, magazines and local news.

Willamette Valley Vineyards was featured on the front page of the June 23rd Statesman Journal newspaper. The article, entitled "Forming a Partnership," highlighted our raptor project and the recent placement of several baby barn owls in our 3 vineyards.

In July, Snooth.com began their "People's Voice Wine Awards" where readers are asked to vote for their favorite wine. Our 2008 Estate Pinot Noir and 2009 Pinot Gris were nominated and have made it to the final round of voting.

America's premier direct marketer of fruit and food, Harry & David, held their 10th annual "Taste of Harry & David Wine Competition" in July where our 2009 Bernau Block received a gold medal.

NBC's hit TV show "Grimm" again chose to feature our 2009 Pinot Noir in select scenes on a recent episode, further strengthening national brand awareness.


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued

KPTV 12's "Good Day Oregon" TV personality, Andy Carson visited the winery in September to film a segment about our 22nd annual Grape Stomp Competition, reaching thousands of Oregon viewers.

Beverage Dynamics and Cheers Magazine both recognized our 2011 Whole Cluster Pinot Noir with 94 points in their September 2012 issues.

Portland Monthly magazine's September 2012 issue featured their list of "Oregon's 50 Best Wines." Our 2009 Estate Pinot Noir received 95 points and was awarded the number 5 position.

In their September 2012 issue, Wine & Spirits magazine recognized our 2011 Whole Cluster Pinot Noir with 90 points and a best buy rating.

In October 2012, the editor of Snooth.com, Gregory Dal Piaz, released his top 15 Pinot noirs, listing our 2009 Estate as #2 with 92 points.

RESULTS OF OPERATIONS

Revenue

In-state net sales, excluding excise taxes, of Company produced wines during the three months ended September 30, 2012 and 2011 were $619,555 and $972,758, respectively, a decrease of $353,203 or 36.3%. This decrease is largely a result of the prior year results including an initial order from the new distributor relationship of approximately $250,000. This decrease was also partly caused by the decrease in the average sales price per case resulting from the change in distribution methods, as Bacchus Distribution used to sell to retailers at a higher average case price than currently achieved selling to a distributor.

Net sales, excluding excise taxes, to out-of-state distributors during the three months ended September 30, 2012 and 2011 were $1,701,442 and $1,752,367, respectively, a decrease of $50,925 or 2.9%. This decrease was a result of a $119,705 decrease in gross sales to distributors, partially offset by decrease in depletion allowance expense paid to distributors. Depletion allowance expense the three months ended September 30, 2012 and 2011 was $53,960 and $122,740, respectively, a decrease of $68,780 or 56.0%. Management's decision to reduce the depletion allowance resulted in a decrease in net sales, but has yielded an increase in gross income.

Net retail sales, excluding excise taxes, for the three months ended September 30, 2012 and 2011 were $916,503 and $804,153, respectively, an increase of $112,350, or 14.0%. This is primarily a reflection of increased tasting room sales and wine club sales. Tasting room sales are believed to have increased as a result of higher guest traffic and a higher ring per guest due to the on-site restaurant and a focus on high margin products.

Cost of Goods Sold

The Company's cost of goods on produced wines is lower compared to the prior year resulting in an increase in gross profit percentage for the three months ended September 30, 2012. The cost of goods of produced wine changes by vintage depending on the vineyard yields as well as actual costs associated with the growing and harvesting of the grapes as well as cellar production costs. Although yields have been lower in the past year, the costs associated with the vintage on a per unit basis have been lower.

Gross Profit

Gross profit for the three months ended September 30, 2012 and 2011 was $1,792,193 and $1,885,445, respectively, a decrease of $93,252 or 4.9%. This decrease is primarily a result of the lower in-state sales for the quarter.

Gross profit margin for the three months ended September 30, 2012 and 2011 was 56.8% and 55.1%, respectively, an increase of 1.7 percentage points. The increase is primarily due to increased retail sales as a percentage of total sales and a reduction in depletion allowances paid to wholesalers, partially offset by the change in sales mix by the elimination of sales to in-state retailers.


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued

Selling, General and Administrative Expense

Selling, general and administrative expense for the three months ended September 30, 2012 and 2011 was $1,211,136 and $1,064,428, respectively, an increase of $146,708 or 13.8%. This increase is due primarily to increased spending on sales efforts both in-state and nationally to help the transition away from the Bacchus Distribution model and to promote new placements nationally. In total, selling, general and administrative expense was 38.4% and 31.1%, as a percentage of net revenue from winery operations, for the three months ended September 30, 2012 and 2011, respectively.

Interest Expense

Interest expense was $86,180 and $51,480 for the three months ended September 30, 2012 and 2011, respectively, an increase of $34,700 or 67.4%. Based on current debt balances and interest rates, Management expects quarterly interest expense of approximately $66,000 for future quarters.

Income Taxes

The income tax expense from continuing operations was $238,105 and $318,078 for the three months ended September 30, 2012 and 2011, respectively, a decrease of $79,973 or 25.1%. The Company's estimated federal and state combined income tax rate was 46.6% and 39.0% for the three months ended September 30, 2012 and 2011, respectively.

Net Income

Net income from continuing operations was $272,903 and $498,471 for the three months ended September 30, 2012 and 2011, respectively, a decrease of $225,568 or 45.3%. This decrease is caused by the increase in selling expenses, coupled with a reduction in gross profits. This is partially offset, however, by a reduction in the losses caused by operations discontinued effective June 30, 2012. Discontinued operations of distributing purchased wine to instate retailers generated a net loss of $4,675 and $125,064 for the three months ended September 30, 2012 and 2011, respectively, a reduction of $120,389 or 96.3%. The combined net income from all operations for the three months ended September 30, 2012 and 2011 was $268,228 and $373,407, respectively, a reduction of $105,179 or 28.2%.

Liquidity and Capital Resources

At September 30, 2012, the Company had a working capital balance of $12.9 million and a current working capital ratio of 8.03:1. At December 31, 2011, the Company had a working capital balance of $12.9 million and a current working capital ratio of 8.11:1.

At September 30, 2012, the Company had a cash balance of $4,477,848. At December 31, 2011, the Company had a cash balance of $3,411,292.

Total cash provided by operating activities from continuing operations in the nine months ended September 30, 2012 and 2011 was $1,793,935 and $1,876,349, respectively.

Total cash used in investing activities from continuing operations in the nine months ended September 30, 2012 and 2011 was $1,044,078 and $1,432,764, respectively.

Total cash provided by/(used in) financing activities from continuing operations in the nine months ended September 30, 2012 and 2011 was $(391,503) and $957,670, respectively. Cash used in financing activities for the nine months ended September 30, 2012 primarily consists of payments on long term debt as well as repurchase of common stock.

Total cash provided by/(used in) discontinued operations in the nine months ended September 30, 2012 and 2011 was $708,202 and ($15,791), respectively. Cash provided from discontinued operations for the nine months ended September 30, 2012 was largely generated through the liquidation of purchased-wine inventory.


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued

The Company has an asset-based loan agreement (the "line of credit") with Umpqua Bank that allows it to borrow up to $2,000,000. The maturity date on this loan agreement is June 2013. The index rate at September 30, 2012 is 3.25%. The loan agreement contains certain restrictive financial covenants with respect to total equity, debt-to-equity and debt coverage that must be maintained by the Company on a quarterly basis. As of September 30, 2012, the Company was in compliance with all of the financial covenants.

At September 30, 2012, the Company had no amount outstanding on the line of credit, and had $2,000,000 available credit. At December 31, 2011, the Company had no amount outstanding on the line of credit, and had $2,000,000 available credit.

As of September 30, 2012, the Company had a total long-term debt balance of $4,076,842, including the portion due in the next year, owed to Farm Credit Services and Kubota. As of December 31, 2011, the Company had a total long-term debt balance of $4,208,590.

At September 30, 2012, the Company owed $0 on grape contracts. For the 2012 harvest, there are grape purchase contracts in place with local growers that will be accrued when the grapes are received in October.

The Company believes that cash flow from operations and funds available under the Company's existing credit facilities will be sufficient to meet the Company's foreseeable short and long-term needs.

ITEM 3:

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