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WVVI > SEC Filings for WVVI > Form 10-Q on 14-May-2013All Recent SEC Filings

Show all filings for WILLAMETTE VALLEY VINEYARDS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for WILLAMETTE VALLEY VINEYARDS INC


14-May-2013

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 in 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, 2012. Such policies were unchanged during the three months ended March 31, 2013.

Overview

Net income for the three months ended March 31, 2013 and 2012 was $296,593 and $186,365, respectively, an increase of $110,228 or 59.1%, in the current year period over the prior year period. Overall gross profit for the three months ended March 31, 2013 and 2012 was $1,756,662 and $1,613,362, respectively, an increase of $143,300 or 8.9%, in the current year period over the prior year period. Gross margin percent for the three months ended March 31, 2013 and 2012 was 57.8% and 59.3%, a decrease of 1.5 percentage points, in the current year period over the prior year period. Pre-tax losses on discontinued operations for the three months ended March 31, 2013 and 2012 was $0 and $153,773, respectively, a decrease of $153,773 or 100.0%, in the current year period over the prior year period.


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

Sales for the three months ended March 31, 2013 and 2012 were $3,041,559 and $2,722,604, respectively, an increase of $318,955 or 11.7%, in the current year period over the prior year period. This is caused by an increase in the current year period over the prior year period in national sales of $196,962 or 9.7%, and an increase in retail sales of $158,817 or 22.5%, which was partially offset by other activity. These increases in sales were primarily the result of increased wine sales to distributors and consumers, and reductions in depletion allowance expenses paid to distributors.

The Company sold approximately 23,349 and 21,415 cases of produced wine during the three months ended March 31, 2013 and 2012, respectively, an increase of 1,934 cases or 9.0%. The increase in wine sales was primarily the result of increased sales efforts by the national and retail sales teams.

The Company generated $0.06 and $0.04 in basic earnings per share during the three months ended March 31, 2013 and 2012, respectively, an increase of $0.02 or 50.0%, in the current year period over the prior year period.

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 March 31, 2013.

The winery bottled approximately 26,035 cases during the three months ended March 31, 2013.

Willamette Valley Vineyards continues to receive positive recognition through regional wine competitions, national publications and online social media outlets.

January marked the 30th annual San Francisco Chronicle Wine Competition where our 2011 Pinot Gris received a Gold Medal and our 2011 Riesling was awarded a Double Gold Medal.

Robert Parker's Wine Advocate issue 202 recognized several of our wines with 90+ point scores; 2010 Hannah Pinot Noir, 92pts; 2010 Elton Pinot Noir, 91pts; 2010 Yamhill-Carlton Pinot Noir, 91pts; 2010 Signature Cuvée Pinot Noir, 90pts.

In March, the Company's founder, Jim Bernau, traveled to New York with the Oregon Wine Board for Snooth.com's "People's Voice Wine Awards" Grand Tasting. Our 2009 Pinot Gris was named one of the "Top 25 Premium Wines" and our 2009 Estate Pinot Noir was the #1 pick among Snooth's readers and recognized as the "Top Super Premium Wine." The previous evening, Mr. Bernau was a featured guest at Snooth's exclusive wine blogger spotlight dinner and has since been the topic of many positive blog posts and online articles.

Beginning with the 2010 vintage, the Estate Pinot Noir is our flagship wine. We have replaced the black vintage label with a label that reflects our use of all estate-grown fruit. This has been a 30 year quest for the Company's founder, Jim Bernau, as he worked to generate enough winegrapes from our Willamette Valley Vineyards, Tualatin Estate and Elton Vineyard properties.

RESULTS OF OPERATIONS

Revenue

Net sales, excluding excise taxes, to distributors during the three months ended March 31, 2013 and 2012 were $2,228,338 and $2,031,376, respectively, an increase of $196,962 or 9.7%, in the current year period over the prior year period. This increase is primarily a result of an increase in the number of cases sold, and a reduction in depletion allowance expenses.

Net retail sales, excluding excise taxes, for the three months ended March 31, 2013 and 2012 were $865,936 and $707,119, respectively, an increase of $158,817, or 22.5%, in the current year period over the prior year period. This increase is primarily a result of increased direct-shipment phone sales, increased wine club sales and increased on-site tasting room sales.


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

RESULTS OF OPERATIONS - continued

Cost of Goods Sold

Cost of Sales for the three months ended March 31, 2013 and 2012 were $1,284,897 and $1,109,242, respectively, an increase of $175,655 or 15.8%. This increase is primarily the result of increased wine sales, and also partially the result of increased production costs.

Gross Profit

Gross profit for the three months ended March 31, 2013 and 2012 was $1,756,662 and $1,613,362, respectively, an increase of $143,300 or 8.9%, in the current year period over the prior year period. This increase is primarily the result of increased wine sales, partially offset by rising production costs resulting in reduced profit margin.

Gross profit margin for the three months ended March 31, 2013 and 2012 was 57.8% and 59.3%, respectively, a decrease of 1.5 percentage points, in the current year period over the prior year period. The decrease is primarily due to increased costs of producing the wine.

Selling, General and Administrative Expense

Selling, general and administrative expense for the three months ended March 31, 2013 and 2012 was $1,267,958 and $1,160,533, respectively, an increase of $107,425 or 9.3%. This increase is primarily the result of increased retail labor, and increased national sales travel.

Interest Expense

Interest expense was $59,342 and $39,120 for the three months ended March 31, 2013 and 2012, respectively, an increase of $20,222 or 51.7%, in the current year period over the prior year period. This increase is primarily due to timing of interest expense recognition.

Income Taxes

The income tax expense from continuing operations was $207,128 and $172,408 for the three months ended March 31, 2013 and 2012, respectively, an increase of $34,720 or 20.1%, in the current year period over the prior year period. The Company's estimated federal and state combined income tax rate was 41.1% and 38.0% for the three months ended March 31, 2013 and 2012, respectively.

Net Income

Net income from continuing operations was $296,593 and $281,766 for the three months ended March 31, 2013 and 2012, respectively, an increase of $14,827 or 5.3%, in the current year period over the prior year period. This increase is primarily the result of increased sales, partially offset by increased selling and general administrative expenses.

Discontinued Operations

For the three months ended March 31, 2013 and 2012, after tax losses from discontinued operations were $0 and $95,401, respectively, a decrease of $95,401 or 100.0%, in the current year period over the prior year period. This reduction is primarily the result of the completion of winding-down all purchased wine sales activity as of December 31, 2012.

Liquidity and Capital Resources

At March 31, 2013, the Company had a working capital balance of $12.5 million and a current working capital ratio of 7.85:1. At December 31, 2012, the Company had a working capital balance of $12.9 million and a current working capital ratio of 6.43:1.


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

RESULTS OF OPERATIONS - continued

At March 31, 2013, the Company had a cash balance of $3,740,757. At December 31, 2012, the Company had a cash balance of $4,553,113. This change is primarily the result of reductions in liabilities, and spending on capital improvements.

Total cash provided by/(used in) operating activities from continuing operations in the three months ended March 31, 2013 and 2012 was ($43,237) and $352,972, respectively. This change is primarily the result of reductions in current liabilities.

Total cash used in investing activities from continuing operations in the three months ended March 31, 2013 and 2012 was $714,924 and $216,936, respectively. Cash used in investing activities for the three months ended March 31, 2013 primarily consists of payments on the remodel and expansion of winery and hospitality center facilities, and payments on vineyard development.

Total cash used in financing activities from continuing operations in the three months ended March 31, 2013 and 2012 was $62,766 and $77,191, respectively. Cash used in financing activities for the three months ended March 31, 2013 primarily consists of payments on long term debt as well as repurchase of common stock.

Total cash provided by discontinued operations in the three months ended March 31, 2013 and 2012 was $8,571 and $307,283 respectively. This change is primarily the result of the completion of winding-down all purchased wine sales activity as of December 31, 2012.

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 March 31, 2013 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 March 31, 2013, the Company was in compliance with all of the financial covenants.

At March 31, 2013, the Company had no amount outstanding on the line of credit, and had $2,000,000 available credit. At December 31, 2012, the Company had no amount outstanding on the line of credit, and had $2,000,000 available credit.

As of March 31, 2013, the Company had a total long-term debt balance of $3,989,172, including the portion due in the next year, owed to Farm Credit Services and Kubota. As of December 31, 2012, the Company had a total long-term debt balance of $4,026,238.

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.

Hospitality Center

In February 2013, construction began on the Wineries Hospitality Center remodel and expansion. Total project cost is approved for up to $4.5 million. New financing has been secured with Farm Credit Services for $2.0 million to partially fund the remodel and expansion, with the balance of the costs to be funded from the Companies existing cash reserves. Features of the remodeled and expanded facility include additional barrel storage capacity, a club-member tasting room, a larger general public tasting area, enhanced kitchen services, new spaces for hosting smaller parties, expanded deck seating to capitalize on views from the winery, and a new lawn terrace for large, outdoor events. Management believes these enhancements will be critical in supporting the future growth of direct-to-consumer sales of Company wines. Construction is expected to be completed during 2013.

ITEM 3:

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