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WVVI > SEC Filings for WVVI > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for WILLAMETTE VALLEY VINEYARDS INC

Form 10-Q for WILLAMETTE VALLEY VINEYARDS INC


8-Aug-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 six months ended June 30, 2013.

Overview

Net income for the three months ended June 30, 2013 and 2012 was $521,125 and $219,912, respectively, an increase of $301,213, or 137.0%, in the current year period over the prior year period. Overall gross profit for the three months ended June 30, 2013 and 2012 was $2,143,894 and $1,699,313, respectively, an increase of $444,581, or 26.2%, in the current year period over the prior year period. Gross margin percent for the three months ended June 30, 2013 and 2012 was 59.4% and 59.6%, a decrease of 0.2 percentage points, in the current year period over the prior year period. Pre-tax losses on discontinued operations for the three months ended June 30, 2013 and 2012 was $0 and $97,499, respectively, a decrease of $97,499, or 100.0%, in the current year period over the prior year period.

Sales for the three months ended June 30, 2013 and 2012 were $3,609,259 and $2,851,146, respectively, an increase of $758,113, or 26.6%, 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 $663,309, or 31.2%, and an increase in retail sales of $94,804, or 13.1%. These increases in sales were primarily the result of increased wine sales to distributors and direct sales to consumers.


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

The Company sold approximately 29,157 and 22,801 cases of produced wine during the three months ended June 30, 2013 and 2012, respectively, an increase of 6,356 cases, or 27.9%, in the current year period over the prior year period. The increase in wine sales was primarily the result of increased sales efforts by the national and retail sales teams.

The Company generated $0.11 and $0.05 in basic earnings per share during the three months ended June 30, 2013 and 2012, respectively, an increase of $0.06, or 120.0%, 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 a balance outstanding of $5,250 on the line of credit as of June 30, 2013.

The winery bottled approximately 27,533 cases during the three months ended June 30, 2013.

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

In April 2013, Wine & Spirits magazine recognized our 2011 Whole Cluster Pinot Noir with 90 points/Best Buy.

NBC's hit show, "Grimm" aired its season 2 finale in May where our Pinot Noir made a cameo. This marks the fourth time our wine has made an appearance since the Oregon-based show began in 2012.

In May, our 2011 Pinot Gris received a 2013 Oyster Award from the 2013 Pacific Coast Oyster Wine Competition. Only 9 other wineries were awarded, Willamette Valley Vineyards being the single winner from Oregon.

Wine & Spirits' June issue recognized our 2010 Signature Cuvée Pinot Noir with 90 points and our 2010 Elton Pinot Noir with 92 points.

The Oregon Live website, powered by the Oregonian newspaper, held its second annual "Winery with the Best View" reader poll in June. Willamette Valley Vineyards received 56% of the votes, successfully winning the poll.

RESULTS OF OPERATIONS

Revenue

Net sales, excluding excise taxes, to distributors during the three months ended June 30, 2013 and 2012 were $2,764,109 and $2,130,018, respectively, an increase of $634,091, or 29.8%, in the current year period over the prior year period. Net sales, excluding excise taxes, to distributors during the six months ended June 30, 2013 and 2012 were $4,992,447 and $4,161,394, respectively, an increase of $831,053, or 20.0%, 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 June 30, 2013 and 2012 were $830,755 and $738,909, respectively, an increase of $91,846, or 12.4%, in the current year period over the prior year period. Net retail sales, excluding excise taxes, for the six months ended June 30, 2013 and 2012 were $1,696,691 and $1,446,028, respectively, an increase of $250,663, or 17.3%, in the current year period over the prior year period. This increase is primarily a result of increased direct-shipment sales and increased wine club sales.

Cost of Sales

Cost of Sales for the three months ended June 30, 2013 and 2012 were $1,465,365 and $1,151,833, respectively, an increase of $313,532, or 27.2%, in the current period over the prior year period. Cost of Sales for the six months ended June 30, 2013 and 2012 were $2,750,262 and $2,261,075, respectively, an increase of $489,187, or 21.6%, in the current period over the prior year period. This increase is primarily the result of increased wine sales.


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

Gross Profit

Gross profit for the three months ended June 30, 2013 and 2012 was $2,143,894 and $1,699,313, respectively, an increase of $444,581, or 26.1%, in the current year period over the prior year period. Gross profit for the six months ended June 30, 2013 and 2012 was $3,900,556 and $3,312,675, respectively, an increase of $587,881, or 17.7%, in the current year period over the prior year period. This increase is primarily the result of increased wine sales.

Gross profit margin for the three months ended June 30, 2013 and 2012 was 59.4% and 59.6%, respectively, a decrease of 0.2 percentage points, in the current year period over the prior year period. Gross profit margin for the six months ended June 30, 2013 and 2012 was 58.6% and 59.4%, respectively, a decrease of 0.8 percentage points, in the current year period over the prior year period. The decrease in gross profit margin is largely the result of a shift in product mix in sales.

Selling, General and Administrative Expense

Selling, general and administrative expense for the three months ended June 30, 2013 and 2012 was $1,258,697 and $1,213,979, respectively, an increase of $44,718, or 3.7%, in the current year period over the prior year period. Selling, general and administrative expense for the six months ended June 30, 2013 and 2012 was $2,526,655 and $2,374,512, respectively, an increase of $152,153, or 6.4%, in the current year period over the prior year period. This increase is not attributable to a specific component of spending.

Interest Expense

Interest expense for the three months ended June 30, 2013 and 2012 was $63,866 and $42,668, respectively, an increase of $21,198, or 49.7%, in the current year period over the prior year period. Interest expense for the six months ended June 30, 2013 and 2012 was $123,208 and $81,788, respectively, an increase of $41,420, or 50.6%, 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 for the three months ended June 30, 2013 and 2012 was $333,730 and $203,081, respectively, an increase of $130,649, or 64.3%, in the current year period over the prior year period. The income tax expense from continuing operations for the six months ended June 30, 2013 and 2012 was $540,858 and $382,567, respectively, an increase of $158,291, or 41.4%, in the current year period over the prior year period. The Company's estimated federal and state combined income tax rate was 39.0% and 42.4% for the three months ended June 30, 2013 and 2012, respectively. The Company's estimated federal and state combined income tax rate was 39.8% and 40.6% for the six months ended June 30, 2013 and 2012, respectively.

Net Income

Net income from continuing operations for the three months ended June 30, 2013 and 2012 was $521,125 and $276,461, respectively, an increase of $244,664, or 88.5%, in the current year period over the prior year period. Net income from continuing operations for the six months ended June 30, 2013 and 2012 was $817,718 and $551,099, respectively, an increase of $266,619, or 48.4%, 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

After tax losses from discontinued operations for the three months ended June 30, 2013 and 2012 were $0 and $56,549, respectively, a decrease of $56,549, or 100.0%, in the current year period over the prior year period. After tax losses from discontinued operations for the six months ended June 30, 2013 and 2012 were $0 and $146,931, respectively, a decrease of $146,931, 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.


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

Liquidity and Capital Resources

At June 30, 2013, the Company had a working capital balance of $11.4 million and a current working capital ratio of 6.24:1. 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.

At June 30, 2013, the Company had a cash balance of $3,209,299. 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 operating activities from continuing operations in the six months ended June 30, 2013 and 2012 was $612,421 and $802,244, respectively. Cash provided by operating activities from continuing operations for the six months ended June 30, 2013 were derived primarily from an increase in net income and a decrease in inventory partially offset by a decrease in payables.

Total cash used in investing activities from continuing operations in the six months ended June 30, 2013 and 2012 was $1,787,639 and $537,340, respectively. Cash used in investing activities for the six months ended June 30, 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 six months ended June 30, 2013 and 2012 was $164,259 and $331,439, respectively. Cash used in financing activities for the six months ended June 30, 2013 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 six months ended June 30, 2013 and 2012 was ($4,337) and $629,489 respectively. This change is primarily the result of the completion of winding-down all purchased wine sales activity as of December 31, 2012.

Non-cash investing and financing activities in the six months ended June 30, 2013 and 2012 was $576,536 and $0 respectively. This change was the result of property and equipment purchases included in accounts payable for the six months ended June 30, 2013.

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 2014. The index rate of prime plus zero, with a floor of 3.25%, at June 30, 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 June 30, 2013, the Company was in compliance with all of the financial covenants.

At June 30, 2013, the Company had $5,250 outstanding on the line of credit, and had $1,994,750 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 June 30, 2013, the Company had a total long-term debt balance of $3,937,723, 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 winery's 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 Company's 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.


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