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WVVI > SEC Filings for WVVI > Form 10-Q on 12-Nov-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


12-Nov-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 nine months ended September 30, 2013.

Overview

The Company generates revenues from the sales of wine to wholesalers and direct to consumers. Direct to consumer sales primarily include sales through the Company's Tasting Rooms and Wine Club. Direct to consumer sales are more profitable to the Company due to prices received being closer to retail than those prices paid by wholesalers. The Company continues to emphasize growth in direct to consumer sales through the Hospitality Center remodel and expansion and growth in wine club membership. Wine Club memberships increased by approximately 390 for the three months ending September 30, 2013. Periodically, the Company will sell grapes or bulk wine, due to them not meeting Company standards or being excess to production targets, however this activity is not a significant part of the Company's activities or part of the long term business plan.

The Company sold approximately 23,415 and 24,751 cases of produced wine during the three months ended September 30, 2013 and 2012, respectively, a decrease of 1,336 cases, or 5.4% in the current year period over the prior year period. The decrease in wine sales was the result of reduced sales to distributors and is believed to involve timing differences between quarters.

Cost of Sales includes grape costs, whether purchased or grown at Company vineyards, crush costs, winemaking and processing costs, bottling, packaging, warehousing and shipping and handling costs. For grapes grown at Company vineyards, costs include farming expenditures and amortization of vineyard development costs. The Company expects cost of sales to increase, over the next several years, as lower yield vintages are released.

At September 30, 2013, wine inventory includes approximately 97,300 cases of bottled wine and 40,845 gallons of bulk wine in various stages of the aging process. Case wine is expected to be sold over the next 12 to 24 months and generally before the release date of the next vintage. The winery bottled approximately 42,155 cases during the three months ended September 30, 2013.


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

Net income for the three months ended September 30, 2013 and 2012 was $232,066 and $268,228, respectively, a decrease of $36,162, or 13.5%, in the current year period over the prior year period. Overall gross profit for the three months ended September 30, 2013 and 2012 was $1,758,858 and $1,792,193, respectively, a decrease of $33,335, or 1.9%, in the current year period over the prior year period. Gross margin percent for the three months ended September 30, 2013 and 2012 was 57.8% and 56.8%, an increase of 1.0 percentage points, in the current year period over the prior year period. Pre-tax losses on discontinued operations for the three months ended September 30, 2013 and 2012 was $0 and $8,060, respectively, a decrease of $8,060, or 100.0%, in the current year period over the prior year period.

The Company generated $0.05 and $0.06 in basic earnings per share during the three months ended September 30, 2013 and 2012, respectively, a decrease of $0.01, or 17.0%, in the current year period over the prior year period.

Willamette Valley Vineyards continues to receive positive recognition through national review magazines, local wine publications and newspapers.

In July, Stephen Tanzer's International Wine Cellar recognized five of our Pinot Noirs with 90+ points; 2010 Elton Pinot Noir, 92pts; 2010 Bernau Block Pinot Noir, 91pts; 2010 Signature Cuvée Pinot Noir, 90pts; Tualatin Estate Pinot Noir, 90pts; Hannah Pinot Noir, 91pts.

Gregory Walter's James Beard Award-winning "PinotReport," issue #88, awarded five of our wines with 90+ points in July; 2010 Tualatin Estate Pinot Noir, 92pts; 2012 Whole Cluster Pinot Noir, 91pts/Smart Buy; 2010 Signature Cuvée Pinot Noir, 91pts, 2010 Elton Pinot Noir, 91pts; 2010 Estate Pinot Noir, 90pts.

Wine Enthusiast Magazine's Paul Gregutt reviewed our 2010 Bernau Block Pinot Noir in their July issue, giving it 90pts and further identifying the wine as a "Cellar Selection."

Our 2012 Riesling was chosen as a value pick for July in the Oregon Wine Press, stating, "WVV couldn't be doing it better… this wine is round and appealing on the palate."

Wine Writer, Julia Crowley, called our 2010 Elton Pinot Noir "the epitome of stellar Willamette Valley Pinot Noir" in a July article in the Eugene Daily News.

RESULTS OF OPERATIONS

Revenue

Sales for the three months ended September 30, 2013 and 2012 were $3,043,546 and $3,155,762, respectively, a decrease of $112,216, or 3.6%, in the current year period over the prior year period. This is caused by a decrease in the current year period over the prior year period in sales through distributors of $170,255, or 7.8%, which was partially offset by an increase in retail sales of $58,039, or 6.0%. The decrease in sales to distributors is partially attributable to timing differences between quarters. The increase in direct sales to consumers is primarily the result of increased wine club sales, partially offset by a decrease in room rental income due to the ongoing Hospitality Center remodel and expansion project.

Sales for the nine months ended September 30, 2013 and 2012 were $9,694,364 and $8,729,512, respectively, an increase of $964,852, or 11.6%, 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 sales through distributors of $659,215, or 10.5%, and an increase in retail sales of $305,637, or 12.5%. These increases in sales were primarily the result of increased wine sales to distributors and direct sales to consumers.

Cost of Sales

Cost of Sales for the three months ended September 30, 2013 and 2012 were $1,284,688 and $1,363,569, respectively, a decrease of $78,881, or 5.8%, in the current period over the prior year period. Cost of Sales for the nine months ended September 30, 2013 and 2012 were $4,034,950 and $3,624,643, respectively, an increase of $410,307, or 11.3%, in the current period over the prior year period. These changes are primarily the result of variations in wine sales.

Gross Profit

Gross profit for the three months ended September 30, 2013 and 2012 was $1,758,858 and $1,792,193, respectively, a decrease of $33,335, or 1.9%, in the current year period over the prior year period. Gross profit for the nine months ended September 30, 2013 and 2012 was $5,659,414 and $5,104,869, respectively, an increase of $554,545, or 10.9%, 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 September 30, 2013 and 2012 was 57.8% and 56.8%, respectively, an increase of 1.0 percentage point, in the current year period over the prior year period. Gross profit margin for the nine months ended September 30, 2013 and 2012 was 58.4% and 58.5%, respectively, a decrease of 0.1 percentage point, in the current year period over the prior year period. The changes in gross profit margin are largely the result of a shift in product sales mix and differences in the ratio of direct sales to consumers and sales through distributors.


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, 2013 and 2012 was $1,339,735 and $1,211,136, respectively, an increase of $128,599, or 10.6%, in the current year period over the prior year period. Selling, general and administrative expense for the nine months ended September 30, 2013 and 2012 was $3,866,390 and $3,585,648, respectively, an increase of $280,742, or 7.8%, in the current year period over the prior year period. This increase is primarily the result of increased selling expenses associated with an increased focus on retail sales.

Interest Expense

Interest expense for the three months ended September 30, 2013 and 2012 was $61,635 and $86,180, respectively, a decrease of $24,545, or 28.5%, in the current year period over the prior year period. Interest expense for the nine months ended September 30, 2013 and 2012 was $184,843 and $167,969, respectively, an increase of $16,874, or 10%, in the current year period over the prior year period. Interest expense has fluctuated in recent periods due to changes in our long-term debt, among other factors.

Income Taxes

The income tax expense from continuing operations for the three months ended September 30, 2013 and 2012 was $178,899 and $238,105, respectively, a decrease of $59,206, or 24.9%, in the current year period over the prior year period.
The income tax expense from continuing operations for the nine months ended September 30, 2013 and 2012 was $719,757 and $621,309, respectively, an increase of $98.448, or 15.8%, in the current year period over the prior year period.
The Company's estimated federal and state combined income tax rate was 43.5% and 46.6% for the three months ended September 30, 2013 and 2012, respectively. The Company's estimated federal and state combined income tax rate was 40.7% and 43.0% for the nine months ended September 30, 2013 and 2012, respectively.

Net Income

Net income from continuing operations for the three months ended September 30, 2013 and 2012 was $232,066 and $272,903, respectively, a decrease of $40,837, or 15.0%, in the current year period over the prior year period. Net income from continuing operations for the nine months ended September 30, 2013 and 2012 was $1,049,784 and $823,364, respectively, an increase of $226,420, or 27.5%, in the current year period over the prior year period. This increase is primarily the result of increased sales, partially offset by increased selling expenses.

Discontinued Operations

After tax losses from discontinued operations for the three months ended September 30, 2013 and 2012 were $0 and $4,675, respectively, a decrease of $4,675, or 100.0%, in the current year period over the prior year period. After tax losses from discontinued operations for the nine months ended September 30, 2013 and 2012 were $0 and $151,606, respectively, a decrease of $151,606, 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 September 30, 2013, the Company had a working capital balance of $9.4 million and a current working capital ratio of 4.04:1. 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 September 30, 2013, the Company had a cash balance of $1,690,234, exclusive of restricted cash of $1,647,562. At December 31, 2012, the Company had a cash balance of $4,553,113. This change is primarily the result of spending on capital improvements.

Total cash provided by operating activities from continuing operations in the nine months ended September 30, 2013 and 2012 was $1,233,656 and $1,793,935, respectively. Cash provided by operating activities from continuing operations for the nine months ended September 30, 2013 were derived primarily from an increase in net income and an increase in inventory partially offset by a decrease in payables.


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

Total cash used in investing activities from continuing operations in the nine months ended September 30, 2013 and 2012 was $4,265,244 and $1,044,078, respectively. Cash used in investing activities for the nine months ended September 30, 2013 primarily consists of payments on the remodel and expansion of winery and hospitality center facilities, and payments on vineyard development.

Total cash provided by/(used in) financing activities from continuing operations in the nine months ended September 30, 2013 and 2012 was $173,046 and ($391,503), respectively. Cash provided by financing activities for the nine months ended September 30, 2013 primarily consists of the receipt of loan proceeds, offset by restrictions in cash, from Farm Credit Services for the Hospitality Center remodel and expansion project, and proceeds from the exercise of stock options partially offset by loan payments and the repurchase of common stock.

Total cash provided by/(used in) discontinued operations in the nine months ended September 30, 2013 and 2012 was ($4,337) and $708,202 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 nine months ended September 30, 2013 and 2012 was $1,038,014 and $0 respectively. This change was the result of property and equipment purchases included in accounts payable for the nine months ended September 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 September 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 September 30, 2013, the Company was in compliance with all of the financial covenants.

At September 30, 2013 and December 31, 2012 the Company had no amount outstanding on the line of credit, and had $2,000,000 available credit.

As of September 30, 2013, the Company had a total long-term debt balance of $5,870,468, 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 and disbursed from 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.

ITEM 3:

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