Willamette Valley Vineyards, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports unaudited fourth-quarter results. The company produces and sells premium Oregon wines through direct-to-consumer and distributor channels.
Financial performance and condition
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net sales | $17.94 million | $15.16 million | +18.4% |
| Gross profit / margin | $10.85 million / 60.5% | $9.02 million / 59.5% | Profit +20.3%; margin improved |
| Operating income | $3.27 million | $2.81 million | +16.5% |
| Net income | $1.90 million | $2.16 million | -12.0% |
| Diluted EPS after preferred dividends | $0.37 | $0.44 | -15.2% |
| Operating cash flow | $2.70 million | $3.01 million | Lower year over year |
- Net sales growth reflected increases in retail (+24.7%), in-state distributor sales (+29.9%), out-of-state sales (+4.1%) and bulk/miscellaneous sales (+213.6%). Sales of company-produced wine rose 13.4% to approximately 121,800 cases.
- Gross margin improvement was attributed to higher average case prices, higher-margin direct sales and the release of higher-margin vintages. Selling, general and administrative expense rose 22.0% to $7.58 million, partly due to Hospitality Center operating costs and distributor-sales efforts.
- Net income declined despite higher operating income: the effective tax rate increased to 40.1% from 26.4%, principally because 2014 included nonrecurring tax credits. 2014 also included $180,035 of net insurance proceeds related to a wine spill.
- At year-end, cash was $4.01 million, versus $0.52 million; working capital was $14.0 million and the current ratio was 4.43. The cash increase primarily reflected preferred-stock proceeds. Restricted cash of $1.48 million related to subscriptions not yet released or processed.
- Cash used in investing was $3.42 million, mainly for vineyard development and property and equipment. Financing provided $4.22 million, including net preferred-stock proceeds of $3.74 million. The company reported no line-of-credit borrowings.
- Long-term debt was $5.17 million, down from $5.50 million; a further $0.49 million was due under a non-interest-bearing land-purchase note. The $2 million revolving credit facility was undrawn and due to expire in June 2016. The company reported compliance with lender covenants.
Material changes and operating developments
- Direct-to-consumer sales increased to 38.5% of net sales from 34.1%; out-of-state distributor sales declined to 43.3% from 49.2%. One distributor accounted for 18.2% of 2015 revenue, compared with 16.6% in 2014.
- The company issued Series A Redeemable Preferred Stock in 2015. It is non-voting, carries a cumulative 5.3% annual dividend ($0.22 per share), and has liquidation preference over common stock. Net proceeds recorded in 2015 were $3.74 million. The company paid $57,611 in preferred dividends for 2015.
- Vineyard and winery expansion continued, including purchases and development of land for planned Pambrun and Elton wine operations. The company reported 697 acres owned or leased and significant acreage in pre-production or available for planting.
- The company produced approximately 120,794 cases in 2015. It planned to bottle approximately 135,700 cases in 2016, above the Estate Winery’s stated 132,000-case capacity; management expected to use Tualatin and temporary storage to accommodate volume. The Tualatin facility adds approximately 25,000 cases of production capacity but was not used for production in 2015.
- Year-end inventory included approximately 67,000 bottled cases and 453,000 gallons of bulk wine. Management said available inventory was sufficient to meet current demand until the 2016 vintage became available.
Outlook, risks and unusual items
- Management expects cash flow from operations and available credit facilities to cover foreseeable operating needs. No formal revenue or earnings guidance is provided. The company planned 2016 vineyard plantings and production described above, with vineyard development and expansion paced to anticipated demand.
- Management expects cost of sales to decline as a percentage of sales over the next several years as higher-yield vintages are released. It also noted that grape supply remains partly dependent on growers and that certain long-term grape contracts expire in 2015 and 2016; negotiations to extend contracts were ongoing.
- Key business risks include harvest and weather variability, vineyard disease and pests (including phylloxera at Tualatin), grape availability and quality, distributor dependence and concentration, intense competition, consumer demand and potential increases in alcohol taxes or regulation. The company cannot estimate a range of loss from the Tualatin phylloxera infestation.
- Preferred-stock dividends depend on legally available funds and the company’s financial condition; unpaid dividends are cumulative but do not themselves compound. The company also disclosed potential securities-law exposure associated with the unusual preferred-stock offering terms.
- In December 2015, the company filed a universal shelf offering permitting up to $18 million of debt and equity securities, with terms to be determined in future supplements. It reported no material pending legal proceedings and no off-balance-sheet arrangements.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end; the auditor did not express an opinion on internal-control effectiveness.
Most important facts for investors to verify
- Whether planned 2016 bottling above Estate Winery capacity can be handled without material additional storage or operating costs, and whether demand supports the planned volume.
- Whether the direct-sales mix and margin gains continue to offset higher selling and hospitality costs, and whether the higher tax burden persists.
- The renewal status and terms of the June 2016 revolving credit facility, covenant headroom, debt-service capacity and funding needs for vineyard and winery expansion.
- Preferred-stock shares issued and proceeds ultimately available after escrow releases, future cumulative dividend obligations, and any additional issuance under the shelf offering.
- Progress in securing grape supply as contracts expire, and the effect of phylloxera and other agricultural risks on yields, costs and wine quality.
- The company reported fourth-quarter 2015 revenue of $5.06 million and net income of $624,000, compared with $4.44 million and $865,000 in fourth-quarter 2014; verify the drivers of the lower quarterly net income.