Willamette Valley Vineyards, Inc. — FY2011 Form 10-K
Business context and period: Oregon-based producer and distributor of premium wines, primarily Pinot Noir, Pinot Gris, Chardonnay and Riesling. The filing covers the fiscal year ended December 31, 2011, with FY2010 as the comparison. The filing also reports fourth-quarter results; this is an annual report, not a quarterly filing.
Financial performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net revenue | $15.662 million | $17.371 million |
| Gross profit / margin | $7.717 million / 49.3% | $7.691 million / 44.3% |
| Operating income | $1.500 million | $846,604 |
| Net income | $857,755 | $411,808 |
| Diluted EPS | $0.18 | $0.08 |
| Cash from operations | $2.720 million | $3.008 million |
- Revenue declined 9.8%, while net income rose 108.3%. Management attributed the improved operating result mainly to lower production costs and reduced selling, general and administrative expenses; gross-profit improvement accounted for only a small share of the operating-income increase.
- Fourth-quarter 2011 net revenue was $3.902 million, gross profit $1.978 million, operating income $437,000 and net income $285,000 (diluted EPS $0.06). In Q4 2010, the corresponding figures were $5.121 million, $2.394 million, $524,000 and $301,000 (EPS $0.06).
- Cash and cash equivalents were $3.411 million at year-end, versus $1.519 million a year earlier. Working capital was $12.9 million and the current ratio 8.11:1, compared with $11.4 million and 5.98:1.
- Long-term debt was $4.209 million, up from $3.279 million; the revolving credit line had no balance against a $2.0 million limit. The company reported compliance with its bank and Farm Credit covenants. Operating cash flow was positive, but lower than in 2010; cash benefited from inventory reduction.
- Capital spending was substantial: cash used in investing activities was $1.738 million, principally for property, equipment and vineyard development. The company reported approximately 85,000 cases of bottled wine inventory at year-end.
Material changes versus FY2010
- Gross margin improved from 44.3% to 49.3%, and produced-wine gross margin increased from 49.7% to 57.3%; management cited lower production costs.
- Retail sales rose 8.2%, but in-state sales fell 17.6% and out-of-state sales fell 4.2%. In-state results were affected by the transition away from the company’s own distribution operation and the lower wholesale selling price under the new distributor arrangement.
- Beginning September 1, 2011, Young’s became the exclusive distributor of Willamette Valley Vineyards and Griffin Creek wines in Washington and most Oregon counties under a seven-year agreement. Bacchus Fine Wines is winding down distribution of company-produced wine and continuing to sell purchased wine inventory while it is depleted.
- The 2011 harvest totaled 1,327 tons, about 27% above the prior year. The winery produced approximately 190,000 gallons (80,200 cases) in 2011 from earlier harvests; the filing says 2011-harvest wine production was expected to be approximately 87,500 cases.
- The company obtained $1.4 million of long-term borrowing during 2011. Its head winemaker died in December; the assistant winemaker assumed the head-winemaker role.
Outlook, risks and unusual items
- Management expected approximately 230,000 gallons (97,000 cases) of production in 2012 and anticipated a profit in Q1 2012, historically its weakest quarter. Sales in January and February 2012 were down 4.0% year over year; retail/direct sales were up 25.1%, while national sales were down 0.4% and Bacchus sales down 27.2% as its role changed.
- Management said operating cash flow and available credit facilities should meet foreseeable needs. The $2.0 million revolving facility was due for renewal in June 2012.
- Key risks include weather, disease and pests (including phylloxera at Tualatin and leased vineyards), grape supply and quality, premium-wine demand, intense competition, distributor performance, possible alcohol-tax or regulatory changes, and reliance on credit facilities. Some pre-1992 vines are not phylloxera-resistant; the company reported no phylloxera detected at Turner.
- Contractual obligations totaled $7.921 million, including $4.209 million of long-term debt, $3.323 million of operating leases and $389,233 of grape payables. Grape contracts can require purchases of qualifying crops up to approximately $1.5 million annually. Management estimated development of about 204 undeveloped vineyard acres could cost approximately $3.67 million as demand warrants.
- The company reported no material pending legal proceedings in Item 3; the notes also describe ordinary-course litigation whose outcome could not be determined. A subsequent-event disclosure says 7,573 shares were repurchased in January–February 2012 at an average $3.32 per share under a program authorized for up to $200,000 through April 1, 2012.
Most important facts for investors to verify
- Whether the Young’s distribution transition can restore in-state sales and sustain margins as Bacchus winds down.
- The June 2012 renewal and terms of the revolving credit facility, ongoing covenant compliance, and debt service relative to cash generation and planned capital spending.
- Whether 2012 production and sales targets are achievable given grape yields, inventory levels, vineyard development needs and agricultural risks.
- The filing’s cover-page response appears to mark “No” to the combined question about timely filing of required reports and being subject to filing requirements for the prior 90 days; verify the exact filing-status disclosure.
- The financial statements received an unqualified audit opinion. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an opinion on internal-control effectiveness.