Willamette Valley Vineyards, Inc. — FY2018 Form 10-K
Reporting period: Year ended December 31, 2018. Although the request identifies 2018 Q4, this is an annual filing; the supplied text does not provide a clear standalone fourth-quarter income or cash-flow result.
Business context
Oregon-based producer and seller of premium, super-premium and ultra-premium wines across multiple labels. Sales are made directly to consumers and through distributors; direct sales generally earn higher gross margins. The company reported 7,508 wine-club memberships and sold in 49 states and the District of Columbia.
Financial and operating metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $23.08 million | $20.85 million |
| Gross profit / margin | $14.78 million / 64.0% | $12.88 million / 61.8% |
| Income from operations | $4.18 million | $3.64 million |
| Net income | $2.86 million | $2.99 million |
| Income applicable to common shareholders | $1.84 million | $2.29 million |
| Basic earnings per common share, after preferred dividends | $0.37 | $0.46 |
| Operating cash flow | $2.30 million | $2.52 million |
| Investing cash flow | $(5.26) million | $(3.92) million |
| Financing cash flow | $(1.08) million | $9.46 million |
| Cash at year-end | $9.74 million | $13.78 million |
Cost of sales was $8.30 million, up 4.1%; selling, general and administrative expense was $10.60 million, up 14.6%. EBITDA, a non-GAAP measure, was $6.06 million versus $5.44 million. Working capital was $23.2 million and the current ratio was 5.31:1.
Gross long-term debt was $6.84 million at year-end; notes payable totaled $1.69 million, including a callable $1.55 million Dundee Hills note. There were no borrowings on the $2.0 million revolving credit line. Total contractual obligations, including debt, grape payables and operating leases, were $14.48 million.
Wine sales volume increased 8.7% to approximately 146,300 cases. Direct sales represented 39.5% of net sales and distributor sales 60.5%. One distributor accounted for approximately 21.0% of total revenue. Harvested grapes totaled 1,986 tons, down from 3,253 tons in 2017; the company purchased 485 tons in 2018.
Material changes versus FY2017
- Net sales increased 10.7%; in-state sales rose 25.6%, retail sales 8.3%, and out-of-state sales 2.5%.
- Gross margin improved to 64.0% from 61.8%, attributed to higher per-case margins, vintages from higher-yield harvests, lower federal excise taxes and no repeat of the prior-year inventory write-down.
- Operating income rose 15.0%, but net income declined 4.5% as the income tax provision increased to $1.08 million from $0.45 million. The effective tax rate was 27.4% versus 13.1%; FY2017 benefited from Tax Cuts and Jobs Act implementation effects.
- Income applicable to common shareholders fell 19.7%, also reflecting higher preferred-stock dividends ($1.02 million versus $0.70 million).
- Cash declined by $4.04 million, principally as investing outflows increased and financing shifted from substantial net inflows in 2017 to net outflows in 2018.
Outlook, commentary and risks
- Management expected to bottle approximately 154,500 cases in 2019, compared with 164,590 produced in 2018, and believed inventory was sufficient for anticipated demand. It expected operating cash flow and available credit to cover foreseeable needs.
- Planned vineyard development includes approximately 15 acres in 2019 and 25 acres in 2020. The company also planned to open Willamette Wineworks in Folsom, California, in 2019. These are plans, not assurances of completion or results.
- The $2.0 million Umpqua Bank credit line was due to expire July 31, 2019. The filing states the company was compliant with its credit and debt covenants at year-end.
- Adoption of the lease accounting standard in 2019 was expected to add approximately $5.0 million of right-of-use assets and corresponding liabilities, with a material balance-sheet impact but minimal direct income-statement impact.
- Key exposures include harvest and weather variability, wildfire smoke, pests and disease (including phylloxera at Tualatin), dependence on purchased grapes, intense competition, distributor concentration, consumer demand, regulation and alcohol taxation. Federal craft beverage tax provisions were effective for 2018–2019; expiration could increase excise taxes.
- Series A preferred stock carries a cumulative annual dividend of $0.22 per share and senior liquidation preference. The company paid $1.02 million in preferred dividends in 2018; common dividends were not anticipated. Preferred shares may be optionally redeemed after June 1, 2021, at the company’s discretion.
- No material legal proceedings or material subsequent events were reported. The financial statements received an unqualified audit opinion; the auditor did not express an opinion on internal control effectiveness. Management assessed disclosure controls and internal control over financial reporting as effective.
Important facts for investors to verify
- Whether 2019 production, sales growth and vineyard-development plans were achieved, and the effect of the lower 2018 harvest on future grape availability and margins.
- Renewal or replacement of the credit line due July 2019, compliance with debt covenants, and repayment or refinancing of the callable Dundee Hills note.
- Whether the distributor representing 21.0% of revenue remains a stable customer and whether distributor incentives and sales concentration change.
- The cash-flow and capital-spending outlook, including continued vineyard and facility investment, against declining year-end cash.
- The impact of lease-standard adoption and the continuation or expiration of federal alcohol-tax provisions after 2019.
- Preferred dividends, redemption terms and any effect on cash available to common shareholders.