Business context and reporting period
Willamette Valley Vineyards, Inc. produces and sells premium Oregon wines, primarily Pinot Noir, through direct-to-consumer channels and distributors. This Form 10-K covers the fiscal year ended December 31, 2014; quarterly figures below are for Q4 2014. Financial statements were audited by Moss Adams LLP, which issued an unqualified opinion.
Key financial metrics
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $15.16 million | $13.27 million |
| Gross profit / margin | $9.02 million / 59.5% | $7.68 million / 57.9% |
| Operating income | $2.81 million | $2.37 million |
| Net income | $2.16 million | $1.42 million |
| Diluted earnings per share | $0.44 | $0.29 |
| Operating cash flow | $3.01 million | $1.69 million |
| Investing cash flow | $(3.72) million | $(6.69) million |
| Cash at year-end | $519,761 | $945,683 |
| Long-term debt, including current portion | $5.50 million | $5.82 million |
Working capital was $9.8 million and the current ratio was 4.63 at year-end, versus $9.8 million and 4.57 in 2013. The $2.0 million revolving credit facility had no balance at year-end; the company reported compliance with its bank covenants. EBITDA, a non-GAAP measure, was $4.30 million versus $3.32 million.
In Q4 2014, net sales were $4.445 million, gross profit $2.554 million, operating income $824,000, and net income $865,000; diluted EPS was $0.18. Q4 2013 figures were $3.578 million, $2.023 million, $612,000, $373,000, and $0.07, respectively.
Material changes versus the prior comparable period
- FY net sales increased 14.2%; company-produced wine case sales rose 6.9% to approximately 107,400.
- Gross margin improved 1.6 percentage points, helped by higher average selling prices and direct sales. Direct-to-consumer sales grew to 34.1% of net sales from 28.2%; retail sales increased 32.3%.
- SG&A rose 17.0% to $6.21 million, primarily due to costs of operating the remodeled Hospitality Center. Operating income nonetheless increased 18.2%.
- Net income rose 51.8%, also benefiting from a lower effective tax rate (26.4% versus 38.9%) and $180,035 of net insurance proceeds for a wine spill. Management said comparable tax credits are not anticipated in future periods.
- Cash declined by about $426,000, chiefly reflecting capital spending; investing outflows moderated as the Hospitality Center project wound down.
Outlook, commentary, risks and unusual items
No formal earnings or revenue guidance is provided. Management planned 2015 bottling of approximately 120,100 cases, compared with 108,958 cases produced in 2014, and expected sufficient inventory to meet current demand until the 2015 vintage becomes available. It expects to use Estate Winery capacity before expanding production at the currently unused Tualatin facility. Vineyard development is intended to increase grape supply; management planned to plant approximately 97 acres in 2015 and 33 acres in 2016. In March 2015, the company agreed to buy approximately 44 acres in the Walla Walla Valley for $736,250, with an option for another 45 acres for $433,000.
- Key operating risks include weather and harvest variability, pests and disease (including phylloxera at Tualatin), and dependence on purchased grapes. Long-term grape contracts expire in 2015 and 2016; the company cannot assure future supply or pricing.
- One distributor represented 16.6% of 2014 revenue. Distributor performance, customer concentration, competitive pressure, consumer demand, and potential increases in alcohol taxes or regulation could affect results.
- Management says operating cash flow historically has not funded all operating needs and relies on credit facilities and term debt. Long-term debt was $5.50 million; the $2 million revolving facility renews in June 2016. Contractual obligations totaled $8.54 million, including debt, grape payables, and operating leases.
- A March 2014 wine spill generated the insurance recovery noted above; management attributed the spill to mechanical error and said it introduced processes intended to reduce recurrence.
- The stock is described as thinly traded. The company does not anticipate paying dividends in the foreseeable future.
Important facts for investors to verify
- Whether the planned 2015 bottling and vineyard planting schedule is achieved, and how much grape supply is secured after contracts expire.
- Whether direct-sales growth and improved margins can continue as Hospitality Center operating costs rise.
- Cash generation, capital spending, debt service, and continued compliance with credit-facility covenants.
- The durability of 2014 earnings given the one-time insurance proceeds and tax credits that management does not expect to recur.
- Completion and financing of the Walla Walla land purchase and any optional acreage acquisition.