Business context and reporting period
Willamette Valley Vineyards, Inc. produces and sells premium Oregon wines, principally under the Willamette Valley Vineyards label. This Form 10-K covers the fiscal year ended December 31, 2013; the quarterly figures below are unaudited. The company sells through direct-to-consumer channels and distributors, with roughly 28% of continuing-operations revenue from direct sales.
Financial performance
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $13.27 million | $12.53 million |
| Gross profit / margin | $7.68 million / 57.9% | $7.27 million / 58.1% |
| Operating income | $2.37 million | $2.20 million |
| Income from continuing operations | $1.42 million | $1.36 million |
| Net income | $1.42 million | $1.20 million |
| Diluted earnings per share | $0.29 | $0.25 |
| Operating cash flow | $1.69 million | $2.39 million |
| Investing cash flow | $(6.69) million | $(1.56) million |
Fourth-quarter 2013 revenue was $3.58 million, gross profit $2.02 million, operating income $0.61 million and net income $0.37 million. Fourth-quarter 2012 figures were $3.80 million, $2.17 million, $0.68 million and $0.53 million, respectively.
Liquidity, debt and operating metrics
- Year-end cash and cash equivalents were $0.95 million, down from $4.55 million; an additional $0.45 million was restricted pending completion of the Hospitality Center project. Working capital was $9.8 million and the current ratio 4.57, versus $12.9 million and 6.43 a year earlier.
- Long-term debt totaled $5.82 million, up from $4.03 million, including a $2.0 million Northwest Farm Credit Services loan for the Hospitality Center project. The $2.0 million Umpqua Bank revolving line had no balance; the facility was due for renewal in June 2014. The company reported compliance with debt covenants at year-end.
- Wine sales volume increased 1.5% to approximately 100,500 cases. Retail sales rose 9.9% and out-of-state sales rose 5.9%; in-state sales were up 1.0%. One distributor accounted for approximately 17.5% of total revenue.
- Operating cash flow declined, while investing outflows rose substantially, primarily reflecting property, equipment and vineyard development spending, including the Hospitality Center expansion.
Material changes versus the prior year
- Revenue increased 5.9% and operating income increased 8.0%; gross margin edged down 0.2 percentage points. Management cited lower distributor depletion expenses and higher direct-sales mix as gross-profit drivers, offset by discounts and product-mix changes.
- Net income grew 18.3%, but the comparison benefited from the absence of the 2012 discontinued-operation loss. Continuing-operations income increased about 4.7%.
- The Hospitality Center remodel and expansion drove the sharp rise in investment spending and lower cash. The project was approved for up to $4.5 million, with additional costs approved in November 2013; completion was expected in April 2014.
- Bacchus Distribution, the company’s self-distribution operation, was wound down in 2012. Company wines in Oregon are now distributed by a third party.
Outlook, risks and unusual items
- Management expected to bottle approximately 115,500 cases in 2014, compared with 95,638 cases produced in 2013; it reported sufficient bulk wine inventory for the planned bottling. The primary Turner winery’s stated capacity is approximately 132,000 cases.
- Sales in the first two months of 2014 were 6.5% below the prior-year period. Direct-to-consumer sales increased 9.4%, while in-state and out-of-state sales declined 10.1% and 13.5%; management attributed weakness in part to winter weather.
- The company depends on purchased grapes as well as its vineyards: it grew approximately 42% of grapes harvested in 2013. Weather, pests and disease—including phylloxera at Tualatin Estate—could affect grape quantity, quality and cost. Management said phylloxera had not been detected at the Turner estate.
- Other material risks include intense competition, reliance on distributors, customer concentration, consumer demand and alcohol-tax or regulatory changes. Management states that historical operating cash flow has not covered all funding needs and that credit-facility availability and covenant compliance remain important.
- Other income included a workers’ compensation premium refund and a Farm Credit patronage payment in 2013. No material legal proceedings were reported. The independent auditor issued an unqualified opinion on the financial statements; management assessed disclosure controls and internal control over financial reporting as effective.
Most important facts for investors to verify
- Whether the Hospitality Center was completed on schedule and within the revised project budget, and whether it improves direct-sales growth and cash generation.
- Whether 2014 sales weakness persisted, particularly in distributor channels, and how sales mix and promotions affected margins.
- Debt repayment capacity, the June 2014 revolving-line renewal, covenant terms and liquidity after project spending.
- Grape supply, costs and vineyard development plans, including exposure to phylloxera and the scheduled expiration of long-term grape contracts in 2015–2016.
- The effect of the 2012 discontinued operation and 2013 one-time other-income items when assessing underlying earnings and cash flow.
- Distributor concentration and the liquidity of the thinly traded common stock; the company did not anticipate paying dividends in the foreseeable future.