Willamette Valley Vineyards, Inc. — FY 2016 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2016; it is an annual report, not a standalone fourth-quarter report. The company produces and sells premium Oregon wines, primarily under the Willamette Valley Vineyards, Tualatin Estate and Griffin Creek labels. Sales are divided between direct-to-consumer channels and distributors. The company reported that direct sales generally earn higher margins.
Quarterly information provided is limited to revenue and sales categories: fourth-quarter net sales were $5.86 million versus $5.06 million in Q4 2015. The filing does not provide a clear standalone Q4 profit or cash-flow value.
Financial performance and position
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net sales | $19.43 million | $17.94 million | +8.3% |
| Gross profit | $12.22 million | $10.85 million | +12.7% |
| Gross margin | 62.9% | 60.5% | +2.4 percentage points |
| Income from operations | $4.17 million | $3.27 million | +27.3% |
| Net income | $2.63 million | $1.90 million | +38.2% |
| Income applicable to common shareholders | $2.17 million | $1.84 million | +17.5% |
| Diluted EPS after preferred dividends | $0.43 | $0.37 | +$0.06 |
| EBITDA, a non-GAAP measure | $5.72 million | $4.76 million | +20.2% |
- Net sales growth reflected higher retail sales (+10.2%), in-state distributor sales (+13.8%) and out-of-state sales (+12.5%). Bulk wine and miscellaneous sales fell 68.5%, largely because excess wine available in 2015 was not present in 2016.
- Gross margin improved primarily due to higher per-case margins and release of higher-margin vintages. Selling, general and administrative expenses rose 6.3% to $8.05 million as the company invested in sales and retail operations.
- Operating cash flow was $3.09 million; investing cash outflow was $5.33 million, primarily for property, equipment and vineyard development; financing cash inflow was $3.94 million. Cash increased to $5.71 million from $4.01 million.
- At year-end, working capital was $16.4 million and the current ratio was 5.59. Current assets were $19.95 million and current liabilities were $3.57 million. Inventory was $11.97 million, up from $10.63 million.
- Long-term debt was approximately $4.87 million, including current maturities; the company also had a $245,417 note payable due April 2017. The $2 million revolving credit line had no balance outstanding. The company reported compliance with debt covenants at year-end.
- Capital spending and vineyard development were significant: property and equipment additions were $4.33 million and vineyard development additions were $1.00 million. Contractual obligations totaled $8.26 million, including debt, grape payables and operating leases.
Material changes versus FY 2015
- Company-produced wine case sales rose 10.6% to approximately 134,700 cases. Production was approximately 141,416 cases, compared with 120,794 in 2015.
- Direct sales represented 36.2% of net revenue, down from 38.7%; distributor sales rose to 63.8% from 61.3%. One distributor accounted for approximately 19.0% of 2016 revenue, versus 18.2% in 2015.
- The company issued additional Series A Redeemable Preferred Stock, receiving $5.33 million net in 2016. Preferred dividends declared and paid totaled $462,529, compared with $57,611 in 2015.
- Net income included a $110,000 recovery related to 2013 grape damage from an adjacent farm’s overspray, recorded as an offset to SG&A.
Outlook, commentary and key risks
- Management expected to bottle approximately 143,000 cases in 2017 and believed inventory was sufficient to meet demand until the 2017 vintage became available. It expected cost of sales as a percentage of sales to decline over the next several years as higher-yield vintages are released.
- The company plans continued vineyard investment and expansion into new wine brands and regions. It reported plans to plant approximately 76 acres in 2017 and 75 acres in 2018; newly planted acreage is expected to begin bearing later. It also reported acquisitions of vineyard properties in Oregon and Washington.
- In February 2017, the company refinanced approximately $3.1 million of Farm Credit debt with a new $5.8 million loan and received about $2.6 million in cash after fees and prepayment costs. The board also authorized an additional $250,000 for common-stock repurchases.
- Management said operating cash flow and available credit were expected to meet foreseeable operating needs. However, it noted historically that operating cash flow had not covered all funding needs; the revolving line was due to expire in July 2017.
- Key risks include weather and crop variability, pests and disease (including phylloxera at Tualatin Vineyards), dependence on purchased grapes and a supplier’s 2016 under-delivery, competition, distributor performance and concentration, and changes in consumer demand or alcohol regulation and taxes.
- Series A preferred stock has a cumulative 5.3% annual dividend ($0.22 per share), subject to legal, cash and credit-facility constraints. It ranks ahead of common stock in liquidation and may be optionally redeemed by the company after June 1, 2021. The company does not anticipate common-stock dividends in the foreseeable future.
- No material legal proceedings were reported as pending. The financial statements received an unqualified audit opinion; the auditor was not engaged to audit internal control over financial reporting.
Most important facts for investors to verify
- Whether 2017 case sales, production and vineyard-development plans were achieved, and how new plantings affect grape supply and margins.
- Renewal or replacement of the revolving credit facility due July 2017, covenant compliance, and the terms and debt-service impact of the February 2017 refinancing.
- Whether direct-to-consumer share and margins recover, given distributors represented 63.8% of net sales and one distributor represented 19.0% of revenue.
- The effect of the supplier shortfall, future grape availability and costs, and phylloxera management at Tualatin Vineyards.
- The cash requirements and priority of preferred dividends and any future preferred-stock redemption, alongside continued capital expenditures and stock repurchases.
- The filing’s gross-margin comparison is stated as 62.9% versus 60.5%; this is a 2.4-percentage-point increase, although the filing also describes the increase as 4.0%, apparently on a relative basis.