Business Context and Reporting Period
Company: Willamette Valley Vineyards, Inc. (WVV)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: WVV is an Oregon-based producer of premium, super premium, and ultra premium wines, primarily Pinot Noir, Chardonnay, Pinot Gris, and Riesling. The company operates a winery and vineyards in Turner, Oregon, and Tualatin Estate in Forest Grove. It utilizes a hybrid distribution model involving direct sales at the winery, self-distribution within Oregon (Bacchus Fine Wines), and independent distributors for out-of-state and export markets.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net Revenues | $16,563,712 | $16,048,238 |
| Gross Margin | $7,713,912 (46.6%) | $7,818,361 (48.7%) |
| Income from Operations | $1,117,399 | $1,363,158 |
| Net Income | $731,470 | $708,594 |
| Diluted EPS | $0.15 | $0.14 |
| Cash and Cash Equivalents | $0 | $350,361 |
| Working Capital | $11.4 million | $9.4 million |
| Current Ratio | 4.98:1 | 4.21:1 |
| Total Long-Term Debt | $3,679,527 | $2,532,782 |
| Line of Credit Utilized | $140,964 | $0 |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 3.2% to $16.6 million, driven by a 7.3% increase in out-of-state distributor sales and a 15.0% increase in sales of WVV branded wines in-state. This offset a 7.2% decline in sales of purchased wines due to the loss of two key brand suppliers.
- Profitability Pressure: Income from operations decreased 18.0% to $1.1 million. This was caused by a reduction in gross profit margin (from 48.7% to 46.6%) due to higher production costs and sales of purchased brands at cost, alongside a 2.2% increase in Selling, General, and Administrative (SG&A) expenses driven by higher labor costs.
- Cash Flow: Operating cash flow turned negative, using $950,466 in 2009 compared to providing $396,594 in 2008. This shift was primarily due to a significant build-up in inventory ($1.6 million increase) and capital expenditures.
- Liquidity: Cash balance dropped to zero by year-end. The company utilized a $1.5 million term loan in 2009 to pay down short-term revolving credit and fund capital projects, resulting in a cash overdraft position of $271,911 at period end (checks not yet cleared).
- Production: The 2009 harvest yielded 2,133 tons of grapes, approximately 50% higher than the prior year, resulting in 132,072 cases of wine production.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects the first quarter of 2010 to be slightly lower than the prior year due to reduced in-state sales activity from a key customer and the loss of purchased brand suppliers, though this is expected to be offset by out-of-state distributor growth.
- Capital Needs: The company is seeking to increase its line of credit from $2.0 million to $3.0 million to support future operations.
- Material Weakness in Internal Controls: Management concluded that internal controls over financial reporting were not effective as of December 31, 2009. A material weakness regarding the allocation of costs to produced wines persisted from 2008, resulting in a $373,691 adjustment to inventory and cost of goods sold during the 2009 audit. Remediation efforts include hiring a full-time controller and expanding accounting resources.
- Risks: Key risks include agricultural hazards (phylloxera infestation at Tualatin Estate, weather variability), dependence on a single customer (13% of 2009 revenue), and the competitive nature of the wine industry. The company also faces potential increases in excise taxes.
- Unusual Items: A one-time accounting change allowed the company to expense farming costs incurred in late 2009 for tax purposes rather than capitalizing them, reducing the effective tax rate from 44% in 2008 to 25% in 2009.
Investor Verification Checklist
- Inventory Valuation: Verify the accuracy of the $12.2 million inventory balance given the material weakness in cost allocation controls and the significant year-over-year increase.
- Liquidity Position: Confirm the company's ability to meet short-term obligations given the $0 cash balance and reliance on the line of credit renewal in June 2010.
- Customer Concentration: Assess the risk associated with the single customer representing 13% of total revenues.
- Debt Covenants: Review compliance with financial covenants (debt-to-equity, debt service coverage) required by Umpqua Bank and NW Farm Credit Services.
- Remediation Progress: Monitor the implementation of new accounting procedures and the effectiveness of the newly hired controller in resolving the internal control material weakness.