Business context and reporting period
Willamette Valley Vineyards, Inc. filed this annual report for the fiscal year ended December 31, 2019. The Oregon-based company produces and sells premium wines through direct-to-consumer channels and distributors. Direct sales generally earn higher margins; distributors generated 61.8% of net sales in 2019 and direct sales 38.2%.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $24.75 million | $23.08 million | +7.2% |
| Gross profit / margin | $15.29 million / 61.8% | $14.78 million / 64.0% | Profit +3.5%; margin −2.2 percentage points |
| Operating income | $3.73 million | $4.18 million | −10.9% |
| Net income | $2.51 million | $2.86 million | −12.2% |
| Income applicable to common shareholders | $1.48 million | $1.84 million | −19.3% |
| Basic income per common share, after preferred dividends | $0.30 | $0.37 | −$0.07 |
| Net cash from operating activities | $4.29 million | $2.30 million | +$1.99 million |
Cost of sales rose 13.9%, faster than revenue, reflecting higher sales volume and costlier wine vintages; SG&A increased 9.1% with staffing, sales efforts and new operations. The gross margin declined accordingly. Bottled case sales increased 7.2% to 156,791. EBITDA was $5.67 million versus $6.06 million in 2018, down 6.5% (a non-GAAP measure).
At year-end, cash was $7.05 million, working capital was $21.4 million and the current ratio was 4.98. The company had no borrowings on its $2.0 million revolving credit line, which was renewed through July 2021. Long-term debt principal was $6.42 million, including $12,431 of vehicle debt; a separate property installment note was $1.47 million. Operating lease liabilities were $4.92 million. The company reported $4.29 million of operating cash flow, $5.32 million of investing outflows and $1.66 million of financing outflows; cash declined $2.69 million during the year. Inventory was $17.08 million.
Material changes versus 2018
- Net sales growth came from retail (+6.4%), in-state (+6.0%) and out-of-state sales (+11.2%); distributor shipments drove most of the increase in case volume.
- Distributor sales rose to 61.8% of net sales from 60.5%, while direct sales declined to 38.2% from 39.5%.
- One distributor accounted for 14.1% of revenue, down from 21.0% in 2018.
- Cash fell from $9.74 million to $7.05 million as investment outlays exceeded operating cash generation.
- Adoption of lease accounting in 2019 added approximately $5.0 million of operating right-of-use assets and lease liabilities; prior-year figures were not restated.
Outlook, risks and unusual items
Management planned approximately 189,825 cases of bottling in 2020, compared with 172,869 produced in 2019, and expected existing wine inventory to support demand until the 2020 vintage became available. Management anticipated lower cost of sales as a percentage of sales as higher-yield vintages are released. The company planned to plant approximately 10 acres in 2020; developing vineyards are expected to begin producing over the next one to three years.
A Bernau Estate tasting room project began in July 2019. Estimated total construction cost is approximately $13.1 million, with $2.1 million spent by year-end; funding is expected from cash, debt and/or equity. Management said operating cash flow and available financing should meet foreseeable needs, but future liquidity depends in part on project costs, financing access and compliance with credit covenants. A new $20 million shelf registration was filed in January 2020; it is potential issuance capacity, not disclosed funding received.
Key risks include weather and wildfire smoke affecting grape quality and supply, vineyard disease (including phylloxera at Tualatin), reliance on purchased grapes, intense competition and distributor dependence, consumer demand and alcohol-tax or regulatory changes. The Series A preferred stock carries a cumulative 5.3% dividend ($0.22 per share annually), senior liquidation preference and optional company redemption after June 1, 2021; common dividends are not anticipated. The company reported no material pending legal proceedings and no material subsequent events. The auditor issued an unqualified opinion; management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Reconcile net income: audited statements report $2,510,901 for 2019, while MD&A elsewhere states $2,553,984. The audited statement shows a 12.2% decline from 2018, whereas the MD&A narrative describes a different decline.
- Confirm EBITDA figures and period labeling: the reconciliation gives $5,668,420 for 2019 and $6,063,147 for 2018, while nearby narrative wording is inconsistent about the comparison year.
- Assess the Bernau Estate project’s final cost, funding mix and effect on liquidity and debt or equity issuance.
- Evaluate grape-supply exposure, including the share purchased from growers and vineyard disease and weather risks.
- Review preferred-stock dividend obligations, potential redemption terms and any future financing that could affect common shareholders.