Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
WVVI > SEC Filings for WVVI > Form 10-K on 29-Mar-2013All Recent SEC Filings

Show all filings for WILLAMETTE VALLEY VINEYARDS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for WILLAMETTE VALLEY VINEYARDS INC


29-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's financial statements and related notes. Some statements and information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations are not historical facts but are forward-looking statements. For a discussion of these forward-looking statements, and of important factors that could cause results to differ materially from the forward-looking statements contained in this report, see Item 1 of Part I, "Business - Forward-Looking Statements."


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - continued

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses Willamette Valley Vineyards' financial statements, which have been prepared in accordance with generally accepted accounting principles. As such, management is required to make certain estimates, judgments and assumptions that are believed to be reasonable based upon the information available. On an on-going basis, management evaluates its estimates and judgments, including those related to product returns, bad debts, inventories, investments, income taxes, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company's principal sources of revenue are derived from sales and distribution of wine. Revenue is recognized from wine sales at the time of shipment and passage of title. The Company's payment arrangements with customers provide primarily 30-day terms and, to a limited extent, 45-day, 60-day or longer terms for some international customers.

The Company values inventories at the lower of actual cost to produce the inventory or market value. The Company regularly reviews inventory quantities on hand and adjusts its production requirements for the next twelve months based on estimated forecasts of product demand. A significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In the future, if the Company's inventory cost is determined to be greater than the net realizable value of the inventory upon sale, the Company would be required to recognize such excess costs in its cost of goods sold at the time of such determination. Therefore, although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the ultimate selling price and, therefore, the carrying value of the Company's inventory and its reported operating results.

The Company capitalizes internal vineyard development costs prior to the vineyard land becoming fully productive. These costs consist primarily of the costs of the vines and expenditures related to labor and materials to prepare the land and construct vine trellises. Amortization of such costs as annual crop costs is done on a straight-line basis for the estimated economic useful life of the vineyard, which is estimated to be 30 years. The Company regularly evaluates the recoverability of capitalized costs. Amortization of vineyard development costs are included in capitalized crop costs that in turn are included in inventory costs and ultimately become a component of cost of goods sold.

The Company pays depletion allowances to the Company's distributors based on their sales to their customers. The Company sets these allowances on a monthly basis and the Company's distributors bill them back on a monthly basis. All depletion expenses associated with a given month are expensed in that month as a reduction of revenues. The Company also pays a sample allowance to some of the Company's distributors in the form of a 1.5% discount applied to invoices for product sold to the Company's distributors. The expenses for samples are expensed at the time of sale in the selling, general and administrative expense. The Company's distributors use the allowance to sample product to prospective customers.

Amounts paid by customers to the Company for shipping and handling expenses are included in the net revenue. Expenses incurred for outbound shipping and handling charges are included in selling, general and administrative expense. Inbound freight costs for Bacchus purchased wines are capitalized into inventory at the time of purchase. The Company's gross margins may not be comparable to other companies in the same industry as other companies may include shipping and handling expenses as a cost of goods sold.

Overview

Results of Operations

The Company produced revenues of $12,527,268 and $12,235,986 in the years 2012 and 2011, respectively, an increase of $291,282 or 2.4%. The primary reasons for this increase are increased retail sales, partially offset by decreases in out-of-state sales to distributors.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - continued

Gross profit was $7,273,932 and $6,968,526 for the years ended December 31 2012 and 2011, respectively, an increase of $305,406 or 4.4%. This increase was generally driven by two key factors: reductions in sales depletion expenses paid to distributors, and; increased direct-to-consumer sales as a percentage of total sales.

The gross margin percent was 58.1% and 57.0% for the years ended December 31, 2012 and 2011, respectively, an increase of 1.1 points or 2.0%. This increase in the gross profit percent is mainly due to reductions in sales depletion expenses paid to distributors, and increased direct-to-consumer sales as a percentage of total sales.

Selling, general and administrative expenses were $5,075,052 and $4,548,125 for the years ended December 31, 2012 and 2011, respectively, an increase of $526,927 or 11.6%. This increase was primarily the result of the absorption of costs from activities that had previously been shared by the in-state distribution activities, which were discontinued during 2012.

Income from operations was $2,198,880 and $2,420,401 for 2012 and 2011, respectively, a decrease of $221,521 or 9.2%. The primary reasons for this decrease are increased selling, general and administrative expenses, partially offset by increases in gross margin.

Losses from discontinued operations before taxes were $242,878 and $919,961 for the years ended December 31, 2012 and 2011, respectively, a reduction of $677,083 or 73.6%. These reductions are primarily related to reductions in warehousing and distribution labor and overhead.

Provision for income taxes was $653,941 and $514,926 for the years ended December 31, 2012 and 2011, respectively, an increase of $139,015 or 27.0%. This increase is primarily related to increased net income before taxes.

Net income was $1,202,849 and $857,755, for 2012 and 2011, respectively, an increase of $345,094 or 40.2%. The primary reason for this increase is reductions in the loss from discontinued operations.

Diluted earnings per share were $0.25 and $0.18 for 2012 and 2011, respectively, an increase of $0.07 or 38.9%. The primary reason for this increase is the increase to net income.

The Company has three primary sales channels: direct-to-consumer sales, in-state sales to distributors, and out-of-state sales to distributors. These three sales channels represent 27.0%, 27.7% and 44.8%, of net sales for the year ended December 31, 2012, respectively. This compares to 23.9%, 28.1% and 48.0% of net sales for the year ended December 31, 2011, respectively.

The Company had cash balances of $4,553,113 and $3,411,292 at December 31, 2012 and 2011, respectively. The Company had a line of credit balance of $0 at December 31, 2012 and 2011.

Discontinued Operations

On June 30, 2012, the Company completed the wind-down of Bacchus Distribution. Bacchus Distribution was the Company's Oregon distribution division, selling both Company produced wines and wines and merchandise purchased from other sources. The decision to wind-down these distribution activities was made due to the increasingly higher regulatory and overhead costs of maintaining Bacchus as an operating unit. Distribution of Company produced wines in Oregon are now performed by an independent distribution company. All sales of purchased wines, and sale of merchandise to retailers, are considered discontinued operations.

Management believes cessation of self-distribution activity, and utilization of Young's Market Company to distribute Company-produced wines in Oregon, also will result in increased gross margins by eliminating the sale of low-margin, purchased wines. In 2011, purchased wine sales accounted for approximately 20% of total sales. These sales generated a gross margin of approximately 19%. The remaining 80% of sales were generated primarily through the sale of Company-produced wine, and generated a gross margin of approximately 57%. In 2011, the overall Company gross margin was 49.0%. After separating out discontinued operations for 2011, gross margin from continuing operations was 57.0%. In 2012, the overall Company gross margin was 55.1%. After separating out discontinued operations for 2012, gross margin from continuing operations was 58.1%.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - continued

Management believes cessation of self-distribution activity, and utilization of Young's Market Company to distribute Company-produced wines in Oregon, will reduce operating expenses. In 2011, total selling, general and administrative expenses were $6,216,833. Of this, $1,668,708 is attributable to self-distribution activities. After separating out discontinued operations for 2011, selling, general and administrative expenses from continuing operations was $4,548,125. In 2012, total selling, general and administrative expenses were $5,532,579. Of this, $457,527 is attributable to self-distribution activities. After separating out discontinued operations for 2012, selling, general and administrative expenses from continuing operations was $5,075,052. This represents a reduction in selling, general and administrative expenses from all sources of $684,254. Management does not expect to incur any selling, general or administrative expenses from discontinued operations in 2013.

At December 31, 2011, purchased wine inventory balance was $612,989. Management successfully liquidated this inventory at or above cost during 2012. There are no other balance sheet amounts related to the cessation of self-distribution activities that are expected to have a material impact on future financial performance.

Hospitality Center

In December 2012, the Board of Directors approved a significant remodel and expansion of the Winery's Hospitality Center. The Board approved a total project cost of up to $4.5 million, to be financed with $2,000,000 of new borrowings from NW Farm Credit Services, with the balance of the costs funded by using existing cash reserves. Features of the remodeled and expanded facility include additional barrel storage capacity, a club-members tasting room, a larger general public tasting area, enhanced kitchen services, new spaces for hosting smaller parties, expanded deck seating to capitalize on views from the winery, and a new lawn terrace for large, outdoor events. Management believes that these enhancements will be critical in supporting the future growth of direct-to-consumer sales of Company wines. Construction began in February 2013, and is expected to be finished before the end of 2013.

Sales

Wine sales and ending inventory amount for the year ended December 31, 2012, are
shown on the following table, as well as planned production quantities for the
year ending December 31, 2013:

                                                                                 Planned Bottling
                                      Cases Sold           Cases On-Hand            Production
Varietal/Product                         2012            December 31, 2012         (Cases) 2013

Pinot Noir/Estate                            13,000                  24,500                 16,000
Pinot Noir/Barrel Select                      7,500                     500                  5,000
Pinot Noir/Founders Reserve                   3,000                   2,000                  2,500
Pinot Noir/Special Designates                 3,500                   4,000                  4,000
Pinot Noir/Whole Cluster                     20,000                   3,000                 26,500
Pinot Gris                                   19,000                  12,000                 12,500
Riesling                                     21,500                   7,500                 16,500
Table Wine                                    6,000                   4,500                  4,000
Other                                         5,500                  13,500                  6,000

Total                                        99,000                  71,500                 93,000

Approximately 47% of the Company's case sales during 2012 were of the Company's flagship varietal, Pinot Noir. Case sales of Riesling and Pinot Gris follow with approximately 22% and 19% of case sales, respectively. The Company sold approximately 99,000 and 104,000 cases of Company-Produced wine during the years ended December 31, 2012 and 2011, respectively. This represents a reduction of approximately 5,000 cases, or 4.8%. This reduction in case sales can be largely attributed to the discontinuation of certain low-margin products that were inconsistent with the Company's overall brand positioning.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - continued

Wine Inventory

The Company had approximately 71,500 cases of bottled wine on-hand at the end of 2012. Sufficient bulk wine inventory was on-hand to bottle approximately 93,000 cases of wine in 2013. Due to low crop yields from the 2012 harvest, inventory balances and planned production amounts for certain varietals are lower than in previous years. Management believes that sufficient stock is on hand to meet current demand levels until the 2013 vintage becomes available.

Production Capacity

Current production volumes are well within the current production capacity constraints of the Winery. In 2012, approximately 91,181 cases were produced, and Management anticipates bottling approximately 93,000 cases in 2013. The winery has capacity to comfortably process about 125,000 cases of wine per year. Management continues to invest in new production technologies to increase the efficiency and quality of wine production. During 2012, the Company did not choose to utilize the wine production facilities at the Tualatin Vineyards location. The Tualatin Vineyards wine production facility has capacity to produce approximately 25,000 cases of wine. The facility is maintained in good condition, and is occasionally used by other local wineries. Management intends to fully utilize the production capacity at the primary Turner location before expanding into the Tualatin Vineyards facility.

Grape Supply

For the 2012 and 2011 vintages, the Company grew approximately 48% and 54% of all grapes harvested, respectively. The remaining grapes harvested were purchased from other growers. In 2012 and 2011, 32% and 25% of grapes harvested were purchased under short-term contracts, and 20% and 21% of grapes harvested were purchased under long-term contracts, respectively.

Grapes are typically harvested and received in October of the vintage year. Upon receipt, the grapes are weighed, and a quality analysis is performed to ensure the grapes meet the standards set forth in the purchase contract. Based on the amount of qualifying grapes received, the full amount payable to the grower is recorded to the grapes payable liability account. Approximately 50% of the grapes payable amount is due in November of the vintage year. The remaining amount is due in March of the following year. The grapes are processed into wine, which is typically bottled and available for sale between 5 months and 2 years from date of harvest.

The Company paid $326,894 and $306,805 for grapes purchased through long-term contracts during the years ended December 31, 2012 and 2011, respectively. The Company received $325,977 and $324,514 worth of grapes from long-term contracts during the years ended December 31, 2012 and 2011, respectively. Grapes payable includes $161,340 and $165,191 of grapes payable from long-term contracts as of December 31, 2012 and 2011, respectively.

The Company plans to address long-term grape supply needs by developing new vineyards on properties currently owned or secured by lease. The Company has approximately 21 acres of vineyards that have been planted but are in the pre-productive stage. These vineyards will begin bearing fruit in the next one to three years. The Company has approximately 183 acres of land that is suitable for future vineyard development. Management currently has plans to plant approximately 24 acres and 45 acres in the years 2013 and 2014, which will begin bearing fruit in years 2017 and 2018, respectively.

Wine Quality

Continued awareness of the Willamette Valley Vineyards brand, the Company and the quality of its wines, was enhanced by national and regional media coverage throughout 2012 and into 2013.

NBC's new hit show "Grimm" chose to feature our 2009 Pinot Noir in select scenes on recent episodes, further strengthening brand awareness.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - continued

In January, our 2009 Pinot Noir and 2009 Pinot Gris received a Gold Medal at the United Way Miami Wine & Food Festival.

The San Francisco Chronicle Wine Competition judged our 2010 Pinot Gris in January, awarding it a Gold Medal.

Up against over 350 outstanding Pinots, our 2008 O'Brien Pinot Noir was awarded a gold medal in February 2012 at the 10th annual Pinot Noir Shootout in California.

Our South Block Pinot Noir was awarded a Gold Medal at Oregon's Newport Seafood & Wine Festival in February.

The OSU Austin Entrepreneurship Program held their 2012 Weatherford Awards in February, recognizing Jim Bernau and 3 other individuals who have "furthered Oregon's pioneering and innovative spirit."

Winemaker, Don Crank was featured in an article in Wines & Vines February issue about wineries adopting conservation methods to save on electricity.

In February, Editor at Large, Harvey Steiman of Wine Spectator magazine gave our 2009 Signature Cuvée Pinot Noir 90pts and our 2010 Riesling 89pts/Top Value.

In their Spring issue, Santé Magazine, for restaurant professionals, recommended and awarded "Gold Stars" to the following wines; 2009 Elton Pinot Noir, 2009 Signature Cuvée Pinot Noir, 2009 Tualatin Estate Pinot Noir, and 2010 Whole Cluster Pinot Noir.

The March 2012 issue of Wine Enthusiast magazine recognized several of our wines with 90+ point scores; 2010 Riesling, 90pts/Best Buy; 2009 Elton Pinot Noir, 91pts/Cellar Selection; 2009 Tualatin Estate Pinot Noir, 90pts.

The April issue of Wine & Spirits recognized several of our Pinots with 90+ point scores: 2009 Bernau Block Pinot Noir, 92pts; 2009 Estate Pinot Noir, 92pts; 2010 Whole Cluster Pinot Noir, 90pts/Best Buy.

The 5th annual Oregon Wine Awards, held every April, awarded three of our wines with Gold or Double Gold Medals: 2009 Tualatin Estate Pinot Noir, Double Gold; 2009 Bernau Block, Gold, 2009 Pinot Noir, Gold.

In June, Entrepreneur.com ran an article titled, "Willamette Valley Vineyards Offers Complex, Heady Oregon Blend." Stating, "This historic vineyard distills the essence of the Beaver State in its acclaimed Pinot Noir and other cool-climate varietals."

America's premier direct marketer of fruit and food, Harry & David, held their 10th annual "Taste of Harry & David Wine Competition" in July where our 2009 Bernau Block received a gold medal.

Beverage Dynamics and Cheers Magazine both recognized our 2011 Whole Cluster Pinot Noir with 94pts in their September issues.

Portland Monthly magazine's September issue featured their list of "Oregon's 50 Best Wines." Our 2009 Estate Pinot Noir received 95 points and was awarded the number 5 position.

In their September issue, Wine & Spirits magazine recognized our 2011 Whole Cluster Pinot Noir with 90 points and a best buy rating.

In October, the editor of Snooth.com, Gregory Dal Piaz, released his top 15 Pinot noirs, listing our 2009 Estate as #2 with 92pts.

On November 27, 2012, The American Wine Society awarded its 2012 Award of Merit to winery owner and environmentalist Jim Bernau. The Award of Merit, the Society's highest honor, recognizes substantial and meritorious contributions to the wine industry. The American Wine Society also recognized our 2011 Pinot Gris with a double gold medal and our 2009 Bernau Block Pinot Noir with a gold medal at their 2012 Wine Awards in October.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - continued

Snooth.com readers got a chance to nominate and vote for their favorite wines in Snooth's 2012 People's Voice Wine Awards. The voting ended in November and our 2009 Pinot Gris was named one of the "Top 25 Premium Wines of 2012" and our 2009 Estate Pinot Noir was the #1 pick among Snooth's readers and recognized as the "Top Super Premium Wine."

Seasonal and Quarterly Results

The Company has historically experienced and expects to continue experiencing seasonal fluctuations in its revenue and net income. Typically, first quarter sales are the lowest of any given year, and sales volumes increase progressively through the fourth quarter because of consumer buying habits.

The following table sets forth certain information regarding the Company's revenue, excluding excise taxes, from Winery operations for the three and twelve months ended December 31, 2012 and 2011:

                                    Three months ended              Twelve months ended
                                       December 31,                     December 31,
                                   2012            2011             2012             2011

Retail sales                    $ 1,028,956     $   882,213     $  3,470,802     $  3,014,979
In-state sales                      778,751         586,935        3,560,392        3,545,713
Out-of-state sales                2,049,778       1,833,696        5,734,737        6,066,194
Bulk wine/miscellaneous sales        65,859               -           65,859              610

Total revenue                     3,923,344       3,302,844       12,831,790       12,627,496

Less excise taxes                  (125,589 )       (87,975 )       (304,522 )       (391,510 )

Net revenue                     $ 3,797,755     $ 3,214,869     $ 12,527,268     $ 12,235,986

2012 Compared to 2011

Retail sales for the years ended December 31, 2012 and 2011 were $3,470,802 and $3,014,979, respectively, an increase of $455,823 or 15.1%. This increase was primarily driven by membership growth in the Company's wine club program, and increased visitor traffic to the winery.

In-state sales for the years ended December 31, 2012 and 2011 were $3,560,392 and $3,545,713, respectively, an increase of $14,679 or 0.4%. Management believes this slight increase in sales is significant, because the 2011 in-state sales included eight months of self-distribution sales of company-produced wines. These sales were made at a higher average price per case than the sales made in 2012 where the company sold through an independent distributor. The Company has made-up for the reduction in average price per case by focusing on higher-end products and increasing product placement.

Out-of-state sales for the years ended December 31, 2012 and 2011 were $5,734,737 and $6,066,194, respectively, a decrease of $331,457 or 5.5%. Management believes this reduction is primarily related to increased competition for Oregon brands with the distributors. At the end of 2011, the Company dramatically reduced depletion incentive programs to distributors. This resulted in a savings of approximately $290,000, but out-of-state gross sales decreased approximately $620,000. Despite this gross sales decrease, Management believes the decision to reduce depletion incentive programs was sound, as it is believed to have helped strengthen the brand's position and has improved margins and profits.

The Company pays alcohol excise taxes to both the OLCC and to the TTB. These taxes are based on product sales volumes. The Company is liable for the taxes upon the removal of product from the Company's warehouse on a per gallon basis. The Company also pays taxes on the grape harvest on a per ton basis to the Oregon Liquor Control Commission for the Oregon Wine Board. The Company's excise taxes for the years ended December 31, 2012 and 2011 were $304,522 and $391,510, a decrease of $86,988 or 22.2%. This was due primarily to the discontinuation of wine importing activities to the state of Oregon, which are subject to Oregon excise taxes. Sales data in the discussion above is quoted before the exclusion of excise taxes.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - continued

Cost of Sales was $5,253,336 and $5,267,460 for the years ended December 31, 2012 and 2011, respectively. This represents a decrease of $14,124 or 0.3%. The changes to cost of sales can be attributed to the overall reduction in cases sold, offset by changes in the product sales mix towards higher cost products that also generally yield higher margins.

As a percentage of net revenue, gross profit was 58.1% and 57.0% in the years ended December 31, 2012 and 2011, respectively, an increase of 1.1 points or 2.0%. This increase in the gross profit percent is mainly due to reductions in sales depletion expenses paid to distributors and increased direct-to-consumer sales as a percentage of total sales.

The Company is continuing its focus on improved distribution of higher margin products through distributors nationwide and through direct sales and strives to minimize increases in grape and production costs.

Selling, general and administrative expenses were $5,075,052 and $4,548,125 for the years ended December 31, 2012 and 2011, respectively, an increase of $526,927 or 11.6%. This increase was related to the absorption of costs from activities that had previously been shared by the in-state distribution activities, which were discontinued during 2012.

Interest income was $8,548 and $12,772 for the years ended December 31, 2012 and 2011, respectively. The decrease in interest income is primarily the result of . . .

  Add WVVI to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for WVVI - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.