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WVVI > SEC Filings for WVVI > Form 10-K on 27-Mar-2014All Recent SEC Filings

Show all filings for WILLAMETTE VALLEY VINEYARDS INC

Form 10-K for WILLAMETTE VALLEY VINEYARDS INC


27-Mar-2014

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."

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.


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

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 reimburses for samples used by distributors up to 1.5% of product sold to the distributors. Sample expenses are recognized at the time the Company is billed in the selling, general and administrative expense.

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. 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

The Company generates revenue from the sales of wine to wholesalers and direct to consumers. Direct to consumer sales primarily include sales through the Company's Tasting Rooms and Wine Club. Direct to consumer sales are more profitable to the Company due to prices received being closer to retail than those prices paid by wholesalers. The Company continues to emphasize growth in direct to consumer sales through the Hospitality Center remodel and expansion and growth in wine club membership. Wine Club memberships had a net increase of approximately 609 for the year ended December 31, 2013. Periodically, the Company will sell grapes or bulk wine, due to them not meeting Company standards or being excess to production targets, however this activity is not a significant part of the Company's activities or part of the long term business plan.

The Company sold approximately 100,500 and 99,000 cases of produced wine during the years ended December 31, 2013 and 2012, respectively, an increase of 1,500 cases, or 1.5% in the current year over the prior year. The increase in wine sales was the result of growth in both retail sales and sales through distributors.

Cost of Sales includes grape costs, whether purchased or grown at Company vineyards, crush costs, winemaking and processing costs, bottling, packaging, warehousing and shipping and handling costs associated with purchased production materials. For grapes grown at Company vineyards, costs include farming expenditures and amortization of vineyard development costs. The Company expects cost of sales to increase, over the next several years, as lower yield vintages are released.

At December 31, 2013, wine inventory includes approximately 69,388 cases of bottled wine and 312,510 gallons of bulk wine in various stages of the aging process. Case wine is expected to be sold over the next 12 to 24 months and generally before the release date of the next vintage. The winery bottled approximately 95,638 cases during the year ended December 31, 2013.


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

Results of Operations

The Company produced revenue of $13,271,914 and $12,527,268 for the years December 31, 2013 and 2012, respectively, an increase of $744,646 or 5.9%, for the year ended December 31, 2013 over the prior year period. The primary reasons for this increase are increased out-of state and retail sales, partially offset by decreased in-state sales.

Gross profit was $7,683,475 and $7,273,932 for the years ended December 31 2013 and 2012, respectively, an increase of $409,543, or 5.6%, for the year ended December 31, 2013 over the prior year period. 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 percentage was 57.9% and 58.1% for the years ended December 31, 2013 and 2012, respectively, a decrease of 0.2 points, or 0.3%, for the year ended December 31, 2013 over the prior year period. This decrease in the gross profit percentage is a result of increases in retail sales subject to discounts, changes in product sales mix and other factors.

Selling, general and administrative expenses were $5,308,931 and $5,075,052 for the years ended December 31, 2013 and 2012, respectively, an increase of $233,879, or 4.6%, for the year ended December 31, 2013 over the prior year period. This increase was primarily the result of the increased selling expenses, which were partially offset by a decrease in general and administrative costs.

Income from operations was $2,374,544 and $2,198,880 for the years ended December 31, 2013 and 2012, respectively, an increase of $175,664, or 8.0%, for the year ended December 31, 3013 over the prior year period. The primary reasons for this increase are increased gross profit, which was partially offset by increased selling expenses.

Losses from discontinued operations before taxes were $0 and $242,878 for the years ended December 31, 2013 and 2012, respectively, a reduction of $242,878, or 100.0%, for the year ended December 31, 3013 over the prior year period. This reduction is directly related to discontinued operations ceasing in 2012.

Provision for income taxes was $904,709 and $739,434 for the years ended December 31, 2013 and 2012, respectively, an increase of $165,275, or 22.4%, for the year ended December 31, 3013 over the prior year period. This increase is primarily related to increased net income before taxes.

Net income was $1,423,492 and $1,202,849, for the years ended December 31, 2013 and 2012, respectively, an increase of $220,643, or 18.3%, for the year ended December 31, 3013 over the prior year period. The primary reasons for this increase are reductions in the loss from discontinued operations and an increase in income from continuing operations.

Diluted earnings per share were $0.29 and $0.25 for the years ended December 31, 2013 and 2012, respectively, an increase of $0.04, or 16%, for the year ended December 31, 3013 over the prior year period. The primary reasons for this increase are reductions in the loss from discontinued operations and an increase in income from continuing operations.

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 28.2%, 17.5% and 54.2%, of net sales for the year ended December 31, 2013, respectively. This compares to 27.6%, 18.3% and 54.1% of net sales for the year ended December 31, 2012, respectively. Miscellaneous and grape sales are included in direct-to-consumer sales.

The Company had cash balances of $945,683, net of restricted cash of $450,000, and $4,553,113 at December 31, 2013 and 2012, respectively. The Company had no outstanding line of credit balance at December 31, 2013 and 2012.

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.


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, also will result in increased gross margins by eliminating the sale of low-margin, purchased wines. 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%.

Management believes cessation of self-distribution activity, and utilization of Young's Market Company to distribute Company-produced wines in Oregon, reduced operating expenses. 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. Management did not incur any selling, general or administrative expenses from discontinued operations in 2013.

Management successfully liquidated purchased wine 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. In November of 2013 the Board approved additional costs, in excess of the original budget, to be funded by using 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 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 in April 2014.

Sales

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


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

                                                                     Planned Bottling
                                                        Cases
                    Cases Sold       Cases Sold        On-Hand          Production
                                                      December
Varietal/Product       2013             2012          31, 2013         (Cases) 2014

Pinot
Noir/Estate              12,500           13,000          19,500                 9,900
Pinot
Noir/Barrel
Select                    6,000            7,500           1,500                 6,000
Pinot
Noir/Founders
Reserve                   2,500            3,000           2,500                 2,700
Pinot
Noir/Special
Designates                2,500            3,500          11,500                 4,500
Pinot Noir/Whole
Cluster                  23,500           20,000           6,500                26,000
Pinot Gris               20,000           19,000           7,000                28,500
Riesling                 20,500           21,500           5,000                26,800
Table Wine                6,500            6,000           2,000                 8,600
Other                     6,500            5,500          13,500                 2,500

Total                   100,500           99,000          69,000               115,500

Approximately 47% of the Company's case sales during 2013 were of the Company's flagship varietal, Pinot Noir. Case sales of Riesling and Pinot Gris follow with approximately 20% and 20% of case sales, respectively. The Company sold approximately 100,500 and 99,000 cases of Company-produced wine during the years ended December 31, 2013 and 2012, respectively. This represents an increase of approximately 1,500 cases, or 1.5%. This increase in case sales was the result of growth in both retail sales and sales through distributors.

Wine Inventory

The Company had approximately 69,000 cases of bottled wine on-hand at the end of 2013. Sufficient bulk wine inventory is on-hand to bottle approximately 115,500 cases of wine in 2014. Management believes that sufficient stock is on hand to meet current demand levels until the 2014 vintage becomes available.

Production Capacity

Current production volumes are well within the current production capacity constraints of the Winery. In 2013, approximately 95,638 cases were produced, and Management anticipates bottling approximately 115,500 cases in 2014. The Winery has capacity to comfortably process about 132,000 cases of wine per year. Management continues to invest in new production technologies to increase the efficiency and quality of wine production. During 2013, 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 2013 and 2012 vintages, the Company grew approximately 42% and 48% of all grapes harvested, respectively. The remaining grapes harvested were purchased from other growers. In 2013 and 2012, 18% and 32% of grapes harvested were purchased under short-term contracts, and 40% and 20% 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 five months and two years from date of harvest.


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

The Company received $554,532 and $325,977 worth of grapes from long-term contracts during the years ended December 31, 2013 and 2012, respectively. The Company received $596,995 and $752,139 worth of grapes from short-term contracts during the years ended December 31, 2013 and 2012, respectively. Total Grapes payable were $689,028 and $539,584 for the years ended December 21, 2013 and 2012, respectively. Grapes payable includes $277,625 and $161,340 of grapes payable from long-term contracts as of December 31, 2013 and 2012, 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 34 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 161 acres of land that is suitable for future vineyard development. Management currently has plans to plant approximately 67 acres and 30 acres in the years 2014 and 2015, which will begin bearing fruit in years 2018 and 2019, respectively. Additionally, the company will seek out opportunities to acquire land for future grape plantings in order to better control its supply chain, more effectively manage grape costs and mitigate uncertainty associated with long-term contracts that expire after vintage years 2015 and 2016.

Wine Quality

Continued awareness of the Willamette Valley Vineyards brand and the quality of its wines, was enhanced by national and regional media coverage throughout 2013 and into 2014.

January 2013 marked the 30th annual San Francisco Chronicle Wine Competition where our 2011 Pinot Gris received a Gold Medal and our 2011 Riesling was awarded a Double Gold Medal.

Robert Parker's Wine Advocate issue 202 recognized several of Willamette Valley Vineyard's wines with 90+ point scores; 2010 Hannah Pinot Noir, 92pts; 2010 Elton Pinot Noir, 91pts; 2010 Yamhill-Carlton Pinot Noir, 91pts; 2010 Signature Cuvée Pinot Noir, 90pts.

In March, Founder and CEO Jim Bernau traveled to New York with the Oregon Wine Board for Snooth.com's "People's Voice Wine Awards" Grand Tasting. The Company's 2009 Pinot Gris was named one of the "Top 25 Premium Wines" and the 2009 Estate Pinot Noir was the #1 pick among Snooth's readers and recognized as the "Top Super Premium Wine." The previous evening, Mr. Bernau was a featured guest at Snooth's exclusive wine blogger spotlight dinner and has since been the topic of many positive blog posts and online articles.

Beginning with the 2010 vintage, the Estate Pinot Noir is the Company's signature wine. The black vintage label has been replaced with a label that reflects the use of all estate-grown fruit. This has been a 30 year quest for Jim Bernau as he worked to generate enough wine grapes from the Company's Willamette Valley Vineyards, Tualatin Estate and Elton Vineyard properties.

In April, Wine & Spirits magazine recognized the 2011 Whole Cluster Pinot Noir with 90 points/Best Buy.

NBC's hit show, "Grimm" aired its season 2 finale in May where a Willamette Valley Vineyards Pinot Noir made a cameo. This marks the 4th time the Company's wine has made an appearance since the Oregon-based show began in 2012.

In May, the Company's 2011 Pinot Gris received a 2013 Oyster Award from the 2013 Pacific Coast Oyster Wine Competition. Only nine other wineries were awarded, Willamette Valley Vineyards being the single winner from Oregon.

Wine & Spirits' June issue recognized the 2010 Signature Cuvée Pinot Noir with 90 points and the 2010 Elton Pinot Noir with 92 points.

The Oregon Live website, powered by the Oregonian newspaper, held its second annual "Winery with the Best View" reader poll in June. Willamette Valley Vineyards received 56% of the votes, successfully winning the poll.


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

In July, Stephen Tanzer's International Wine Cellar recognized five of the Company's Pinot Noirs with 90+ points; 2010 Elton Pinot Noir, 92pts; 2010 Bernau Block Pinot Noir, 91pts; 2010 Signature Cuvée Pinot Noir, 90pts; Tualatin Estate Pinot Noir, 90pts; Hannah Pinot Noir, 91pts.

Gregory Walter's James Beard Award-winning "PinotReport," issue #88, awarded five Willamette Valley Vineyard wines with 90+ points in July; 2010 Tualatin Estate Pinot Noir, 92pts; 2012 Whole Cluster Pinot Noir, 91pts/Smart Buy; 2010 Signature Cuvée Pinot Noir, 91pts, 2010 Elton Pinot Noir, 91pts; 2010 Estate Pinot Noir, 90pts.

Wine Enthusiast Magazine's Paul Gregutt reviewed the 2010 Bernau Block Pinot Noir in their July issue, giving it 90pts and further identifying the wine as a "Cellar Selection." The Company's 2012 Riesling was chosen as a value pick for July in the Oregon Wine Press, stating, "WVV couldn't be doing it better… this wine is round and appealing on the palate."

Wine Writer, Julia Crowley, called the winery's 2010 Elton Pinot Noir "the epitome of stellar Willamette Valley Pinot Noir" in a July article in the Eugene Daily News.

The Company's Estate Pinot Noir made a cameo in November on the hit CBS television show, "How I Met Your Mother," which featured the American actor, John Lithgow.

In November, the winery hosted the Oregon Leadership Dinner presented by Oregon Governor Kitzhaber and First Lady Cylvia Hayes and benefiting Special Olympics Oregon. The event earned coverage in several media outlets including, Willamette Living Magazine and the Oregonian, Statesman Journal and the Eugene Daily News newspapers.

The Company's 2010 Bernau Block Pinot Noir received 90pts in the Wine & Spirits December issue, stating, "This polished pinot has a high-toned pine scent to support its dark red cherry fruit."

Eugene Monthly magazine chose the 2010 Tualatin Estate Pinot Noir, among only three other wines, to feature in their "Festive Froths, Wines for the Winter Season" article in their Winter 2013 issue.

Jim Bernau and Willamette Valley Vineyards were featured in the December issue of Willamette Living Magazine in an interview article called, "Meet the Vintner." The article highlighted our new hospitality center and how the winery began.

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, 2013 and 2012:

                                    Three months ended               Twelve months ended
                                       December 31,                     December 31,
                                   2013            2012             2013             2012

Retail sales                    $ 1,034,804     $ 1,028,956     $  3,813,953     $  3,470,802
In-state sales                      621,920         778,751        2,376,497        2,353,682
Out-of-state sales                2,001,924       2,049,778        7,349,489        6,941,447
Bulk wine/miscellaneous sales         5,535          65,859            9,376           65,859

Total revenue                     3,664,183       3,923,344       13,549,315       12,831,790

Less excise taxes                   (86,634 )      (125,589 )       (277,401 )       (304,522 )

Net revenue                     $ 3,577,549     $ 3,797,755     $ 13,271,914     $ 12,527,268


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

2013 Compared to 2012

Retail sales for the years ended December 31, 2013 and 2012 were $3,813,953 and $3,470,802, respectively, an increase of $343,151, or 9.9%, for the year ended December 31, 3013 over the prior year period. This increase was primarily driven by membership growth in the Company's wine club program and by increased visitor traffic to the winery's McMinnville Tasting Room and Tualatin Estate Vineyards locations, which were partially offset by a decrease in room rental fees as a result of hospitality center construction.

In-state sales for the years ended December 31, 2013 and 2012 were $2,376,497 and $2,353,682, respectively, an increase of $22,815, or 1.0%, for the year ended December 31, 3013 over the prior year period. Management believes this slight increase is not attributable to any single factor.

Out-of-state sales for the years ended December 31, 2013 and 2012 were $7,349,489 and $6,941,447, respectively, an increase of $408,042, or 5.9%. Management believes this increase is primarily related to increased sales efforts combined with a decrease in depletion incentives granted to distributors.

. . .

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