UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 30,October 31, 2023
OR
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to Commission file number 001-40240
The Duckhorn Portfolio, Inc.
(Exact name of registrant as specified in its charter)
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| Delaware | | 81-3866305 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1201 Dowdell Lane
Saint Helena, CA 94574
(Address including zip code, of Principal Executive Offices)principal executive offices)
(707) 302-2658
(Registrant'sRegistrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol(s)Symbol | | Name of each exchange on which registered |
| Common Stock, par value $0.01 per share | | NAPA | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated
filer | ☒ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company |
| ☒ | | ☐ | | ☐ | | ☐ | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The registrant had outstanding 115,293,780115,367,710 shares of common stock, $0.01 par value per share, as of June 1,November 29, 2023.
Glossary
The following terms are used in this quarterly report unless otherwise noted or indicated by the context:
•“Company,” “we,” “us,” “our,” “Duckhorn” and “The Duckhorn Portfolio” refer to The Duckhorn Portfolio, Inc. and its consolidated subsidiaries.
•“2016 Plan” refers to the Company's board-approved 2016 Equity Incentive Plan.
•“2021 Plan” refers to the Company's board-approved 2021 Equity Incentive Plan.
•“ASC” refers to the Accounting Standards Codification.
•“Controlled Company” refers to a company of which more than 50% of the voting power for the election of its directors is held by a single person, entity or group.
•“COVID-19” refers to the pandemic for the COVID-19 virus.
•“DTC channel” and “DTC” refer to our sales and distribution channel through which we sell wine directly to consumers without any licensee intermediaries (wholesale or retail), which is permissible through in-person sales at one of our tasting rooms or, where permitted by law, through our multi-winery e-commerce website.
•“ESPP” refers to our 2021 Employee Stock Purchase Plan.
•“Estate vineyards” refers to vineyards owned or controlled by the Company.
•“Estate wines” refers to wine made with grapes that share geographical provenance and are farmed, fermented, aged and bottled on-site at Company-controlled vineyards and facilities.
•“Exchange Act” refers to the Securities Exchange Act of 1934.
•“Fiscal 2021” refers to our fiscal year ended July 31, 2021.
•“Fiscal 2022” refers to our fiscal year ended July 31, 2022.
•“Fiscal 2023” refers to our fiscal year ended July 31, 2023.
•“LIBOR” refers to London Interbank Offered Rate.
•“Luxury wine” refers to wines sold for $15 or higher per 750ml bottle.
•“New Credit Facility” and “New Credit Agreement” refer to the Amended and Restated First Lien Loan and Security Agreement, dated as of November 4, 2022 (as amended by Amendment No. 1, dated February 6, 2023, and as amended by Amendment No. 2, dated May 2, 2023), by and among the Company, the borrowers named therein, the lenders named therein and the Bank of the West, as administrative agent and collateral agent.
•“Off-premise” refers to retail accounts that are a business with a license that allows a customer to purchase our wines for consumption at a location other than the retailer’s licensed location, such as grocery stores and liquor stores.
•“On-premise” refers to retail accounts that are a business with a license that allows a customer to purchase our wines and consume them at the licensed location, such as restaurants, bars and hotels.
•“Original Credit Facility” and “Original Credit Agreement” refer to the original first lien credit facility pursuant to that certain First Lien Loan and Security Agreement, dated as of October 14, 2016 (as amended by Amendment No. 1, dated July 28, 2017, as amended by Amendment No. 2, dated as of April 19, 2018, as amended by Amendment No. 3 dated as of August 1, 2018, as amended by Amendment No. 4 dated as of October 30, 2018, as amended by Amendment No. 5 dated as of June 7, 2019, as amended by Amendment No. 6 dated as of August 17, 2020, as amended by Amendment No. 7 dated February 22, 2021, and as amended by Amendment No. 8 dated August 30, 2022), by and among the Company, the borrowers named therein, the lenders named therein and the Bank of the West, as administrative agent.
•“Retail” refers to establishments that are licensed to purchase our wine for resale to consumers, such as grocery stores, liquor stores and restaurants.
•“SEC” refers to U.S. Securities and Exchange Commission.
•“Term SOFR” refers to the forward-looking term rate based on the Secured Overnight Financing Rate.
•“TSG” refers to TSG Consumer Partners LLC, together with certain affiliates.
•“Ultra-luxury wine” refers to wines with suggested retail prices of $25 or higher per 750ml bottle.
•“U.S.” refers to the United States.
•“U.S. GAAP” refers to United States Generally Accepted Accounting Principles.
•“VIE” refers to variable interest entity.
•“Wholesale channel” refers to our sales and distribution channel through which we sell wine to distributors and, in California, directly to retail accounts.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q and other materials filed or to be filed by us with the U.S. Securities and Exchange Commission (“SEC”) contains statements that are or may be considered to be, forward-looking statements. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies and other future conditions. Forward-looking statements can be identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “contemplate” and other similar expressions, although not all forward-looking statements contain these identifying words. Important factors that could cause actual results and events to differ materially from those indicated in the forward-looking statements include, among others, the following:
• our ability to manage the growth of our business;
• our reliance on our brand name, reputation and product quality;
• the effectiveness of our marketing and advertising programs, including the consumer reception of the launch and expansion of our product offerings;
• general competitive conditions, including actions our competitors may take to grow their businesses;
• overall decline in the health of the economy and the impact of inflation on consumer discretionary spending and consumer demand for wine;
• the occurrence of severe weather events (including fires, floods and earthquakes), catastrophic health events, natural or man-made disasters, social and political conditions war or civil unrest;
• risks associated with disruptions in our supply chain for grapes and raw and processed materials, including corks,barrels, glass bottles, barrels,cork, winemaking additives and agents, water and other supplies;
• the disruptionimpact of the delivery of wine to customers;
• the impact of COVID-19 and its variantspandemic on our customers, suppliers, business, results of operations and financial results;condition;
• disrupted or delayed service by the distributors and government agencies we rely on for the distribution of our wines outside of California;
• our ability to successfully execute our growth strategy;
• risks associated with our acquisition of Sonoma-Cutrer Vineyards, Inc.;
• decreases in our wine score ratings by wine rating organizations;
• quarterly and seasonal fluctuations in our operating results;
• our success in retaining or recruiting, or changes required in, our officers, key employees or directors;
• our ability to protect our trademarks and other intellectual property rights, including our brand and reputation;
• our ability to comply with laws and regulations affecting our business, including those relating to the manufacture, sale and distribution of wine;
• the risks associated with the legislative, judicial, accounting, regulatory, political and economic risks and conditions specific to both domestic and to international markets;
• claims, demands and lawsuits to which we are, and may in the future, be subject and the risk that our insurance or indemnities coverage may not be sufficient;
• our ability to operate, update or implement our IT systems;
• our ability to successfully pursue strategic acquisitions and integrate acquired businesses;
• our potential ability to obtain additional financing when and if needed;
• our substantial indebtedness and our ability to maintain compliance with restrictive covenants in the documents governing such indebtedness;
• TSG’sTSG Consumer Partners LLC's (“TSG”) significant influence over us and our status as a “controlled company” under the rules of the New York Stock Exchange;
• the potential liquidity and trading of our securities; and
• the future trading prices of our common stock and the impact of securities analysts’ reports on these prices.
You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events, and trends that we believe may affect our business, results of operations and financial condition and operating results.condition. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk factors”Factors” in our Fiscal 20222023 Annual Report on Form 10-K and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a highly competitive environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q. And while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements whether as a result of new information, future developments or otherwise. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not rely on our forward-looking statements in making your investment decision. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.
Investors and others should note that we may announce material information to our investors using our investor relations website (https://ir.duckhorn.com), SEC filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with our investors and the public about our Company, our business and other issues. It is possible that the information we post on social media could be deemed to be material information. We therefore encourage investors to visit these websites from time to time. The information contained on such websites and social media posts is not incorporated into this filing. Further, our references to website URLs in this filing are intended to be inactive textual references only.
PART I
Item 1. Financial Statements
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| Index to Condensed Consolidated Financial Statements |
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The Duckhorn Portfolio, Inc. Condensed Consolidated Statements of Financial Position (Unaudited, in thousands, except share and per share data) |
| | | April 30, 2023 | | July 31, 2022 | | October 31, 2023 | | July 31, 2023 |
| ASSETS | ASSETS | ASSETS |
| Current assets: | Current assets: | | Current assets: | |
| Cash | Cash | $ | 36,077 | | | $ | 3,167 | | Cash | $ | 21,182 | | | $ | 6,353 | |
| Accounts receivable trade, net | Accounts receivable trade, net | 43,274 | | | 37,026 | | Accounts receivable trade, net | 71,254 | | | 48,706 | |
| Inventories | Inventories | 327,313 | | | 285,430 | | Inventories | 389,199 | | | 322,227 | |
| | Prepaid expenses and other current assets | Prepaid expenses and other current assets | 10,929 | | | 13,898 | | Prepaid expenses and other current assets | 8,393 | | | 10,244 | |
| Total current assets | Total current assets | 417,593 | | | 339,521 | | Total current assets | 490,028 | | | 387,530 | |
| Long-term assets | | |
| Property and equipment, net | Property and equipment, net | 267,474 | | | 269,659 | | Property and equipment, net | 328,468 | | | 323,530 | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | 20,875 | | | 23,375 | | Operating lease right-of-use assets | 18,834 | | | 20,376 | |
| Intangible assets, net | Intangible assets, net | 186,116 | | | 191,786 | | Intangible assets, net | 182,337 | | | 184,227 | |
| Goodwill | Goodwill | 425,209 | | | 425,209 | | Goodwill | 425,209 | | | 425,209 | |
| Other long-term assets | 5,286 | | | 1,963 | | |
| Total long-term assets | 904,960 | | | 911,992 | | |
| Other assets | | Other assets | 8,327 | | | 6,810 | |
| Total assets | Total assets | $ | 1,322,553 | | | $ | 1,251,513 | | Total assets | $ | 1,453,203 | | | $ | 1,347,682 | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | LIABILITIES AND STOCKHOLDERS’ EQUITY | | LIABILITIES AND STOCKHOLDERS’ EQUITY |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
| Accounts payable | Accounts payable | $ | 2,914 | | | $ | 3,382 | | Accounts payable | $ | 33,023 | | | $ | 4,829 | |
| Accrued expenses | Accrued expenses | 31,909 | | | 29,475 | | Accrued expenses | 90,022 | | | 38,246 | |
| Accrued compensation | Accrued compensation | 12,063 | | | 12,893 | | Accrued compensation | 8,651 | | | 16,460 | |
| Deferred revenue | Deferred revenue | 13,156 | | | 272 | | Deferred revenue | 11,199 | | | 66 | |
| | Current operating lease liabilities | 3,647 | | | 3,498 | | |
| | | Current maturities of long-term debt | Current maturities of long-term debt | 9,721 | | | 9,810 | | Current maturities of long-term debt | 9,721 | | | 9,721 | |
| Other current liabilities | Other current liabilities | 3,214 | | | 672 | | Other current liabilities | 4,870 | | | 5,138 | |
| Total current liabilities | Total current liabilities | 76,624 | | | 60,002 | | Total current liabilities | 157,486 | | | 74,460 | |
| Long-term liabilities | | |
| Revolving line of credit, net | — | | | 108,674 | | |
| Long-term debt, net of current maturities and debt issuance costs | Long-term debt, net of current maturities and debt issuance costs | 213,158 | | | 105,074 | | Long-term debt, net of current maturities and debt issuance costs | 231,148 | | | 223,619 | |
| | Operating lease liabilities | Operating lease liabilities | 17,117 | | | 19,732 | | Operating lease liabilities | 15,141 | | | 16,534 | |
| | Deferred income taxes | Deferred income taxes | 90,483 | | | 90,483 | | Deferred income taxes | 90,216 | | | 90,216 | |
| Other long-term liabilities | 2,217 | | | 387 | | |
| Total long-term liabilities | 322,975 | | | 324,350 | | |
| Other liabilities | | Other liabilities | 445 | | | 445 | |
| Total liabilities | Total liabilities | 399,599 | | | 384,352 | | Total liabilities | 494,436 | | | 405,274 | |
| Commitments and contingencies (Note 10) | | |
| Stockholders' equity: | |
| Common stock, $0.01 par value; 500,000,000 shares authorized; 115,293,780 issued and outstanding at April 30, 2023 and 115,184,161 issued and outstanding at July 31, 2022 | 1,153 | | | 1,152 | | |
| Commitments and contingencies (Note 9) | | Commitments and contingencies (Note 9) | | | |
| Stockholders’ equity: | | Stockholders’ equity: |
| Common stock, $0.01 par value; 500,000,000 shares authorized; 115,367,710 and 115,316,308 issued and outstanding at October 31, 2023 and July 31, 2023, respectively | | Common stock, $0.01 par value; 500,000,000 shares authorized; 115,367,710 and 115,316,308 issued and outstanding at October 31, 2023 and July 31, 2023, respectively | 1,154 | | | 1,153 | |
| Additional paid-in capital | Additional paid-in capital | 735,871 | | | 731,597 | | Additional paid-in capital | 738,365 | | | 737,557 | |
| Retained earnings | Retained earnings | 185,353 | | | 133,824 | | Retained earnings | 218,659 | | | 203,122 | |
| Total The Duckhorn Portfolio, Inc. stockholders' equity | 922,377 | | | 866,573 | | |
| Total The Duckhorn Portfolio, Inc. stockholders’ equity | | Total The Duckhorn Portfolio, Inc. stockholders’ equity | 958,178 | | | 941,832 | |
| Non-controlling interest | Non-controlling interest | 577 | | | 588 | | Non-controlling interest | 589 | | | 576 | |
| Total stockholders' equity | 922,954 | | | 867,161 | | |
| Total liabilities and stockholders' equity | $ | 1,322,553 | | | $ | 1,251,513 | | |
| Total stockholders’ equity | | Total stockholders’ equity | 958,767 | | | 942,408 | |
| Total liabilities and stockholders’ equity | | Total liabilities and stockholders’ equity | $ | 1,453,203 | | | $ | 1,347,682 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
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The Duckhorn Portfolio, Inc. Condensed Consolidated Statements of Operations (Unaudited, in thousands, except share and per share data) |
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| Three months ended April 30, | | Nine months ended April 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Net sales (net of excise taxes of $1,126, $1,072, $4,179 and $4,056, respectively) | $ | 91,242 | | | $ | 91,584 | | | $ | 302,901 | | | $ | 294,501 | |
| Cost of sales | 40,731 | | | 47,622 | | | 142,494 | | | 148,652 | |
| Gross profit | 50,511 | | | 43,962 | | | 160,407 | | | 145,849 | |
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| Selling, general and administrative expenses | 23,989 | | | 23,126 | | | 79,307 | | | 70,178 | |
| Income from operations | 26,522 | | | 20,836 | | | 81,100 | | | 75,671 | |
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| Interest expense | 2,993 | | | 1,618 | | | 7,839 | | | 4,860 | |
| Other expense (income), net | 729 | | | (1,046) | | | 3,385 | | | (2,477) | |
| Total other expenses, net | 3,722 | | | 572 | | | 11,224 | | | 2,383 | |
| Income before income taxes | 22,800 | | | 20,264 | | | 69,876 | | | 73,288 | |
| Income tax expense | 6,006 | | | 4,699 | | | 18,358 | | | 18,483 | |
| Net income | 16,794 | | | 15,565 | | | 51,518 | | | 54,805 | |
| Less: Net loss (income) attributable to non-controlling interest | 3 | | | — | | | 11 | | | (35) | |
| Net income attributable to The Duckhorn Portfolio, Inc. | $ | 16,797 | | | $ | 15,565 | | | $ | 51,529 | | | $ | 54,770 | |
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| Net income per share of common stock: | | | | | | | |
| Basic | $ | 0.15 | | | $ | 0.14 | | | $ | 0.45 | | | $ | 0.48 | |
| Diluted | $ | 0.15 | | | $ | 0.14 | | | $ | 0.45 | | | $ | 0.47 | |
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| Weighted average shares of common stock outstanding: | | | | | | | |
| Basic | 115,255,671 | | | 115,115,850 | | | 115,209,972 | | | 115,070,183 | |
| Diluted | 115,367,455 | | | 115,281,724 | | | 115,425,034 | | | 115,347,808 | |
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| | | Three months ended October 31, |
| | | | | 2023 | | 2022 |
| Net sales (net of excise taxes of $1,394 and $1,584, respectively) | | | | | $ | 102,509 | | | $ | 108,171 | |
| Cost of sales | | | | | 48,656 | | | 53,461 | |
| Gross profit | | | | | 53,853 | | | 54,710 | |
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| Selling, general and administrative expenses | | | | | 30,483 | | | 25,739 | |
| Income from operations | | | | | 23,370 | | | 28,971 | |
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| Interest expense | | | | | 4,004 | | | 2,162 | |
| Other income, net | | | | | (1,813) | | | (87) | |
| Total other expenses, net | | | | | 2,191 | | | 2,075 | |
| Income before income taxes | | | | | 21,179 | | | 26,896 | |
| Income tax expense | | | | | 5,629 | | | 7,087 | |
| Net income | | | | | 15,550 | | | 19,809 | |
| Less: Net (income) loss attributable to non-controlling interest | | | | | (13) | | | 6 | |
| Net income attributable to The Duckhorn Portfolio, Inc. | | | | | $ | 15,537 | | | $ | 19,815 | |
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| Earnings per share of common stock: | | | | | | | |
| Basic | | | | | $ | 0.13 | | | $ | 0.17 | |
| Diluted | | | | | $ | 0.13 | | | $ | 0.17 | |
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| Weighted average shares of common stock outstanding: | | | | | | | |
| Basic | | | | | 115,339,774 | | | 115,184,161 | |
| Diluted | | | | | 115,451,719 | | | 115,275,692 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
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The Duckhorn Portfolio, Inc. Condensed Consolidated Statements of Stockholders'Stockholders’ Equity (Unaudited, in thousands, expect share data) |
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| Three months ended April 30, |
| Common stock | | | | Additional
paid-in capital | | Retained
earnings | | Total
The Duckhorn Portfolio, Inc. stockholders' equity | | Non-controlling interest | | Total stockholders' equity |
| Shares | | Amount | | | | | |
| Balances at January 31, 2023 | 115,219,396 | | | $ | 1,152 | | | | | | | $ | 734,763 | | | $ | 168,556 | | | $ | 904,471 | | | $ | 580 | | | $ | 905,051 | |
| Net income (loss) | — | | | — | | | | | | | — | | | 16,797 | | | 16,797 | | | (3) | | | 16,794 | |
Issuance of common stock
under equity incentive plans | 116,474 | | | 1 | | | | | | | — | | | — | | | 1 | | | — | | | 1 | |
| Equity-based compensation (Note 11) | — | | | — | | | | | | | 1,756 | | | — | | | 1,756 | | | — | | | 1,756 | |
| Taxes paid related to net share settlement of equity awards | (42,090) | | | — | | | | | | | (648) | | | — | | | (648) | | | — | | | (648) | |
| Balances at April 30, 2023 | 115,293,780 | | | $ | 1,153 | | | | | | | $ | 735,871 | | | $ | 185,353 | | | $ | 922,377 | | | $ | 577 | | | $ | 922,954 | |
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| Balances at January 31, 2022 | 115,065,210 | | | $ | 1,151 | | | | | | | $ | 729,508 | | | $ | 112,839 | | | $ | 843,498 | | | $ | 586 | | | $ | 844,084 | |
| Net income | — | | | — | | | | | | | — | | | 15,565 | | | 15,565 | | | — | | | 15,565 | |
Issuance of common stock
under equity incentive plans | 154,273 | | | 2 | | | | | | | (2) | | | — | | | — | | | — | | | — | |
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| Equity-based compensation (Note 11) | — | | | — | | | | | | | 1,365 | | | — | | | 1,365 | | | — | | | 1,365 | |
| Taxes paid related to net share settlement of equity awards | (51,720) | | | (1) | | | | | | | (838) | | | — | | | (839) | | | — | | | (839) | |
| Balances at April 30, 2022 | 115,167,763 | | | $ | 1,152 | | | | | | | $ | 730,033 | | | $ | 128,404 | | | $ | 859,589 | | | $ | 586 | | | $ | 860,175 | |
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| Three months ended October 31, |
| Common stock | | | | Additional
paid-in capital | | Retained
earnings | | Total The Duckhorn Portfolio, Inc. stockholders’ equity | | Non-controlling interest | | Total stockholders’ equity |
| Shares | | Amount | | | | | |
| Balances at July 31, 2023 | 115,316,308 | | | $ | 1,153 | | | | | | | $ | 737,557 | | | $ | 203,122 | | | $ | 941,832 | | | $ | 576 | | | $ | 942,408 | |
| Net income | — | | | — | | | | | | | — | | | 15,537 | | | 15,537 | | | 13 | | | 15,550 | |
| Issuance of common stock under equity incentive plans | 79,639 | | | 1 | | | | | | | — | | | — | | | 1 | | | — | | | 1 | |
| Equity-based compensation (Note 10) | — | | | — | | | | | | | 1,150 | | | — | | | 1,150 | | | — | | | 1,150 | |
| Taxes paid related to net share settlement of equity awards | (28,237) | | | — | | | | | | | (342) | | | — | | | (342) | | | — | | | (342) | |
| Balances at October 31, 2023 | 115,367,710 | | | $ | 1,154 | | | | | | | $ | 738,365 | | | $ | 218,659 | | | $ | 958,178 | | | $ | 589 | | | $ | 958,767 | |
| | | | | | | | | | | | | | | | | |
| Balances at July 31, 2022 | 115,184,161 | | | $ | 1,152 | | | | | | | $ | 731,597 | | | $ | 133,824 | | | $ | 866,573 | | | $ | 588 | | | $ | 867,161 | |
| Net income (loss) | — | | | — | | | | | | | — | | | 19,815 | | | 19,815 | | | (6) | | | 19,809 | |
| Equity-based compensation (Note 10) | — | | | — | | | | | | | 1,180 | | | — | | | 1,180 | | | — | | | 1,180 | |
| Balances at October 31, 2022 | 115,184,161 | | | $ | 1,152 | | | | | | | $ | 732,777 | | | $ | 153,639 | | | $ | 887,568 | | | $ | 582 | | | $ | 888,150 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
10
| | | | | | | | | | | | | | |
The Duckhorn Portfolio, Inc.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited, in thousands, except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended April 30, |
| Common stock | | | Additional
paid-in capital | | Retained
earnings | | Total
The Duckhorn Portfolio, Inc. stockholders' equity | | Non-controlling interest | | Total stockholders' equity |
| Shares | | Amount | | | | |
| Balances at July 31, 2022 | 115,184,161 | | | $ | 1,152 | | | | | | $ | 731,597 | | | $ | 133,824 | | | $ | 866,573 | | | $ | 588 | | | $ | 867,161 | |
| Net income (loss) | — | | | — | | | | | | — | | | 51,529 | | | 51,529 | | | (11) | | | 51,518 | |
Issuance of common stock
under equity incentive plans | 138,839 | | | 1 | | | | | | — | | | — | | | 1 | | | — | | | 1 | |
| Issuance of employee stock purchase plan | 12,870 | | | — | | | | | | 181 | | | — | | | 181 | | | — | | | 181 | |
| | | | | | | | | | | | | | | | |
| Equity-based compensation (Note 11) | — | | | — | | | | | | 4,741 | | | — | | | 4,741 | | | — | | | 4,741 | |
| Taxes paid related to net share settlement of equity awards | (42,090) | | | — | | | | | | (648) | | | — | | | (648) | | | — | | | (648) | |
| | | | | | | | | | | | | | | | |
| Balances at April 30, 2023 | 115,293,780 | | | $ | 1,153 | | | | | | $ | 735,871 | | | $ | 185,353 | | | $ | 922,377 | | | $ | 577 | | | $ | 922,954 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | | |
| | | | | | |
| Balances at July 31, 2021 | 115,046,793 | | | $ | 1,150 | | | | | | $ | 726,903 | | | $ | 73,634 | | | $ | 801,687 | | | $ | 551 | | | $ | 802,238 | |
| Net income | — | | | — | | | | | | — | | | 54,770 | | | 54,770 | | | 35 | | | 54,805 | |
Issuance of common stock
under equity incentive plans | 172,690 | | | 3 | | | | | | (2) | | | — | | | 1 | | | — | | | 1 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Equity-based compensation (Note 11) | — | | | — | | | | | | 4,240 | | | — | | | 4,240 | | | — | | | 4,240 | |
| Taxes paid related to net share settlement of equity awards | (51,720) | | | (1) | | | | | | (838) | | | — | | | (839) | | | — | | | (839) | |
Initial public offering, net of
issuance costs | — | | | — | | | | | | (270) | | | — | | | (270) | | | — | | | (270) | |
| Balances at April 30, 2022 | 115,167,763 | | | $ | 1,152 | | | | | | $ | 730,033 | | | $ | 128,404 | | | $ | 859,589 | | | $ | 586 | | | $ | 860,175 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
118
| | |
The Duckhorn Portfolio, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands) |
| | | Nine months ended April 30, | | Three months ended October 31, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| Cash flows from operating activities | Cash flows from operating activities | | | | Cash flows from operating activities | | | |
| Net income | Net income | $ | 51,518 | | | $ | 54,805 | | Net income | $ | 15,550 | | | $ | 19,809 | |
| Adjustments to reconcile net income to net cash from operating activities: | Adjustments to reconcile net income to net cash from operating activities: | | Adjustments to reconcile net income to net cash from operating activities: | |
| | Depreciation and amortization | Depreciation and amortization | 20,528 | | | 17,345 | | Depreciation and amortization | 7,329 | | | 5,757 | |
| Loss on disposal of assets | 75 | | | 12 | | |
| Gain on disposal of assets | | Gain on disposal of assets | (42) | | | (32) | |
| Change in fair value of derivatives | Change in fair value of derivatives | 2,943 | | | (1,947) | | Change in fair value of derivatives | (1,889) | | | (368) | |
| Amortization of debt issuance costs | Amortization of debt issuance costs | 774 | | | 1,206 | | Amortization of debt issuance costs | 194 | | | 402 | |
| | Equity-based compensation | Equity-based compensation | 4,741 | | | 4,240 | | Equity-based compensation | 1,150 | | | 1,180 | |
| | Change in operating assets and liabilities: | Change in operating assets and liabilities: | | Change in operating assets and liabilities: | |
| Accounts receivable trade, net | Accounts receivable trade, net | (6,248) | | | (5,851) | | Accounts receivable trade, net | (22,547) | | | (32,619) | |
| Inventories | Inventories | (39,278) | | | (24,340) | | Inventories | (66,115) | | | (55,626) | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | 1,633 | | | 1,767 | | Prepaid expenses and other current assets | 1,781 | | | 442 | |
| Other long-term assets | (508) | | | (46) | | |
| Other assets | | Other assets | 283 | | | 122 | |
| Accounts payable | Accounts payable | (352) | | | 1,535 | | Accounts payable | 28,045 | | | 42,670 | |
| Accrued expenses | Accrued expenses | 3,681 | | | 4,550 | | Accrued expenses | 51,985 | | | 37,262 | |
| Accrued compensation | Accrued compensation | (831) | | | (5,820) | | Accrued compensation | (7,808) | | | (3,733) | |
| Deferred revenue | Deferred revenue | 12,884 | | | 425 | | Deferred revenue | 11,132 | | | 11,797 | |
| Other current and long-term liabilities | 193 | | | (26) | | |
| Other current and non-current liabilities | | Other current and non-current liabilities | (982) | | | (679) | |
| Net cash provided by operating activities | Net cash provided by operating activities | 51,753 | | | 47,855 | | Net cash provided by operating activities | 18,066 | | | 26,384 | |
| Cash flows from investing activities | Cash flows from investing activities | | Cash flows from investing activities | |
| Purchases of property and equipment, net of sales proceeds | Purchases of property and equipment, net of sales proceeds | (14,111) | | | (24,798) | | Purchases of property and equipment, net of sales proceeds | (10,395) | | | (6,418) | |
| | Net cash used in investing activities | Net cash used in investing activities | (14,111) | | | (24,798) | | Net cash used in investing activities | (10,395) | | | (6,418) | |
| Cash flows from financing activities | Cash flows from financing activities | | Cash flows from financing activities | |
| Payments under line of credit | Payments under line of credit | (119,000) | | | (77,000) | | Payments under line of credit | (13,000) | | | (20,000) | |
| Borrowings under line of credit | Borrowings under line of credit | 9,000 | | | 68,000 | | Borrowings under line of credit | 23,000 | | | 5,000 | |
| | Issuance of long-term debt | 225,833 | | | — | | |
| | Payments of long-term debt | Payments of long-term debt | (117,666) | | | (8,538) | | Payments of long-term debt | (2,500) | | | (2,808) | |
| Taxes paid related to net share settlement of equity awards | Taxes paid related to net share settlement of equity awards | (648) | | (839) | | Taxes paid related to net share settlement of equity awards | (342) | | — | |
| Proceeds from employee stock purchase plan | 181 | | — | | |
| Payments for debt issuance costs | (2,432) | | | — | | |
| Payments of deferred offering costs | — | | | (270) | | |
| Net cash used in financing activities | (4,732) | | | (18,647) | | |
| | Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | 7,158 | | | (17,808) | |
| Net increase in cash | Net increase in cash | 32,910 | | | 4,410 | | Net increase in cash | 14,829 | | | 2,158 | |
| Cash - Beginning of period | Cash - Beginning of period | 3,167 | | | 4,244 | | Cash - Beginning of period | 6,353 | | | 3,167 | |
| Cash - End of period | Cash - End of period | $ | 36,077 | | | $ | 8,654 | | Cash - End of period | $ | 21,182 | | | $ | 5,325 | |
| Supplemental cash flow information | Supplemental cash flow information | | | | Supplemental cash flow information | | | |
| Interest paid, net of amount capitalized | Interest paid, net of amount capitalized | $ | 4,421 | | | $ | 3,726 | | Interest paid, net of amount capitalized | $ | 4,009 | | | $ | 1,777 | |
| Income taxes paid | Income taxes paid | $ | 10,921 | | | $ | 13,923 | | Income taxes paid | $ | 11,607 | | | $ | — | |
| Non-cash investing activities | Non-cash investing activities | | Non-cash investing activities | |
| Property and equipment additions in accounts payable and accrued expenses | Property and equipment additions in accounts payable and accrued expenses | $ | 332 | | | $ | 507 | | Property and equipment additions in accounts payable and accrued expenses | $ | 3,300 | | | $ | 3,776 | |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
129
The Duckhorn Portfolio, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
1. Description of businessBusiness
The Duckhorn Portfolio, Inc. and its subsidiaries (the “Company” or “Management”(collectively, “the Company,” “Management,” “we,” “us,” “our” and “Duckhorn”), headquartered in St. Helena, CA, produce luxury and ultra-luxury wine across a portfolio of winery brands, including Duckhorn Vineyards, Decoy, Goldeneye, Paraduxx, Migration, Canvasback, Calera, Kosta Browne, Greenwing and Postmark.
The Company'sCompany’s revenue is comprised of wholesalesales to distributors and DTC sales.direct to trade accounts in California (“wholesale”) and direct to consumer (“DTC”). Wholesale revenue is generated through sales directly to California retailers and restaurants, sales to distributors and agents located in other states throughout the United States (“U.S.”) and sales to export distributors that sell internationally. DTC revenue results from individual consumers purchasing wine directly from the Company through club membership, the Company'sCompany’s website or tasting rooms located in Napa Valley, California; Anderson Valley, California; Sebastopol, California; Hollister, California; and Walla Walla, Washington.
The Company owns or controls, through long-term leases, certain high-quality vineyards throughout Northern and Central California and Washington. Vinification takes place at wineries owned, leased or under contract with third parties predominately located in Napa Valley, California; Anderson Valley, California; Hopland, California; Hollister, California; San Luis Obispo, California; Sebastopol, California; and Walla Walla, Washington.
Fiscal year
The Company'sCompany’s fiscal year ends on July 31. Unless otherwise stated, references to particular years or quarters refer to the Company’s fiscal years and the associated periods in those fiscal years. Except as otherwise specified, information in this report is provided as of October 31, 2023.
Secondary offeringsOffering
In April 2023, the Company completed a secondary offering where certain existing stockholders sold 6,000,000 shares of common stock at a price of $15.35 per share. The Company did not receive any of the proceeds from the sale of the shares by the existing stockholders. In connection with the offering, the Company incurred costs of $0.4 million duringin the three and nine months ended April 30, 2023, which are reflected in selling, general and administrative expenses on the Condensed Consolidated Statement of Operations.
In the firstthird quarter of Fiscal 2022, the Company completed a secondary offering where certain existing stockholders sold 12,000,000 shares of common stock at a price of $20.50 per share. In November 2021, an additional 626,467 shares of common stock were sold pursuant to the partial exercise of the underwriters' option to purchase additional shares. The Company did not receive any of the proceeds from the sale of the shares by the existing stockholders. In connection with the offering, the Company incurred costs of $0.6 million during the nine months ended April 30, 2022, which are reflected in selling, general and administrative expenses on the Condensed Consolidated Statement of Operations.2023
2.Basis of presentationPresentation and recent accounting pronouncementsRecent Accounting Pronouncements
Basis of presentation
The Company’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAPgenerally accepted accounting principles (“U.S. GAAP”) and Article 10 of the Securities and Exchange Commission’s Regulation S-X. These Condensed Consolidated Financial Statements have been prepared on the same basis as the Company'sCompany’s audited annual financial statements and, in the opinion of Management, reflect all adjustments, consisting only of normal, recurring adjustments, which are necessary for the fair statement of the Company'sCompany’s financial information for the interim periods presented. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending July 31, 2023,2024, for any other interim period or for any future year.
The Condensed Consolidated Statement of Financial Position as of July 31, 20222023 was derived from the Company's audited financial statements for the fiscal year ended July 31, 2022,2023, previously filed with the SEC. The Condensed Consolidated Financial Statements do not include all of the information and note disclosures required by U.S. GAAP and should be read in conjunction with the audited consolidated financial statementsConsolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2022.2023.
Principles of consolidation
The Condensed Consolidated Financial Statements include the accounts of The Duckhorn Portfolio, Inc. and its subsidiaries, including a consolidated VIEvariable interest entity (“VIE”) of which the Company has determined it is the primary beneficiary. All intercompany balances and transactions are eliminated in consolidation.
Accounting estimates
The preparation of Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to, the following: useful lives and recoverability of long-lived assets, inventory obsolescence and reserves, capitalized indirect inventory costs, allowance for credit losses, calculation of accrued liabilities, customer incentive reserves, uncertain tax positions, contingent liabilities, equity-based compensation and deferred revenues. Actual results could differ from those estimates.
Preferred stock
The Company has 100,000,000 shares of $0.01 par value preferred stock authorized, none of which are issued and outstanding.
Variable interest entities
The Company evaluates its ownership, contractual relationships and other interests in entities to determine the nature and extent of the interests, whether such interests are variable interests and whether the entities are VIEs in accordance with ASCAccounting Standards Codification (“ASC”) Topic 810, Consolidations. These evaluations can be complex and involve Management judgment as well as the use of estimates and assumptions based on available historical information, among other factors. Thus, it represents a Level 3 measurement as defined in ASC Topic 820, Fair Value Measurement. Based on these evaluations, if the Company determines that it is the primary beneficiary of a VIE, the entity is consolidated into the financial statements. At April 30,October 31, 2023 and July 31, 2022,2023, the Company'sCompany’s ownership percentage of the sole identified VIE was 76.2%. The total net assets of the VIE included on the Condensed Consolidated StatementStatements of Financial Position were $2.3 million and $2.4 million at April 30,as of October 31, 2023 and July 31, 2022, respectively.2023. The assets and liabilities, which may only be used to settle its own obligations, are primarily related to property, equipment and working capital accounts, which generally represent the amounts owed by or to the Company for goodsgrape sales under current contracts.contracts and farming costs.
Recently adopted accounting pronouncements
In March 2020, the Financial Accounting Standards Board issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), and further issued subsequent amendments to the initial guidance. The Company adopted the standard effective August 1, 2022, the first day of Fiscal 2023. The adoption of the standard did not have a material impact on the Condensed Consolidated Financial Statements or the related disclosures.
As previously disclosed in the Annual Report on Form 10-K for the year ended July 31, 2022, the Company adopted ASU No. 2016-02, Leases(Topic 842) using the modified retrospective transition method as of the first day of Fiscal 2022. The impact of the adoption of ASC 842 on previously reported interim financial statements during the year ended July 31, 2022, included the recognition of right-of-use ("ROU") assets and lease liabilities for operating leases. The adoption of ASC 842 also resulted in reclassifying certain lines within operating activities in the Condensed Consolidated Statement of Cash Flows due to changes in operating assets and liabilities for the related accounts. These changes to previously disclosed amounts conform to the current period presentation.
No other new accounting pronouncements issued or effective as of April 30,October 31, 2023 have had, or are expected to have, a material impact on the Condensed Consolidated Financial Statements or the related disclosures.
3. Revenue
Disaggregated revenue information
The following table presents the percentages of consolidated net sales disaggregated by sales channels:
| | | Three months ended April 30, | | Nine months ended April 30, | | | Three months ended October 31, |
| | 2023 | | 2022 | | 2023 | | 2022 | | | 2023 | | 2022 |
| Wholesale - Distributors | Wholesale - Distributors | 68.6 | % | | 62.0 | % | | 68.9 | % | | 66.0 | % | Wholesale - Distributors | | 77.0 | % | | 76.4 | % |
Wholesale - California direct to trade(a) | Wholesale - California direct to trade(a) | 17.5 | | | 16.6 | | | 17.4 | | | 17.6 | | Wholesale - California direct to trade(a) | | 15.6 | | | 15.8 | |
DTC(b) | DTC(b) | 13.9 | | | 21.4 | | | 13.7 | | | 16.4 | | DTC(b) | | 7.4 | | | 7.8 | |
Net sales | Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | Net sales | | 100.0 | % | | 100.0 | % |
(a) Includes $0.7 million and $0.6 million of sales related to bulk and grape sales for the ninethree months ended April 30,October 31, 2023 and $0.1 million and $2.9 million for the three and nine months ended April 30, 2022, respectively.
(b) Includes shipping and handling revenue of $0.3 million and $1.4$0.1 million for each of the three and nine months ended April 30,October 31, 2023 respectively, and $1.0 million and $2.0 million for the three and nine months ended April 30, 2022, respectively.
(c) For the three months ended October 31, 2023, excludes lease income of $0.9 million from Geyserville winery acquired in June 2023.
Charges, recoveries and reductions related to credit loss on accounts receivable and the related allowance were immaterial for the three and nine months ended April 30, 2023. RecoveriesOctober 31, 2023 and reductions in the allowance for credit loss were immaterial for the three and nine months ended April 30, 2023.2022. As of April 30,October 31, 2023 and July 31, 2022,2023, the allowance for credit losses was $0.4 million for both periods.$0.5 million.
Contract balances
When the Company receives payment from a customer, prior to meeting the performance obligation under the terms of a contract, the Company records deferred revenue, which represents a contract liability. The Company’s deferred revenue is primarily comprised of cash collected from wines sold through our DTC channelschannel ahead of the wine shipment date. The Company does not recognize revenue until control of the wine is transferred and the performance obligation is met.
Deferred revenue in the Condensed Consolidated Statements of Financial Position was $13.2$11.2 million and $0.3$0.1 million at April 30,October 31, 2023 and July 31, 2022,2023, respectively. InThe amount of revenue recognized relating to the opening contract liability balance for the three and nine months ended April 30,October 31, 2023 thewas immaterial. The Company recognized revenue of $3.2$0.2 million and $0.3 million, respectively, which wasduring the three months ended October 31, 2022, included in the opening contract liability balance for the corresponding period.
4. Inventories
Inventories were comprised of the following: | | (in thousands) | (in thousands) | April 30, 2023 | | July 31, 2022 | (in thousands) | October 31, 2023 | | July 31, 2023 |
| Finished goods | Finished goods | $ | 105,015 | | | $ | 108,989 | | Finished goods | $ | 134,070 | | | $ | 145,355 | |
| Work in progress | Work in progress | 214,048 | | | 162,337 | | Work in progress | 234,856 | | | 161,795 | |
| Raw materials | Raw materials | 8,250 | | | 14,104 | | Raw materials | 20,273 | | | 15,077 | |
| Inventories | Inventories | $ | 327,313 | | | $ | 285,430 | | Inventories | $ | 389,199 | | | $ | 322,227 | |
Inventories are stated at the lower of cost or net realizable value, and are primarily measured on a first-in-first-out basis. The Company records valuation adjustments to the carrying value of its inventories based on periodic reviews of slow-moving, obsolete and excess inventory to determine the need for reserves by comparing inventory carrying values with their net realizable values upon ultimate sale or disposal. The Company'sCompany’s estimates of net realizable value are based on historical experience as well as Management'sManagement’s judgments with respect to future market conditions. In the period the Company determines a reserve is required, the Company recognizes a
charge to cost of sales for the excess of the carrying value over net realizable value. The inventory reserve was $0.1$1.2 million and $5.1$0.9 million at April 30,October 31, 2023 and July 31, 2022,2023, respectively.
The Company capitalizes into inventoryinventories depreciation related to property and equipment used in the production of inventory. For the three months ended April 30,October 31, 2023 and 2022, the amount capitalized was $4.9$3.8 million and $4.0$3.5 million, respectively, and $13.5 million and $10.6 million for the nine months ended April 30, 2023 and 2022, respectively. The Company also capitalizes total lease costs related to leases used in the production of inventory. For the three months ended April 30,October 31, 2023 and 2022, the amount capitalized was $1.2 million and $1.0$1.1 million, respectively.For the nine months ended April 30, 2023 and 2022, the amount capitalized was $3.4 million and $3.2 million, respectively.
5. Property and equipment, net
Property and equipment, net was comprised of the following:
| | | | | | | | | | | | | |
| (in thousands) | | | April 30, 2023 | | July 31, 2022 |
| Land | | | $ | 136,328 | | | $ | 136,328 | |
| Buildings and improvements | | | 70,861 | | | 70,813 | |
| Machinery and equipment | | | 53,864 | | | 52,619 | |
| Vineyards and improvements | | | 44,866 | | | 44,759 | |
| Barrels | | | 37,155 | | | 30,067 | |
| Construction in progress | | | 7,600 | | | 5,664 | |
| Property and equipment, gross | | | 350,674 | | | 340,250 | |
| Less: accumulated depreciation and amortization | | | (83,200) | | | (70,591) | |
| Property and equipment, net | | | $ | 267,474 | | | $ | 269,659 | |
Depreciation expense recognized in selling, general and administrative expenses was $0.4 million and $0.3 million for the three months ended April 30, 2023 and 2022, respectively, and $1.3 million and $1.0 million for the nine months ended April 30, 2023 and 2022, respectively. See Note 4 (Inventories) for depreciation expense capitalized into inventory.
Vineyard acquisitions
In the second quarter of Fiscal 2022, the Company completed the purchase of three Napa County, California vineyards and related assets for a total of $14.5 million.
6.Accrued expensesExpenses
Accrued expenses were comprised of the following:
| | (in thousands) | (in thousands) | April 30, 2023 | | July 31, 2022 | (in thousands) | October 31, 2023 | | July 31, 2023 |
| Bulk wine and other received not invoiced | | Bulk wine and other received not invoiced | $ | 46,433 | | | $ | 529 | |
Trade spend(a) | Trade spend(a) | $ | 14,964 | | | $ | 15,319 | | Trade spend(a) | 16,879 | | | 12,721 | |
Income taxes payable(b) | Income taxes payable(b) | 7,375 | | | 387 | | Income taxes payable(b) | 5,042 | | | 11,019 | |
Deferred compensation liability(c) | Deferred compensation liability(c) | 2,920 | | | 2,142 | | Deferred compensation liability(c) | 3,523 | | | 3,261 | |
| Barrel purchases | | Barrel purchases | 2,271 | | | 2,589 | |
| Accrued professional fees | Accrued professional fees | 774 | | | 3,191 | | Accrued professional fees | 2,314 | | | 599 | |
| | Accrued invoices and other accrued expenses | Accrued invoices and other accrued expenses | 5,876 | | | 8,436 | | Accrued invoices and other accrued expenses | 13,560 | | | 7,528 | |
| Accrued expenses | Accrued expenses | $ | 31,909 | | | $ | 29,475 | | Accrued expenses | $ | 90,022 | | | $ | 38,246 | |
(a) Trade spend refers to estimated amounts the Company owes to distributors for depletion-based incentives.
(b) Effective March 2023, as revised in October 2023, the IRS postponed certain tax filings and payment deadlines, until OctoberNovember 2023, in areas designated with eligible Federal Emergency Management Agency declarations. During the three months ended April 30,third fiscal quarter of 2023, the Company deferred federal and state tax payments and expects to paywhich was paid in full during the deferred amount in the first fiscal quarter of 2024.three months ended October 31, 2023.
(c) The Company intends to use the cash surrender value life insurance policies to partially settle its deferred compensation plan liability. The cash surrender value of the life insurance policies were $2.3was $2.4 million and $1.8$2.7 million at April 30,October 31, 2023 and July 31, 2022,2023, respectively, and are included in other long-term assets on the Condensed Consolidated Statements of Financial Position.
7.6. Debt
At April 30,Long-term debt, net of current maturities and debt issuance costs was comprised of the following:
| | | | | | | | | | | |
| (in thousands) | October 31, 2023 | | July 31, 2023 |
| Revolving line of credit | $ | 23,000 | | | $ | 13,000 | |
| Term loan, first lien | 218,332 | | | 220,832 | |
| Total debt | 241,332 | | | 233,832 | |
| Less: Current maturities of long-term debt | (9,721) | | | (9,721) | |
| Total long-term debt | 231,611 | | | 224,111 | |
Debt issuance costs(a) | (463) | | | (492) | |
| Total long-term debt, net of current maturities and debt issuance costs | $ | 231,148 | | | $ | 223,619 | |
_______________________________________________(a) Debt issuance costs are the costs associated with the term loan facility. Debt issuance costs of $2.6 million and $2.8 million at October 31, 2023 and July 31, 2023, respectively, associated with the Company had unused capacity of $425.0 million under the new revolving line of credit excluding the incremental seasonal borrowing amount of an additional $30.0 million of capacity. There were no amounts outstandingand delayed draw term loan facilities are recorded in other assets on the letter of credit sub-facility or the swingline sub-facility at April 30, 2023.
Included in interest expense in the Condensed Consolidated Statements of Operations is amortization related to debt issuance costsFinancial Position.
The Company is subject to the requirements of various financial covenants pursuant to the term loans and revolving line of credit, including a debt to capitalization ratio and a fixed charge coverage ratio as defined in the New Credit Facility. As of April 30, 2023, the Company is in compliance with all covenants.
Amendment to the Original Credit Agreement
Effective August 30,On November 4, 2022, Mallard Buyer Corp., Selway Wine Company and certain other subsidiaries of The Duckhorn Portfolio, Inc. (collectively, the “Borrowers”) entered into Amendment No. 8the Amended and Restated First Lien Loan and Security Agreement (“Credit Facility” and “Credit Agreement”) with the lenders named therein and BMO Harris (as successor in interest to the Original Credit Agreement, to extend the maturity date of all facilities to November 1, 2023 and to transition from a LIBOR based interest rate to a Term SOFR based interest rate plus applicable margins defined by the termsBank of the Original Credit Facility. The transaction did not result in any additional cash proceeds.West), as administrative agent and collateral agent.
New Credit Agreement
Effective November 4, 2022, the Borrowers entered into the New Credit Agreement which amends and restates, in its entirety, the Original Credit Agreement. The New Credit Agreement provides for $675.8 million in first lien senior secured credit facilities consisting of (i) a $425.0 million revolving credit facility, (ii) a $225.8 million term loan facility and (iii) a $25.0 million delayed draw term loan facility. The maturity date for loans borrowed under the New Credit Agreement is November 4, 2027.
The principal of the term loan facility is repayable in quarterly installments equal to $2.4 million, with a final installment equal to the New Credit Agreement replacesentire remaining outstanding principal amount due on the $135.0 million term loan tranche one facility, $25.0 million term loan tranche two facility and $25.0 million capital expenditure facility under the Original Credit Agreement.
The New Credit Agreement allows the Borrowers, at any time, to request additional term loans, revolver commitments and delayed draw term loan commitments in an aggregate amount of up to $400.0 million (the “Incremental Facility”). The lenders are not under any obligation to provide the Incremental Facility, and the Incremental Facility is subject to certain customary conditions precedent and other limitations.
Borrowings under the revolver portion of the New Credit Agreement generally bear interest based on the sum of the forward-looking term rate based on the Secured Overnight Financing Rate (“Term SOFRSOFR”) plus a loan margin based on average availability as follows: (a) less than or equal to 33% of average availability, a loan margin of 1.50%, (b) greater than 33% and less than or equal to 66% of average availability, a loan margin of 1.25%, and (c) greater than 66% of average availability, a loan margin of 1.00%. Borrowings under the term loan and delayed draw portions of the New Credit Agreement generally bear interest based on the sum of (i) Term SOFR plus (ii) a credit spread adjustment of 10 basis points for 1-month and 3-month interest periods and 15 basis points for a six-month interest period plus (iii) a loan margin of 1.625%.
The New Credit Agreement also includes an unused line fee and contains customary representations and warranties and affirmative and negative covenants for agreements of this type. In addition, the New Credit Agreement requires compliance with the following financial covenants, in each case commencing from fiscal quarter ending January 31, 2023: (i) a debt to capitalization ratio not to exceed 0.55:1.00, measured at the end of each fiscal quarter and (ii) a fixed charge coverage ratio not to be less than 1.15:1.00, measured at the end of each fiscal quarter.
The Company incurred approximately $3.3 million in debt issuance costs, including bank financing fees and third party legal and other professional fees in closing the New Credit Agreement, As of which approximately $2.4 million were capitalized in accordance with ASC Topic 470, Debt. The fees associated with the revolving and delayed draw term facilities were capitalized to other long-term assets and the fees associated with the term loan facility were capitalized to long-term debt, net of current maturities and debt issuance costs on the Condensed Consolidated Statement of Position. The capitalized debt issuance costs are amortized as interest expense over the term of the New Credit Agreement. Other related charges incurred of $0.9 million that were not capitalized during the period are reflected in other (income) expense in the Condensed Consolidated Statement of Operations.
Amendment to the New Credit Agreement
Effective February 6,October 31, 2023, the Company entered into Amendment No. 1 to the Amendedwas in compliance with all covenants.
At October 31, 2023 and Restated First Lien Loan and Security Agreement. The changes in the amendment are administrative in nature and did not impact the Company's outstanding debt or related debt covenants. The amendment did not result in any additional cash proceeds or changes in commitment amounts.
Long-term debt, net was comprised of the following:
| | | | | | | | | | | |
| (in thousands) | April 30, 2023 | | July 31, 2022 |
| Revolving line of credit | $ | — | | | $ | 110,000 | |
| Term loan, first lien | 223,332 | | | 110,117 | |
Capital expenditure loan(a) | — | | | 5,049 | |
| Total debt | 223,332 | | | 225,166 | |
| Less: Current maturities of long-term debt | (9,721) | | | (9,810) | |
| Total long-term debt | 213,611 | | | 215,356 | |
Debt issuance costs(b) | (453) | | | (1,608) | |
| Total long-term debt, net of current maturities and debt issuance costs | $ | 213,158 | | | $ | 213,748 | |
_________________________________________________________(a) The capital expenditure loan under the Original Credit Agreement was replaced as part of the refinancing and execution of the New Credit Agreement. As of April 30,July 31, 2023, the Company has not drawnhad unused capacity of $402.0 million and $412.0 million, respectively, under the revolving credit facility, excluding the incremental seasonal borrowing amount of an additional $30.0 million of capacity. There were no amounts outstanding on the delayed draw term loan, underletter of credit sub-facility or the New Credit Agreement.
(b) At April 30,swingline sub-facility at October 31, 2023 debt issuance costs are the costs associated with the term loan facility. Debt issuance costs of $2.8 million associated with the revolving credit and delayed draw term loan facilities are recorded in other long-term assets on the Condensed Consolidated Statements of Financial Position. Under the Original Credit Facility, the revolving credit facility debt issuance costs were treated consistently with those of the term debt facilities as the Company did not intend to repay the revolving credit facility in full prior to its maturity.
8.7. Derivative instrumentsInstruments
The Company manages exposure to interest rates and foreign currency movements by entering into derivative contracts from time to time, as movements in such markets could impact the Company’s financial results and Condensed Consolidated Statements of Financial Position.results.
The changes in estimated fair values of derivative instruments result from changes in interest rates and foreign currency exchange rates. Such changes serve to offset exposure in related business assets or liabilities. The Company is exposed to credit loss in the event of nonperformance by a counterparty. Certain of the Company'sCompany’s derivative instruments are subject to master netting agreements. In certain circumstances, this agreement allows the Company to net-settle amounts payable or receivable related to multiple derivative transactions with the same counterparty. The fair values of derivative instruments are presented on a gross basis, even when the derivative instruments are subject to master netting arrangements. Collateral is generally not required of the Company or of the counterparties to the master netting agreements, and no cash collateral was received or pledged under such agreements as of April 30,October 31, 2023 or July 31, 2022.2023. The Company does not enter into derivative instruments for
trading or speculative purposes. The Company'sCompany’s accounting policies do not apply hedge accounting treatment to derivative instruments.
As of April 30, 2023, the Company held the following interest rate swap agreement, which fixed the interest rate on the applicable notional amount of outstanding variable rate debt:
| | | | | | | | | | | | | | | | | | | | |
Notional amount (in thousands) | | Interest rate | | Effective date | | Expiration date |
| | | | | | |
| $100,000 | | 3.735% | | January 4, 2023 | | November 4, 2027 |
The total notional amounts of the Company’s derivative instruments outstanding are as follows:
| | | | | | | | | | | |
| (in thousands) | April 30, 2023 | | July 31, 2022 |
| Derivative instruments not designated as hedging instruments | | | |
| Interest rate swap contract | $ | 100,000 | | | $ | 100,000 | |
| Foreign currency forward contracts | 5,610 | | | 2,793 | |
| Total derivative instruments not designated as hedging instruments | $ | 105,610 | | | $ | 102,793 | |
Effective September 30, 2022, the Company amended its interest rate swap initially entered into in March 2020, which expired on March 23, 2023, to transition from a LIBOR-based floating rate to a Term SOFR based floating rate. On January 4, 2023, the Company entered into an interest rate swap that partially mitigates the risk to the Company due to potential future Term SOFR movements by trading floating rate payments for fixed rate payments on an applicable notional amount of outstanding variable rate debt. Effective September 30, 2022, the Company amended its interest rate swap initially entered into in March 2020, which expired on March 23, 2023, to transition from a LIBOR-based floating rate to a Term SOFR based floating rate.
As discussed in Note 10 (Commitments and contingencies),of October 31, 2023, the Company held the following interest rate swap agreement, which fixed the interest rate on the applicable notional amount of outstanding variable rate debt:
| | | | | | | | | | | | | | | | | | | | |
Notional amount (in thousands) | | Interest rate | | Effective date | | Expiration date |
| | | | | | |
| $100,000 | | 3.735% | | January 4, 2023 | | November 4, 2027 |
The total notional amounts of the Company’s derivative instruments outstanding are as follows:
| | | | | | | | | | | |
| (in thousands) | October 31, 2023 | | July 31, 2023 |
| | | |
| Interest rate swap contract | $ | 100,000 | | | $ | 100,000 | |
| Foreign currency forward contracts | 167 | | | 5,610 | |
| Total derivative instruments not designated as hedging instruments | $ | 100,167 | | | $ | 105,610 | |
The Company manages annual barrel purchases by engaging domestic and foreign cooperages to provide specified barrel quantities on agreed delivery dates. SomeA significant portion of these invoices are paid in Euros. In order to reduce the foreign exchange risk associated with the Euro to U.S. Dollar conversion rate, the Company enters into foreign currency forward contracts, generally aligning settlement dates with expected barrel deliveries and the anticipated timing of payments to various coopers.
See Note 9 (Commitments and contingencies) for additional information related to the Company’s barrel purchase commitments. Results of period derivative activity
The estimated fair value and classification of derivative instruments on the accompanying Condensed Consolidated Statements of Financial Position for April 30,October 31, 2023 were as follows:
| | | Derivative Assets | | Derivative Liabilities | | | Derivative Assets | | Derivative Liabilities | |
| (in thousands) | (in thousands) | Balance Sheet Classification | | Fair Value | | Balance Sheet Classification | | Fair Value | | (in thousands) | Balance Sheet Classification | | Fair Value | | Balance Sheet Classification | | Fair Value | |
| Interest rate swap contract | Interest rate swap contract | Prepaid expenses and other current assets | | $ | — | | | Other long-term liabilities | | $ | 1,830 | | | Interest rate swap contract | Other assets | | $ | 3,082 | | | Other liabilities | | $ | — | | |
| Foreign currency forward contracts | Prepaid expenses and other current assets | | 107 | | | Other current liabilities | | — | | | |
| Foreign currency forward contract | | Foreign currency forward contract | Prepaid expenses and other current assets | | — | | | Other current liabilities | | 7 | | |
| Total derivatives not designated as hedging instruments | Total derivatives not designated as hedging instruments | | $ | 107 | | | $ | 1,830 | | | Total derivatives not designated as hedging instruments | | $ | 3,082 | | | $ | 7 | | |
The estimated fair value and classification of derivative instruments on the accompanying Condensed Consolidated Statements of Financial Position for July 31, 20222023 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative Assets | | Derivative Liabilities | |
| (in thousands) | Balance Sheet Classification | | Fair Value | | Balance Sheet Classification | | Fair Value | |
| Interest rate swap contracts | Prepaid expenses and other current assets | | $ | 1,443 | | | Other long-term liabilities | | $ | — | | |
| Foreign currency forward contracts | Prepaid expenses and other current assets | | — | | | Other current liabilities | | 223 | | |
| Total derivatives not designated as hedging instruments | | | $ | 1,443 | | | | | $ | 223 | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative Assets | | Derivative Liabilities | |
| (in thousands) | Balance Sheet Classification | | Fair Value | | Balance Sheet Classification | | Fair Value | |
| Interest rate swap contract | Other assets | | $ | 1,117 | | | Other liabilities | | $ | — | | |
| Foreign currency forward contracts | Prepaid expenses and other current assets | | 69 | | | Other current liabilities | | — | | |
| Total derivatives not designated as hedging instruments | | | $ | 1,186 | | | | | $ | — | | |
The amounts and classification of the gains and losses in the Condensed Consolidated Statements of Operations related to derivative instruments not designated as hedging instruments are as follows:
| | | Three months ended April 30, | | Nine months ended April 30, | | | | Three months ended October 31, |
| (in thousands) | (in thousands) | Classification | | 2023 | | 2022 | | 2023 | | 2022 | (in thousands) | Classification | | | 2023 | | 2022 |
| Interest rate swap contracts | Other expense (income), net | | $ | 900 | | | $ | (1,117) | | | $ | 3,273 | | | $ | (2,079) | | |
| Interest rate swap contract | | Interest rate swap contract | Other income, net | | | $ | (1,965) | | | $ | (145) | |
| Foreign currency forward contracts | Foreign currency forward contracts | Other expense (income), net | | (18) | | | 127 | | | (330) | | | 132 | | Foreign currency forward contracts | Other income, net | | | 76 | | | (223) | |
| Total loss (gain) | | $ | 882 | | | $ | (990) | | | $ | 2,943 | | | $ | (1,947) | | |
| Total gain | | Total gain | | | | $ | (1,889) | | | $ | (368) | |
|
9.8. Fair value measurementsValue Measurements
The Company applies a fair value hierarchy pursuant to ASC Topic 820, Fair Value Measurement, which consists of three levels of inputs used to measure fair value:
Level 1 Inputs to fair value are quoted prices in active markets for identical assets or liabilities;
Level 2 Inputs to fair value are based on observable data other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data such as interest rates or yield curves for substantially the full term of the instrument; and
Level 3 Inputs to fair value are based on unobservable data for the instrument and are supported by little or no market activity.
Following is a description of the valuation methodologies used for instruments measured at fair value in the Condensed Consolidated Financial Statements, as well as the general classification of such instruments under the valuation hierarchy.
Interest rate swap contracts:contract: The fair value of the Company’s interest rate swap agreement is estimated with the assistance of a third party,third-party, using inputs that can be corroborated by observable market data (Level 2 of the fair value hierarchy).
Foreign currency forward contracts: The fair value of the Company’s outstanding foreign currency forward contracts areis estimated with the assistance of a third party,third-party, using inputs that can be corroborated by observable market data (Level 2 of the fair value hierarchy).
Deferred compensation plan: Contributions to the Company’s deferred compensation plan are managed by a third partythird-party administrative agent. The fair value of the total contributed plan assets and liabilities are based on inputs that can be corroborated by observable market data (Level 2 of the fair value hierarchy).
The Company’s other financial instruments consist mainly of cash, accounts receivable, accounts payable, accrued expenses and debt. The carrying value of all other financial instruments, except debt, approximates fair value due to the short-term nature of these assets and liabilities. The carrying value of the Company'sCompany’s debt approximates fair value as the interest rates are variable and reflective of market rates (Level 2 of the fair value hierarchy).
The Company’s assets and liabilities measured and recorded at fair value on a recurring basis at April 30,October 31, 2023, were as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Fair value measurements using: |
| Quoted prices in active markets (Level 1) | | Significant other observable inputs
(Level 2) | | Significant unobservable inputs
(Level 3) | | |
AssetsAssets: | | | | | | | | |
| | | | | | | | |
Foreign currency forward contracts | | $ | — | | | $ | 107 | | | $ | — | | | |
Deferred compensation plan asset | | $ | — | | | $ | 2,262 | | | $ | — | | | |
Liabilities | | | | | | | | |
| Interest rate swap contract | | $ | — | | | $ | 1,8303,082 | | | $ | — | |
| | | | | | |
| Deferred compensation plan asset | | $ | — | | | $ | 2,387 | | | $ | — | |
| Liabilities: | | | | | | |
| | | | | | |
| Deferred compensation liability | | $ | — | | | $ | 2,9203,523 | | | $ | — | |
| Foreign currency forward contracts | | $ | — | | | $ | 7 | | | $ | — | |
The Company’s assets and liabilities measured and recorded at fair value on a recurring basis at July 31, 2022,2023, were as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Fair value measurements using: |
| Quoted prices in active markets (Level 1) | | Significant other observable inputs
(Level 2) | | Significant unobservable inputs
(Level 3) | | |
AssetsAssets: | | | | | | | | |
| Interest rate swap contract | | $ | — | | | $ | 1,117 | | | $ | — | |
| Foreign currency forward contracts | | $ | — | | | $ | 1,44369 | | | $ | — | | | |
| | | | | | | | |
| Deferred compensation plan asset | | $ | — | | | $ | 1,7532,670 | | | $ | — | | | |
LiabilitiesLiabilities: | | | | | | | | |
| | | | | | | | |
Foreign currency forward contracts | | $ | — | | | $ | 223 | | | $ | — | | | |
| Deferred compensation liability | | $ | — | | | $ | 2,1423,261 | | | $ | — | | | |
| | | | | | | | |
10.9. Commitments and contingenciesContingencies
Long-term purchase contracts
The Company has entered into certain grape purchase contracts with various growers to supply a significant portion of its future grape requirements for wine production. The lengths of the contracts vary from one to eight16 years, and prices per ton are either determined at the outset for the contract duration or are negotiated annually. The Company'sCompany’s grape purchase contracts generally include acceptance provisions based on qualitative and quantitative grape quality characteristics. For the 2023 harvest, the Company purchased 32,000 tons of grapes at a cost of approximately $85.7 million which will be recognized into inventory during Fiscal 2024. For the 2022 harvest, the Company purchased 29,000 tons of grapes for a total cost of approximately $71.0 million inwhich was recognized into inventory during Fiscal 2023. For the 2021 harvest, the Company purchased grapes for a total cost of $68.1 million in Fiscal 2022. The Company also increases the scope of its grape contracts when necessitated by supply needs to meet production levels in future periods.
Purchase commitments
The Company enters into commitments to purchase barrels for each harvest, a significant portion of which are settled in Euros. As of July 31, 2022,2023, the Company had $8.8$10.6 million in barrel purchase commitments. During the ninethree months ended April 30,October 31, 2023, the Company paid the remaining commitments and liabilities$8.1 million associated with the barrel purchases for the 2022 harvest. As of April 30, 2023, the Company has entered into barrel purchase commitments of approximately $10.3 million for the 2023 harvest. In order to reduce the foreign exchange risk associated with the Euro to U.S. Dollar conversion rate, the Company enters into foreign currency forward contracts, generally aligning settlement dates with expected barrel deliveries and the anticipated timing of payments to various coopers. The Company does not enter into these contracts for speculative purposes. Gains and losses on these contracts are recorded in other income, net on the Condensed Consolidated Statements of Operations. See Note 87 (Derivative instruments) for the total notional value and impact on the Condensed Consolidated Financial Statements due to foreign currency forward contracts.
The Company enters into various contracts with third parties for custom crush, storage, glass and mobile bottling services. The costs related to these contracts are recorded in the period the service is provided. The contracts for custom crush services typically have minimums that the Company is required to pay if certain grape volume thresholds are not delivered. The Company does not record these minimums related to service contracts as contingent liabilities on the Condensed Consolidated Statements of Financial Position given the harvest yield size, resulting volumes and qualities of grape deliveries are not known or estimable until harvest, when all related contingencies would be resolved.
Contingent liabilities
The Company evaluates pending or threatened litigation, operational events which could result in regulatory or civil penalties, environmental risks and other sources of potential contingent liabilities during the year. In accordance with applicable accounting guidance, the Company establishes an accrued liability when those matters present loss contingencies which are both probable and reasonably estimable. As of April 30,October 31, 2023 and July 31, 2022,2023, there were no material contingent obligations requiring accrual or disclosure.
In the ordinary course of business, the Company enters into agreements containing standard indemnification provisions. The aggregate maximum potential future liability of the Company under such indemnification provisions is uncertain, as these involve potential future claims against the Company that have not occurred. The Company expects the risk of any future obligations under these indemnification provisions to be remote. As of April 30,October 31, 2023 and July 31, 2022,2023, no amounts have been accrued related to such indemnification provisions.
1110. Equity-based compensationEquity-Based Compensation
2016 Equity Plan
In 2016, the Company adopted the 2016 Equity Plan, which provided profit interest units to certain employees of the Company. In connection with the adoption of the Company's 2021 Plan, the Company will no longer grant additional awards under the 2016 Plan. However, the terms and conditions of the 2016 Plan will continue to govern the previously granted awards, to the extent applicable. The remaining awards vested on August 1, 2022 and were fully expensed as of July 31, 2022. The total fair value of restricted shares that vested during the nine months ended April 30, 2023 was $4.9 million.
Restricted shares
The following table represents restricted share activity:
| | | | | | | | | | | | | |
| Performance-based shares | | Weighted-average grant-date fair value (per share) | | |
| Unvested as of July 31, 2022 | 266,158 | | | $ | 14.23 | | | |
| Granted | — | | | — | | | |
| Vested | (266,158) | | | 14.23 | | | |
| Forfeited | — | | | — | | | |
| | | | | |
| Unvested as of April 30, 2023 | — | | | $ | — | | | |
2021 Equity Incentive Plan
In March 2021, the Company'sCompany’s Board of Directors approved the 2021 Equity Incentive Plan (“2021 Equity Plan”), which provides for granting up to 14,003,560 shares of the Company'sCompany’s common stock to employees, officers and founders.stock. Restricted stock units and stock options are granted to certain employees of the Company, advisors and directors (collectively “grants”). The grants are considered equity awards for purposes of calculating compensation expense and are equity-classified in the Condensed Consolidated Statements of Financial Position.
Stock options
Stock option awards are valued using the Black-Scholes option pricing model to estimate the fair value of each stock option award on the date of grant and expense ratably over the vesting period, generally four years. Stock options have a ten year term.
The following table represents the stock option activity:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Number of options | | Weighted-average exercise price (per share) | | | | Weighted-average remaining contractual life (in years) | | Aggregate intrinsic value (in thousands) |
| Outstanding at July 31, 2022 | | | 1,555,610 | | | $ | 17.15 | | | | | 8.7 | | $ | 3,847 | |
| Granted | | | 1,067,979 | | | 14.43 | | | | | | | |
| Exercised | | | (2,586) | | | 15.00 | | | | | | | |
| Forfeited | | | (118,237) | | | 16.94 | | | | | | | |
| Expired | | | (40,473) | | | 17.25 | | | | | | | |
| Outstanding at April 30, 2023 | | | 2,462,293 | | | $ | 15.99 | | | | | 8.6 | | $ | 817 | |
| | | | | | | | | | | |
| Exercisable as of April 30, 2023 | | | 685,331 | | | $ | 17.15 | | | | | 8.0 | | |
The Company recognized equity compensation expense related to the 2021 Plan stock options in selling, general and administrative expenses and capitalized a portion into inventories on the Condensed Consolidated Statements of Financial Position, as applicable. Total recognized equity compensation expense related to the 2021 Plan stock
options was $0.8 million and $0.5 million for the three months ended April 30, 2023 and 2022, respectively, and $2.1 million and $1.5 million for the nine months ended April 30, 2023 and 2022, respectively. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Number of options outstanding | | Weighted-average exercise price (per share) | | | | Weighted-average remaining contractual life (in years) | | Aggregate intrinsic value (in thousands) |
| Balance at July 31, 2023 | | | 2,321,233 | | | $ | 15.98 | | | | | 8.0 | | $ | — | |
| Granted | | | 1,254,867 | | | 9.90 | | | | | | | |
| Exercised | | | — | | | — | | | | | | | |
| Forfeited | | | (414,743) | | | 15.62 | | | | | | | |
| Expired | | | (122,639) | | | 16.64 | | | | | | | |
| Balance at October 31, 2023 | | | 3,038,718 | | | $ | 13.49 | | | | | 8.2 | | $ | 665 | |
| | | | | | | | | | | |
| Exercisable as of October 31, 2023 | | | 830,135 | | | $ | 16.39 | | | | | 5.4 | | $ | — | |
The total unrecognized compensation expense related to the 2021 Plan stock options was $8.7$9.4 million as of April 30,October 31, 2023, which is expected to be recognized over a weighted-average period of 2.93.2 years. The weighted-average grant-date fair value of options granted during the three months ended October 31, 2023 was $3.98 per share.
The following assumptions were applied in the Black-Scholes option pricing model to estimate the grant-date fair value of the stock options granted:
| | | | | | | | Three months ended October 31, |
| | Nine months ended April 30, 2023 | | 2023 | | 2022 |
| Expected term (in years)(a) | Expected term (in years)(a) | 6.23 | Expected term (in years)(a) | 6.22 | | 6.23 |
Expected dividend yield(b) | Expected dividend yield(b) | — | % | Expected dividend yield(b) | — | % | | — | % |
Risk-free interest rate(c) | Risk-free interest rate(c) | 3.96 | % | Risk-free interest rate(c) | 4.55 | % | | 3.96 | % |
Expected volatility(d) | Expected volatility(d) | 33.9 | % | Expected volatility(d) | 30.9 | % | | 33.9 | % |
| Stock price | $ | 14.43 | |
(a) Calculated as the midpoint between the weighted-average time to vest and the time to expiration.
(b) The Company has not historically paid and does not expect to pay dividends in the foreseeable future.
(c) The risk-free rate was estimated from the U.S. Treasury Constant Maturity Rates for a period consistent with the expected term in effect at the grant date.
(d) TheDue to a lack of sufficient trading history of the Company's common stock, the expected volatility was estimated based on analysis of the historical and implied volatility of the Company's common stock and a group of guideline public companies deemed to be comparable publicpublicly traded peers within the Company’s industry.
Restricted stock units
Restricted stock units (“RSUs”) are valued using the closing market price of our common stock on the date of grant. Expense is recognized ratably over the vesting period, generally four years for RSUs issued to employees and one year for RSUs issued to our independent directors.
The following table represents the RSU grant activity under the 2021 Plan:
| | | | | | | | | | | | | |
| Number of units | | Weighted-average grant-date fair value (per share) | | |
| Unvested as of July 31, 2022 | 414,609 | | | $ | 17.32 | | | |
| Granted | 382,985 | | | 14.56 | | | |
| Vested | (138,807) | | | 17.64 | | | |
| Forfeited | (39,414) | | | 16.94 | | | |
| Unvested as of April 30, 2023 | 619,373 | | | $ | 15.56 | | | |
The Company recognized equity compensation expense related to the 2021 Plan RSUs in selling, general and administrative expenses and capitalized a portion into inventories on the Condensed Consolidated Statements of Financial Position, as applicable. Total recognized equity compensation expense related to the 2021 Plan RSUs was $0.9 million and $0.7 million, for the three months ended April 30, 2023 and 2022, respectively, and $2.5 million and $2.3 million for the nine months ended April 30, 2023 and 2022, respectively. | | | | | | | | | | | | | |
| Number of units | | Weighted-average grant-date fair value (per share) | | |
| Unvested as of July 31, 2023 | 562,861 | | | $ | 15.52 | | | |
| Granted | 561,098 | | | 10.42 | | | |
| Vested | (79,639) | | | 14.43 | | | |
| Forfeited | (138,253) | | | 15.62 | | | |
| Unvested as of October 31, 2023 | 906,067 | | | $ | 12.44 | | | |
The total fairintrinsic value of restricted stock that vested during the ninethree months ended April 30,October 31, 2023 was $1.5$1.0 million. The total unrecognized compensation expense related to the 2021 Plan RSUs was $8.5$9.9 million as of April 30,October 31, 2023, which is expected to be recognized over a weighted-average period of 2.62.8 years.
Compensation expense
During three months ended October 31, 2023 and 2022, the Company recognized total equity-based compensation expense due to units vesting over their requisite service periods for all plans of $1.2 million and $1.2 million, respectively. The Company recognizes equity-based compensation in selling, general and administrative expenses, net of actual forfeitures as incurred, in the Condensed Consolidated Statements of Operations, except for amounts capitalized to inventories in the Condensed Consolidated Statements of Financial Position.
Employee Stock Purchase Plan
The Company adopted the 2021 Employee Stock Purchase Plan, which allows for the issuance of up to a total of 1,250,509 shares of the Company's common stock. As of April 30, 2023, there were 1,221,597 shares available for issuance under the ESPP. The Company recognized equity compensation expense related to the ESPP in selling, general and administrative expenses and capitalized a portion into inventory, as applicable. For the three and nine months ended April 30, 2023, total recognized compensation expense was immaterial.
12.11. Earnings per sharePer Share
Basic earnings per share is calculated by dividing the net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflects the dilution that would occur if any potentially dilutive instruments were exercised or converted into shares of common stock.
The following is a reconciliation of the Company'sCompany’s basic and diluted incomeearnings per share calculation:
| | | Three months ended April 30, | | Nine months ended April 30, | | | Three months ended October 31, |
| (in thousands, except per share data) | 2023 | | 2022 | | 2023 | | 2022 | |
| (in thousands, except share and per share amounts) | | (in thousands, except share and per share amounts) | | 2023 | | 2022 |
| Numerator: | Numerator: | | | | | | | | Numerator: | | | | |
| Net income attributable to The Duckhorn Portfolio, Inc. | Net income attributable to The Duckhorn Portfolio, Inc. | $ | 16,797 | | | $ | 15,565 | | | $ | 51,529 | | | $ | 54,770 | | Net income attributable to The Duckhorn Portfolio, Inc. | | $ | 15,537 | | | $ | 19,815 | |
| | Denominator: | Denominator: | | Denominator: | | |
| Weighted average number of shares outstanding for basic per share calculation | Weighted average number of shares outstanding for basic per share calculation | 115,255,671 | | 115,115,850 | | 115,209,972 | | | 115,070,183 | | Weighted average number of shares outstanding for basic per share calculation | | 115,339,774 | | | 115,184,161 | |
| Effect of dilutive potential shares(a): | Effect of dilutive potential shares(a): | | Effect of dilutive potential shares(a): | | |
| Stock options | Stock options | 867 | | | 45,076 | | | 2,390 | | | 123,162 | | Stock options | | 80,598 | | | 11,976 | |
| Restricted stock awards | 110,917 | | | 120,798 | | | 212,672 | | | 154,463 | | |
| Restricted stock units | | Restricted stock units | | 31,347 | | | 79,555 | |
| Adjusted weighted average shares outstanding for diluted per share calculation | Adjusted weighted average shares outstanding for diluted per share calculation | 115,367,455 | | 115,281,724 | | 115,425,034 | | | 115,347,808 | | Adjusted weighted average shares outstanding for diluted per share calculation | | 115,451,719 | | | 115,275,692 | |
| Earnings per share attributable to
The Duckhorn Portfolio, Inc.: | Earnings per share attributable to
The Duckhorn Portfolio, Inc.: | | Earnings per share attributable to The Duckhorn Portfolio, Inc.: | | |
| Basic | Basic | $ | 0.15 | | | $ | 0.14 | | | $ | 0.45 | | | $ | 0.48 | | Basic | | $ | 0.13 | | | $ | 0.17 | |
| Diluted | Diluted | $ | 0.15 | | | $ | 0.14 | | | $ | 0.45 | | | $ | 0.47 | | Diluted | | $ | 0.13 | | | $ | 0.17 | |
(a) Calculated using the treasury stock method.
For the three months ended April 30,October 31, 2023 and 2022, there were 0.71.2 million and 0.2 million incremental common shares issuable upon the exercise of certain stock options, respectively, that were not included in the calculation of diluted EPS because the effect of their inclusion would have been antidilutive under the treasury stock method. For the nine months ended April 30, 2023 and 2022, there were 0.5 million and 0.20.3 million incremental common shares issuable upon the exercise of certain stock options, respectively, that were not included in the calculation of diluted EPS because the effect of their inclusion would have been antidilutive under the treasury stock method. Refer to Note 1110 (Equity-based compensation) for the terms of the awards.
13.12. Income taxesTaxes
Income tax expense was $6.0$5.6 million, and $18.4with an effective tax rate of 26.6% for the three months ended October 31, 2023, respectively, compared to $7.1 million, with an effective tax rate of 26.3% and 26.3% for the three and nine months ended April 30, 2023, respectively, compared to $4.7 million and $18.5 million, with an effective tax rate of 23.2% and 25.2% for the three and nine months ended April 30, 2022, respectively.October 31, 2022. The
effective tax rates for both periods presented were higher than the federal statutory rate of 21% primarily due to the impact of state income taxes.
14.13. Subsequent events
Second Amendment to the Amended and Restated First Lien Loan and Security AgreementEvents
On May 2,November 16, 2023, the Company, Auguste Merger Sub, Inc., a California corporation and an indirect wholly-owned subsidiary of the Company (“Merger Sub”), Brown-Forman Corporation, a Delaware corporation (“Brown-Forman”), and Sonoma-Cutrer Vineyards, Inc., a California corporation and a wholly-owned subsidiary of Brown-Forman (“Sonoma-Cutrer”), entered into Amendment No. 2an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Merger Sub will merge with and into Sonoma-Cutrer (the “Merger”) with Sonoma-Cutrer continuing as the Amendedsurviving entity after the Merger. The board of directors of the Company approved the Merger Agreement, the Merger and Restated First Lien Loanthe other transactions contemplated by the Merger Agreement.
Sonoma-Cutrer Vineyards specializes in luxury Chardonnay brands. Sonoma-Cutrer owns six estate vineyards with approximately 1,100 acres in both the Russian River Valley and Security Agreement. The amendment amends and restatesSonoma Coast appellations. It sells its luxury wine across the definition of fixed charge coverage ratioU.S. in the New Credit Agreement to replace unfinanced capital expenditures with maintenance capital expenditureswholesale channel through distributors and in the calculationDTC channel with retail price points ranging from $20 to $50 per bottle.
At consummation of the fixed charge coverage ratio.
Acquisition of North Coast Wine Production Facility
On May 4, 2023, the Company announced that it entered into a definitive agreement to acquire a production winery and seven acres of planted Cabernet Sauvignon in Alexander Valley, Sonoma County, California.Merger, Brown-Forman will receive approximately $400.0 million. The purchase price is comprised of 31,531,532 shares of the transaction isCompany’s common stock valued at approximately $55.0$350.0 million and is$50.0 million payable in cash, subject to certain customary closing conditions. adjustments set forth in the Merger Agreement, including for cash, working capital, indebtedness and transaction expenses. The cash consideration is expected to be funded through cash on hand and borrowings under the Company’s revolving credit facility.
The transaction is expected to close in the fourth fiscalthird quarter of 2023the Company’s Fiscal 2024, subject to regulatory approvals and is expected to be funded with the New Credit Facility and available cash. The Company is currently assessing the fair value of identifiable net assets acquired.customary closing conditions.
Item 2. Management’s discussionDiscussion and analysisAnalysis of financial conditionFinancial Condition and resultsResults of operationsOperations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See “Cautionary note regarding forward-looking statements” included in this Quarterly Report on Form 10-Q. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed in Part I “Item 1A. Risk factors” included in our Annual Report on Form 10-K for Fiscal 2022.2023.
Introduction
MD&A is provided as a supplement to the accompanying Condensed Consolidated Financial Statements and related notes to help provide an understanding of our results of business, results of operations and financial condition.
MD&A is organized as follows:
•Overview. This section provides a general description of our business and industry trends, and a discussion of our key metrics for the three months ended October 31, 2023. In addition, this section includes a discussion of recent developments and transactions affecting comparability that we believe are important in understanding our results of operations and financial condition, and in anticipating future trends.
•Results of operations. This section provides a discussion of our components of results of operations and an analysis of our results of operations for the three months ended October 31, 2023 as compared to the three months ended October 31, 2022.
•Non-GAAP financial measures and adjusted EBITDA reconciliation. This section provides a reconciliation of adjusted EBITDA, a non-GAAP financial measure, to net income attributable to The Duckhorn Portfolio, Inc., the most directly comparable measure prepared in accordance with GAAP.
•Liquidity and capital resources. This section provides a discussion of our financial condition and liquidity as of October 31, 2023, which includes (i) a discussion of our sources of liquidity (ii) a discussion of our material cash requirements as of October 31, 2023; (iii) an analysis of changes in our cash flows for the three months ended October 31, 2023 as compared to the three months ended October 31, 2022; (iv) a discussion of our capital resources, including the availability under our credit facilities, our outstanding debt, covenant compliance and off-balance sheet arrangements as of October 31, 2023.
•Critical accounting policies and estimates. This section discusses our critical accounting policies considered to be important to our results of operations and financial condition, which typically require significant judgment and estimation on the part of management in their application. In addition, all of our significant accounting policies, including our critical accounting policies, are summarized in Note 2 (Basis of presentation and recent accounting pronouncements) to the accompanying Condensed Consolidated Financial Statements.
•Recent accounting pronouncements. This section discusses the potential impact on our reported results of operations and financial condition of certain accounting standards that have been recently issued.
Overview
The Duckhorn Portfolio is the premier scaled pure-play producer of luxury wines sold for $15 or higher in North America. We offer a curated and comprehensive portfolio of luxury wines with suggested retail prices ranging from $20 to $200$230 per bottle. Our wines are available in all 50 states, the District of Columbia and over 50 countries under a world-class luxury portfolio of winery brands, including Duckhorn Vineyards, Decoy, Goldeneye, Paraduxx, Migration, Canvasback, Calera, Kosta Browne, Greenwing and Postmark. The primary market for our wines is the U.S.
We sell our wines to distributors outside California and directly to trade accounts in California, which together comprise our wholesale channel. We also sell directly to consumers through our DTC channel, which includes eightseven tasting rooms, wine clubs and our multi-winery e-commerce website. Our powerful omni-channel sales model continues to drive strong margins by leveraging long-standing relationships.
The following factors and trends in our business are expected to be key drivers of our net sales growth for the foreseeable future:
•Leverage our sales and marketing strength to gain market share. Leverage sales and marketing strengths and increasing brand awareness and grow sales of our winery brands to our existing consumer base and a new generation of consumers, allowing us to gain market share in a consolidating marketplace.
•Insightful and targeted portfolio evolution. Launch winery brand extensions and continue evolving and strategically broadening our portfolio.
•Expand and accelerate wholesale channel distribution. Capture distribution growth opportunities and accelerate sales to existing distributors, expand our geographical reach withing the U.S. and retail accounts in California.
•Continue to invest in DTC capabilities. Engage with our consumers, create brand evangelists and drive adoption across our portfolio through brand-specific tasting rooms, multiple wine clubs and our multi-winery e-commerce website, all of which enable us to cross-sell wines within our portfolio.
•Evaluate strategic acquisitions opportunistically. Disciplined evaluation of strategic acquisitions when opportunities arise to create stockholder value. In Fiscal 2023, we purchased a state-of-the-art winemaking facility in Alexander Valley, California, which is nearly double the size of the Company’s previously largest production facility, and included seven acres of planted Cabernet Sauvignon for approximately $54.6 million. In November 2023, we entered into a merger agreement with Sonoma-Cutrer as discussed below, see “—Key factors affecting our performance — Recent development”. Sonoma-Cutrer is well-known for luxury Chardonnay brands, with six estate vineyards spanning approximately 1,100 acres in both the Russian River Valley and Sonoma Coast appellations.
Key financial metrics
We use net sales, gross profit and adjusted EBITDA to evaluate the performance of our business, identify trends in our business, prepare financial forecasts and make capital allocation decisions. We believe the following metrics are useful in evaluating our performance. Adjusted EBITDA should not be considered in isolation or as a substitute for any other financial information depicting our results prepared in accordance with U.S. GAAP. Certain judgments and estimates are inherent in our processes to calculate these key financial metrics. See “—Limitations of non-GAAPNon-GAAP financial measures and adjusted EBITDA reconciliation” for additional information.
| | | Three months ended April 30, | | Nine months ended April 30, | | | Three months ended October 31, |
| (in thousands) | (in thousands) | 2023 | | 2022 | | 2023 | | 2022 | (in thousands) | | 2023 | | 2022 |
| Net sales | Net sales | $ | 91,242 | | | $ | 91,584 | | | $ | 302,901 | | | $ | 294,501 | | Net sales | | $ | 102,509 | | | $ | 108,171 | |
| Gross profit | Gross profit | $ | 50,511 | | | $ | 43,962 | | | $ | 160,407 | | | $ | 145,849 | | Gross profit | | $ | 53,853 | | | $ | 54,710 | |
| Net income attributable to The Duckhorn Portfolio, Inc. | Net income attributable to The Duckhorn Portfolio, Inc. | $ | 16,797 | | | $ | 15,565 | | | $ | 51,529 | | | $ | 54,770 | | Net income attributable to The Duckhorn Portfolio, Inc. | | $ | 15,537 | | | $ | 19,815 | |
| Adjusted EBITDA | Adjusted EBITDA | $ | 35,820 | | | $ | 32,873 | | | $ | 110,298 | | | $ | 105,272 | | Adjusted EBITDA | | $ | 34,713 | | | $ | 35,665 | |
Net sales
Our net sales represent revenues less discounts, promotions and excise taxes.
Gross profit
Gross profit is equal to our net sales less cost of sales. Cost of sales includes all wine production costs, winemaking, bottling, packaging, warehousing and shipping and handling costs. Our gross profit and gross profit margins on net sales are impacted by the mix of winery brands we sell in our portfolio. See “—Components of results of operation and keyKey factors affecting our performance”performance—Sales channels” for additional information.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income before interest, taxes, depreciation and amortization, purchase accounting adjustments, transaction expenses, certain inventory write-downs, changes in the fair value of
derivatives, equity-based compensation, net lease income, debt refinancing costs and certain other items which are not related to our core operating performance.wildfire costs. Adjusted EBITDA is a key performance measure we use in evaluating our operational results. We believe adjusted EBITDA is a helpful measure to provide investors an understanding of how management regularly monitors our core operating performance, as well as how management makes operational and strategic decisions in allocating resources. We believe adjusted EBITDA also provides management and investors consistency and comparability with our past financial performance and facilitates period to period comparison of operations, as it eliminates the effects of certain variations unrelated to our overall performance. See “—Limitations of non-GAAPNon-GAAP financial measures and adjusted EBITDA reconciliation” for additional information.
Key operating metrics
We monitor the following key operating metrics to help us evaluate our business, identify trends affecting our business, measure our performance, formulate business plans and make strategic decisions. We believe the following metrics are useful in evaluating our business but should not be considered in isolation or, solely with respect to price / mix contribution, as a substitute for financial information prepared and presented in accordance with U.S. GAAP. Certain judgments and estimates are inherent in our processes to calculate these metrics.
Net sales percentage by channel
We calculate net sales percentage by channel as net sales made through our wholesale channel to distributors, through our wholesale channel directly to trade accounts in California and through our DTC channel, respectively, as a percentage of our total net sales. We monitor net sales percentage across all three routes to market to understand the effectiveness of our omni-channel distribution model and to ensure we are deploying resources effectively to optimize engagement with our customers across our complementary distribution channels.
| | | Three months ended April 30, | | Nine months ended April 30, | | | Three months ended October 31, |
| | 2023 | | 2022 | | 2023 | | 2022 | | | 2023 | | 2022 |
| Wholesale - Distributors | Wholesale - Distributors | 68.6 | % | | 62.0 | % | | 68.9 | % | | 66.0 | % | Wholesale - Distributors | | 77.0 | % | | 76.4 | % |
| Wholesale - California direct to trade | Wholesale - California direct to trade | 17.5 | | | 16.6 | | | 17.4 | | | 17.6 | | Wholesale - California direct to trade | | 15.6 | | | 15.8 | |
| DTC | DTC | 13.9 | | | 21.4 | | | 13.7 | | | 16.4 | | DTC | | 7.4 | | | 7.8 | |
| Net sales | Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | Net sales | | 100.0 | % | | 100.0 | % |
The composition of our net sales, expressed in percentages by channel for the three months ended April 30,October 31, 2023 was impactedsaw relative consistency by DTC offering timing shifts. The Kosta Browne Appellation Series, our highest volume Kosta Browne offering, shifted intochannel over the fourth quarter of Fiscal 2023, compared to the third quarter of Fiscal 2022. Additionally, the Kosta Browne Estate Series offering shifted into the third quarter of Fiscal 2023, compared to the fourth quarter of Fiscal 2022.prior year period. In our wholesale business, we strengthened our market position and delivered volume growthcontributions decreased during the three and nine months ended April 30, 2023.October 31, 2023 when compared to the three months ended October 31, 2022 related to a slight depletion decline partially offset by an increase in accounts. DTC also experienced volume contribution decreases mainly related to our wine club sales. For discussion of intra-period seasonality, see “—Key factors affecting our performance—Seasonality”.
Net sales growth contribution
Net sales growth is defined as the percentage increase of net sales in the period compared to the prior year period. Contribution to net sales growth is calculated based on the portion of changes in net sales for a given period that is driven by two factors: changes in sales volume and changes in sales price and mix. Volume contribution presents the percentage increase in cases sold in the current year period compared to the prior year period. Price / mix
contribution presents net sales growth less volume contribution and reflects that, in addition to changes in sales volume, changes in net sales are primarily attributable to changes in sales price and mix.
| | | Three months ended April 30, | | Nine months ended April 30, | | | Three months ended October 31, |
| | 2023 | | 2022 | | 2023 | | 2022 | | | 2023 | | 2022 |
| Net sales growth | Net sales growth | (0.4) | % | | 1.3 | % | | 2.9 | % | | 10.8 | % | Net sales growth | | (5.2) | % | | 3.8 | % |
| Volume contribution | Volume contribution | 3.5 | % | | (0.6) | % | | 4.2 | % | | 10.0 | % | Volume contribution | | (3.4) | % | | 9.2 | % |
| Price / mix contribution | Price / mix contribution | (3.9) | % | | 1.9 | % | | (1.4) | % | | 0.8 | % | Price / mix contribution | | (1.8) | % | | (5.4) | % |
Price / mix contribution forFor the three months ended April 30,October 31, 2023, the negative volume contribution was mainly driven by the net impact of DTC offering timing shifts between the third and fourth quarters of Fiscal 2023, partially offset by price increases taken earlierexpected sales decline in all channels, against a strong comparison in the fiscal year.
For the nine months ended April 30, 2023, the decrease inprior period, as off-premise and on-premise experienced declines. The negative price / mix contribution was mainly impacted by DTC offering shifts andbrand mix.
For the three months ended October 31, 2022, negative price mix contribution was impacted by the outsized volume growth of the wholesale channel, partially offset by price increases. Despite lapping high growth rates we achievedseen in the prior year period,both off-premise and on-premise growth. We increased our focus on trade account growthaccounts and pricing optimization were primary drivers of our sales performanceexperienced strong on-premise and off-premise depletions for the ninethree months ended April 30, 2023.
For the nine months ended April 30, 2022, growth in net sales was mainly attributable to strong sales volume growth and a positive price / mix contribution demonstrating the shift back toward pre-COVID-19 trends as shown by the sustained growth in our on-premise sales. Generally, on-premise expansion also drives increased sales in our ultra-luxury brands that sell at higher average sales prices and positively impact price / mix contribution.
Components of results of operation and key factors affecting our performance
Net sales
Our net sales consist primarily of wine sales to distributors and directly to trade accounts in California, which together comprise our wholesale channel, and directly to individual consumers through our DTC channel. Net sales generally represent wine sales and shipping, when applicable. Sales are generally recorded at the point of shipment and are recorded net of consideration provided to customers through various incentive programs, other promotional discounts and excise taxes.
We refer to the volume of wine we sell in terms of cases, each of which represents a standard 12 bottle case of wine (in which each bottle has a volume of 750 milliliters). Cases sold represent wine sales through our wholesale and DTC channels. Depletions, in turn, represent sell-through from our distributors, including our California wholesale channel, to trade accounts nationally.
The following factors and trends in our business are expected to be key drivers of our net sales growth for the foreseeable future:
•Further leverage brand strength. Leverage sales and marketing strengths and increasing brand awareness and grow sales of our winery brands to our existing consumer base and a new generation of consumers in a consolidating marketplace.
•Insightful and targeted portfolio evolution. Launch winery brand extensions and continue evolving and strategically broadening our portfolio.
•Distribution expansion and acceleration. Capture distribution growth opportunities and accelerate sales to existing distributors and retail accounts in California.
•Continued investment in DTC channel. Engage with our consumers, create brand evangelists and drive adoption across our portfolio through brand-specific tasting rooms, multiple wine clubs and our multi-winery e-commerce website, all of which enable us to cross-sell wines within our portfolio.October 31, 2022.
•Opportunistic evaluation of strategic acquisitions. Disciplined evaluation of strategic acquisitions when opportunities arise to create stockholder value.
The primary market forKey factors affecting our wines is the United States, which represented approximately 94% of our net sales during the nine months ended April 30, 2023. Accordingly, our results of operations are primarily dependent on U.S. consumer spending.performance
Sales channels
Channel mix can affect our performance and results of operations, particularly gross profit and gross profit margin.
•Wholesale channel.channel. Consistent with sales practices in the wine industry, sales to trade accounts in California and to distributors in other states occur below suggested retail price. We work closely with our distributors to increase the volume of our wines and number of products that are sold in their respective territories. In California, where we make sales directly to trade accounts, we benefit from greater control over our sales and higher profit margins by selling directly to retailers in the state. Our wholesale channel constitutes a greater proportion of our net sales than our DTC channel.
•DTC channel.channel. Wines sold through our DTC channel are generally sold at suggested retail prices. DTC channel sales represent important direct connections with our customers. DTC channel sales growth will generally be favorable to price / mix contribution and gross profit margin in periods where that channel constitutes a greater proportion of net sales than in a comparative period.
Wholesale channel sales made on credit terms generally require payment within 90 days of delivery, and a substantial majority are collected within 60 days. In periods where the net sales channel mix reflects a greater concentration of wholesale sales (which typically occurs in our first and second fiscal quarters), we typically experience an increase in accounts receivable for the period to reflect the change in sales mix, with payment collections in the subsequent period generally reducing accounts receivable and having a positive impact on cash flows in such subsequent period.
While we seek to increase sales in both channels, we expect that our future sales will continue to be substantially comprised of sales in the wholesale channel. We routinely offer sales discountsintend to maintain and promotions through various programsstrengthen our long-standing relationships within our network of distributors, which we believe will be critical to distributors aroundour continued growth and success. In the countrywholesale channel, we are positioned as a “one-stop shop” for all the luxury and to trade accounts in California. These programs, where permissible, include volume-based discounts on sales orders, depletion-based incentives we payultra-luxury needs of our consumers, distributors and certain other promotional activities. The expense associated with these discountsretailers.
In the DTC channel, our holistic approach to consumer engagement both online and promotionsoffline is estimatedsupported by an integrated e-commerce platform and recorded as a reductionportfolio wine shop, seven distinctive tasting room experiences located throughout Northern California and Washington, and several award-winning wine clubs, all of which enable us to total salescross-sell wines within our portfolio. Growth in calculating net sales. While our promotional activities may resultDTC channel or shifts in some variabilityour member offerings will impact the price / mix contribution and gross profit margins in net sales from quarter to quarter, historically, the impact of these activities on our results has generally been proportional to changes in total net sales.impacted periods.
Seasonality
OurGenerally, our net sales are typically highest in the first half of our fiscal year, predominantly due to increased consumer demand around major holidays. Net sales seasonality differs for wholesale and DTC channels, resulting in quarterly seasonality in our net sales that depends on the channel mix for that period. We typically experience a higher concentration of sales through our wholesale channel during our first and second fiscal quarters due to increased purchasing by distributors in anticipation of higher consumer demand during the holiday season. This dynamic generally results in lower average selling prices due to distributor and retail sales discounts and promotions in our wholesale channel. See “—Key operating metrics.” In Fiscal 2022,2023, our net sales in the first, second, third and fourth fiscal quarters represented approximately 28%27%, 26%, 25%23% and 21%24%, respectively, of our total net sales for the year. We expect quarterly net sales seasonality to be impacted in Fiscal 2023 by the net impacts of DTC offering timing shifts between the third and fourth quarters of Fiscal 2023 compared to the comparable prior year periods in Fiscal 2022.
Gross profit
Gross profit is equal to net sales minus cost of sales. Cost of sales includes grape and bulk wine purchase costs. For grapes we grow, cost of sales includes amounts incurred to develop and farm the vineyards we own and lease. Cost of sales also includes all winemaking and processing charges, bottling, packaging, warehousing and shipping and handling. Costs associated with storing and maintaining wines that age longer than one year prior to sale continue to be capitalized until the wine is bottled and available for sale.
As we continue to grow our business in the future, we expect gross profit to increase as our sales grow and as we effectively manage our cost of sales, subject to any future unexpected volatility in the grape and bulk wine markets, increased seasonal labor costs and, to a lesser extent inflationary impact from commodity costs, including dry goods and packaging materials.
Agribusiness
We have developed a diversified sourcing and production model, supported by our eight wineries, world-class and strategically located vineyards controlled or owned by the Company (“Estate vineyardsproperties”) and strong relationships with quality-oriented growers. In addition, our sourcing model includes the purchase of high-quality bulk wine from established suppliers to add a highly flexible element of diversity to our supply model. Generally, over 85%approximately 10% of our total production isthe grapes are sourced from third party growers and, to a significantly lesser extent, the bulk wine market.our Estate properties, with approximately 90% sourced from third-party growers. Our ability to adjust the composition of a particular vintage among our grape and bulk wine sourcing supply channels allows us to tailor inputs based on varying market or seasonal factors, which we believe enables us to produce the highest possible quality wine while optimizing gross profit.
Consistent with other agriculture enterprises, the cost of our wine fluctuates due to annual harvest yields, which vary due to weather and other events. In addition to agricultural factors, price volatility in the grape and bulk wine markets, competition for supply and seasonal labor costs also impact our cost of sales. We may continue to experience fluctuations in the costs of producing wine, which could impact our gross profit.
Selling, general and administrative expenses
Selling, general and administrative expenses consist of selling expenses, marketing expenses and general and administrative expenses. Selling expenses consist primarily of direct selling expenses in our wholesale and DTC channels, including payroll and related costs, product samples and tasting room operating costs, including processing fees and outside services. Marketing expenses consist primarily of advertising costs to promote winery brand awareness, customer retention costs, payroll and related costs. General and administrative expenses consist primarily of payroll and related costs, administrative expenses to support corporate functions, legal and professional fees, depreciation, accounting and information technology, tenancy expenses and other costs related to management.
Other expenses
Other expenses consist primarily of interest expense we incur on balances outstanding under the terms of our Original Credit Facility and our New Credit Facility, amortization related to debt issuance costs and realized and unrealized gains or losses on our derivative instruments.
Income tax expense
Income tax expense consists of federal and state taxes payable to various federal, state and local tax authorities.
Inventory lifecycle
Grape growing on our Estate vineyardsproperties
Although generally over 85%Approximately 10% of our wine is derived fromthe grapes grown by third party growers and, to a significantly lesser extent, bulk wine we purchase, the remainder isare sourced from our Estate vineyardsproperties that we own or lease. Once a vineyard reaches consistent yield levels, approximately three to five years after planting, it
will generally produce a relatively consistent amount of fruit for approximately 15 to 25 years, at which time blocks of the vineyard will gradually be replanted in stages after a period of lying fallow. The length of time between initial investment and ultimate sale of our Estate wines, coupled with the ongoing investment required to produce quality wine, is not typical of most agricultural industries.
Harvest-to-release
Of the total case volume we produce and sell, the majority is comprised of red wines from grape varietalsvarieties such as Cabernet Sauvignon, Pinot Noir and Merlot, which can have production lifecycles spanning months and years from harvest until the time the wine is released, depending on the aging requirements prescribed by the winemakers responsible for each of our winery brands. Our red wines generally have a harvest-to-release inventory lifecycle that can range from 1511 to 48 months. Our white, rosé and sparkling wines generally have a harvest-to-release inventory lifecycle that can range from fiveeight to 4844 months. During aging and storage, until bottling, we continue to capitalize overhead costs into the carrying value of the wine.
Given the long-term nature of our investment, grape purchasing and bulk wine purchasing decisions, our production planning processes are designed to mitigate the risk of over-supply by sourcing a portion of our production needs in the spot markets to the degree appropriate based on winery brand and vintage. This opportunistic approach to grape purchases also helps reduce our overall exposure to future grape price volatility.
Recent developments
Acquisition of Geyserville Winery
On June 22, 2023, we acquired a production winery and seven acres of planted Cabernet Sauvignon in Alexander Valley, Sonoma County, California. With this purchase, we expect to expand our processing, storing and bottling capabilities to reduce our reliance on custom crush facilities, and gain better visibility to our cost of goods. The purchase price of the transaction was $54.6 million and was funded with $15.0 million from the Credit Facility and available cash.
Merger Agreement - Sonoma-Cutrer
On November 16, 2023, the Company, Auguste Merger Sub, Inc., a California corporation and an indirect wholly-owned subsidiary of the Company (“Merger Sub”), Brown-Forman Corporation, a Delaware corporation
(“Brown-Forman”), and Sonoma-Cutrer Vineyards, Inc., a California corporation and a wholly-owned subsidiary of Brown-Forman (“Sonoma-Cutrer”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Merger Sub will merge with and into Sonoma-Cutrer (the “Merger”) with Sonoma-Cutrer continuing as the surviving entity after the Merger. Sonoma-Cutrer is well-known for luxury Chardonnay brands. Sonoma-Cutrer owns six estate vineyards with approximately 1,100 acres in both the Russian River Valley and Sonoma Coast appellations. It sells its luxury wine across the U.S. in the wholesale channel through distributors and in the DTC channel with retail price points ranging from $20 to $50 per bottle.
At consummation of the Merger, Brown-Forman will receive approximately $400.0 million. The purchase price is comprised of 31,531,532 shares of the Company’s common stock valued at approximately $350.0 million and $50.0 million payable in cash, subject to adjustments set forth in the Merger Agreement, including for cash, working capital, indebtedness and transaction expenses. The cash consideration is expected to be funded through cash on hand and borrowings under the Company’s revolving credit facility. The transaction is expected to close in the third quarter of the Company’s Fiscal 2024, subject to regulatory approvals, customary closing conditions and the required period having elapsed since the mailing to the Company’s stockholders of a definitive information statement with respect to approval by the Company’s stockholders of the transactions contemplated by the Merger Agreement.
Components of results of operation
Net sales
Our net sales consist primarily of wine sales to distributors and directly to trade accounts in California, which together comprise our wholesale channel, and directly to individual consumers through our DTC channel. We refer to the volume of wine we sell in terms of cases, each of which represents a standard 12 bottle case of wine, in which each bottle has a volume of 750 milliliters. Cases sold represent wine sales through our wholesale and DTC channels.
Net sales generally represent wine sales and shipping, when applicable. Sales are generally recorded at the point of shipment and are recorded net of consideration provided to customers through various incentive programs, other promotional discounts, as described below, and excise taxes. Additionally, shipping and handling costs, grape sales and lease income are included within net sales.
Depletions represent sell-through from our distributors, including our California wholesale channel, to trade accounts. We routinely offer sales discounts and promotions through various programs to distributors around the country and to trade accounts in California. These programs, where permissible, include volume-based discounts on sales orders, depletion-based incentives we pay to distributors, and certain other promotional activities. The expense associated with these discounts and promotions is estimated and recorded as a reduction to total sales in calculating net sales.
Gross profit
Gross profit is equal to net sales minus cost of sales. Cost of sales includes grape and bulk wine purchase costs. For grapes we grow, cost of sales includes amounts incurred to develop and farm the vineyards we own and lease. Cost of sales also includes all winemaking and processing charges, bottling, packaging, warehousing and shipping and handling. Costs associated with storing and maintaining wines that age longer than one year prior to sale continue to be capitalized until the wine is bottled and available for sale.
Selling, general and administrative expenses
Selling, general and administrative expenses consist of selling expenses, marketing expenses and general and administrative expenses. Selling expenses consist primarily of direct selling expenses in our wholesale and DTC channels, including payroll and related costs, product samples and tasting room operating costs, including processing fees and outside services. Marketing expenses consist primarily of advertising costs to promote winery
brand awareness, customer retention costs, payroll and related costs. General and administrative expenses consist primarily of payroll and related costs, administrative expenses to support corporate functions, legal and professional fees, depreciation, accounting and information technology, tenancy expenses and other costs related to management.
Other expenses, net
Other income, net consist primarily of interest expense we incur on balances outstanding under the terms of our Credit Facility, amortization related to debt issuance costs and realized and unrealized gains or losses on our derivative instruments.
Income tax expense
Income tax expense consists of federal and state taxes payable to various federal, state and local tax authorities.
Results of operations
The following table sets forth our results of operations for the periods presented and expresses the relationship of each line item shown as a percentage of net sales for the periods indicated. The table below should be read in conjunction with the corresponding discussion and our audited Consolidated Financial Statements included in our Annual Report on Form 10-K for Fiscal 2022,2023, our unaudited Condensed Consolidated Financial Statements and related footnotes included elsewhere in this Quarterly Report on Form 10-Q:
| | | Three months ended April 30, | | Nine months ended April 30, | | | Three months ended October 31, |
| (in thousands, except percentages) | 2023 | | 2022 | | 2023 | | 2022 | |
| (in thousands) | | (in thousands) | | 2023 | | 2022 |
| Net sales | Net sales | $ | 91,242 | | | 100.0 | % | | $ | 91,584 | | | 100.0 | % | | $ | 302,901 | | | 100.0 | % | | $ | 294,501 | | | 100.0 | % | Net sales | | $ | 102,509 | | | 100.0 | % | | $ | 108,171 | | | 100.0 | % |
| Cost of sales | Cost of sales | 40,731 | | | 44.6 | | | 47,622 | | | 52.0 | | | 142,494 | | | 47.0 | | | 148,652 | | | 50.5 | | Cost of sales | | 48,656 | | | 47.5 | | | 53,461 | | | 49.4 | |
| Gross profit | Gross profit | 50,511 | | | 55.4 | | | 43,962 | | | 48.0 | | | 160,407 | | | 53.0 | | | 145,849 | | | 49.5 | | Gross profit | | 53,853 | | | 52.5 | | | 54,710 | | | 50.6 | |
| Selling, general and administrative expenses | Selling, general and administrative expenses | 23,989 | | | 26.3 | | | 23,126 | | | 25.2 | | | 79,307 | | | 26.2 | | | 70,178 | | | 23.7 | | Selling, general and administrative expenses | | 30,483 | | | 29.7 | | | 25,739 | | | 23.8 | |
| | Income from operations | Income from operations | 26,522 | | | 29.1 | | | 20,836 | | | 22.8 | | | 81,100 | | | 26.8 | | | 75,671 | | | 25.7 | | Income from operations | | 23,370 | | | 22.8 | | | 28,971 | | | 26.8 | |
| Interest expense | Interest expense | 2,993 | | | 3.3 | | | 1,618 | | | 1.8 | | | 7,839 | | | 2.6 | | | 4,860 | | | 1.7 | | Interest expense | | 4,004 | | | 3.9 | | | 2,162 | | | 2.0 | |
| Other expense (income), net | 729 | | | 0.7 | | | (1,046) | | | (1.1) | | | 3,385 | | | 1.1 | | | (2,477) | | | (0.8) | | |
| Other income, net | | Other income, net | | (1,813) | | | (1.8) | | | (87) | | | (0.1) | |
| Total other expenses, net | Total other expenses, net | 3,722 | | | 4.1 | | | 572 | | | 0.6 | | | 11,224 | | | 3.7 | | | 2,383 | | | 0.8 | | Total other expenses, net | | 2,191 | | | 2.1 | | | 2,075 | | | 1.9 | |
| Income before income taxes | Income before income taxes | 22,800 | | | 25.0 | | | 20,264 | | | 22.1 | | | 69,876 | | | 23.1 | | | 73,288 | | | 24.9 | | Income before income taxes | | 21,179 | | | 20.7 | | | 26,896 | | | 24.9 | |
| Income tax expense | Income tax expense | 6,006 | | | 6.6 | | | 4,699 | | | 5.1 | | | 18,358 | | | 6.1 | | | 18,483 | | | 6.3 | | Income tax expense | | 5,629 | | | 5.5 | | | 7,087 | | | 6.6 | |
| Net income | Net income | 16,794 | | | 18.4 | | | 15,565 | | | 17.0 | | | 51,518 | | | 17.0 | | | 54,805 | | | 18.6 | | Net income | | 15,550 | | | 15.2 | | | 19,809 | | | 18.3 | |
| Less: Net loss (income) attributable to non-controlling interest | 3 | | | — | | | — | | | — | | | 11 | | | — | | | (35) | | | — | | |
| Less: Net (income) loss attributable to non-controlling interest | | Less: Net (income) loss attributable to non-controlling interest | | (13) | | | — | | | 6 | | | — | |
| Net income attributable to The Duckhorn Portfolio, Inc. | Net income attributable to The Duckhorn Portfolio, Inc. | $ | 16,797 | | | 18.4 | % | | $ | 15,565 | | | 17.0 | % | | $ | 51,529 | | | 17.0 | % | | $ | 54,770 | | | 18.6 | % | Net income attributable to The Duckhorn Portfolio, Inc. | | $ | 15,537 | | | 15.2 | % | | $ | 19,815 | | | 18.3 | % |
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| Net sales |
| | | | | Three months ended October 31, | | Change |
| (in thousands) | | | | | | | | | 2023 | | 2022 | | $ | | % |
| Net sales | | | | | | | | | $ | 102,509 | | | $ | 108,171 | | | $ | (5,662) | | | (5.2) | % |
Net sales for the three months ended October 31, 2023 decreased $5.7 million, or 5.2%, to $102.5 million compared to $108.2 million for the three months ended October 31, 2022. Net sales decreased for the three months ended October 31, 2023, mainly attributable to negative volume contributions in all sales channels and a negative price / mix contribution. For further discussion of changes in sales volume and changes in sales price and mix, see “—Net sales growth contribution”.
Comparison | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of sales |
| | | | | Three months ended October 31, | | Change |
| (in thousands) | | | | | | | | | 2023 | | 2022 | | $ | | % |
| Cost of sales | | | | | | | | | $ | 48,656 | | | $ | 53,461 | | | $ | (4,805) | | | (9.0) | % |
Cost of the three and nine months ended April 30, 2023 and 2022
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| Net sales |
| Three months ended April 30, | | Change | | Nine months ended April 30, | | Change |
| (in thousands, except percentages) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Net sales | $ | 91,242 | | | $ | 91,584 | | | $ | (342) | | | (0.4) | % | | $ | 302,901 | | | $ | 294,501 | | | $ | 8,400 | | | 2.9 | % |
Net sales for the three months ended April 30, 2023 decreased $0.3by $4.8 million, or 0.4%9.0%, to $91.2 million compared to $91.6$48.7 million for the three months ended April 30, 2022. Net sales decreased for the three months ended April 30,October 31, 2023 mainly attributable to planned DTC offering timing shifts between the third and fourth quarters of Fiscal 2023, resulting in a negative price / mix contribution that was partially offset by planned price increases and volume contribution.
Net sales for the nine months ended April 30, 2023 increased $8.4 million, or 2.9%, to $302.9 million compared to $294.5 million for the nine months ended April 30, 2022. The increase in net sales for the nine months ended April 30, 2023 is primarily driven by volume growth in the wholesale channel, while benefiting from price increases that supported net sales growth, partially offset by the planned shifts in DTC offering timing.
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| Cost of sales |
| Three months ended April 30, | | Change | | Nine months ended April 30, | | Change |
| (in thousands, except percentages) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Cost of sales | $ | 40,731 | | | $ | 47,622 | | | $ | (6,891) | | | (14.5) | % | | $ | 142,494 | | | $ | 148,652 | | | $ | (6,158) | | | (4.1) | % |
Cost of sales decreased by $6.9 million, or 14.5%, to $40.7$53.5 million for the three months ended April 30, 2023 comparedOctober 31, 2022, primarily due to $47.6lower sales that correspondingly decreased cost of sales. We continued to manage our cost of sales through our diversified supply planning strategy.
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| Gross profit |
| | | | | Three months ended October 31, | | Change |
| (in thousands, except percentages) | | | | | | | | | 2023 | | 2022 | | $ | | % |
| Gross profit | | | | | | | | | $ | 53,853 | | | $ | 54,710 | | | $ | (857) | | | (1.6) | % |
| Gross margin | | | | | | | | | 52.5% | | 50.6% | | | | |
Gross profit decreased $0.9 million, or 1.6%, to $53.9 million for the three months ended April 30, 2022. Cost of sales decreased by $6.2 million, or 4.1%, to $142.5 million for the nine months ended April 30,October 31, 2023 compared to $148.7 million for the nine months ended April 30, 2022. The decrease in cost of sales for the three and nine months ended April 30, 2023 was primarily due to lapping an inventory reserve charge related to excess seltzer products of $3.9 million recorded in the three and nine months ended April 30, 2022, in addition to favorable brand mix.
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| Gross profit |
| Three months ended April 30, | | Change | | Nine months ended April 30, | | Change |
| (in thousands, except percentages) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Gross profit | $ | 50,511 | | | $ | 43,962 | | | $ | 6,549 | | | 14.9 | % | | $ | 160,407 | | | $ | 145,849 | | | $ | 14,558 | | | 10.0 | % |
| Gross margin | 55.4% | | 48.0% | | | | | | 53.0% | | 49.5% | | | | |
Gross profit increased $6.5 million, or 14.9%, to $50.5$54.7 million for the three months ended April 30,October 31, 2022. Gross profit margin was 52.5% for the three months ended October 31, 2023 compared to $44.050.6% for the three months ended October 31, 2022. This increase was the result of cost of sales improvement and lower discounting for the three months ended October 31, 2023 compared to the prior period.
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| Selling, general and administrative expenses |
| | | | | Three months ended October 31, | | Change |
| (in thousands) | | | | | | | | | 2023 | | 2022 | | $ | | % |
| Selling expenses | | | | | | | | | $ | 13,233 | | | $ | 13,526 | | | $ | (293) | | | (2.2) | % |
| Marketing expenses | | | | | | | | | 2,211 | | | 2,290 | | | (79) | | | (3.4) | |
| General and administrative expenses | | | | | | | | | 15,039 | | | 9,923 | | | 5,116 | | | 51.6 | |
| Total selling, general and administrative expenses | | | | | | | | | $ | 30,483 | | | $ | 25,739 | | | $ | 4,744 | | | 18.4 | % |
Selling, general and administrative expenses increased $4.7 million, or 18.4%, to $30.5 million for the three months ended April 30, 2022. Gross profit increased $14.6 million, or 10.0%,October 31, 2023, compared to $160.4$25.7 million for the ninethree months ended April 30,October 31, 2022. Total selling, general and administrative expenses as a percentage of net sales increased to 30.0% in the three months ended October 31, 2023 compared to $145.8 million for23.8% in the ninethree months ended April 30,October 31, 2022. The increases in gross profitgeneral and gross marginadministrative expenses for the three and nine months ended April 30,October 31, 2023 versus the prior year period were largely attributable to higher transaction costs related to our pending acquisition of Sonoma-Cutrer Vineyards and higher depreciation expense related to the resultasset acquisition of planned pricethe Geyserville winery in Fiscal 2023.
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| Other expenses, net |
| | | | | Three months ended October 31, | | Change |
| (in thousands) | | | | | | | | | 2023 | | 2022 | | $ | | % |
| Interest expense | | | | | | | | | $ | 4,004 | | | $ | 2,162 | | | $ | 1,842 | | | 85.2 | % |
| Other income, net | | | | | | | | | (1,813) | | | (87) | | | (1,726) | | | N.M. |
| Total other expenses, net | | | | | | | | | 2,191 | | | 2,075 | | | $ | 116 | | | 5.6 | % |
N.M. - Not Meaningful
Total other expenses, net increased by $0.1 million, to $2.2 million for the three months ended October 31, 2023, compared to $2.1 million for the three months ended October 31, 2022. The increases taken earlier in the year, favorable brand mix, andtotal other expenses, net,
lapping the aforementioned seltzer inventory reserve, partially offset by margin impact from the DTC offering timing shifts compared to the prior year period.
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| Operating expenses |
| Selling, general and administrative expenses |
| Three months ended April 30, | | Change | | Nine months ended April 30, | | Change |
| (in thousands, except percentages) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Selling expenses | $ | 12,000 | | | $ | 11,296 | | | $ | 704 | | | 6.2 | % | | $ | 37,881 | | | $ | 32,666 | | | $ | 5,215 | | | 16.0 | % |
| Marketing expenses | 1,969 | | | 2,113 | | | (144) | | | (6.8) | | | 6,860 | | | 7,172 | | | (312) | | | (4.4) | |
| General and administrative expenses | 10,020 | | | 9,717 | | | 303 | | | 3.1 | | | 34,566 | | | 30,340 | | | 4,226 | | | 13.9 | |
| Total selling, general and administrative expenses | $ | 23,989 | | | $ | 23,126 | | | $ | 863 | | | 3.7 | % | | $ | 79,307 | | | $ | 70,178 | | | $ | 9,129 | | | 13.0 | % |
Selling, general and administrative expenses increased $0.9 million, or 3.7%, to $24.0 million for the three months ended April 30, 2023, compared to $23.1 million for the three months ended April 30, 2022. The increases in selling, general and administrative expenses for the three months ended April 30, 2023 were largely attributable to higher compensation costs related to investments in our workforce as well as other direct selling costs, partially offset by the timing of operating expenses, versus the prior year period. These increases were partially offset by the shift of certain operating expenses from the third quarter of Fiscal 2023 into the fourth quarter of Fiscal 2023.
Selling, general and administrative expenses increased $9.1 million, or 13.0%, to $79.3 million for the nine months ended April 30, 2023, compared to $70.2 million for the nine months ended April 30, 2022. The increases in selling, general and administrative expenses for the nine months ended April 30, 2023 were largely attributable to higher professional fees and higher compensation costs. See “—Limitations of non-GAAP financial measures and adjusted EBITDA reconciliation” for additional information on transaction expenses reflected in operating expenses during the period.
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| Other expenses, net |
| Three months ended April 30, | | Change | | Nine months ended April 30, | | Change |
| (in thousands, except percentages) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Interest expense | $ | 2,993 | | | $ | 1,618 | | | $ | 1,375 | | | 85.0 | % | | $ | 7,839 | | | $ | 4,860 | | | $ | 2,979 | | | 61.3 | % |
| Other expense (income), net | 729 | | | (1,046) | | | 1,775 | | | 169.7 | % | | 3,385 | | | (2,477) | | | 5,862 | | | 236.7 | % |
| Total other expenses, net | $ | 3,722 | | | $ | 572 | | | $ | 3,150 | | | 550.7 | % | | $ | 11,224 | | | $ | 2,383 | | | $ | 8,841 | | | 371.0 | % |
Total other expenses, net increased by $3.2 million, to $3.7 million for the three months ended April 30, 2023, compared to $0.6 million for the three months ended April 30, 2022. Total other expenses, net increased by $8.8 million to $11.2 million for the nine months ended April 30, 2023 compared to $2.4 million for the nine months ended April 30, 2022. The increases in total other expenses, net, for the three and nine months ended April 30,October 31, 2023 compared to the prior year periodsperiod were driven by higher interest expense as a result of unfavorable interest rate movements on our variable-rate debt, greater unfavorableand higher average outstanding debt balances compared to the prior year period, partially offset by favorable fair value adjustments on our interest rate swap agreements and debt issuance costs incurred in connection with our New Credit Facility.agreement. See Note 76 (Debt) and Note 87 (Derivative instruments) to our Condensed Consolidated Financial Statements for additional information.
| | Income tax expense | Income tax expense | Income tax expense |
| | Three months ended April 30, | | Change | | Nine months ended April 30, | | Change | | | Three months ended October 31, | | Change |
| (in thousands, except percentages) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % | |
| (in thousands) | | (in thousands) | | 2023 | | 2022 | | $ | | % |
| Income tax expense | Income tax expense | $ | 6,006 | | | $ | 4,699 | | | $ | 1,307 | | | 27.8 | % | | $ | 18,358 | | | $ | 18,483 | | | $ | (125) | | | (0.7) | % | Income tax expense | | $ | 5,629 | | | $ | 7,087 | | | $ | (1,458) | | | (20.6) | % |
Income tax expense increased 27.8%decreased 20.6%, or $1.3$1.5 million, to $6.0$5.6 million for the three months ended April 30,October 31, 2023 compared to $4.7$7.1 million for the three months ended April 30,October 31, 2022. The increasedecrease in income tax expense for the three months ended April 30, 2023 is primarily due to an increase in income before taxes and an expanded state income tax base. Income tax expense decreased by $0.1 million, to $18.4 million for the nine months ended April 30, 2023 compared to $18.5 million for the nine months ended April 30, 2022. The decrease in income tax expense for the nine months ended April 30,October 31, 2023 is primarily due to a decrease in income before taxes, partially offset bytaxes. For the impact ofthree months ended October 31, 2023 and 2022, the effective tax rates were 26.6% and 26.3%, respectively, mainly reflecting the federal tax rate and state income taxes.
Limitations of non-GAAPNon-GAAP financial measures and adjusted EBITDA reconciliation
We believe adjusted EBITDA is a useful measure to us and our investors to assist in evaluating our operating performance because it provides consistency and comparability with our past financial performance across fiscal periods, as the metric eliminates the effects of certain expenses unrelated to our core operating performance that would result in variability in our results for reasons unrelated to overall continuing operations.
Adjusted EBITDA has certain limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under U.S. GAAP. Some of these limitations include:
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
•adjusted EBITDA does not reflect changes in, or cash requirements for, the Company’s working capital needs;
•adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Company’s debt;
•adjusted EBITDA does not reflect income tax payments that may represent a reduction in cash available to the Company; and
•other companies, including companies in the Company’s industry, may calculate adjusted EBITDA differently, which reduce their usefulness as comparative measures.
In evaluating adjusted EBITDA, we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of adjusted EBITDA should not be construed as an inference that the Company’s future results will be unaffected by the types of items excluded from the calculation of adjusted EBITDA.
For comparative periods presented, our primary operational drivers of adjusted EBITDA have been strong, sustained sales growth in our wholesale channel and modest growth in DTC channel performance, management ofgross profit margins as we manage our cost of sales and operating expenses through our diversified supply planning strategy and discipline over selling, general and administrative expenses relative to our sales growth.strategy.
The following table represents the reconciliation of adjusted EBITDA to net income attributable to The Duckhorn Portfolio, Inc.: the most directly comparable measure prepared in accordance with U.S. GAAP: | | | Three months ended April 30, | | Nine months ended April 30, | | | Three months ended October 31, |
| (in thousands) | (in thousands) | 2023 | | 2022 | | 2023 | | 2022 | (in thousands) | | 2023 | | 2022 |
| Net income attributable to The Duckhorn Portfolio, Inc. | Net income attributable to The Duckhorn Portfolio, Inc. | $ | 16,797 | | | $ | 15,565 | | | $ | 51,529 | | | $ | 54,770 | | Net income attributable to The Duckhorn Portfolio, Inc. | | $ | 15,537 | | | $ | 19,815 | |
| Interest expense | Interest expense | 2,993 | | | 1,618 | | | 7,839 | | | 4,860 | | Interest expense | | 4,004 | | | 2,162 | |
| Income tax expense | Income tax expense | 6,006 | | | 4,699 | | | 18,358 | | | 18,483 | | Income tax expense | | 5,629 | | | 7,087 | |
Depreciation and amortization expense(a) | Depreciation and amortization expense(a) | 7,238 | | | 6,237 | | | 20,528 | | | 17,345 | | Depreciation and amortization expense(a) | | 7,329 | | | 5,757 | |
| EBITDA | EBITDA | 33,034 | | | 28,119 | | | 98,254 | | | 95,458 | | EBITDA | | 32,499 | | | 34,821 | |
Purchase accounting adjustments(a) | Purchase accounting adjustments(a) | 224 | | | 54 | | | 331 | | | 347 | | Purchase accounting adjustments(a) | | 25 | | | 42 | |
Transaction expenses(b) | Transaction expenses(b) | 142 | | | 347 | | | 3,795 | | | 3,116 | | Transaction expenses(b) | | 3,236 | | | 162 | |
| Inventory write-down(c) | — | | | 3,935 | | | — | | | 3,935 | | |
| Change in fair value of derivatives(d)(c) | Change in fair value of derivatives(d)(c) | 882 | | | (990) | | | 2,943 | | | (1,947) | | Change in fair value of derivatives(d)(c) | | (1,889) | | | (368) | |
Equity-based compensation(e)(d) | Equity-based compensation(e)(d) | 1,538 | | | 1,365 | | | 4,110 | | | 4,240 | | Equity-based compensation(e)(d) | | 1,052 | | | 1,008 | |
| Debt refinancing costs(f) | — | | | — | | | 865 | | | — | | |
| Wildfire costs | — | | | 43 | | | — | | | 123 | | |
| Lease income, net(e) | | Lease income, net(e) | | (210) | | | — | |
| Adjusted EBITDA | Adjusted EBITDA | $ | 35,820 | | | $ | 32,873 | | | $ | 110,298 | | | $ | 105,272 | | Adjusted EBITDA | | $ | 34,713 | | | $ | 35,665 | |
|
(a) Purchase accounting adjustments relate to the impacts of business combination accounting for our historical acquisition by TSG, and certain other transactions consummated prior to Fiscal 2021, which resulted in fair value adjustments to inventory and long-lived assets. Purchase accounting adjustments in depreciation and amortization expense include amortization of intangible assets of $1.9 million for both the three months ended April 30, 2023 and 2022, and $5.7 million for the nine months ended April 30,October 31, 2023 and 2022.
(b) Transaction expenses include legal services, professional fees and other due diligence expenses for allboth periods presented. TransactionThese expenses forare reflected in selling, general and administrative expenses on the three and nine months ended April 30, 2023 and 2022 also include secondary offerings completed in April 2023 and October 2021, respectively. See Note 1 (Description of business) to our Condensed Consolidated Financial Statements for additional information.Statement of Operations.
(c) Inventory write-down pertainsRepresents non-cash adjustments to changes in the Company's increasefair value of derivatives, which are reflected in inventory obsolescence reserves for excess inventory levels of certain seltzer products. See Note 4 (Inventories) to ourother income, net on the Condensed Consolidated Financial Statements for additional information.Statement of Operations.
(d) See Note 8 (Derivative instruments)Represents non-cash charges related to ourequity-based compensation, which are reflected in selling, general and administrative expenses and cost of sales on the Condensed Consolidated Financial Statements for additional information.Statement of Operations.
(e) See Note 11 (Equity-based compensation)Reflects lease income, net related to ouran operating lease in which we are the lessor of Geyserville winery acquired in Fiscal 2023, reflected in net sales and selling, general and administrative expenses on the Condensed Consolidated Financial StatementsStatement of Operations. The lease term expires February 2024, with no option for additional information.renewal.
(f) See Note 7 (Debt) to our Condensed Consolidated Financial Statements for additional information.
Liquidity and capital resources
Sources of liquidity
Our primary cash needs are for working capital purposes, such as producing or purchasing inventory and funding operating and capital expenditures. We fund our operational cash requirements with cash flows from operating activities and borrowings under our New Credit Facility. As of April 30,October 31, 2023, we had $36.1$21.2 million in cash and $425.0$402.0 million in undrawn capacity on our revolving line of credit, subject to the terms of our New Credit Facility.
Due to the seasonal nature of our operations, our cash needs are generally greatest during harvest, a period which can span from August to November based on agricultural conditions and other factors outside our control. We believe that our expected operating cash flows, cash on hand and borrowing capacity on our revolving line of credit, will be adequate to meet our cash needs for the next 12 months. However, changes in our business growth plan, planned capital expenditures or responses to an ever-changing and highly competitive industry landscape may result in changes to our cash requirements.
Material cash requirements
Beyond the next 12 months, we expect cash flows generated from operations, in addition to our New Credit Facility, will be our primary sources of liquidity. Based on our current operating performance, we believe these sources will be adequate to meet the cash requirements necessary to meet our future business growth plans and contractual obligations. Our liquidity needs generally include expected working capital requirements, planned capital expenditures, operating lease payments, estimated tax liabilities and principal and interest payments contractually due pursuant to the terms of our New Credit Facility.
For the 20222023 harvest, we contracted for grapes at a totalan estimated cost of approximately $71.0$85.7 million in Fiscal 2023.2024. Additionally, we have purchase obligations including for inventory and various contracts with third parties for custom crush, storage and bottling services. See Note 109 (Commitments and contingencies) to our Condensed Consolidated Financial Statements for further information on other commitments.
WeAs of October 31, 2023, we have approximately $23.6$26.5 million in scheduled principal payments and related interest payments due over the next 12 months and approximately $257.3$273.4 million of principal payments and related interest payments due thereafter until our New Credit Facility matures on November 4, 2027. The calculated interest payment amounts use actual rates available as of AprilOctober 2023 and assume these rates for all future interest payments on the outstanding New Credit Facility, exclusive of any future impact from our interest rate swap agreements.agreement. See “—Capital resources”,Note 6 (Debt) to our Condensed Consolidated Financial Statements, where our New Credit Facility is described in greater detail. Our future minimum operating lease payments due within the next 12 months total approximately $4.3 million with $19.4$17.7 million due in the following years. See our Condensed Consolidated Financial Statements for further information on our operating leases.
We expect to be able to satisfy our liquidity needs for the next 12 months and beyond using cash generated from operations. If our cash needs change in the future, we may seek alternative or incremental funding sources to respond to changes in our business. To the extent required, we may seek to fund additional liquidity through debt or equity financing, although we can provide no assurance that such forms of capital will be available when needed, if at all, or available on terms that are acceptable.
Acquisition of North Coast Wine Production Facility
On May 4, 2023, we announced that we entered into a definitive agreement to acquire a production winery and seven acres of planted Cabernet Sauvignon in Alexander Valley, Sonoma County, California. With this purchase, we expect to expand our processing, storing and bottling capabilities. The purchase price of the transaction is approximately $55.0 million and is subject to certain customary closing conditions. The transaction is expected to close in the fourth fiscal quarter of 2023 and is expected to be funded with the New Credit Facility and available cash.
Cash flows
The following table presents the major components of net cash flows.
| | | | | | | | | | | |
| Nine months ended April 30, |
| (in thousands) | 2023 | | 2022 |
| Cash flows provided by (used in): | | | |
| Operating activities | $ | 51,753 | | | $ | 47,855 | |
| Investing activities | (14,111) | | | (24,798) | |
| Financing activities | (4,732) | | | (18,647) | |
| Net increase in cash | $ | 32,910 | | | $ | 4,410 | |
Comparison of the nine months ended April 30, 2023 and 2022 | | | | | | | | | | | |
| Three months ended October 31, |
| (in thousands) | 2023 | | 2022 |
| Cash flows provided by (used in): | | | |
| Operating activities | $ | 18,066 | | | $ | 26,384 | |
| Investing activities | (10,395) | | | (6,418) | |
| Financing activities | 7,158 | | | (17,808) | |
| Net increase in cash | $ | 14,829 | | | $ | 2,158 | |
Operating activities
Our cash flows from operating activities consist primarily of net income adjusted for certain non-cash transactions, including depreciation and amortization, amortization of debt issuance costs, changes in the fair values of derivatives, equity-based compensation and deferred income taxes. Operating cash flows also reflect the periodic changes in working capital, primarily inventory, accounts receivable, prepaid expenses, accounts payable and accrued expenses.
For the ninethree months ended April 30,October 31, 2023, net cash provided by operating activities was $51.8$18.1 million compared to $47.9$26.4 million for the ninethree months ended April 30,October 31, 2022, an increasea decrease of $3.9$8.3 million. The changes in cash provided by operating activities were primarily driven by the following factors:
•The net income after adjusting for non-cash items increaseddecreased operating cash flows by $4.9$4.5 million;
•Changes in accounts payable and accrued expenses increaseddecreased operating cash flows by $2.2$4.0 million due primarily to timing of invoice accruals and payments;
•Deferred revenues increased operating cash flows by $12.5 million primarily due to an offering shift for wines sold through our DTC channel; and
•Increases in inventory for the ninethree months ended April 30,October 31, 2023 were due to timing impacts in bulk and bottled wine supply management to support increases in demand resulted in a decrease to operating cash flow of $14.9 million.$10.5 million; and
•Changes in accounts receivable were due to timing impacts in net sales related to our wholesale sales channel, generally subject to credit terms, which resulted in a $10.1 million increase in operating cash flow.
Investing activities
For the ninethree months ended April 30,October 31, 2023, net cash used in investing activities related to capital expenditures of $14.1$10.4 million compared to $24.8$6.4 million for the ninethree months ended April 30, 2022. For the nine months ended April 30, 2023 andOctober 31, 2022, capital expenditureswhich included barrel purchases of approximately $9.0$8.1 million and $7.4$4.7 million, respectively. For the nine months ended April 30, 2022, we completed the purchase of three Napa County, California vineyards and related assets for a total of $14.5 million. From time to time, we evaluate wineries, vineyards and production facilities for potential opportunities to make strategic acquisitions and other capital improvements to support our growth. Any such transactions may require us to make additional investments and capital expenditures in the future.
Financing activities
For the ninethree months ended April 30,October 31, 2023, net cash used in financing activities was $4.7$7.2 million as compared to cash provided by financing activities of $18.6$17.8 million for the ninethree months ended April 30,October 31, 2022. For the ninethree months ended April 30,October 31, 2023, net cash used in financing activities primarily resulted from our New Credit Facility, including the issuance of new long-term debt of $225.8 million and borrowings under our line of credit of $9.0$23.0 million, partially offset by the payments under our line of credit of $119.0$13.0 million and payments of long-term debt of $117.7 million and payments of debt issuance costs of $2.4$2.5 million. For the ninethree months ended April 30,October 31, 2022, net cash used in financing activities primarily included payments under our line of credit of $77.0$20.0 million and payments of long-term debt of $8.5$2.8 million, partially offset by borrowings under our line of credit of $68.0$5.0 million.
Capital resources
Original Credit Facility
OnAs of October 14, 2016, Mallard Buyer Corp, Selway Wine31, 2023, the Company and certain other subsidiarieshad unused capacity of The Duckhorn Portfolio, Inc. (collectively,$402.0 million under the “Borrowers”) entered into the Original Credit Facility with a syndicated group of lenders. The Original Credit Facility provided a combination of term and revolving line of credit, features. The term andexcluding the incremental seasonal borrowing amount of an additional $30.0 million of capacity. As of October 31, 2023, the Company had outstanding draws of $23.0 million on the revolving line of credit borrowings have variable interest rates, based primarilycredit. There were no outstanding draws on Term SOFR based rate plus an applicable margin as defined in the Original Credit Agreement. Interest was paid monthly or quarterly based on loan type. Our debt was collateralized by substantially all of our cash, trade accounts receivable, real and personal property. Pursuant to the terms and conditions of the Original Credit Agreement, we issued the instruments discussed below.
Eighth Amendment to the First Lien Loan and Security Agreement
On August 30, 2022, the Borrowers entered into Amendment No. 8 to the First Lien Loan and Security Agreement to extend the maturity date of all facilities to November 1, 2023 and to transition from a LIBOR-based interest rate to a Term SOFR-based interest rate. The transaction did not result in any additional cash proceeds.
New Credit Agreement
Effective November 4, 2022, the Borrowers entered into the New Credit Agreement which amends and restates, in its entirety, the Original Credit Agreement. The New Credit Agreement provides for $675.8 million in first lien senior secured credit facilities consisting of (i) a $425.0 million revolving credit facility, (ii) a $225.8 million term loan facility and (iii) a $25.0 million delayed draw term loan. The outstanding principal balance was $218.3 million for the term loan facility.as of October 31, 2023. The maturity date for loans borrowed under the New Credit Agreement is November 4, 2027.
The Credit Facility is summarized below. See Note 76 (Debt) to our Condensed Consolidated Financial Statements for additional information.
We incurred approximately $3.3 million in debt issuance costs, including bank financing fees and third party legal and other professional fees in closing the New Credit Agreement, of which approximately $2.4 million was capitalized in accordance with ASC Topic 470, Debt. The capitalized debt issuance costs will be amortized as interest expense over the term of the New Credit Agreement. Remaining debt issuance costs incurred of $0.9 million were expensed and recorded to other (income) expense in the Condensed Consolidated Statement of Operations.
The instruments described below include the impacts of the New Credit Facility.
Revolving Line of Credit — The revolving line of credit allows the Borrowers to draw amounts up to $425.0 million, excluding the incremental seasonal borrowing amount of an additional $30.0 million of capacity. The revolving line of credit matures on November 4, 2027. The interest rate rangedranges from Term SOFR plus 100 basis points to Term SOFR plus 150 basis points depending on the average availability of the revolving line of credit. The amount available to borrow on the revolving line of credit is subject to a monthly borrowing base calculation, based primarily on the Company’s inventory and accounts receivable balances.
Term Loans — The term loan facility in the New Credit Agreement replaces the $135.0 million term loan tranche one facility, $25.0 million term loan tranche two facility and $25.0 million capital expenditure facility under the Original Credit Agreement. The term loan facility provides an aggregate principleprincipal amount equal to $225.8 million, with quarterly principal payments and the remaining unpaid principal and interest due upon maturity on November 4, 2027. The term loan has an interest rate of Term SOFR plus a 10 to 15 basis points credit spread adjustment and a 1.625% loan margin.
Delayed Draw Term Loan — The delayed draw term loan has a maximum, non-revolving draw-down limit of $25.0 million with quarterly principal payments and the remaining unpaid principal and interest due upon maturity on November 4, 2027. The $25.0 million is fully available, and undrawn, and has an interest rate of Term SOFR plus a 10 to 15 basis points credit spread adjustment and a 1.625% loan margin.
As of April 30, 2023, there were no outstanding draws on the revolving line of credit, nor on the delayed draw term loan. The outstanding principal balance was $223.3 million for the term loan as of April 30, 2023.
The New Credit Agreement contains customary affirmative covenants, including delivery of audited financial statements and customary negative covenants that, among other things, limit our ability to incur additional indebtedness or to grant certain liens. As of April 30,October 31, 2023, we are in compliance with all covenants. See Note 7 (Debt) to our Condensed Consolidated Financial Statements for additional information.
First Amendment to the Amended and Restated First Lien Loan and Security Agreement
Effective February 6, 2023, we entered into Amendment No. 1 to the Amended and Restated First Lien Loan and Security Agreement. The changes in the amendment are administrative in nature and did not have a material impact on the Company's outstanding debt or related debt covenants. The amendment did not result in any additional cash proceeds or changes in commitment amounts.
Second Amendment to the Amended and Restated First Lien Loan and Security Agreement
On May 2, 2023, we entered into Amendment No. 2 to the Amended and Restated First Lien Loan and Security Agreement. The amendment amends and restates the definition of the fixed charge coverage ratio in the New Credit Agreement to replace unfinanced capital expenditures with maintenance capital expenditures in the calculation of the fixed charge coverage ratio.
Off-balance sheet arrangements
As of April 30,October 31, 2023, we did not have any off-balance sheet arrangements that had, or are reasonably likely to have in the future, a material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Critical accounting policies and estimates
Our management’s discussion and analysis of our financial condition and results of operations are based on our Condensed Consolidated Financial Statements, which are prepared in accordance with U.S. GAAP. The preparation of these Condensed Consolidated Financial Statements requires the application of appropriate technical accounting rules and guidance, as well as the use of estimates. The application of these policies requires judgments regarding future events. These estimates and judgments could materially impact the Condensed Consolidated Financial Statements and disclosures based on varying assumptions, as future events rarely develop exactly as forecasted, and even the best estimates routinely require adjustment.
There have been no material changes in our critical accounting policies during the ninethree months ended April 30,October 31, 2023, as compared to those disclosed in the “Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in our Annual Report on Form 10-K for Fiscal 2022.
Recent accounting pronouncements
See Note 2 (Basis of presentation and significant accounting policies) to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report for additional information regarding recent accounting pronouncements.
Item 3. Quantitative and qualitative disclosures about market riskQualitative Disclosures About Market Risk
Our ongoing business operations cause us to be exposed to certain market risks, including fluctuations in interest rates, commodity prices and other costs related to production inputs, foreign currencies and inflation.
Interest rates
We are subject to interest rate risk in connection with changes in interest rates on our credit facilities, which bear interest at variable rates based upon a Term SOFR based rate plus applicable margins or predetermined alternative rates, as applicable, pursuant to the terms of our New Credit Facility. As of April 30,October 31, 2023, our outstanding borrowings at variable interest rates totaled $223.3$241.3 million. AnA hypothetical increase of 100 basis points in the effective interest rate applied to these borrowings would result in a $2.2$2.4 million increase in interest expense on an annualized basis and could have a material effect onimpact our results of operation orand financial condition. We manage our interest rate risk through normal operating and financing activities and through the use of derivative financial instruments. To mitigate exposure to fluctuations in interest rates, we entered into an interest rate swapsswap in March 2020 (subsequently amended in September 2022, which expired on March 23, 2023) and January 2023. See Note 87 (Derivative instruments) to our Condensed Consolidated Financial Statements for further information on our interest rate swap agreements.agreement.
Inflation
We do not believe that inflation has had a material impact on our business, results of operations or financial condition to date. We continue to monitortrack the impact of inflation in an attempt to minimize its effects through pricing strategies and cost reductions. If, however, our operations are impacted by significant inflationary pressures, we may not be able to fully offset such impacts through price increases on our products, supply negotiations or production improvements. A higher than anticipated rate of inflation in the future could harm our operations and financial condition.
Foreign currency
Our revenues and costs are denominated in U.S. dollars and are not subject to significant foreign exchange risk. Fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our Condensed Consolidated Statements of Operations. The Company uses foreign exchange forward contracts to offset a portion of the foreign currency exchange risks associated with forecasted purchases of barrels from France. The maximum term for the Company's outstandingWe generally use foreign exchange forward contracts was less thanup to a twelve months as of April 30, 2023.month duration. See Note 87 (Derivative instruments) to our Condensed Consolidated Financial Statements for further information.
Sensitivity due to fluctuations in foreign currency exchange rates was not material as of April 30,October 31, 2023.
Commodity prices
The primary commodity in our product is grapes, and generally, more than 85%10% of our inputthe grapes are sourced from third party suppliers in the form of grapesour Estate properties that we own or bulk wine.lease. For these purchased grapes and bulk wine, prices are subject to many factors beyond our control, such as the yields of various grape varietalsvarieties in different geographies, the annual demand for these grapes and the vagaries of these farming businesses, including poor harvests due to adverse weather conditions, natural disasters and pestilence. Our grape and bulk wine supply mix varies from year to year between pre-contracted purchasespurchase commitments and spot purchases; the variation from year to year is based on market conditions and sales demands. We do not engage in commodity hedging on our forecasted purchases of grapes and bulk wine. We continue to diversify our sources of supply and look to changes annually to our product lines to optimize the grapes available each harvest year.
Other raw materials we source include glass, corkscork and wine additives. We currently source these materials from multiple vendors. We continue togenerally negotiate prices with these suppliers on an annual basis, conducting a competitive bidding process for all raw materials to leverage our volume in lowering the input costs of production. We do not engage in forward, future or other derivative hedging activities to attempt to manage future price volatility of raw materials or other production-related inputs. As a result, some of these prices change over time, and future changes to commodity prices, raw materials or other significant inputs in our wine production could have a material impact to our future results of operations.
Item 4. Controls and proceduresProcedures
Disclosure controls and procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 (“Exchange Act”), as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure.
As of the end of the period covered by this Quarterly Report on Form 10-Q, our management, under the supervision of and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures defined in Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of April 30,October 31, 2023, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in reports we file pursuant to the Exchange Act is communicated to management as appropriate for disclosure consideration, and is accurately and timely recorded, processed, summarized, and reported within the time periods specified by applicable SEC forms and regulations.
Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the three months ended April 30,October 31, 2023.
Limitations on the effectiveness of controls
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based on certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
PART II
Item 1. Legal proceedingsProceedings
From time to time, we are involved in various legal proceedings arising from the normal course of business activities. Legal expenses associated with loss contingencies are accrued if reasonably estimable and the related matter is probable of causing the Company to incur expenses or other losses based on future contingent events in accordance with the Company'sCompany’s policies, otherwise legal expenses are expensed as incurred. We are not presently a party to any litigation the outcome of which, we believe, if determined adversely to us, would individually or, taken together with other matters, have a material adverse effect on our business, operating results, cash flows or financial condition.
Item 1A. Risk factorsFactors
For a discussion of our potential risks and uncertainties, please seeThe following updates the informationrisk factors previously reported under the heading “Risk Factors” in our Annual Report on Form 10-K for Fiscal 2022.2023. There have been no material changes since our previous 10-K filing.filing other than as set forth below.
We may be unable to complete the acquisition of Sonoma-Cutrer within the anticipated timeframe or at all, which could prevent us from receiving the anticipated benefits from the acquisition in the anticipated timeframe or at all.
On November 16, 2023, we entered into a Merger Agreement with Sonoma-Cutrer. The transaction is expected to close in the third quarter of the Company’s Fiscal 2024, and remains subject to customary closing conditions, including receipt of required regulatory approvals, and the required period having elapsed since the mailing to the Company’s stockholders of a definitive information statement with respect to approval by the Company’s stockholders of the transactions contemplated by the Merger Agreement. As a result, there is no assurance that the acquisition will be consummated in the anticipated timeframe or at all. In addition, the Company may be required to pay Brown-Forman a reverse termination fee of approximately $5 million, subject to certain limitations set forth in the merger agreement, if the Merger Agreement is terminated as result of a change of control of the Company. Any failure to consummate the acquisition in the anticipated timeframe or at all could prevent the Company from receiving the expected benefits from the Merger.
We may not successfully manage the transition of leadership associated with the resignation of our CEO, which could have an adverse impact on us.
As previously disclosed in a Current Report on Form 8-K filed with the SEC on September 24, 2023, Alex Ryan retired from his positions as President, Chief Executive Officer and Chairman, effective September 27, 2023, and Deirdre Mahlan was appointed interim President, Chief Executive Officer and Chairperson. Ms. Mahlan had previously served as a member of the Board of Directors and chair of the Audit Committee of the Board of Directors.
In addition, as a result of Ms. Mahlan serving in the role of interim Chief Executive Officer, President and Chairperson, she is no longer an independent director and she resigned as member of the Audit Committee and we are, accordingly, not in compliance with Section 303A.07 of the NYSE Listed Company Manual, which requires that a listed company’s audit committee be comprised of at least three members, all of whom are independent. We expect to regain compliance upon the completion of the CEO search process, at which time we expect Ms. Mahlan will rejoin the Audit Committee as an independent director.
Our success will depend, in part, on our management of the transition to, and integration of, the interim CEO and a permanent successor, and the effectiveness of the interim CEO and the permanent successor. The Board of Directors is currently conducting a nationwide search for a permanent CEO. However, there can be no assurance that we will be successful in finding suitable permanent successors or in a timely manner. The CEO position is
critical to executing on and achieving our vision, strategic direction, culture, and products. The leadership transition may create uncertainty among employees, suppliers and customers, divert resources and management attention, impact public or market perception, our stock price or our performance, any of which could negatively impact our ability to operate effectively or execute our strategies and result in an adverse impact on our business.
Item 5. Other Information
Rule 10b5-1 trading plans
During the three months ended October 31, 2023, Pete Przybylinski, Sean Sullivan and Zachary Rasmuson, each an officer for purposes of Section 16 of the Exchange Act, had equity trading plans enacted in accordance with Rule 10b5-1(c)(1) under the Exchange Act. An equity trading plan is a written document that preestablishes the amounts, prices and dates (or formula for determining the amounts, prices and dates) of future purchases or sales of the Company’s stock, including sales of shares acquired under the Company’s employee and director equity plans.
The following 10b5-1 agreements were entered into during the three months ended October 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Position | | Trading Agreement Adoption Date | | Duration of Trading Agreement | | Aggregate Number of Securities to be Sold under the Trading Agreement |
| Pete Przybylinski | | Executive Vice President, Chief Sales Officer | | October 6, 2023 | | January 5, 2024 - June 30, 2024 | | 140,000 |
| Zachary Rasmuson | | Executive Vice President, Chief Operating Officer | | October 6, 2023 | | January 5, 2024 - June 30, 2024 | | 48,000 |
Item 6. Exhibits
| | Exhibit no. | Exhibit no. | | Exhibit description | | Incorporated by reference | Exhibit no. | | Exhibit description | | Incorporated by reference |
| | | | | Form | | Date | | Number | | File no. | | | | | Form | | Date | | Number | | File no. |
| 3.1* | | | | | | | | | | | |
| | 3.1 | | 3.1 | | | | 10-Q | | June 8, 2023 | | 3.1 | | 001-40240 |
| 3.2 | 3.2 | | | | 8-K | | March 22, 2021 | | 3.2 | | 001-40240 | 3.2 | | | | 8-K | | March 22, 2021 | | 3.2 | | 001-40240 |
| 4.1 | 4.1 | | | | S-1/A | | March 10, 2021 | | 4.1 | | 333-253412 | 4.1 | | | | S-1/A | | March 10, 2021 | | 4.1 | | 333-253412 |
| 4.2 | 4.2 | | | | 10-K | | October 4, 2021 | | 4.2 | | 001-40240 | 4.2 | | | | 10-K | | October 4, 2021 | | 4.2 | | 001-40240 |
| 10.1 | 10.1 | | | | 8-K | | November 4, 2022 | | 10.1 | | 001-40240 | 10.1 | | | | 8-K | | September 27, 2023 | | 10.1 | | 001-40240 |
| 10.2 | 10.2 | | | | 10-Q | | March 8, 2023 | | 10.2 | | 001-40240 | 10.2 | | | | 8-K | | September 27, 2023 | | 10.2 | | 001-40240 |
| 10.3* | | | | |
| | 31.1* | 31.1* | | | | 31.1* | | | |
| 31.2* | 31.2* | | | | 31.2* | | | |
| 32.1* | 32.1* | | | | 32.1* | | | |
| 101.INS* | 101.INS* | | XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | | 101.INS* | | XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). | |
| 101.SCH* | 101.SCH* | | XBRL Taxonomy Extension Schema Document. | | 101.SCH* | | XBRL Taxonomy Extension Schema Document. | |
| 101.CAL* | 101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document. | | 101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF* | 101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document. | | 101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB* | 101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document. | | 101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE* | 101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document. | | 101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104* | 104* | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | 104* | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
* Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| | |
| The Duckhorn Portfolio, Inc. |
| | |
Date: June 8,December 6, 2023 | By: | /s/ Alex RyanDeirdre Mahlan |
| | Alex RyanDeirdre Mahlan |
| | Interim President, Chief Executive Officer and ChairmanChairperson |
| | (Principal Executive Officer) |
| | |
Date: June 8,December 6, 2023 | By: | /s/ Lori BeaudoinJennifer Fall Jung |
| | Lori BeaudoinJennifer Fall Jung |
| | Executive Vice President, Chief Financial Officer |
| | (Principal Financial Officer and Principal Accounting Officer) |
