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, 2022January 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)
| | | | | | | | |
| 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)
(707) 302-2658
(Registrant'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) | | 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 115,167,916115,219,396 shares of common stock, $0.01 par value per share, as of May 31, 2022.March 1, 2023.
Glossary
The following terms are used in this quarterly report unless otherwise noted or indicated by the context:
•"“Company," "we," "us," "our," "Duckhorn"” “we,” “us,” “our,” “Duckhorn” and "The“The Duckhorn Portfolio"Portfolio” refer to The Duckhorn Portfolio, Inc. and its consolidated subsidiaries.
•"“2016 Equity Plan"Plan” refers to the Company's board approvedboard-approved 2016 Equity Incentive Plan.
•"“2021 Plan"Plan” refers to the Company's board approvedboard-approved 2021 Equity Incentive Plan.
•"ASC"“ASC” refers to Accounting Standards Codification developed by the FASB.Codification.
•"ASU" refers to Accounting Standards Updates issued by the FASB to communicate changes to the ASC.
•"“Controlled Company"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"“COVID-19” refers to the ongoing pandemic surroundingfor the COVID-19 the disease caused by a novel strain of coronavirus that was declared a global pandemic by the World Health Organization in March 2020.virus.
•"Credit Facility"“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 existingSecurities 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, 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, and as amended by Amendment No. 7 dated as of February 22, 2021)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.
•"DTC channel" and "DTC" refers 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 Employee Stock Purchase Plan.
•"Estate vineyards" refers to vineyards controlled or owned 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 facilities.
•"Exchange Act" refers to the Securities Exchange Act of 1934.
•"FASB" refers to Financial Accounting Standards Board.
•"First Lien Loan Agreement " see Credit Facility.
•"Fiscal 2017" refers to our fiscal year ended July 31, 2017.
•"Fiscal 2018" refers to our fiscal year ended July 31, 2018.
•"Fiscal 2019" refers to our fiscal year ended July 31, 2019.
•"Fiscal 2020" refers to our fiscal year ended July 31, 2020.
•"Fiscal 2021" refers to our fiscal year ended July 31, 2021.
•"Fiscal 2022" refers to our fiscal year ended July 31, 2022.
•"IPO" refers to our initial public offering completed in March 2021.
•"JOBS Act" refers to the Jumpstart Our Business Startups Act of 2015.
•"LIBOR" refers to London Interbank Offered Rate.
•"Luxury wine" refers to wines with suggested retail prices of $15 or higher per 750ml bottle.
•"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.
•"Retail"“Retail” refers to establishments that are licensed to purchase our wine for resale to consumers, such as grocery stores, liquor stores and restaurants.
•"SEC"“SEC” refers to U.S. Securities and Exchange Commission.
•"Securities Act"“Term SOFR” refers to The Securities Act of 1933.the forward-looking term rate based on the Secured Overnight Financing Rate.
•"TSG"“TSG” refers to TSG Consumer Partners LLC, together with certain affiliates.
•"“Ultra-luxury wine"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"GAAP” refers to accounting principles generally accepted in the United States.States Generally Accepted Accounting Principles.
•"VIE"“VIE” refers to variable interest entity.
•"“Wholesale channel"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 statementsNote Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q and other materials filed or to be filed by us with the Securities and Exchange Commission 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, glass bottles, barrels, winemaking additives and agents, water and other supplies;
• the disruption of the delivery of wine to customers;
• the impact of COVID-19 and its variants on our customers, suppliers, business operations and financial results;
• 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;
• 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’s 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, financial condition and operating results. 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” in our Fiscal 20212022 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.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 amounts) | (in thousands, except share and per share amounts) | April 30, 2022 | | July 31, 2021 | (in thousands, except share and per share amounts) | January 31, 2023 | | July 31, 2022 |
| ASSETS | ASSETS | (unaudited) | | | ASSETS |
| Current assets | Current assets | | Current assets | |
| Cash | Cash | $ | 8,654 | | | $ | 4,244 | | Cash | $ | 7,292 | | | $ | 3,167 | |
| Accounts receivable trade (net of allowance of $400 and $800, respectively) | 39,104 | | | 33,253 | | |
| Inventories, net | 292,077 | | | 267,737 | | |
| Accounts receivable trade, net | | Accounts receivable trade, net | 48,324 | | | 37,026 | |
| Inventories | | Inventories | 327,024 | | | 285,430 | |
| | Prepaid expenses and other current assets | Prepaid expenses and other current assets | 8,992 | | | 9,167 | | Prepaid expenses and other current assets | 13,125 | | | 13,898 | |
| Total current assets | Total current assets | 348,827 | | | 314,401 | | Total current assets | 395,765 | | | 339,521 | |
| Long-term assets | Long-term assets | | Long-term assets | |
| Property and equipment, net | Property and equipment, net | 253,279 | | | 240,939 | | Property and equipment, net | 271,217 | | | 269,659 | |
| Operating lease right-of-use assets | | Operating lease right-of-use assets | 21,777 | | | 23,375 | |
| Intangible assets, net | Intangible assets, net | 194,784 | | | 200,547 | | Intangible assets, net | 188,006 | | | 191,786 | |
| Goodwill | Goodwill | 425,209 | | | 425,209 | | Goodwill | 425,209 | | | 425,209 | |
| | Other long-term assets | Other long-term assets | 2,067 | | | 2,021 | | Other long-term assets | 5,487 | | | 1,963 | |
| Total long-term assets | Total long-term assets | 875,339 | | | 868,716 | | Total long-term assets | 911,696 | | | 911,992 | |
| Total assets | Total assets | $ | 1,224,166 | | | $ | 1,183,117 | | Total assets | $ | 1,307,461 | | | $ | 1,251,513 | |
| | LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | LIABILITIES AND EQUITY |
| Current liabilities | Current liabilities | | Current liabilities | |
| Accounts payable | Accounts payable | $ | 5,042 | | | $ | 3,556 | | Accounts payable | $ | 18,410 | | | $ | 3,382 | |
| Accrued expenses | Accrued expenses | 25,294 | | | 21,557 | | Accrued expenses | 29,071 | | | 29,475 | |
| Accrued compensation | Accrued compensation | 11,025 | | | 16,845 | | Accrued compensation | 9,224 | | | 12,893 | |
| | Deferred revenue | Deferred revenue | 3,528 | | | 3,102 | | Deferred revenue | 3,285 | | | 272 | |
| | Current operating lease liabilities | | Current operating lease liabilities | 3,603 | | | 3,498 | |
| | Current maturities of long-term debt | Current maturities of long-term debt | 10,510 | | | 11,324 | | Current maturities of long-term debt | 9,721 | | | 9,810 | |
| Other current liabilities | Other current liabilities | 490 | | | 397 | | Other current liabilities | 3,056 | | | 672 | |
| Total current liabilities | Total current liabilities | 55,889 | | | 56,781 | | Total current liabilities | 76,370 | | | 60,002 | |
| Long-term liabilities | Long-term liabilities | | Long-term liabilities | |
| Revolving line of credit, net | Revolving line of credit, net | 113,342 | | | 121,348 | | 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 | 107,112 | | | 114,625 | | Long-term debt, net of current maturities and debt issuance costs | 215,633 | | | 105,074 | |
| | Operating lease liabilities | | Operating lease liabilities | 18,000 | | | 19,732 | |
| Derivative instrument | | Derivative instrument | 1,537 | | | — | |
| Deferred income taxes | Deferred income taxes | 86,667 | | | 86,667 | | Deferred income taxes | 90,483 | | | 90,483 | |
| Other long-term liabilities | Other long-term liabilities | 981 | | | 1,458 | | Other long-term liabilities | 387 | | | 387 | |
| Total long-term liabilities | Total long-term liabilities | 308,102 | | | 324,098 | | Total long-term liabilities | 326,040 | | | 324,350 | |
| Total liabilities | Total liabilities | 363,991 | | | 380,879 | | Total liabilities | 402,410 | | | 384,352 | |
| Commitments and Contingencies (Note 11) | 0 | | 0 | |
| Commitments and contingencies (Note 10) | | Commitments and contingencies (Note 10) | |
| Equity | Equity | | Equity |
| Common stock, $0.01 par value; 500,000,000 shares authorized, 115,167,763 issued and outstanding at April 30, 2022 and 115,046,793 issued and outstanding at July 31, 2021 | 1,152 | | | 1,150 | | |
| Common stock, $0.01 par value; 500,000,000 shares authorized; 115,219,396 issued and outstanding at January 31, 2023 and 115,184,161 issued and outstanding at July 31, 2022 | | Common stock, $0.01 par value; 500,000,000 shares authorized; 115,219,396 issued and outstanding at January 31, 2023 and 115,184,161 issued and outstanding at July 31, 2022 | 1,152 | | | 1,152 | |
| Additional paid-in capital | Additional paid-in capital | 730,033 | | | 726,903 | | Additional paid-in capital | 734,763 | | | 731,597 | |
| Retained earnings | Retained earnings | 128,404 | | | 73,634 | | Retained earnings | 168,556 | | | 133,824 | |
| Total The Duckhorn Portfolio, Inc. equity | Total The Duckhorn Portfolio, Inc. equity | 859,589 | | | 801,687 | | Total The Duckhorn Portfolio, Inc. equity | 904,471 | | | 866,573 | |
| Non-controlling interest | Non-controlling interest | 586 | | | 551 | | Non-controlling interest | 580 | | | 588 | |
| Total equity | Total equity | 860,175 | | | 802,238 | | Total equity | 905,051 | | | 867,161 | |
| Total liabilities and equity | Total liabilities and equity | $ | 1,224,166 | | | $ | 1,183,117 | | Total liabilities and equity | $ | 1,307,461 | | | $ | 1,251,513 | |
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) |
| | | Three months ended April 30, | | Nine months ended April 30, | | Three months ended January 31, | | Six months ended January 31, |
| (in thousands, except share and per share amounts) | (in thousands, except share and per share amounts) | 2022 | | 2021 | | 2022 | | 2021 | (in thousands, except share and per share amounts) | 2023 | | 2022 | | 2023 | | 2022 |
| Net sales (net of excise taxes of $1,072, $1,368, $4,056 and $3,782, respectively) | $ | 91,584 | | | $ | 90,425 | | | $ | 294,501 | | | $ | 265,720 | | |
| Net sales (net of excise taxes of $1,469, $1,507, $3,052 and $2,983, respectively) | | Net sales (net of excise taxes of $1,469, $1,507, $3,052 and $2,983, respectively) | $ | 103,488 | | | $ | 98,736 | | | $ | 211,659 | | | $ | 202,917 | |
| Cost of sales | Cost of sales | 47,622 | | | 43,496 | | | 148,652 | | | 132,759 | | Cost of sales | 48,302 | | | 49,259 | | | 101,763 | | | 101,030 | |
| Gross profit | Gross profit | 43,962 | | | 46,929 | | | 145,849 | | | 132,961 | | Gross profit | 55,186 | | | 49,477 | | | 109,896 | | | 101,887 | |
| | Selling, general and administrative expenses | Selling, general and administrative expenses | 23,083 | | | 31,142 | | | 70,055 | | | 65,418 | | Selling, general and administrative expenses | 29,579 | | | 23,845 | | | 55,318 | | | 47,052 | |
| | Casualty loss (gain), net (Note 13) | 43 | | | (421) | | | 123 | | | (6,636) | | |
| Income from operations | Income from operations | 20,836 | | | 16,208 | | | 75,671 | | | 74,179 | | Income from operations | 25,607 | | | 25,632 | | | 54,578 | | | 54,835 | |
| | Interest expense | Interest expense | 1,618 | | | 3,755 | | | 4,860 | | | 10,947 | | Interest expense | 2,684 | | | 1,636 | | | 4,846 | | | 3,242 | |
| Other income, net | (1,046) | | | (2,192) | | | (2,477) | | | (5,006) | | |
| Total other expenses | 572 | | | 1,563 | | | 2,383 | | | 5,941 | | |
| Other expense (income), net | | Other expense (income), net | 2,743 | | | (338) | | | 2,656 | | | (1,431) | |
| Total other expenses, net | | Total other expenses, net | 5,427 | | | 1,298 | | | 7,502 | | | 1,811 | |
| Income before income taxes | Income before income taxes | 20,264 | | | 14,645 | | | 73,288 | | | 68,238 | | Income before income taxes | 20,180 | | | 24,334 | | | 47,076 | | | 53,024 | |
| Income tax expense | Income tax expense | 4,699 | | | 5,623 | | | 18,483 | | | 19,694 | | Income tax expense | 5,265 | | | 6,407 | | | 12,352 | | | 13,784 | |
| Net income | Net income | 15,565 | | | 9,022 | | | 54,805 | | | 48,544 | | Net income | 14,915 | | | 17,927 | | | 34,724 | | | 39,240 | |
| Less: Net (income) loss attributable to non-controlling interest | — | | | — | | | (35) | | | 4 | | |
| Less: Net loss (income) attributable to non-controlling interest | | Less: Net loss (income) attributable to non-controlling interest | 2 | | | 5 | | | 8 | | | (35) | |
| Net income attributable to The Duckhorn Portfolio, Inc. | Net income attributable to The Duckhorn Portfolio, Inc. | $ | 15,565 | | | $ | 9,022 | | | $ | 54,770 | | | $ | 48,548 | | Net income attributable to The Duckhorn Portfolio, Inc. | $ | 14,917 | | | $ | 17,932 | | | $ | 34,732 | | | $ | 39,205 | |
| | Net income per share of common stock: | Net income per share of common stock: | | Net income per share of common stock: | |
| Basic | Basic | $ | 0.14 | | | $ | 0.08 | | | $ | 0.48 | | | $ | 0.47 | | Basic | $ | 0.13 | | | $ | 0.16 | | | $ | 0.30 | | | $ | 0.34 | |
| Diluted | Diluted | $ | 0.14 | | | $ | 0.08 | | | $ | 0.47 | | | $ | 0.47 | | Diluted | $ | 0.13 | | | $ | 0.16 | | | $ | 0.30 | | | $ | 0.34 | |
| | Weighted average shares of common stock outstanding: | Weighted average shares of common stock outstanding: | | Weighted average shares of common stock outstanding: | |
| Basic | Basic | 115,115,850 | | | 107,976,264 | | | 115,070,183 | | | 103,755,180 | | Basic | 115,191,575 | | | 115,049,395 | | | 115,187,868 | | | 115,048,094 | |
| Diluted | Diluted | 115,281,724 | | | 108,404,009 | | | 115,347,808 | | | 104,123,270 | | Diluted | 115,327,660 | | | 115,389,502 | | | 115,424,809 | | | 115,391,011 | |
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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 Changes in Equity (unaudited)
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| (in thousands, except share amounts) | Common stock | | | Additional
paid-in capital | | Retained
earnings | | Total
The Duckhorn Portfolio, Inc. equity | | Non-controlling interest | | Total equity |
| Shares | | Amount | | | | |
| Balances at July 31, 2020 | 101,713,460 | | | $ | 1,017 | | | | | | $ | 535,372 | | | $ | 117,658 | | | $ | 654,047 | | | $ | 557 | | | $ | 654,604 | |
| Net income (loss) | — | | | — | | | | | | — | | | 17,523 | | | 17,523 | | | (1) | | | 17,522 | |
| Equity-based compensation | — | | | — | | | | | | 288 | | | — | | | 288 | | | — | | | 288 | |
| Balances at October 31, 2020 | 101,713,460 | | | $ | 1,017 | | | | | | $ | 535,660 | | | $ | 135,181 | | | $ | 671,858 | | | $ | 556 | | | $ | 672,414 | |
| Net income (loss) | — | | | — | | | | | | — | | | 22,003 | | | 22,003 | | | (3) | | | 22,000 | |
| Equity-based compensation (Note 12) | — | | | — | | | | | | 288 | | | — | | | 288 | | | — | | | 288 | |
| Balances at January 31, 2021 | 101,713,460 | | | $ | 1,017 | | | | | | $ | 535,948 | | | $ | 157,184 | | | $ | 694,149 | | | $ | 553 | | | $ | 694,702 | |
| Net income | — | | | — | | | | | | — | | | 9,022 | | | 9,022 | | | — | | | 9,022 | |
| Dividend to parent | — | | | — | | | | | | — | | | (100,000) | | | (100,000) | | | — | | | (100,000) | |
| Initial public offering, net of issuance costs | 13,333,333 | | | 133 | | | | | | 180,691 | | | — | | | 180,824 | | | — | | | 180,824 | |
| Equity-based compensation (Note 12) | — | | | — | | | | | | 8,962 | | | — | | | 8,962 | | | $ | — | | | 8,962 | |
| Balances at April 30, 2021 | 115,046,793 | | | $ | 1,150 | | | | | | $ | 725,601 | | | $ | 66,206 | | | $ | 792,957 | | | $ | 553 | | | $ | 793,510 | |
| | | | | | | | | | | | | | | | |
| Balances at July 31, 2021 | 115,046,793 | | | $ | 1,150 | | | | | | $ | 726,903 | | | $ | 73,634 | | | $ | 801,687 | | | $ | 551 | | | $ | 802,238 | |
| Net income | — | | | — | | | | | | — | | | 21,273 | | | 21,273 | | | 40 | | | 21,313 | |
| Equity-based compensation (Note 12) | — | | | — | | | | | | 1,459 | | | — | | | 1,459 | | | — | | | 1,459 | |
| Balances at October 31, 2021 | 115,046,793 | | | $ | 1,150 | | | | | | $ | 728,362 | | | $ | 94,907 | | | $ | 824,419 | | | $ | 591 | | | $ | 825,010 | |
| Net income (loss) | — | | | — | | | | | | — | | | 17,932 | | | 17,932 | | | (5) | | | 17,927 | |
| Initial public offering, net of issuance costs | — | | | — | | | | | | (270) | | | — | | | (270) | | | — | | | (270) | |
| Issuance of common stock under equity incentive plans | 18,417 | | | 1 | | | | | | — | | | — | | | 1 | | | — | | | 1 | |
| Equity-based compensation (Note 12) | — | | | — | | | | | | 1,416 | | | — | | | 1,416 | | | — | | | 1,416 | |
| Balances at January 31, 2022 | 115,065,210 | | | $ | 1,151 | | | | | | $ | 729,508 | | | $ | 112,839 | | | $ | 843,498 | | | $ | 586 | | | $ | 844,084 | |
| Net income (loss) | — | | | — | | | | | | — | | | 15,565 | | | 15,565 | | | — | | | 15,565 | |
| Issuance of common stock under equity incentive plans | 154,273 | | | 2 | | | | | | (2) | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | |
| Equity-based compensation (Note 12) | — | | | — | | | | | | 1,365 | | | — | | | 1,365 | | | — | | | 1,365 | |
| Shares withheld related to net share settlement | (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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended January 31, |
| (in thousands, except share amounts) | Common stock | | | | Additional
paid-in capital | | Retained
earnings | | Total
The Duckhorn Portfolio, Inc. equity | | Non-controlling interest | | Total equity |
| Shares | | Amount | | | | | |
| Balances at October 31, 2022 | 115,184,161 | | | $ | 1,152 | | | | | | | $ | 732,777 | | | $ | 153,639 | | | $ | 887,568 | | | $ | 582 | | | $ | 888,150 | |
| Net income | — | | | — | | | | | | | — | | | 14,917 | | | 14,917 | | | (2) | | | 14,915 | |
Issuance of common stock
under equity incentive plans | 22,365 | | | — | | | | | | | — | | | — | | | — | | | — | | | — | |
| Issuance of employee stock purchase plan | 12,870 | | | — | | | | | | | 181 | | | — | | | 181 | | | — | | | 181 | |
| Equity-based compensation (Note 11) | — | | | — | | | | | | | 1,805 | | | — | | | 1,805 | | | — | | | 1,805 | |
| | | | | | | | | | | | | | | | | |
| Balances at January 31, 2023 | 115,219,396 | | | $ | 1,152 | | | | | | | $ | 734,763 | | | $ | 168,556 | | | $ | 904,471 | | | $ | 580 | | | $ | 905,051 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | | | |
| | | | | | | |
| Balances at October 31, 2021 | 115,046,793 | | | $ | 1,150 | | | | | | | $ | 728,362 | | | $ | 94,907 | | | $ | 824,419 | | | $ | 591 | | | $ | 825,010 | |
| Net income (loss) | — | | | — | | | | | | | — | | | 17,932 | | | 17,932 | | | (5) | | | 17,927 | |
Issuance of common stock
under equity incentive plans | 18,417 | | | 1 | | | | | | | — | | | — | | | 1 | | | — | | | 1 | |
| Equity-based compensation (Note 11) | — | | | — | | | | | | | 1,416 | | | — | | | 1,416 | | | — | | | 1,416 | |
Initial public offering, net of
issuance costs | — | | | — | | | | | | | (270) | | | — | | | (270) | | | — | | | (270) | |
| Balances at January 31, 2022 | 115,065,210 | | | $ | 1,151 | | | | | | | $ | 729,508 | | | $ | 112,839 | | | $ | 843,498 | | | $ | 586 | | | $ | 844,084 | |
| | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
10
| | | | | | | | | | | | | | |
The Duckhorn Portfolio, Inc.
Condensed Consolidated Statements of Cash FlowsChanges in Equity (unaudited)
|
| | | | | | | | | | | |
| Nine months ended April 30, |
| (in thousands) | 2022 | | 2021 |
| Cash flows from operating activities | | | |
| Net income | $ | 54,805 | | | $ | 48,544 | |
| Adjustments to reconcile net income to net cash from operating activities: | | | |
| | | |
| Depreciation and amortization | 17,345 | | | 16,434 | |
| Loss on disposal of assets | 12 | | | 62 | |
| Change in fair value of derivatives | (1,947) | | | (4,818) | |
| Amortization of debt issuance costs | 1,206 | | | 1,221 | |
| Loss on debt extinguishment | — | | | 272 | |
| | | |
| Equity-based compensation | 4,240 | | | 9,538 | |
| Change in operating assets and liabilities: | | | |
| Accounts receivable trade, net | (5,851) | | | (17,491) | |
| Inventories, net | (24,340) | | | (23,514) | |
| Prepaid expenses and other current assets | 1,767 | | | (5,848) | |
| Other long-term assets | (46) | | | (304) | |
| Accounts payable | 1,535 | | | 4,176 | |
| Accrued expenses | 4,550 | | | 11,677 | |
| Accrued compensation | (5,820) | | | 5,098 | |
| | | |
| | | |
| Deferred revenue | 425 | | | (3,381) | |
| Other current and long-term liabilities | (26) | | | (130) | |
| Net cash provided by operating activities | 47,855 | | | 41,536 | |
| | | |
| Cash flows from investing activities | | | |
| Purchases of property and equipment | (24,878) | | | (11,452) | |
| | | |
| Proceeds from sales of property and equipment | 80 | | | 52 | |
| Net cash used in investing activities | (24,798) | | | (11,400) | |
| | | |
| Cash flows from financing activities | | | |
| Dividend to parent | — | | | (100,000) | |
| Proceeds from issuance of common stock pursuant to the initial public offering, net of underwriters' discounts and commissions | — | | | 187,500 | |
| Payments of deferred offering costs | (270) | | | (3,580) | |
| Payments under line of credit | (77,000) | | | (245,000) | |
| Borrowings under line of credit | 68,000 | | | 140,500 | |
| Extinguishment of long-term debt | — | | | (38,131) | |
| Issuance of long-term debt | — | | | 38,131 | |
| Payments of long-term debt | (8,538) | | | (10,513) | |
| Repayment of capital leases | — | | | (8) | |
| Taxes paid related to net share settlement of equity awards | (839) | | | — | |
| | | |
| | | |
| Debt issuance costs | — | | | (260) | |
| Net cash used in financing activities | (18,647) | | | (31,361) | |
| Net increase in cash | 4,410 | | | (1,225) | |
| Cash - Beginning of year | 4,244 | | | 6,252 | |
| Cash - End of year | $ | 8,654 | | | $ | 5,027 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Non-cash investing and financing activities | | | |
| | | |
| Property and equipment additions in accounts payable and accrued expenses | $ | 507 | | | $ | 639 | |
| Deferred offering costs in accounts payable, accrued expenses and prepaid expenses | $ | — | | | $ | 3,096 | |
| Cashless exercise of stock options | $ | 78 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended January 31, |
| (in thousands, except share amounts) | Common stock | | | Additional
paid-in capital | | Retained
earnings | | Total
The Duckhorn Portfolio, Inc. equity | | Non-controlling interest | | Total 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) | — | | | — | | | | | | — | | | 34,732 | | | 34,732 | | | (8) | | | 34,724 | |
Issuance of common stock
under equity incentive plans | 22,365 | | | — | | | | | | — | | | — | | | — | | | — | | | — | |
| Issuance of employee stock purchase plan | 12,870 | | | — | | | | | | 181 | | | — | | | 181 | | | — | | | 181 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Equity-based compensation (Note 11) | — | | | — | | | | | | 2,985 | | | — | | | 2,985 | | | — | | | 2,985 | |
| | | | | | | | | | | | | | | | |
| Balances at January 31, 2023 | 115,219,396 | | | $ | 1,152 | | | | | | $ | 734,763 | | | $ | 168,556 | | | $ | 904,471 | | | $ | 580 | | | $ | 905,051 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | | |
| | | | | | |
| Balances at July 31, 2021 | 115,046,793 | | | $ | 1,150 | | | | | | $ | 726,903 | | | $ | 73,634 | | | $ | 801,687 | | | $ | 551 | | | $ | 802,238 | |
| Net income (loss) | — | | | — | | | | | | — | | | 39,205 | | | 39,205 | | | 35 | | | 39,240 | |
Issuance of common stock
under equity incentive plans | 18,417 | | | 1 | | | | | | — | | | — | | | 1 | | | — | | | 1 | |
| Equity-based compensation (Note 11) | — | | | — | | | | | | 2,875 | | | — | | | 2,875 | | | — | | | 2,875 | |
Initial public offering, net of
issuance costs | — | | | — | | | | | | (270) | | | — | | | (270) | | | — | | | (270) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Balances at January 31, 2022 | 115,065,210 | | | $ | 1,151 | | | | | | $ | 729,508 | | | $ | 112,839 | | | $ | 843,498 | | | $ | 586 | | | $ | 844,084 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
11
| | |
The Duckhorn Portfolio, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited) |
| | | | | | | | | | | |
| Six months ended January 31, |
| (in thousands) | 2023 | | 2022 |
| Cash flows from operating activities | | | |
| Net income | $ | 34,724 | | | $ | 39,240 | |
| Adjustments to reconcile net income to net cash from operating activities: | | | |
| | | |
| Depreciation and amortization | 13,290 | | | 11,047 | |
| Loss (gain) on disposal of assets | 93 | | | (13) | |
| Change in fair value of derivatives | 2,061 | | | (957) | |
| Amortization of debt issuance costs | 593 | | | 804 | |
| | | |
| | | |
| Equity-based compensation | 2,985 | | | 2,875 | |
| | | |
| Change in operating assets and liabilities: | | | |
| Accounts receivable trade, net | (11,298) | | | (9,755) | |
| Inventories | (39,881) | | | (28,187) | |
| Prepaid expenses and other current assets | 26 | | | (361) | |
| Other long-term assets | (555) | | | (217) | |
| Accounts payable | 15,020 | | | 6,377 | |
| Accrued expenses | 830 | | | 6,621 | |
| Accrued compensation | (3,669) | | | (4,129) | |
| Deferred revenue | 3,013 | | | (2,960) | |
| Other current and long-term liabilities | 865 | | | (1,557) | |
| Net cash provided by operating activities | 18,097 | | | 18,828 | |
| Cash flows from investing activities | | | |
| Purchases of property and equipment, net of sales proceeds | (12,388) | | | (23,336) | |
| | | |
| Net cash used in investing activities | (12,388) | | | (23,336) | |
| Cash flows from financing activities | | | |
| Payments under line of credit | (119,000) | | | (52,000) | |
| Borrowings under line of credit | 9,000 | | | 63,000 | |
| | | |
| Issuance of long-term debt | 225,833 | | | — | |
| Payments of long-term debt | (115,166) | | | (5,696) | |
| | | |
| Proceeds from employee stock purchase plan | 181 | | — | |
| Payments for debt issuance costs | (2,432) | | | — | |
| Payments of deferred offering costs | — | | | (270) | |
| Net cash (used in) provided by financing activities | (1,584) | | | 5,034 | |
| Net increase in cash | 4,125 | | | 526 | |
| Cash - Beginning of period | 3,167 | | | 4,244 | |
| Cash - End of period | $ | 7,292 | | | $ | 4,770 | |
| Supplemental cash-flow information | | | |
| Interest paid, net of amount capitalized | $ | 1,649 | | | $ | 2,479 | |
| Income taxes paid | $ | 10,621 | | | $ | 8,014 | |
| Non-cash investing activities | | | |
| Property and equipment additions in accounts payable and accrued expenses | $ | 467 | | | $ | 193 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements (unaudited).
12
The Duckhorn Portfolio, Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
1. Description of business
The Duckhorn Portfolio, Inc. and its subsidiaries (the "Company"“Company” or "Management"“Management”), headquartered in St. Helena, CA, produces luxury and ultra-luxury wine across a portfolio of winery brands, including Duckhorn Vineyards, Decoy, Goldeneye, Paraduxx, Goldeneye, Migration, Decoy, Canvasback, Calera, Kosta Browne, Greenwing and Postmark.
The Company's revenue is comprised of wholesale and DTC sales. Wholesale revenue is generated through sales directly to California retailers and restaurants, sales to distributors and agents located in other states throughout the 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'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's fiscal year ends on July 31.
Secondary offering
In the first quarter of Fiscal 2022, the Company completed a secondary offering where certain existing shareholdersstockholders 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 $1.0$0.6 million ofduring the six months ended January 31, 2022, which $0.4 million was incurred in the fourth quarter of Fiscal 2021. These costs are reflected in selling, general and administrative expenses on the Condensed Consolidated Statement of Operations.
2. Basis of presentation and recent accounting pronouncements
Basis of presentation
The Company’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP and Article 10 of the Securities and Exchange Commission’s Regulation S-X. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP may be condensed or omitted. These Condensed Consolidated Financial Statements have been prepared on the same basis as the Company'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's financial information for the interim periods presented. These interim results are not necessarily indicative of the results to be expected for the year ending July 31, 2022,2023, for any other interim period or for any future year.
The Condensed Consolidated Statement of Financial Position as of July 31, 2022 was derived from the Company's audited financial statements for the fiscal year ended July 31, 2022, previously filed with the SEC. The Condensed Consolidated Financial Statements are unauditeddo 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 statements and related notes theretoincluded in our Annual Report on Form 10-K for the fiscal year ended July 31, 2021, as the Company's interim disclosures do not generally repeat those included in the annual statements.2022.
Principles of consolidation
The Condensed Consolidated Financial Statements include the accounts of The Duckhorn Portfolio, Inc. and its subsidiaries, including a consolidated 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 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 doubtful accounts receivable,credit losses, calculation of accrued liabilities, customer incentive reserves, uncertain tax positions, contingent liabilities, fair value of assets and liabilities acquired in connection with business combinations, 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 ASC Topic 810, Consolidations.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. 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, 2022January 31, 2023 and July 31, 2021,2022, the Company's ownership percentage of the sole identified VIE was 76.2%. The VIE'stotal net assets of the VIE included on the Condensed Consolidated Statement of Financial Position were $2.3 million and $2.4 million and $2.2 million at April 30, 2022January 31, 2023 and July 31, 2021,2022, respectively. 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 goods under current contracts.
RecentRecently adopted accounting pronouncements
As an “emerging growth company” as established byIn March 2020, the JOBS Act,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 is permitted to delayadopted the standard effective August 1, 2022, the first day of Fiscal 2023. The adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has elected to use the adoption dates available to private companies. Asstandard did not have a result, the Company’s financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies. Basedmaterial impact on the Company's aggregate worldwide market value of voting and non-voting common equity held by non-affiliates as of January 31, 2022,Condensed Consolidated Financial Statements or the Company determined it will become a “large accelerated filer” and lose emerging growth company status beginning with itsrelated disclosures.
As previously disclosed in the Annual Report on Form 10-K for the year endingended July 31, 2022.
Recently issued accounting pronouncements not yet adopted:
In February 2016,2022, the FASB issuedCompany adopted ASU No. 2016-02, Leases (Topic(Topic 842), and several amendments, codified using the modified retrospective transition method as of the first day of Fiscal 2022. The impact of the adoption of ASC 842 which supersedes prior guidance on accounting for leases under FASB ASC 840, Leases. ASU No. 2016-02, among other provisions, (i) requires lessees to classify leases as either finance or operating leases, (ii) generally requires all leases to be recorded on the Condensed Consolidated Statements of Financial Position through the recognition of right-of-use assets and corresponding lease liabilities and (iii) expands mandatory qualitative and quantitative disclosures regarding leasing activities. The FASB issued ASU No. 2020-05, “Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842) Effective dates for certain entities”, which extends the effective date for all other entities, for annual reporting periods beginning after December 15, 2021, and forpreviously reported interim periods within fiscal years beginning after December 15, 2022. The amended standard is effective for the Company beginning withfinancial statements during the year ended July 31, 2022. Early adoption is permitted.
We intend to implement this guidance using the modified retrospective approach under the transition method, which does not require adjustments to or modified disclosures related to earlier comparative periods. The optional transition method permits an entity to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company intends to elect certain optional practical expedients in adopting ASC 842, the total impact of which is not yet known.
The Company's adoption is ongoing, including the assessments over changes to our accounting systems, processes, and internal controls over financial reporting to support the accounting and disclosure requirements of the new standard. Our assessment will be completed during the fourth quarter of Fiscal 2022.
While the Company has not yet quantified the impact, adjustments resulting from the adoption of this standard will materially increase total assets and total liabilities with2022, included the recognition of right of useright-of-use ("ROU") assets and lease liabilities related to the Company'sfor operating leases.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326), Measurement The adoption of Credit Losses on Financial Instruments, andASC 842 also issued subsequent amendments to the initial guidance, collectively, ASC 326, to replace the incurred loss impairment methodologyresulted in current U.S. GAAP with a methodology that requires the reflection of expected credit losses and will also require consideration of a broader range of reasonable and supportable information to determine credit loss estimates. For many entities with financial instruments, the standard will require the use of a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses, which may resultreclassifying certain lines within operating activities in the earlier recognition of credit losses on financial instruments. This guidance will be effective for the Company beginning with the year ended July 31, 2022. The Company is currently evaluating the impact this standard could have on the Condensed Consolidated Financial Statements.
In May 2021, the FASB issued ASU No. 2021-04, Earnings per Share (Topic 260), Debt - ModificationsStatement of Cash Flows due to changes in operating assets and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Entity (Subtopic 815-40), to clarify the accounting for modifications or exchanges of equity-classified warrants. This amendment applies to freestanding call options. In accordance with the ASU, if there is a modification and the option is still determined to be classified as equity, the modification should be accounted for as an exchange of the original option for a new option. This guidance will be effectiveliabilities for the Company beginning withrelated accounts. These changes to previously disclosed amounts conform to the year ended Julycurrent period presentation.
No other new accounting pronouncements issued or effective as of January 31, 2023 with early adoption permitted. The Company does not anticipate the adoption of ASU 2021-04have had, or are expected to have, a material impact on the Condensed Consolidated Financial Statements.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 January 31, | | Six months ended January 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| Wholesale - distributors | 62.0 | % | | 59.5 | % | | 66.0 | % | | 64.4 | % | |
Wholesale - California direct to retail(a) | 16.6 | | | 15.7 | | | 17.6 | | | 16.5 | | |
| Wholesale - Distributors | | Wholesale - Distributors | 61.3 | % | | 67.2 | % | | 69.0 | % | | 67.9 | % |
Wholesale - California direct to trade(a) | | Wholesale - California direct to trade(a) | 19.1 | | | 19.8 | | | 17.4 | | | 18.1 | |
DTC(b) | DTC(b) | 21.4 | | | 24.8 | | | 16.4 | | | 19.1 | | DTC(b) | 19.6 | | | 13.0 | | | 13.6 | | | 14.0 | |
| Net sales | Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
(a) Includes $0.1 million and $2.4$0.6 million of sales related to bulk grape and merchandisegrape sales for the three months and ninesix months ended April 30, 2022, respectively. Sales of a similar nature were immaterialJanuary 31, 2023, and $0.5 million and $2.8 million for the three months and ninesix months ended April 30, 2021January 31, 2022, respectively.
(b) Includes shipping and handling revenue of $1.0$0.9 million and $1.3$1.0 million for the three and six months ended April 30, 2022 and 2021,January 31, 2023, respectively, and $2.0$0.4 million and $2.3$0.9 million for the ninethree and six months ended April 30,January 31, 2022, respectively.
Charges related to credit loss on accounts receivable were immaterial for the three and 2021, respectively.six months ended January 31, 2023. Recoveries and reductions in the allowance for credit loss were immaterial for the three and six months ended January 31, 2023. As of January 31, 2023 and July 31, 2022, the allowance for credit losses was $0.4 million for both periods.
Contract liabilitiesbalances
When the Company receives payment from a customer, prior to transferringmeeting the productperformance 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 members for purchaseschannels, 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.
As shown onDeferred revenue in the Condensed Consolidated Statements of Financial Position the balance of deferred revenue was $3.1$3.3 million and $0.3 million at January 31, 2023 and July 31, 2021,2022, respectively. In the beginning of the period,three and was $3.5 million at April 30, 2022, the end of the period. Revenue recognized during the ninesix months ended April 30, 2022,January 31, 2023, the Company recognized revenue of $12.1 million and $0.3 million, respectively, which was included in the opening contract liability balance for the corresponding period totaled $3.0 million.period.
4. Inventories
Inventories were comprised of the following: | | | | | | | | | | | |
| (in thousands) | April 30,
2022 | | July 31
2021 |
| Finished goods | | | |
| Bottled wine | $ | 85,981 | | | $ | 120,876 | |
| Merchandise | 382 | | | 547 | |
| Work in progress | | | |
| Bulk wine | 191,119 | | | 130,693 | |
| Packaging | 4,034 | | | 3,541 | |
| Overhead | 3,234 | | | 613 | |
| Raw materials | | | |
| Deferred crop costs | 7,327 | | | 11,467 | |
| Total | $ | 292,077 | | | $ | 267,737 | |
| | | | | | | | | | | |
| (in thousands) | January 31,
2023 | | July 31,
2022 |
| Finished goods | $ | 91,142 | | | $ | 108,989 | |
| Work in progress | 232,227 | | | 162,337 | |
| Raw materials | 3,655 | | | 14,104 | |
| Inventories | $ | 327,024 | | | $ | 285,430 | |
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's estimates of net realizable value are based on historical experience as well as Management'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. As of April 30, 2022, the Company'sThe inventory reserve was $0.4 million and $5.1 million an increase of $3.9 million fromat January 31, 2023 and July 31, 2022. The increase was primarily due to excess inventory levels2022, respectively.
The Company capitalizes into inventory depreciation related to property and equipment used in the production of inventory. For the ninethree months ended April 30,January 31, 2023 and 2022, and the year ended July 31, 2021, the amount of depreciation capitalized was $10.6$5.2 million and $12.5$4.0 million, respectively, and $8.6 million and $6.6 million for the six months ended January 31, 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 January 31, 2023 and 2022, the amount capitalized was $1.1 million and $1.1 million, respectively. For the six months ended January 31, 2023 and 2022, the amount capitalized was $2.2 million and $2.1 million, respectively.
5. Property and equipment, net
Property and equipment, net was comprised of the following major components as of:following:
| | (in thousands) | (in thousands) | | April 30,
2022 | | July 31,
2021 | (in thousands) | | January 31,
2023 | | July 31,
2022 |
| Land | Land | | $ | 131,297 | | | $ | 120,063 | | Land | | $ | 136,328 | | | $ | 136,328 | |
| Buildings and improvements | Buildings and improvements | | 68,909 | | | 68,616 | | Buildings and improvements | | 70,847 | | | 70,813 | |
| Machinery and equipment | | Machinery and equipment | | 53,160 | | | 52,619 | |
| Vineyards and improvements | Vineyards and improvements | | 32,525 | | | 29,164 | | Vineyards and improvements | | 44,866 | | | 44,759 | |
| Machinery and equipment | | 51,849 | | | 49,607 | | |
| Barrels | Barrels | | 31,055 | | | 26,349 | | Barrels | | 37,185 | | | 30,067 | |
| Total depreciable property and equipment | Total depreciable property and equipment | | 315,635 | | | 293,799 | | Total depreciable property and equipment | | 342,386 | | | 334,586 | |
| Less: accumulated depreciation and amortization | Less: accumulated depreciation and amortization | | (67,359) | | | (58,542) | | Less: accumulated depreciation and amortization | | (77,898) | | | (70,591) | |
| Total depreciable property and equipment, net | Total depreciable property and equipment, net | | 248,276 | | | 235,257 | | Total depreciable property and equipment, net | | 264,488 | | | 263,995 | |
| Construction in progress | Construction in progress | | 5,003 | | | 5,682 | | Construction in progress | | 6,729 | | | 5,664 | |
| Property and equipment, net | Property and equipment, net | | $ | 253,279 | | | $ | 240,939 | | Property and equipment, net | | $ | 271,217 | | | $ | 269,659 | |
Depreciation expense recognized in selling, general and administrative expenses was $0.3$0.5 million and $1.0 million for three months and nine months ended April 30, 2022 and $0.3 million for the three months ended January 31, 2023 and 2022, respectively, and $0.9 million and $0.7 million for three months and ninethe six months ended April 30, 2021,January 31, 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 3three Napa County, California vineyards and related assets for a total of $14.5 million.
6. Other intangible assetsAccrued expenses
Intangible assetsAccrued expenses were comprised of the following components:following:
| | | | | | | | | | | | | | | | | | | |
| April 30, 2022 |
| (in thousands) | Gross carrying amount | | Accumulated amortization | | | | Net |
| Definite-lived intangible assets | | | | | | |
| Customer relationships | $ | 92,720 | | | $ | 39,944 | | | | | $ | 52,776 | |
| Leasehold interests | 1,572 | | | 464 | | | | | 1,108 | |
| Total definite-lived intangible assets | 94,292 | | | 40,408 | | | | | 53,884 | |
| Indefinite-lived intangible assets | | | | | | |
| Trade names | 139,600 | | | — | | | | | 139,600 | |
| Lane rights | 1,300 | | | — | | | | | 1,300 | |
| Total indefinite-lived intangible assets | 140,900 | | | — | | | | | 140,900 | |
| Total other intangible assets | $ | 235,192 | | | $ | 40,408 | | | | | $ | 194,784 | |
| | | | | | | | | | | | | | | | | | | |
| July 31, 2021 |
| (in thousands) | Gross carrying amount | | Accumulated amortization | | | | Net |
| Definite-lived intangible assets | | | | | | |
| Customer relationships | $ | 92,720 | | | $ | 34,274 | | | | | $ | 58,446 | |
| Leasehold interests | 1,572 | | | 371 | | | | | 1,201 | |
| Total definite-lived intangible assets | 94,292 | | | 34,645 | | | | | 59,647 | |
| Indefinite-lived intangible assets | | | | | | |
| Trade names | 139,600 | | | — | | | | | 139,600 | |
| Lane rights | 1,300 | | | — | | | | | 1,300 | |
| Total indefinite-lived intangible assets | 140,900 | | | — | | | | | 140,900 | |
| Total other intangible assets | $ | 235,192 | | | $ | 34,645 | | | | | $ | 200,547 | |
The Company’s amortization expense for the three months ended April 30, 2022 and 2021 was $1.9 million, and for the nine months ended April 30, 2022 and 2021 was $5.8 million. For the next five years, the Company anticipates the annual amortization of the definite-lived intangible assets that have been recorded as of April 30, 2022 to be $7.7 million per year.
| | | | | | | | | | | |
| (in thousands) | January 31,
2023 | | July 31,
2022 |
Trade spend(a) | $ | 17,477 | | | $ | 15,319 | |
| Accrued professional fees | 3,903 | | | 3,191 | |
Deferred compensation liability(b) | 2,879 | | | 2,142 | |
| Income taxes payable | 1,730 | | | 387 | |
| Bulk wine and other received not invoiced | 882 | | | 143 | |
| Barrel purchases | — | | | 988 | |
| Accrued invoices and other accrued expenses | 2,200 | | | 7,305 | |
| Accrued expenses | $ | 29,071 | | | $ | 29,475 | |
7.Accrued expenses_______________________________________________The Company’s accrued expenses balance consisted of the following amounts:
| | | | | | | | | | | |
| (in thousands) | April 30,
2022 | | July 31,
2021 |
Trade spend(a) | $ | 15,026 | | | $ | 10,734 | |
| Bulk wine and other received not invoiced | 961 | | | 1,526 | |
| Barrel purchases | — | | | 936 | |
Deferred compensation liability(b) | 2,052 | | | 2,096 | |
| Income tax payable | 1,104 | | | — | |
| Accrued invoices and other accrued expenses | 6,151 | | | 6,265 | |
| Total | $ | 25,294 | | | $ | 21,557 | |
(a) Trade spend refers to estimated amounts the Company owes to distributors for depletion-based incentives for meeting specific depletion targets.
(b) The Company intends to use the cash surrender value life insurance policies in settlingto partially settle its deferred compensation plan liability. The cash surrender value of the life insurance policies was $2.3 million and $1.8 million and $1.7 million at April 30, 2022January 31, 2023 and July 31, 2021, respectively.
2022, respectively, and is included in other long-term assets on the Condensed Consolidated Statements of Financial Position.
8.7. Debt
At January 31, 2023, 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 outstanding on the letter of credit sub-facility or the swingline sub-facility at January 31, 2023.
Included in interest expense in the Condensed Consolidated Statements of Operations is amortization related to debt issuance costs of $0.2 million and $0.4 million for the three months ended January 31, 2023 and 2022, respectively, and of $0.6 million and $0.8 million for the six months ended January 31, 2023 and 2022, respectively.
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 net worth maximumcapitalization ratio and a fixed charge coverage ratio as defined in the New Credit Facility. As of AprilJanuary 31, 2023, the Company is in compliance with all covenants.
Amendment to the Original Credit Agreement
Effective August 30, 2022, Mallard Buyer Corp., Selway Wine Company and certain other subsidiaries of The Duckhorn Portfolio, Inc. (collectively, the “Borrowers”) entered into an eighth amendment 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 terms of the Original Credit Facility. 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 facility. The maturity date for loans borrowed under the New Credit Agreement is November 4, 2027.
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 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 Term SOFR 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 wasincurred 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 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 will be 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 violation of any financial covenant.
Included in interestother (income) expense in the Condensed Consolidated StatementsStatement of Operations,Operations.
Long-term debt, net was comprised of the following:
| | | | | | | | | | | |
| (in thousands) | January 31, 2023 | | July 31, 2022 |
| Revolving line of credit | $ | — | | | $ | 110,000 | |
| Term loan, first lien | 225,832 | | | 110,117 | |
Capital expenditure loan(a) | — | | | 5,049 | |
| Total debt | 225,832 | | | 225,166 | |
| Less: Current maturities of long-term debt | (9,721) | | | (9,810) | |
| Total long-term debt | 216,111 | | | 215,356 | |
Debt issuance costs(b) | (478) | | | (1,608) | |
| Total long-term debt, net of current maturities and debt issuance costs | $ | 215,633 | | | $ | 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. Under the New Credit Facility, the intent of the delayed draw term loan is similar to that of the capital expenditure loan under the Original Credit Agreement. The delayed draw term loan is secured by certain capital expenditures. As of January 31, 2023, the Company has not drawn on the delayed draw term loan.
(b) At January 31, 2023, debt issuance costs are the costs associated with the term loan facility. Debt issuance costs of $3.0 million associated with the revolving credit and delayed draw term loan facilities are recorded in depreciation and amortizationother long-term assets on the Condensed Consolidated Statements of Cash Flows, is amortization related toFinancial Position. Under the Original Credit Facility, the revolving credit facility debt issuance costs were treated consistently with those of $0.4 million and $0.4 million for the three months ended April 30, 2022 and 2021, respectively and $1.2 million and $1.2 million forterm debt facilities as the nine months ended April 30, 2022 and 2021, respectively.
Revolving line of credit
At April 30, 2022, $310.0 million was availableCompany did not intend to draw underrepay the revolving linecredit facility in full prior to its maturity.
9.8. Derivative instruments
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 financial results and Condensed Consolidated Statements of Financial Position.
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'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, 2022January 31, 2023 or July 31, 2021.2022. The Company does not enter into derivative instruments for trading or speculative purposes. The Company's accounting policies do not apply hedge accounting treatment to derivative instruments.
As of April 30, 2022,January 31, 2023, the Company held the following interest rate swap agreements, which fixed the interest rate on the applicable notional amount of outstanding variable rate debt:
| Notional amount (in thousands) | Notional amount (in thousands) | | Interest rate | | Effective date | | Expiration date | Notional amount
(in thousands) | | Interest rate | | Effective date | | Expiration date |
| $100,000 | $100,000 | | 0.487% | | March 21, 2020 | | March 23, 2023 | $100,000 | | 0.315% | | September 30, 2022 | | March 23, 2023 |
| $100,000 | | $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) | January 31,
2023 | | July 31,
2022 |
| Derivative instruments not designated as hedging instruments | | | |
| Interest rate swap contracts | $ | 200,000 | | | $ | 100,000 | |
| Foreign currency forward contracts | 1,010 | | | 2,793 | |
| Total derivative instruments not designated as hedging instruments | $ | 201,010 | | | $ | 102,793 | |
Effective September 30, 2022, the Company amended its interest rate swap initially entered into in March 2020 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.
As discussed in Note 1110 (Commitments and contingencies), the Company manages annual barrel purchases by engaging domestic and foreign cooperages to provide specified barrel quantities on agreed delivery dates. Some 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 deliverydeliveries and the anticipated timing of payments to various coopers.
The total notional amounts of the Company’s derivative instruments outstanding are as follows:
| | | | | | | | | | | |
| (in thousands) | April 30,
2022 | | July 31,
2021 |
| Derivative instruments not designated as hedging instruments | | | |
| Interest rate swap contracts | $ | 100,000 | | | $ | 100,000 | |
| Foreign currency forward contracts | 2,785 | | | 2,369 | |
| Total derivative instruments not designated as hedging instruments | $ | 102,785 | | | $ | 102,369 | |
Results of period derivative activity
The estimated fair value and classification of derivative instruments on the accompanying Condensed Consolidated Statements of Financial Position arefor January 31, 2023 were as follows:
| | | | | | | | | | | | | | |
| (in thousands) | | April 30,
2022 | | July 31,
2021 |
| Derivative instruments not designated as hedging instruments | | | |
| Classification | | | |
| Interest rate swap contracts | | | | |
| Swap contract | Current asset | $ | 1,599 | | | $ | — | |
| | | | |
| | | | |
| Derivative instrument | Other long-term liabilities | — | | | (480) | |
| Total interest rate swap contract liability | | $ | 1,599 | | | $ | (480) | |
| | | | |
| Foreign currency forward contracts | | | | |
| Derivative instrument | Other current assets | $ | — | | | $ | 5 | |
| FX contract | Other current liabilities | (127) | | | — | |
| Total foreign currency contract asset | | $ | (127) | | | $ | 5 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Derivative Assets | | Derivative Liabilities | |
| Balance Sheet Classification | | Fair Value | | Balance Sheet Classification | | Fair Value | |
| Interest rate swap contracts | Prepaid expenses and other current assets | | $ | 607 | | | Derivative instrument | | $ | 1,537 | | |
| Foreign currency forward contracts | Prepaid expenses and other current assets | | 89 | | | Other current liabilities | | — | | |
| Total derivatives not designated as hedging instruments | | | $ | 696 | | | | | $ | 1,537 | | |
The estimated fair value and classification of derivative instruments on the accompanying Condensed Consolidated Statements of Financial Position for July 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Derivative Assets | | Derivative Liabilities | |
| Balance Sheet Classification | | Fair Value | | Balance Sheet Classification | | Fair Value | |
| Interest rate swap contracts | Prepaid expenses and other current assets | | $ | 1,443 | | | Derivative instrument | | $ | — | | |
| Foreign currency forward contracts | Prepaid expenses and other current assets | | — | | | Other current liabilities | | 223 | | |
| Total derivatives not designated as hedging instruments | | | $ | 1,443 | | | | | $ | 223 | | |
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 January 31, | | Six months ended January 31, |
| (in thousands) | (in thousands) | Classification | 2022 | | 2021 | | 2022 | | 2021 | (in thousands) | Classification | 2023 | | 2022 | | 2023 | | 2022 |
| Interest rate swap contracts | Interest rate swap contracts | Other income, net | $ | (1,117) | | | $ | (1,949) | | | $ | (2,079) | | | $ | (4,895) | | Interest rate swap contracts | Other expense (income), net | $ | 2,518 | | | $ | (515) | | | $ | 2,373 | | | $ | (962) | |
| Foreign currency forward contracts | Foreign currency forward contracts | Other income, net | 127 | | | (41) | | | 132 | | | 77 | | Foreign currency forward contracts | Other expense (income), net | (89) | | | — | | | (312) | | | 5 | |
| Total gains | | $ | (990) | | | $ | (1,990) | | | $ | (1,947) | | | $ | (4,818) | | |
| Total loss (gain) | | Total loss (gain) | | $ | 2,429 | | | $ | (515) | | | $ | 2,061 | | | $ | (957) | |
10.9. Fair value measurements
The Company applies a fair value hierarchy pursuant to ASC Topic 820, Fair Value Measurement, which consists of three levels of inputs that may be 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: The fair value of the Company’s interest rate swap agreement isagreements are estimated with the assistance of a 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 is estimated with the assistance of a 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's debt approximates fair value as the interest rates are variable and reflective of market rates. Debt is categorized as a Levelrates (Level 2 liability withinof the fair value hierarchy.hierarchy).
The Company’s assets and liabilities measured and recorded at fair value on a recurring basis at April 30, 2022,January 31, 2023, were as follows:
| | (in thousands) | (in thousands) | Fair value measurements using: | (in thousands) | | Fair value measurements using: |
| Quoted prices in active markets (Level 1) | | Significant other observable inputs
(Level 2) | | Significant unobservable inputs
(Level 3) | | Total | | Quoted prices in active markets (Level 1) | | Significant other observable inputs
(Level 2) | | Significant unobservable inputs
(Level 3) | | Total |
| Assets | Assets | | Assets | | | | | | | | |
| Interest rate swap contracts | $ | — | | | $ | 1,599 | | | $ | — | | | $ | 1,599 | | |
| Interest rate swap contract | | Interest rate swap contract | | $ | — | | | $ | 607 | | | $ | — | | | $ | 607 | |
| | Deferred compensation plan asset | Deferred compensation plan asset | — | | | 1,763 | | | $ | — | | | 1,763 | | Deferred compensation plan asset | | — | | | 2,308 | | | — | | | 2,308 | |
| Liabilities | Liabilities | | Liabilities | |
| | Interest rate swap contract | | Interest rate swap contract | | $ | — | | | $ | 1,537 | | | $ | — | | | $ | 1,537 | |
| | Deferred compensation liability | Deferred compensation liability | $ | — | | | $ | 2,052 | | | — | | | $ | 2,052 | | Deferred compensation liability | | — | | | 2,879 | | | — | | | 2,879 | |
The Company’s assets and liabilities measured and recorded at fair value on a recurring basis at July 31, 2021,2022, 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) | | Total |
| Assets | | | | | | | |
| | | | | | | |
| Foreign currency forward contracts | $ | — | | | $ | 5 | | | $ | — | | | $ | 5 | |
| Deferred compensation plan asset | — | | | 1,719 | | | — | | | 1,719 | |
| Liabilities | | | | | | | |
| Interest rate swap contracts | $ | — | | | $ | 480 | | | $ | — | | | $ | 480 | |
| | | | | | | |
| Deferred compensation liability | — | | | 2,096 | | | — | | | 2,096 | |
11.Commitments and contingencies
Operating leases
The Company leases approximately 160 acres of vineyard property in California under various third-party operating lease agreements, with terms ranging from one to 30 years, expiring in future years through December 2046. The Company also leases office space, office equipment and visitor centers under third-party operating leases. Some lease agreements contain purchase options and many include renewal options at specified dates throughout the lease terms. Rental expense was $1.0 million and $3.0 million for the three months and nine months ended April 30, 2022, respectively, and $1.0 million and $3.0 million for the three months and nine months ended April 30, 2021, respectively, the majority of which is capitalized into inventory. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Fair value measurements using: |
| Quoted prices in active markets (Level 1) | | Significant other observable inputs
(Level 2) | | Significant unobservable inputs
(Level 3) | | Total |
| Assets | | | | | | | | |
| Interest rate swap contracts | | $ | — | | | $ | 1,443 | | | $ | — | | | $ | 1,443 | |
| | | | | | | | |
| Deferred compensation plan asset | | — | | | 1,753 | | | — | | | 1,753 | |
| Liabilities | | | | | | | | |
| | | | | | | | |
| Foreign currency forward contracts | | $ | — | | | $ | 223 | | | $ | — | | | $ | 223 | |
| Deferred compensation liability | | — | | | 2,142 | | | — | | | 2,142 | |
At April 30, 2022, the future minimum payments under the non-cancelable operating lease agreements by fiscal year are as follows:
| | | | | |
| (in thousands) | |
| Remaining portion of 2022 | $ | 1,011 | |
| 2023 | 4,058 | |
| 2024 | 4,102 | |
| 2025 | 4,072 | |
| 2026 | 2,689 | |
| Thereafter (collectively) | 10,834 | |
| Total | $ | 26,766 | |
The Company is also party to non-cancelable sublease agreements. Sublease income was immaterial for the three months10.Commitments and nine months ended April 30, 2022 and is accounted for as other income within income from operations in the Condensed Consolidated Statements of Operations. The terms of the agreements range from contingenciesthree to five years and the total future minimum payments for these subleases is immaterial.
Long-term purchase contracts
The Company has entered into long-termcertain grape purchase contracts with certain grapevarious growers to supply a significant portion of the Company'sits future production requirements.grape requirements for wine production. The lengths of the contracts typically vary from one to eight years, and prices per ton are either determined at the outset for the contract duration or are negotiated annually. The Company's grape purchase contracts generally include acceptance provisions based on qualitative and quantitative grape quality characteristics. For the 2022 harvest, the Company purchased grapes for a total cost of approximately $71.0 million in Fiscal 2023. For the 2021 harvest, the Company contractedpurchased grapes for approximately 34,000 tons of grapes at a total cost of $68.1 million in Fiscal 2022. For the 2020 harvest, the Company purchased approximately 12,000 tons of grapes at a total cost of $26.5 million in Fiscal 2021. The increase in Fiscal 2022 was attributable to lower quantities available in the prior harvest at the Company's contractually-defined quality levels due to wildfires compounded with higher demand. 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 has ongoingenters into commitments to purchase approximately 8,525 barrels for each harvest, a total of $9.1 million,significant portion of which approximately $7.3are settled in Euros. As of July 31, 2022, the Company had $8.8 million will bein barrel purchase commitments. During the six months ended January 31, 2023, the Company paid in Euros.the remaining commitments and liabilities associated with the barrel purchases for the 2022 harvest. As of January 31, 2023, the Company does not yet have any commitments for the 2023 harvest. In order to reduce the foreign currency exchange risk associated with the Euro to U.S. Dollar conversion rate, the Company enteredenters into foreign currency forward contracts, generally aligning settlement dates with expected barrel deliverydeliveries 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 the Condensed Consolidated Statements of Operations. See Note 98 (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-partiesthird parties for custom crush, storage 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, 2022,January 31, 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 believesexpects the probabilityrisk of incurringany future obligations under these indemnification provisions isto be remote. As of April 30, 2022January 31, 2023 and July 31, 2021,2022, no amounts have been accrued related to such indemnification provisions.
12
11. Equity-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 six months ended January 31, 2023 was $4.9 million.
Restricted shares
The following table represents restricted share activity:
| | | | | | | | | | | | | |
| Performance-based shares | | Weighted-average grant-date fair value | | |
| Unvested as of July 31, 2022 | 266,158 | | | $ | 14.23 | | | |
| Granted | — | | | — | | | |
| Vested | (266,158) | | | 14.23 | | | |
| Forfeited | — | | | — | | | |
| | | | | |
| Unvested as of January 31, 2023 | — | | | $ | — | | | |
2021 Equity incentive planIncentive Plan
In March 2021, the Company's Board of Directors approved the 2021 Plan, which provides for granting up to 14,003,560 shares of the Company's common stock to employees, officers, and founders. 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
The following table represents the stock option activity:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Number of options | | Weighted-average exercise price | | | | 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 | | | (39,599) | | | 17.25 | | | | | | | |
| Outstanding at January 31, 2023 | | | 2,463,167 | | | $ | 15.99 | | | | | 8.8 | | $ | 3,079 | |
| | | | | | | | | | | |
| Exercisable as of January 31, 2023 | | | 336,673 | | | $ | 17.13 | | | | | 8.2 | | |
The Company recognized in selling, general and administrative expenses equity compensation expense related to the 2021 Plan totaling $1.0 millionstock options in selling, general and $3.2 million foradministrative expenses and capitalized a portion into inventories on the three months and nine months ended April 30, 2022, respectively,Condensed Consolidated Statements of Financial Position, as applicable, due to units vesting over their requisite service period. In addition,periods. Total recognized equity compensation expense related to the Company capitalized into inventory $0.22021 Plan stock options was $0.8 million and $0.6$0.5 million for the
three months ended January 31, 2023 and 2022, respectively, and $1.3 million and $1.0 million for the three months and ninesix months ended April 30,January 31, 2023 and 2022, respectively.
Stock options
Stock option activity and activity regarding shares available for grant under the 2021 Plan is shown below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Number of options | | Weighted-average exercise price | | | | Weighted-average remaining contractual life
(in years) | | Aggregate intrinsic value
(in thousands) |
| Outstanding at July 31, 2021 | | | 1,552,648 | | | $ | 17.11 | | | | | 0 | | 0 |
| | | | | | | | | | | |
| Granted | | | 50,034 | | | 18.53 | | | | | | | |
| | | | | | | | | | | |
| Exercised | | | (5,172) | | | 15.00 | | | | | | | |
| Forfeited | | | (17,499) | | | 17.00 | | | | | | | |
| Outstanding at April 30, 2022 | | | 1,580,011 | | | $ | 17.16 | | | | | 9.0 | | $ | 5,218 | |
The total unrecognized compensation expense related to the 2021 Plan stock options was $5.6$9.5 million as of April 30, 2022,January 31, 2023, which is expected to be recognized over a weighted-average period of 2.9 years. 0.4 million options were vested and exercisable as of April 30, 2022.
Restricted stock units
RSU grant activity under the 2021 Plan is shown below:
| | | | | | | | | | | | | |
| Number of units | | Weighted-average grant-date fair value per share | | |
| Unvested as of July 31, 2021 | 555,950 | | | $ | 16.95 | | | |
| Granted | 39,011 | | | 19.51 | | | |
| Vested | (167,518) | | | 16.64 | | | |
| Forfeited | (5,833) | | | 17.00 | | | |
| Unvested as of April 30, 2022 | 421,610 | | | $ | 17.30 | | | |
The total fair value of restricted stock that vested during the nine months ended April 30, 2022 was $2.3 million. The total unrecognized compensation expense related to the 2021 Plan RSUs was $6.9 million as of April 30, 2022, which is expected to be recognized over a weighted-average period of 2.83.1 years.
2016 Equity Plan
In 2016, the Company adopted the 2016 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 Company recognized equity compensation expense related to the 2016 Plan in selling, general and administrative expenses due to units vesting over their requisite service periods in the aggregate amounts of $0.1 million and $0.4 million for the three months and nine months ended April 30, 2022, respectively, and $0.2 million and $0.8 million for the three months and nine months ended April 30, 2021, respectively. The total unrecognized compensation expense related to the 2016 Plan was $0.1 million as of April 30, 2022, which is expected to be recognized over a weighted-average period of 0.3 years.
Restricted shares
| | | | | | | | | | | | | |
| Performance-based shares | | Weighted-average grant-date fair value | | |
| Unvested as of July 31, 2021 | 399,234 | | | $ | 14.23 | | | |
| Granted | — | | | — | | | |
| Vested | (133,076) | | | 14.23 | | | |
| Forfeited | — | | | — | | | |
| | | | | |
| Unvested as of April 30, 2022 | 266,158 | | | $ | 14.23 | | | |
The total fair value of restricted shares that vested during the nine months ended April 30, 2022 was $1.9 million.
Employee Stock Purchase Plan
In connection with the IPO, 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. The ESPP, pursuant to Internal Revenue Code Section 423, allows eligible participants to purchase shares using payroll deductions of up to 15% of their total compensation, subject to a $25,000 calendar year limitation on contributions. The purchase price of each share will be 85% of the lesser of the fair market value of the stock as determined on the applicable grant date or the applicable purchase date for each offering period.
Each offering period is six months in duration. The first offering period for the Employee Stock Purchase Plan began on January 3, 2022. Thereafter, offering periods will begin on the first business day of January and July. No purchases have been made under the ESPP as of April 30, 2022.
The fair value of ESPP shares is estimated at the date of grant using the Black-Scholes option-pricing valuation model. The following assumptions were applied in the Black-Scholes option pricing model to estimate the grant-date fair value of the ESPP forstock options granted in the initial offering period that began onsix months ended January 3, 2022.31, 2023:
| | | | | | | |
| | | |
| | | |
Expected term (in years)(a)
| 0.5 | | |
Expected dividend yield(b)
| — | | | |
Risk-free interest rate(c)
| 0.22 | % | | |
Expected volatility(d)
| 47 | % | | |
Stock price | $ | 23.33 | | | |
| | | | | |
| Six months ended January 31, 2023 |
| |
Expected term (in years)(a) | 6.23 |
Expected dividend yield(b) | — | % |
Risk-free interest rate(c) | 3.96 | % |
Expected volatility(d) | 33.9 | % |
| Stock price | $ | 14.43 |
(a) Based onCalculated as the contractual terms ofmidpoint between the 2021 ESPP Agreementweighted-average time to vest and equalthe time to each option period.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 Treasury Yield CurveRates for a period consistent with the expected term in effect at the grant date.
(d) The expected volatility was estimated based on analysis of the Company's historical and implied volatility and consideringof a group of guideline public companies deemed to be comparable public peers within the Company’s industry.
Restricted stock units
The equity-basedfollowing 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 | (22,333) | | | 20.24 | | | |
| Forfeited | (39,414) | | | 16.94 | | | |
| Unvested as of January 31, 2023 | 735,847 | | | $ | 15.81 | | | |
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, due to units vesting over their requisite service periods, of $0.9 million and $0.8 million, respectively, for the three months ended January 31, 2023 and 2022 and $1.6 million and $1.6 million for the six months ended January 31, 2023 and 2022, respectively. The total unrecognized compensation expense related to the 2021 Plan RSUs was $9.4 million as of January 31, 2023, which is expected to be recognized over a weighted-average period of 2.8 years.
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. An offering period under the Plan began on September 1, 2022 and ended on December 30, 2022. The Company recognized equity compensation expense related to the ESPP is generallyin selling, general and administrative expenses and capitalized a portion into inventory, as applicable. For the three and six months ended January 31, 2023, total recognized evenly over the service period unless otherwise stipulated by the award agreement. The service period is the period over which the employee performs the related services, which is normally the same as the six month ESPP offering period.
As of April 30, 2022, total estimatedcompensation expense was immaterial and $0.1 million, respectively. There was no unrecognized compensation expense related to the ESPP was $0.1 million. That cost is expected to be recognized over the remaining termas of the offering period of 0.2 years.January 31, 2023.
13. Casualty loss
Wildfires
Several wildfires occurred in northern California in the first quarter of Fiscal 2021. Other than smoke exposure to unharvested grapes, the Company's owned and leased vineyards did not sustain damage during the fires. Fire and smoke exposure related expenses are reported on the casualty loss line in the Condensed Consolidated Statement of Operations and were immaterial in the current fiscal year and Management believes any ongoing expenses for this matter will continue to be immaterial.
Flood
In Fiscal 2021, as discussed in the 2021 Form 10-K, the Company received proceeds from an insurance claim related to losses incurred in February 2019 due to a flood at a winery. Any incremental charges in the fiscal year ended July 31, 2021, offset by insurance proceeds received, which were reported on the casualty gain, net line item in the Consolidated Statements of Operations and did not recur in Fiscal 2022.
14.12. Earnings per 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's basic and diluted income per share calculation:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended April 30, | | Nine months ended April 30, |
| (in thousands, except share and per share amounts) | 2022 | | 2021 | | 2022 | | 2021 |
| Numerator - Net income attributable to The Duckhorn Portfolio, Inc. | $ | 15,565 | | | $ | 9,022 | | | $ | 54,770 | | | $ | 48,548 | |
| | | | | | | |
| Denominator: | | | | | | | |
| Weighted average number of shares of common stock outstanding - basic | 115,115,850 | | | 107,976,264 | | | 115,070,183 | | | 103,755,180 | |
Dilutive stock options and restricted stock(a) | 165,874 | | | 427,745 | | | 277,625 | | | 368,090 | |
| Weighted average number of shares of common stock outstanding - assuming dilution | 115,281,724 | | | 108,404,009 | | | 115,347,808 | | | 104,123,270 | |
| | | | | | | |
| Earnings per share attributable to The Duckhorn Portfolio, Inc. | | | | | | | |
| Basic | $ | 0.14 | | | $ | 0.08 | | | $ | 0.48 | | | $ | 0.47 | |
| Diluted | $ | 0.14 | | | $ | 0.08 | | | $ | 0.47 | | | $ | 0.47 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
| (in thousands, except share and per share amounts) | 2023 | | 2022 | | 2023 | | 2022 |
Numerator: Net income attributable to
The Duckhorn Portfolio, Inc. | $ | 14,917 | | | $ | 17,932 | | | $ | 34,732 | | | $ | 39,205 | |
| Denominator: | | | | | | | |
| Weighted average number of shares outstanding for basic per share calculation | 115,191,575 | | 115,049,395 | | 115,187,868 | | | 115,048,094 | |
Effect of dilutive potential shares(a): | | | | | | | |
| Stock options | — | | | 145,990 | | | — | | | 158,261 | |
| Restricted stock awards | 136,085 | | | 194,117 | | | 236,941 | | | 184,656 | |
| Adjusted weighted average shares outstanding for diluted per share calculation | 115,327,660 | | 115,389,502 | | 115,424,809 | | | 115,391,011 | |
Earnings per share attributable to
The Duckhorn Portfolio, Inc. | | | | | | | |
| Basic | $ | 0.13 | | | $ | 0.16 | | | $ | 0.30 | | | $ | 0.34 | |
| Diluted | $ | 0.13 | | | $ | 0.16 | | | $ | 0.30 | | | $ | 0.34 | |
______________________________________(a) Calculated using the treasury stock method.
There were 18,422 and 5,674 outstanding common stock awards deemed anti-dilutive for
For the three months ended January 31, 2023 and nine2022, there were 0.6 million and 0.1 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 six months ended April 30,January 31, 2023 and 2022, there were 0.5 million and 0.1 million incremental common shares issuable upon the exercise of certain stock options, respectively, and none outstandingthat 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 11 (Equity-based compensation) for the three months and nine months ended April 30, 2021.terms of the awards.
15.13. Income taxes
Income tax expense was $4.7$5.3 million and $18.5$12.4 million, with an effective tax rate of 23.2%26.1% and 25.2%,26.2% for the three months and ninesix months ended April 30, 2022,January 31, 2023, respectively, compared to $5.6$6.4 million and $19.7$13.8 million, with an effective tax rate of 38.4%26.3% and 28.9%26.0% for the three months and ninesix months ended April 30, 2021,January 31, 2022, respectively. The effective tax rates for allboth periods presented were higher than the federal statutory rate of 21% primarily due to the impact of state income taxes and equity-based compensation expense, partially offset by R&D tax credits claimed.taxes.
16.14. Subsequent events
In May 2022,Effective February 6, 2023, the Company purchased a San Luis Obispo County, California vineyardentered into the First Amendment to the Amended and related improvements for a total of $18.2 million.Restated First Lien Loan and Security Agreement. The Company has evaluated this transaction under ASC Topic 805 and determined it will be recognized as an asset acquisitionchanges in the amendment are administrative in nature and do not have a material impact on the Company's fourth quarter of Fiscal 2022.outstanding debt or related debt covenants. The amendment did not result in any additional cash proceeds or changes in commitment amounts.
Item 2. Management’s discussion and analysis of financial condition and results of operations
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 2021.2022.
Overview
The Duckhorn Portfolio is the premier scaled producer of luxury wines in North America. We have delighted millions of consumers with authentic, high-quality, approachable wines for over four decades. We championoffer a curated and comprehensive portfolio of highly acclaimed luxury wines across multiple varietals, appellations, brands and price points.with suggested retail prices ranging from $20 to $200 per bottle. Our portfolio is focused exclusively on the desirable luxury segment, which we define as wines sold for $15 or higher per 750ml bottle.
We sell our winesare available in all 50 states and over 50 countries at prices ranging from $20 to $200 per bottle under a world-class luxury portfolio of winery brands, including Duckhorn Vineyards, Decoy, Kosta Browne, Goldeneye, Paraduxx, Calera, Migration, Canvasback, Calera, Kosta Browne, Greenwing and Postmark. Our wines have a strong record of achieving critical acclaim, vintage after vintage. Each winery brand boasts its own winemaking team to create distinct experiences for consumers, to ensure product quality and continuity and to galvanize sustainable farming practices. Beyond our winemaking teams is an organization comprised of passionate, talented employees, including a highly tenured executive team that has approximately 100 years of cumulative experience with Duckhorn.
We sell our wines to distributors outside California and directly to retailtrade accounts in California, which together comprise our wholesale channel. We also sell directly to consumers through our DTC channel, which made up approximately 16% ofincludes eight tasting rooms, wine clubs and our net sales for the first nine months of Fiscal 2022.multi-winery e-commerce website. Our powerful omni-channel sales model drivescontinues to drive strong margins by leveraging long-standing relationships developed over the past forty years. We believe our iconic winery brands together with our scaled, quality-focused production, omni-channel distribution and dedicated employees, set the standard for North American luxury wine.relationships.
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, but adjustedperformance. 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.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended April 30, | | Nine months ended April 30, |
| (in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
| Net sales | $ | 91,584 | | | $ | 90,425 | | | $ | 294,501 | | | $ | 265,720 | |
| Gross profit | $ | 43,962 | | | $ | 46,929 | | | $ | 145,849 | | | $ | 132,961 | |
| Net income attributable to The Duckhorn Portfolio, Inc. | $ | 15,565 | | | $ | 9,022 | | | $ | 54,770 | | | $ | 48,548 | |
| Adjusted EBITDA | $ | 32,873 | | | $ | 32,946 | | | $ | 105,272 | | | $ | 98,845 | |
The following table represents the reconciliation ofnon-GAAP financial measures and adjusted EBITDA to net income attributable to The Duckhorn Portfolio, Inc.:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended April 30, | | Nine months ended April 30, |
| (in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
| Net income attributable to The Duckhorn Portfolio, Inc. | $ | 15,565 | | | $ | 9,022 | | | $ | 54,770 | | | $ | 48,548 | |
| Interest expense | 1,618 | | | 3,755 | | | 4,860 | | | 10,947 | |
| Income tax expense | 4,699 | | | 5,623 | | | 18,483 | | | 19,694 | |
| Depreciation and amortization expense | 6,237 | | | 5,554 | | | 17,345 | | | 16,434 | |
| EBITDA | 28,119 | | | 23,954 | | | 95,458 | | | 95,623 | |
Purchase accounting adjustments(a) | 54 | | | 126 | | | 347 | | | 1,449 | |
Transaction expenses(b) | 347 | | | 2,304 | | | 3,116 | | | 2,304 | |
| | | | | | | |
Inventory write-down(c) | 3,935 | | | — | | | 3,935 | | | — | |
Change in fair value of derivatives(d) | (990) | | | (1,991) | | | (1,947) | | | (4,818) | |
Equity-based compensation(e) | 1,365 | | | 8,962 | | | 4,240 | | | 9,538 | |
Casualty gain, net(f) | — | | | — | | | — | | | (7,832) | |
| | | | | | | |
Loss on debt extinguishment(g) | — | | | — | | | — | | | 272 | |
IPO preparation costs(h) | — | | | — | | | — | | | 405 | |
Wildfire costs(i) | 43 | | | (421) | | | 123 | | | 1,196 | |
COVID-19 costs(j) | — | | | 12 | | | — | | | 708 | |
| Adjusted EBITDA | $ | 32,873 | | | $ | 32,946 | | | $ | 105,272 | | | $ | 98,845 | |
(a) Purchase accounting adjustments relate to the impacts of prior business combination accounting for our acquisition by TSG in Fiscal 2017, our subsequent acquisitions of Calera and Kosta Browne in Fiscal 2018 and Fiscal 2019, respectively, and certain other transactions consummated prior to our acquisition by TSG, which resulted in fair value adjustments to inventory and long-lived assets.
(b) Transaction expenses include legal and professional fees and change of control payments incurred in connection with our IPO in March 2021. Also included are expenses incurred for abandoned transactions and the secondary offering completed in October 2021. These expenses were directly related to such transactions and were incremental to our normal operating expenses.
(c) Inventory write-down pertains to the Company's increase in inventory obsolescence reserves for excess inventory levels of certain seltzer products. See Note 4 (Inventories) to our Condensed Consolidated Financial Statementsreconciliation” for additional information.
(d) See Note 9 (Derivative instruments) to our Condensed Consolidated Financial Statements for additional information.
(e) See Note 12 (Equity-based compensation) to our Condensed Consolidated Financial Statements for additional information.
(f) Casualty gain, net in adjusted EBITDA pertains to the flood event at one of our wineries in Fiscal 2019, and was primarily comprised of insurance proceeds received pursuant to our claim, offset by flood damage and remediation costs. The proceeds received, offset by costs incurred, are reported on the casualty loss (gain), net line in the Condensed Consolidated Statements of Operations. See Note 13 (Casualty loss) to our Condensed Consolidated Financial Statements for additional information.
(g) Loss on debt extinguishment includes charges for unamortized deferred financing fees we recognized in connection with amendments to our Credit Facility.
(h) IPO preparation costs include professional fees incurred for outside consultants to advise us on legal, accounting and tax matters related to our preparation for becoming a public company which were not directly attributable to an offering.
(i) Wildfire costs include the cost of unharvested fruit that was damaged and rendered useless, charges we incurred to respond to imminent wildfire threat with fire-fighting crews to protect our assets, clean-up and smoke remediation expenses to restore operations at our tasting rooms after the fires, testing fees to evaluate our fruit for possible smoke damage, and washing or other grape processing costs prior to vinification to reduce the risk of smoke in finished wine. These costs are reported on the casualty loss (gain), net line in the Condensed Consolidated Statements of Operations along with related crop insurance proceeds received. See Note 13 (Casualty loss) to our Condensed Consolidated Financial Statements for additional information. While we expect the potential for wildfires to be an ongoing risk to running an agricultural business in California, we believe the wildfires and related costs we experienced are not indicative of our core operating performance.
(j) COVID-19 costs include certain incremental expenses incurred during the outbreak of the COVID-19 pandemic and the short-term closure mandates imposed by government officials in the jurisdictions in which we operate. These costs include tasting room expenses incurred during a period of mandatory closure and reduced capacity, salaries and severance expenses for certain employees and other immaterial costs to transfer inventory.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
| (in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Net sales | $ | 103,488 | | | $ | 98,736 | | | $ | 211,659 | | | $ | 202,917 | |
| Gross profit | $ | 55,186 | | | $ | 49,477 | | | $ | 109,896 | | | $ | 101,887 | |
| Net income attributable to The Duckhorn Portfolio, Inc. | $ | 14,917 | | | $ | 17,932 | | | $ | 34,732 | | | $ | 39,205 | |
| Adjusted EBITDA | $ | 38,813 | | | $ | 34,310 | | | $ | 74,478 | | | $ | 72,400 | |
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 key factors affecting our performance” 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, non-cash equity-based compensation expense, purchase accounting adjustments, casualty losses or gains, impairment losses (including certain inventory charges),transaction expenses, changes in the fair value of
derivatives, equity-based compensation and certain other items which are not related to our core operating performance. Adjusted EBITDA is a key metricperformance measure we use in evaluating our operational results. We believe adjusted EBITDA is a helpful measure to evaluate business performance in comparison to budgets, forecasts and prior period financial results, providing a measure that Management believes reflects the Company’sprovide investors an understanding of how management regularly monitors our core operating performance.
For comparative periods presented, our primaryperformance, as well as how management makes operational drivers ofand strategic decisions in allocating resources. We believe adjusted EBITDA have been sustained sales growth inalso provides management and investors consistency and comparability with our wholesale channelpast financial performance and steady growth in our DTC channel, managementfacilitates period to period comparison of our costoperations, as it eliminates the effects of sales through our diversified supply planning strategy, and discipline over selling, general and administrative expenses relativecertain variations unrelated to our sales growth.overall performance. See “—Limitations of non-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 retailtrade accounts in California and through our DTC channel, respectively, as a percentage of our total net sales. We monitor net sales percentage across theseall 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, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Wholesale - distributors | 62.0 | % | | 59.5 | % | | 66.0 | % | | 64.4 | % |
| Wholesale - California direct to retail | 16.6 | % | | 15.7 | % | | 17.6 | % | | 16.5 | % |
| DTC | 21.4 | % | | 24.8 | % | | 16.4 | % | | 19.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Wholesale - Distributors | 61.3 | % | | 67.2 | % | | 69.0 | % | | 67.9 | % |
| Wholesale - California direct to trade | 19.1 | % | | 19.8 | % | | 17.4 | % | | 18.1 | % |
| DTC | 19.6 | % | | 13.0 | % | | 13.6 | % | | 14.0 | % |
| Total net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
The composition of our net sales, expressed in percentages by channel for the three months and nine months ended April 30, 2022 and 2021, performed generally in line with historical trends, and continuedJanuary 31, 2023, was impacted by a DTC offering shift into the second quarter of Fiscal 2023 compared to demonstrate signsthe first quarter of recovery from COVID-19 disruption across major markets.Fiscal 2022. In our wholesale business, the expansion of on-premise activity was a bright spot for the broader industry, and yet we outperformed by climbing beyond pre-pandemic levels and strengthening our share even when compared to the notably rapid expansion in the comparative prior year period. Off-premise activity remained a key strength in our results as we strengthened share gains across our broader wholesale channel. We believe sales channel mix inmarket position and delivered volume growth during the future may be more consistent with performance prior to the COVID-19 pandemic than those periods most prominently impacted by COVID-19 disruption, depending on changing consumer purchasing patterns and future market conditions.six months ended January 31, 2023.
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 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 January 31, | | Six months ended January 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| Net sales growth | Net sales growth | 1.3 | % | | 31.6 | % | | 10.8 | % | | 21.7 | % | Net sales growth | 4.8 | % | | 18.0 | % | | 4.3 | % | | 15.8 | % |
| Volume contribution | Volume contribution | (0.6) | % | | 41.0 | % | | 10.0 | % | | 30.2 | % | Volume contribution | (0.4) | % | | 24.8 | % | | 4.5 | % | | 15.3 | % |
| Price / mix contribution | Price / mix contribution | 1.9 | % | | (9.4) | % | | 0.8 | % | | (8.5) | % | Price / mix contribution | 5.2 | % | | (6.8) | % | | (0.2) | % | | 0.5 | % |
Price / mix contribution for the three months ended April 30,January 31, 2023 was bolstered by a DTC offering shift into the second quarter of Fiscal 2023 compared to the first quarter of Fiscal 2022, as well as pricing increases in our wholesale channel that supported net sales growth reflected positive price mix. The positivefor the quarter versus the prior year period.
For the six months ended January 31, 2023, a relatively neutral price / mix contribution was primarily a result of strength in Duckhorn Vineyards and Decoy driving our top line expansion, with a substantial portion of the growth concentrated in wholesale. Volume growth was down 0.6%, nearly keeping pace withimpacted by the outsized volume growth seen forof the three months ended April 30, 2021.wholesale channel and flat DTC channel performance, while benefiting from pricing increases that supported net sales growth. Despite achievinglapping high growth rates we achieved in the prior year period, weour focus on trade account growth was a primary driver of increased our market share gains and saw strong off-premise performancevolume for the threesix months ended April 30, 2022. Our consistent use of distributor and retail sales discounts and promotions in our wholesale channel to gain market share has historically placed modest downward pressure on price / mix contribution. To the extent we deploy a similar strategyJanuary 31, 2023. Wholesale performance was largely balanced in the future, we would expect to see similar downward pressure on price / mix.
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 ourchannels, with on-premise sales.slightly outpacing off-premise growth. Generally, on-premise growthexpansion also drives increased sales in our ultra-luxury brands that sell at higher average sales prices and positively impact price / mix contribution. In
For the prior year period, we saw immensesix months ended January 31, 2022, growth primarily driven by off-premisein net sales of our luxury winery brands that drovewas mainly attributable to continued strong sales volume growth and a negative price / mix contribution.
We expectneutral price / mix contribution will continue to movedemonstrating the shift back toward historical levels as consumer purchasing and consumption habits normalize followingpre-COVID-19 trends with the COVID-19 pandemic. We expect that volume contribution will continue to be the primary driver of changesgrowth in our net sales in future periods. To the extent our growth is fueled by sales of lower-priced luxury winery brands, we may see lower or negative price / mix contribution in the future, with potential for favorable impacts to price / mix due to brand velocity at varying price points.on-premise sales.
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 retail 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 returns, 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 sales channel, to retailtrade accounts nationally.
The following factors and trends in our business have driven net sales growth over the past fiscal years and are expected to be key drivers of our net sales growth for the foreseeable future:
•Further leverage brand strength. We believe our comprehensive growth plan will continue to increaseLeverage 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. This plan is made possible by our omni-channel platform, which enables us to grow both through increased volume with existing and new customers and accounts as well as through periodic price increases, particularly on our higher end, smaller lot DTC wines.consumers in a consolidating marketplace.
•Insightful and targeted portfolio evolution. Our curated portfolioLaunch winery brand extensions and historical growth result from long-term dedication to continuous evolutioncontinue evolving and alignment with the luxury wine consumer. We believe we can drive additional sales throughstrategically broadening our wholesale and DTC channels. As we continue to scale, we believe ourportfolio.
growth mindset, coupled with our differentiated production and distribution platform, will enable us to adapt and remain at the forefront of our industry.
•Distribution expansion and acceleration. Purchasing by distributors and loyal accounts that continue to feature our wines are key drivers of net sales. We plan to continue broadening distribution of the wines in our portfolio as well as to increase the volume of wine sold to existing accounts. We believe our long-standing existing commercial relationships coupled with exceptional portfolio strength position us to captureCapture distribution growth opportunities and accelerate sales to existing distributors and retail accounts in California.
•Continued investment in DTC channel.We expect to continue to invest in our DTC channel, leveraging wine clubs and brand-specific tasting rooms to engage 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.
•Opportunistic evaluation of strategic acquisitions. OurDisciplined evaluation of strategic and opportunistic approach to evaluating acquisitions has led to the successful acquisition of two winery brands in the past five years: Kosta Browne and Calera. While our growth and success are not contingent upon future acquisitions, we believe our team has the capabilities and track record both to execute and to integrate meaningful acquisitions when opportunities arise to create stockholder value.
The primary market for our wines is the United States, which has historically represented approximately 95%94% of our net sales.sales during the six months ended January 31, 2023. Accordingly, our results of operations are primarily dependent on U.S. consumer discretionary spending.
Sales channels
Our sales and distribution platform is based on long-standing relationships with a highly-developed network of distributor accounts in all U.S. states (except California, where we sell directly to retail accounts) and in over 50 countries globally. We also have developed strong relationships with consumers who buy our wines directly from us in the DTC channel. Channel mix can affect our performance and results of operations, particularly gross profit and gross profit margin.
•Wholesale channel. Consistent with sales practices in the wine industry, sales to retailerstrade 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 by the retail accounts in their respective territories. In California, where we make sales directly to retailtrade accounts, we benefit from greater control over our sales and higher profit margins by selling directly to retailers in the state. Our wholesale channel comprisesconstitutes a greater proportion of our net sales than our DTC channel.
•DTC channel. Wines sold through our DTC channelschannel are generally sold at suggested retail prices. Our DTC channel continuessales represent important direct connections with our customers. DTC channel sales growth will generally be favorable to grow asprice/mix contribution and gross profit margin in periods where that channel constitutes a resultgreater proportion of net sales than in a number of factors, including a shift to more consumption and corporate engagement in the home.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 intend to maintain and strengthen our long-standing relationships within our network of distributors, which we believe will be critical to our continued growth and success. In the wholesale channel, we are positioned as a one-stop luxury and ultra-luxury wine shop, offering a diverse mix of high-quality winery brands and varietals at varying luxury and ultra-luxury price points. We believe this strategy will enable us to continue increasing our share of the wholesale luxury and ultra-luxury wine market in the future, as customers will have greater opportunity to engage with and experience wines across our broad portfolio. We continue to innovate with new products at all price points within the portfolio. We strive to enhance customer engagement and increase sales as new customers encounter our wines and existing customers trade up to higher-priced wines.
Our sales mix within our wholesale channel has reflected disproportional benefits to off-premise sales in certain periods, while on-premise sales have experienced variability, directly related to the COVID-19 pandemic, which began impacting our sales in March 2020. Our responses to periods of historical disruption in the wholesale channel have focused on strengthening relationships with our accounts and distributors, introducing new products and maintaining and strengthening our winery brand engagement. We believe this approach has enabled us to strengthen our portfolio and increase our market share relative to competitors during periods of market disruption.
We routinely offer sales discounts and promotions through various programs to distributors around the country and to retailtrade accounts in California. These programs, where permissible, include volume-based discounts on sales orders, depletion-based incentives we pay distributors and certain other promotional activities. The expense associated with these discounts and promotions is estimated and recorded as a reduction ofto total sales in order to arrive at reportedcalculating net sales. While our promotional activities may result in some variancevariability in total net sales from quarter to quarter, historically, the total impact of suchthese activities on annualour results has generally been proportional to changes in total net sales has been generally stable, and we expect this trend to continue in the future.
In the DTC channel, our holistic approach to consumer engagement both online and offline is supported by an integrated e-commerce platform and portfolio 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 cross-sell wines within our portfolio. These strategies are designed to maximize each winery brand and property while driving awareness for the Company’s other world-class wines and properties, resulting in more and deeper customer connections. We strive to evolve our offerings, experiences and communication to match the generational shifts in wine engagement preferences and related purchasing decisions. In addition, we anticipate that our holistic consumer engagement approach will help our DTC sales remain strong through the near-term impact of the COVID-19 pandemic on consumer purchasing behaviors.
Increasing customer engagement is a key driver of our business and results of operations. We continue to invest in our DTC channel and in performance marketing to drive customer engagement. In addition to developing new offerings and cross-selling wines in our portfolio of winery brands, we focus on increasing customer conversion and customer retention. As we continue to invest in enhancing our DTC channel, we expect to continue to increase customer engagement, which we believe will result in greater customer satisfaction and retention.sales.
Seasonality
Our net sales are typically highest in the first half of our fiscal year, mostlypredominantly 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, which has the effect of loweringseason. This dynamic generally results in lower average selling prices as a result of the use ofdue to distributor and retail sales discounts and promotions in our wholesale channel. See “—Key operating metrics.” In Fiscal 2021,2022, our net sales in the first, second, third and fourth fiscal quarters represented approximately 27%28%, 26%, 25%, 27% and 21%, respectively, of our total net sales for the year.
Gross profit
Gross profit is equal to our net sales minus our 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. Additionally, we expect gross profit as a percentage of net sales to remain consistent with historical levels or to improve to the extent we return toward normalized consumer spending behavior across the industry and within our business, particularly with respect to on-premise sales in the wholesale channel, which would favorably influence our gross profit margins on net sales.
Agribusiness
We have developed a diversified sourcing and production model, supported by our eight wineries, world-class, and world-class, strategically located Estate vineyards 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% of our total production is sourced from third-partythird party growers and, to a significantly lesser extent, the bulk wine market. 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. Although we expect selling, general and administrative expenses to increase as sales and related support needs expand, we expect our sales growth rate to outpace the rate of increased selling, general and administrative expenses as we achieve further efficiencies of scale. We also expect to incur greater selling, general and administrative expenses as a result of operating as a publicly traded company.
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 vineyards
Although generally over 85% of our wine is typically derived from grapes grown by third party growers and, to a significantly lesser extent, bulk wine we purchase, the remainder is sourced from our Estate vineyards 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. Over the long-term as our business grows, we expect Estate vineyards to represent a smaller relative share
Harvest-to-release
Of the total case volume we produce and sell, the majority is comprised of red wines from grape varietals 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 15 to 48 months. Our white, rosé and sparkling wines generally have a
harvest-to-release inventory lifecycle that can range from five to 3548 months. During aging and storage, 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 exposure to future grape price volatility.
Other factors impacting the comparability of our results of operations
Impacts of COVID-19
In March 2020, the World Health Organization declared a global pandemic due to the spread of COVID-19, the disease caused by a novel strain of coronavirus. As governmental authorities implemented various measures limiting the activities of businesses and individuals to reduce the spread of COVID-19, wine producers in the United States were generally classified as essential businesses, which enabled us to continue producing and selling our wine. For the safety of our employees and the individuals with whom we work, we adapted our policies and protocols to meet applicable federal, state and local requirements, and we continue to monitor and revise our policies as appropriate.
The comparability of our results of operations have been significantly impacted by the effects of the COVID-19 pandemic on our business, industry, customer behavior, key markets where we operate and as a result of macroeconomic factors. Accordingly, certain period-over-period comparisons have been and may continue to be influenced by disruption due to the COVID-19 pandemic.
At the outset of the COVID-19 pandemic in the third quarter of Fiscal 2020, we experienced a significant decrease in sales of ultra-luxury wines sold through our on-premise wholesale sales channel and a significant increase of sales of ultra-luxury and luxury wines sold at off-premise retailers. Historically, our ultra-luxury winery brands have delivered higher gross profit margins, and generally sell in larger volumes on-premise than our luxury winery brands, which typically see higher sales volumes off-premise. This shift in sales channel mix continued through the majority of Fiscal 2021.
During Fiscal 2022, we observed continued signs of reopening across the domestic consumer product markets and reversion toward consumer purchasing habits which we believe to be more in line with trends observable before the COVID-19 pandemic. On-premise sales have continued to increase from their pandemic lows, resulting in higher sales of our ultra-luxury winery brands and fortifying on-premise sales for the nine months ended April 30, 2022. Off-premise activity remained a key strength in our results as we strengthened share gains across our broader wholesale channel. We expect sales channel mix to continue to move toward historical levels and to reflect consumer purchasing patterns more consistent with performance prior to the COVID-19 pandemic. At the same time, the significant off-premise sales growth that we experienced during the pandemic may be tempered compared to the outsized growth rates in pandemic-impacted comparative periods. Although we have observed strong customer demand during periods impacted by pervasive stay-at-home restrictions, and cannot predict the future impact on consumer spending as these restrictions continue to vary by market, we believe that the diverse offerings of The Duckhorn Portfolio, which include a broad spectrum of price points, mitigates some of the risk to our future operations in periods in which the on- and off-premise relative mix fluctuates.
During the pandemic, our tasting rooms have also experienced lower tasting fee revenue due to reduced capacities or mandatory closure in order to comply with applicable regulations despite sustained operating levels of expenses, primarily comprised of tasting room operating expenses during periods of capacity restrictions or mandatory closure. Conversely, e-commerce sales increased substantially in response to lockdowns as customers sought to purchase our wines in a manner that reduced human contact. We believe that our tasting rooms will continue to see strong visitation and sales results as the pandemic wanes, tourism increases and regulations limiting occupancy are eased. At the same time, we believe that customers who used e-commerce platforms to purchase our wines will continue to enjoy the convenience of those platforms to purchase wines from The Duckhorn Portfolio, Inc.
Impact of wildfires
During the first quarter of Fiscal 2021, several wildfires occurred in Northern California. These fires adversely affected certain industry grape supplies. Other than smoke exposure to grapes that had not been harvested, our vineyards did not sustain damage during the fires. However, smoke and fire damage to vineyards in the primary regions and markets where we source fruit rendered some of the available grapes unacceptable for the Company’s production needs. In response, we took steps to obtain alternative sources of supply that we believe substantially mitigates the impact of the fires on our supply. Based on our internal analysis of the impacts of the wildfires, we believe the potential future impact on our operational results to be immaterial. We continue to monitor the ongoing effects on our business for any material changes to that conclusion. Wildfires and smoke damage to grape yields have resulted in disruption and could continue to disrupt the overall grape supply market, introduce changes to our production plan, impact the quantity or release timing of expected case sales in our sales forecast, or result in changes to future gross profit margins as compared to prior periods.
We continue to enhance our wildfire response plan and to mitigate the supply risk associated with wildfires in the following ways:
•our diversified sourcing strategy, with a mix of our owned or leased Estate properties and high-quality grower contracts, covers a wide geographic footprint across California and Washington; and
•we have assembled a team of winemakers and operational leadership with deep industry experience, enabling us to respond effectively to supply disruption in our active grape sourcing markets or to expand into new sourcing markets if needed.
Impacts of purchase accounting due to prior acquisitions
We were acquired by TSG in Fiscal 2017, and subsequently completed acquisitions of Calera and Kosta Browne in Fiscal 2018 and Fiscal 2019, respectively. In applying business combination accounting pursuant to U.S. GAAP authoritative literature in connection with each of these transactions, we recorded acquired assets and liabilities at their fair values. The impacts of these purchase accounting adjustments primarily resulted in reductions to deferred revenue, increases to inventory, increases to long-lived assets and recognition of indefinite-lived intangible assets and definite-lived intangible assets, which amortize over their assigned useful lives ranging from 9 to 14 years. See Note 6 (Other intangible assets) to our Condensed Consolidated Financial Statements for additional information.
The effects of purchase accounting adjustments on our operational performance caused our pre-tax income from operations to be lower in certain periods than we would otherwise have recognized due to increased cost of sales from step-up to fair value of inventory and increased operating expenses due to step-up depreciation on property and equipment and amortization of definite-lived intangible assets. The table below reflects the line items of our Condensed Consolidated Statements of Operations impacted by these purchase accounting adjustments:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended April 30, | | Nine months ended April 30, |
| (in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| | | | | | | |
| Purchase accounting adjustments to cost of sales | $ | 54 | | | $ | 126 | | | $ | 347 | | | $ | 1,449 | |
| Impact of purchase accounting on gross profit | (54) | | | (126) | | | (347) | | | (1,449) | |
| Amortization of customer relationships and other intangible assets | 1,921 | | | 1,921 | | | 5,762 | | | 5,762 | |
| Impact of purchase accounting on selling, general and administrative expenses | 1,921 | | | 1,921 | | | 5,762 | | | 5,762 | |
| Impacts of purchase accounting on income before income taxes | $ | (1,975) | | | $ | (2,047) | | | $ | (6,109) | | | $ | (7,211) | |
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 annual consolidated financial
statements, 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 January 31, | | Six months ended January 31, |
| (in thousands, except percentages) | (in thousands, except percentages) | 2022 | | 2021 | | 2022 | | 2021 | | (in thousands, except percentages) | 2023 | | 2022 | | 2023 | | 2022 |
| Net sales | Net sales | $ | 91,584 | | | 100.0 | % | | $ | 90,425 | | | 100.0 | % | | $ | 294,501 | | | 100.0 | % | | $ | 265,720 | | | 100.0 | % | | Net sales | $ | 103,488 | | | 100.0 | % | | $ | 98,736 | | | 100.0 | % | | $ | 211,659 | | | 100.0 | % | | $ | 202,917 | | | 100.0 | % |
| Cost of sales | Cost of sales | 47,622 | | | 52.0 | | | 43,496 | | | 48.1 | | | 148,652 | | | 50.5 | | | 132,759 | | | 50.0 | | | Cost of sales | 48,302 | | | 46.7 | | | 49,259 | | | 49.9 | | | 101,763 | | | 48.1 | | | 101,030 | | | 49.8 | |
| Gross profit | Gross profit | 43,962 | | | 48.0 | | | 46,929 | | | 51.9 | | | 145,849 | | | 49.5 | | | 132,961 | | | 50.0 | | | Gross profit | 55,186 | | | 53.3 | | | 49,477 | | | 50.1 | | | 109,896 | | | 51.9 | | | 101,887 | | | 50.2 | |
| Selling, general, and administrative expenses | 23,083 | | | 25.2 | | | 31,142 | | | 34.4 | | | 70,055 | | | 23.8 | | | 65,418 | | | 24.6 | | | |
| Selling, general and administrative expenses | | Selling, general and administrative expenses | 29,579 | | | 28.6 | | | 23,845 | | | 24.1 | | | 55,318 | | | 26.1 | | | 47,052 | | | 23.1 | |
| | Casualty loss (gain), net | 43 | | | — | | | (421) | | | (0.5) | | | 123 | | | — | | | (6,636) | | | (2.5) | | | |
| | Income from operations | Income from operations | 20,836 | | | 22.8 | | | 16,208 | | | 17.9 | | | 75,671 | | | 25.7 | | | 74,179 | | | 27.9 | | | Income from operations | 25,607 | | | 24.7 | | | 25,632 | | | 26.0 | | | 54,578 | | | 25.8 | | | 54,835 | | | 27.0 | |
| Interest expense | Interest expense | 1,618 | | | 1.8 | | | 3,755 | | | 4.2 | | | 4,860 | | | 1.7 | | | 10,947 | | | 4.1 | | | Interest expense | 2,684 | | | 2.6 | | | 1,636 | | | 1.7 | | | 4,846 | | | 2.3 | | | 3,242 | | | 1.6 | |
| Other income, net | (1,046) | | | (1.1) | | | (2,192) | | | (2.4) | | | (2,477) | | | (0.8) | | | (5,006) | | | (1.9) | | | |
| Total other expenses | 572 | | | 0.6 | | | 1,563 | | | 1.7 | | | 2,383 | | | 0.8 | | | 5,941 | | | 2.2 | | | |
| Other expense (income), net | | Other expense (income), net | 2,743 | | | 2.6 | | | (338) | | | (0.3) | | | 2,656 | | | 1.3 | | | (1,431) | | | (0.7) | |
| Total other expenses, net | | Total other expenses, net | 5,427 | | | 5.2 | | | 1,298 | | | 1.3 | | | 7,502 | | | 3.5 | | | 1,811 | | | 0.9 | |
| Income before income taxes | Income before income taxes | 20,264 | | | 22.1 | | | 14,645 | | | 16.2 | | | 73,288 | | | 24.9 | | | 68,238 | | | 25.7 | | | Income before income taxes | 20,180 | | | 19.5 | | | 24,334 | | | 24.6 | | | 47,076 | | | 22.2 | | | 53,024 | | | 26.1 | |
| Income tax expense | Income tax expense | 4,699 | | | 5.1 | | | 5,623 | | | 6.2 | | | 18,483 | | | 6.3 | | | 19,694 | | | 7.4 | | | Income tax expense | 5,265 | | | 5.1 | | | 6,407 | | | 6.5 | | | 12,352 | | | 5.8 | | | 13,784 | | | 6.8 | |
| Net income | Net income | 15,565 | | | 17.0 | | | 9,022 | | | 10.0 | | | 54,805 | | | 18.6 | | | 48,544 | | | 18.3 | | | Net income | 14,915 | | | 14.4 | | | 17,927 | | | 18.2 | | | 34,724 | | | 16.4 | | | 39,240 | | | 19.3 | |
| Less: Net loss (income) attributable to non-controlling interest | Less: Net loss (income) attributable to non-controlling interest | — | | | — | | | — | | | — | | | (35) | | | — | | | 4 | | | — | | | Less: Net loss (income) attributable to non-controlling interest | 2 | | | — | | | 5 | | | — | | | 8 | | | — | | | (35) | | | — | |
| Net income attributable to The Duckhorn Portfolio, Inc. | Net income attributable to The Duckhorn Portfolio, Inc. | $ | 15,565 | | | 17.0 | % | | $ | 9,022 | | | 10.0 | % | | $ | 54,770 | | | 18.6 | % | | $ | 48,548 | | | 18.3 | % | | Net income attributable to The Duckhorn Portfolio, Inc. | $ | 14,917 | | | 14.4 | % | | $ | 17,932 | | | 18.2 | % | | $ | 34,732 | | | 16.4 | % | | $ | 39,205 | | | 19.3 | % |
|
Comparison of the three and ninesix months ended April 30,January 31, 2023 and 2022 and 2021
| | Net sales | Net sales | Net sales |
| | Three months ended April 30, | | Change | | Nine months ended April 30, | | Change | | Three months ended January 31, | | Change | | Six months ended January 31, | | Change |
| (in thousands, except percentages) | (in thousands, except percentages) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % | (in thousands, except percentages) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Net sales | Net sales | $ | 91,584 | | | $ | 90,425 | | | $ | 1,159 | | | 1.3 | % | | $ | 294,501 | | | $ | 265,720 | | | $ | 28,781 | | | 10.8 | % | Net sales | $ | 103,488 | | | $ | 98,736 | | | $ | 4,752 | | | 4.8 | % | | $ | 211,659 | | | $ | 202,917 | | | $ | 8,742 | | | 4.3 | % |
Net sales for the three months ended April 30, 2022January 31, 2023 increased $1.2$4.8 million, or 1.3%4.8%, to $91.6$103.5 million compared to $90.4$98.7 million for the three months ended April 30, 2021.January 31, 2022. The increase in net sales for the three months ended April 30, 2022January 31, 2023 was driven by a favorable shift in price/positive price / mix contribution duein our DTC channel sales related to favorable brand mix led by wholesale, partially offset by negative volume growth.a DTC offering shift to the second quarter of Fiscal 2023 compared to the first quarter of Fiscal 2022, as well as planned pricing increases.
Net sales for the ninesix months ended April 30, 2022January 31, 2023 increased $28.8$8.7 million, or 10.8%4.3%, to $294.5$211.7 million compared to $265.7$202.9 million for the ninesix months ended April 30, 2021.January 31, 2022. The increase in net sales for the ninesix months ended April 30, 2022 wasJanuary 31, 2023 is primarily driven by volume growth and favorable price / a neutral price/mix contribution, as a result of strong growth leddriven by both volume and mix improvements in the wholesale sales channels.channel and planned pricing increases.
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| Cost of sales |
| Three months ended April 30, | | Change | | Nine months ended April 30, | | Change |
| (in thousands, except percentages) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Cost of sales | $ | 47,622 | | | $ | 43,496 | | | $ | 4,126 | | | 9.5 | % | | $ | 148,652 | | | $ | 132,759 | | | $ | 15,893 | | | 12.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of sales |
| Three months ended January 31, | | Change | | Six months ended January 31, | | Change |
| (in thousands, except percentages) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Cost of sales | $ | 48,302 | | | $ | 49,259 | | | $ | (957) | | | (1.9) | % | | $ | 101,763 | | | $ | 101,030 | | | $ | 733 | | | 0.7 | % |
Cost of sales increaseddecreased by $4.1$1.0 million, or 9.5%1.9%, to $47.6$48.3 million for the three months ended April 30, 2022January 31, 2023 compared to $43.5$49.3 million for the three months ended April 30, 2021.January 31, 2022. The increasedecrease in cost of sales for the three months ended April 30, 2022 isJanuary 31, 2023 was primarily driven by higher sales and an increase in our inventory reserve for excess seltzer products (see Note 4 (Inventories) for additional information). As the remaining seltzer inventory levels are immaterial, we do not expect a material impact to any future period as a result of potential further inventory reserves for this product.favorable brand mix.
Cost of sales increased by $15.9$0.7 million, or 12.0%0.7%, to $148.7$101.8 million for the ninesix months ended April 30, 2022January 31, 2023 compared to $132.8$101.0 million for the ninesix months ended April 30, 2021.TheJanuary 31, 2022. The increase in cost of sales for the ninesix months ended April 30, 2022 isJanuary 31, 2023 was primarily driven by higher sales, and an increase in the seltzer inventory reserve, partially offset by favorable brand mix.
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| Gross profit |
| Three months ended January 31, | | Change | | Six months ended January 31, | | Change |
| (in thousands, except percentages) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Gross profit | $ | 55,186 | | | $ | 49,477 | | | $ | 5,709 | | | 11.5 | % | | $109,896 | | $101,887 | | $ | 8,009 | | | 7.9 | % |
| Gross margin | 53.3 | % | | 50.1 | % | | | | | | 51.9 | % | | 50.2 | % | | | | |
Gross profit increased $5.7 million, or 11.5%, to $55.2 million for the diminishing impactsthree months ended January 31, 2023 compared to $49.5 million for the three months ended January 31, 2022. Gross profit increased $8.0 million, or 7.9%, to $109.9 million for the six months ended January 31, 2023 compared to $101.9 million for the six months ended January 31, 2022. The increases in gross profit and gross margin for the three and six months ended January 31, 2023 were primarily the result of step-up costbrand and channel mix shifts and pricing increases that were net favorable to gross profit margin.
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| Operating expenses |
| Selling, general and administrative expenses |
| Three months ended January 31, | | Change | | Six months ended January 31, | | Change |
| (in thousands, except percentages) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Selling expenses | $ | 12,355 | | | $ | 10,971 | | | $ | 1,384 | | | 12.6 | % | | $ | 25,882 | | | $ | 21,369 | | | $ | 4,513 | | | 21.1 | % |
| Marketing expenses | 2,601 | | | 2,887 | | | (286) | | | (9.9) | | | 4,891 | | | 5,059 | | | (168) | | | (3.3) | |
| General and administrative expenses | 14,623 | | | 9,987 | | | 4,636 | | | 46.4 | | | 24,545 | | | 20,624 | | | 3,921 | | | 19.0 | |
| Total selling, general and administrative expenses | $ | 29,579 | | | $ | 23,845 | | | $ | 5,734 | | | 24.0 | % | | $ | 55,318 | | | $ | 47,052 | | | $ | 8,266 | | | 17.6 | % |
Selling, general and administrative expenses increased $5.7 million, or 24.0%, to $29.6 million for the three months ended January 31, 2023, compared to $23.8 million for the three months ended January 31, 2022. Selling, general and administrative expenses increased $8.3 million, or 17.6%, to $55.3 million for the six months ended January 31, 2023, compared to $47.1 million for the six months ended January 31, 2022. The increases in selling, general and administrative expenses for the three and six months ended January 31, 2023 were largely attributable to higher professional fees, most of wine due to purchase accounting adjustments from prior acquisitions. Forwhich we incurred in the second quarter. See “—Limitations of non-GAAP financial measures and adjusted EBITDA reconciliation” for additional information see “—Other factors impacting the comparability of our results of operations”.on transaction expenses
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| Gross profit |
| Three months ended April 30, | | Change | | Nine months ended April 30, | | Change |
| (in thousands, except percentages) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Gross profit | $ | 43,962 | | | $ | 46,929 | | | $ | (2,967) | | | (6.3) | % | | $ | 145,849 | | | $ | 132,961 | | | $ | 12,888 | | | 9.7 | % |
| Gross margin | 48.0 | % | | 51.9 | % | | | | | | 49.5 | % | | 50.0 | % | | | | |
Gross profit decreased $3.0 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other expenses, net |
| Three months ended January 31, | | Change | | Six months ended January 31, | | Change |
| (in thousands, except percentages) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Interest expense | 2,684 | | | 1,636 | | | $ | 1,048 | | | 64.1 | % | | $ | 4,846 | | | $ | 3,242 | | | $ | 1,604 | | | 49.5 | % |
| Other expense (income), net | 2,743 | | | (338) | | | 3,081 | | | 911.5 | % | | 2,656 | | | (1,431) | | | 4,087 | | | 285.6 | % |
| Total other expenses, net | $ | 5,427 | | | $ | 1,298 | | | $ | 4,129 | | | 318.1 | % | | $ | 7,502 | | | $ | 1,811 | | | $ | 5,691 | | | 314.2 | % |
Total other expenses, net increased by $4.1 million, or 6.3%, to $44.0$5.4 million for the three months ended April 30, 2022January 31, 2023, compared to $46.9$1.3 million for the three months ended April 30, 2021. Gross profit margin was 48.0%January 31, 2022. Total other expenses, net increased by $5.7 million to $7.5 million for the six months ended January 31, 2023 compared to $1.8 million for the six months ended January 31, 2022. The increases in total other expenses, net, for the three and six months ended April 30, 2022January 31, 2023 compared to 51.9%the prior year periods were driven by higher interest expense as a result of unfavorable interest rate movements on our variable-rate debt, greater unfavorable fair value adjustments on our interest rate swap agreements and debt issuance costs incurred in connection with our New Credit Facility. See Note 7 (Debt) and Note 8 (Derivative instruments) to our Condensed Consolidated Financial Statements for additional information.
Limitations of non-GAAP financial measures and adjusted EBITDA reconciliation
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 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 three months ended April 30, 2021. The decrease in gross profit forCompany’s working capital needs;
•adjusted EBITDA does not reflect the three months ended April 30, 2022 is primarilysignificant interest expense, or the result of an increase in our inventory reserve (see Note 4 (Inventories) for additional information), which more than offset positive mix shiftscash requirements necessary to service interest or principal payments, on the Company’s debt;
•adjusted EBITDA does not reflect income tax payments that were favorable to gross profit margin.
Gross profit increased $12.9 million, or 9.7%, to $145.8 million for the nine months ended April 30, 2022 compared to $133.0 million for the nine months ended April 30, 2021. Gross profit margin was 49.5% for the nine months ended April 30, 2022 compared to 50.0% for the nine months ended April 30, 2021. While gross profit margins were generally consistent over the comparative periods, the increase in gross profit for the nine months ended April 30, 2022 was primarily the result of higher sales volume, brand and channel mix shifts that were net favorable to gross profit margin,may represent a reduction in step-upcash 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 stable, modestly higher DTC channel performance, management of our cost of wine sold due to lower balances of remaining inventory with associated step-up from purchase accounting in previous periods, offset by an increase insales through our inventory reserve (see Note 4 (Inventories) for additional information related to the inventory reserve).
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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) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Selling expenses | $ | 11,296 | | | $ | 9,699 | | | $ | 1,597 | | | 16.5 | % | | $ | 32,666 | | | $ | 26,425 | | | $ | 6,241 | | | 23.6 | % |
| Marketing expenses | 2,113 | | | 2,314 | | | (201) | | | (8.7) | | | 7,172 | | | 6,239 | | | 933 | | | 15.0 | |
| General and administrative expenses | 9,674 | | | 19,129 | | | (9,455) | | | (49.4) | | | 30,217 | | | 32,754 | | | (2,537) | | | (7.7) | |
| Total selling, general and administrative expenses | $ | 23,083 | | | $ | 31,142 | | | $ | (8,059) | | | (25.9) | % | | $ | 70,055 | | | $ | 65,418 | | | $ | 4,637 | | | 7.1 | % |
Selling, generaldiversified supply planning strategy and administrative expenses decreased $8.1 million, or 25.9%, to $23.1 million for the three months ended April 30, 2022, compared to $31.1 million for the three months ended April 30, 2021. The decrease indiscipline over selling, general and administrative expenses for the three months ended April 30, 2022 was driven by IPO related expenses, specifically equity-based compensation and other transaction costs incurred in the third quarter of Fiscal 2021 which were not present in the third quarter of Fiscal 2022, partially offset by higher compensation expense due to headcount increase.
Selling, general and administrative expenses increased $4.6 million, or 7.1%, to $70.1 million for the nine months ended April 30, 2022, compared to $65.4 million for the nine months ended April 30, 2021. The increase in selling, general, and administrative expenses for the nine months ended April 30, 2022 is largely attributable to compensation costs duerelative to our expanded workforce, higher equity-based compensation as a public company as compared to the prior year period, transaction expenses incurred for the secondary offering (see Note 1 (Description of business) for additional information related to the offering), higher general and administrative costs related to being a public company and higher selling expenses in support of revenue-generating activities as travel restrictions lessened versus the comparative prior year period.
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| Casualty loss (gain), net |
| Three months ended April 30, | | Change | | Nine months ended April 30, | | Change |
| (in thousands, except percentages) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Casualty loss (gain), net | $ | 43 | | | $ | (421) | | | $ | 464 | | | 110.2 | % | | $ | 123 | | | $ | (6,636) | | | $ | 6,759 | | | 101.9 | % |
Casualty loss (gain), net increased by $0.5 million, or 110.2%, for the three months ended April 30, 2022 compared to the three months ended April 30, 2021. The increase in casualty loss (gain), net is primarily due tosales growth.
The following table represents the receiptreconciliation of crop insurance proceeds received inadjusted EBITDA to net income attributable to The Duckhorn Portfolio, Inc.: | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
| (in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Net income attributable to The Duckhorn Portfolio, Inc. | $ | 14,917 | | | $ | 17,932 | | | $ | 34,732 | | | $ | 39,205 | |
| Interest expense | 2,684 | | | 1,636 | | | 4,846 | | | 3,242 | |
| Income tax expense | 5,265 | | | 6,407 | | | 12,352 | | | 13,784 | |
Depreciation and amortization expense(a) | 7,533 | | | 6,280 | | | 13,290 | | | 11,109 | |
| EBITDA | 30,399 | | | 32,255 | | | 65,220 | | | 67,340 | |
Purchase accounting adjustments(a) | 65 | | | 99 | | | 107 | | | 292 | |
Transaction expenses(b) | 3,596 | | | 1,024 | | | 3,653 | | | 2,770 | |
| | | | | | | |
| | | | | | | |
Change in fair value of derivatives(c) | 2,429 | | | (515) | | | 2,061 | | | (957) | |
Equity-based compensation(d) | 1,564 | | | 1,416 | | | 2,572 | | | 2,875 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Debt refinancing costs(e) | 760 | | | — | | | 865 | | | — | |
| Wildfire costs | — | | | 31 | | | — | | | 80 | |
| Adjusted EBITDA | $ | 38,813 | | | $ | 34,310 | | | $ | 74,478 | | | $ | 72,400 | |
________________________________________________ (a) Purchase accounting adjustments relate to the third quarterimpacts of business combination accounting for our acquisition by TSG, and certain other transactions consummated prior to Fiscal 2021, relatedwhich resulted in fair value adjustments to wildfires resultinginventory and long-lived assets. Purchase accounting adjustments in fruit damagedepreciation and amortization expense include amortization of intangible assets of $1.9 million for the three months ended January 31, 2023 and 2022, and $3.8 million for the six months ended January 31, 2023 and 2022.
(b) Transaction expenses include legal services, professional fees and other direct costs which occurred in the first quarter of Fiscal 2021.
Casualty loss (gain), net increased by $6.8 million, or 101.9%,due diligence expenses for all periods presented. Transaction expenses for the ninethree and six months ended April 30,January 31, 2022 compared toalso include the nine months ended April 30,secondary offering completed in October 2021. The increase in casualty loss (gain), net is primarily due to insurance proceeds received in Fiscal 2021 related to a flood at one of our wineries in a previous fiscal year that did not reoccur in the current fiscal year.
(c) See Note 13 (Casualty loss)8 (Derivative instruments) to our Condensed Consolidated Financial Statements for furtheradditional information.
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| Other expenses |
| Three months ended April 30, | | Change | | Nine months ended April 30, | | Change |
| (in thousands, except percentages) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Interest expense | 1,618 | | | 3,755 | | | $ | (2,137) | | | (56.9) | % | | $ | 4,860 | | | $ | 10,947 | | | $ | (6,087) | | | (55.6) | % |
| Other income, net | (1,046) | | | (2,192) | | | 1,146 | | | 52.3 | % | | (2,477) | | | (5,006) | | | 2,529 | | | 50.5 | % |
| Total other expenses | $ | 572 | | | $ | 1,563 | | | $ | (991) | | | (63.4) | % | | $ | 2,383 | | | $ | 5,941 | | | $ | (3,558) | | | (59.9) | % |
Other expenses decreased by $1.0 million, or 63.4%,(d) See Note 11 (Equity-based compensation) to $0.6 million for the three months ended April 30, 2022 compared to $1.6 million for the three months ended April 30, 2021. The decrease in other expenses for the three months ended April 30, 2022 is driven by a decrease in interest expense due to lower debt balances outstanding for the period and a lower overall swap notional balance.
Other expenses decreased by $3.6 million, or 59.9%, to $2.4 million for the nine months ended April 30, 2022 compared to $5.9 million for the nine months ended April 30, 2021. The decrease in other expenses for the nine months ended April 30, 2022 is largely due to lower debt balances outstanding for the period, in conjunction with lower average interest rates on our variable-rate debt. The change in our other income, net was primarily driven by downward pressure on LIBOR and a lower overall swap notional balance. Both of these factors contributed to a change in overall swap position to an asset on our Condensed Consolidated Financial Statements for additional information.
(e) See Note 7 (Debt) to our Condensed Consolidated Financial Statements for additional information.
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| Income tax expense |
| Three months ended April 30, | | Change | | Nine months ended April 30, | | Change |
| (in thousands, except percentages) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Income tax expense | $ | 4,699 | | | $ | 5,623 | | | $ | (924) | | | (16.4) | % | | $ | 18,483 | | | $ | 19,694 | | | $ | (1,211) | | | (6.1) | % |
Income tax expense decreased $0.9 million, or 16.4%, to $4.7 million for the three months ended April 30, 2022 compared to $5.6 million for the three months ended April 30, 2021. The decrease in income tax expenses for the three months ended April 30, 2022 is primarily due to a reduction in unfavorable permanent book/tax differences related to non-deductible equity-based compensation.
Income tax expense decreased $1.2 million, or 6.1%, to $18.5 million for the nine months ended April 30, 2022 compared to $19.7 million for the nine months ended April 30, 2021. The decrease in income tax expense for the nine months ended April 30, 2022 is primarily due to a reduction in unfavorable permanent book/tax differences related to non-deductible equity-based compensation.
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, 2022,January 31, 2023, we had $8.7$7.3 million in cash and $310.0$425.0 million available in undrawn capacity on our revolving line of credit, subject to the terms of our New Credit Facility.
In response to the COVID-19 pandemic, we evaluated risks related to our inventory and liquidity management, which we determined to be sufficiently mitigated, subject to reassessment in the future in response to pandemic-related impacts as they occur. The full impact of COVID-19 on our future operations remains
uncertain and will be determined by the length and severity of pandemic-related disruption. Consequently, unforeseen future events could negatively impact our operations, results of operations, cash flows and liquidity.
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 the impacts of the global pandemic or 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 2022 harvest, we contracted for grapes at a total cost of approximately $71.0 million in Fiscal 2023. Additionally, we have purchase obligations, including for inventory and various contracts with third parties for custom crush, storage and mobile bottling services. See Note 10 (Commitments and contingencies) to our Condensed Consolidated Financial Statements for further information on other commitments.
We have approximately $23.7 million in scheduled principal payments and related interest payments due over the next 12 months and approximately $263.2 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 January 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. See “—Capital resources”, where our New Credit Facility is described in greater detail. Our future minimum operating lease payments due within the next 12 months total approximately $4.2 million with $20.4 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.
Cash flows
The following table presents the major components of net cash flows.
| | | Nine months ended April 30, | | | Six months ended January 31, |
| (in thousands) | (in thousands) | 2022 | | 2021 | | (in thousands) | 2023 | | 2022 |
| Cash flows provided by (used in): | Cash flows provided by (used in): | | | Cash flows provided by (used in): | |
| Operating activities | Operating activities | $ | 47,855 | | | $ | 41,536 | | | Operating activities | $ | 18,097 | | | $ | 18,828 | |
| Investing activities | Investing activities | (24,798) | | | (11,400) | | | Investing activities | (12,388) | | | (23,336) | |
| Financing activities | Financing activities | (18,647) | | | (31,361) | | | Financing activities | (1,584) | | | 5,034 | |
| Net increase in cash | Net increase in cash | $ | 4,410 | | | $ | (1,225) | | | Net increase in cash | $ | 4,125 | | | $ | 526 | |
Comparison of the six months ended January 31, 2023 and 2022
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 ninesix months ended April 30, 2022,January 31, 2023, net cash provided by operating activities was $47.9$18.1 million compared to $41.5$18.8 million for the ninesix months ended April 30, 2021,January 31, 2022, a increasedecrease of $6.4$0.7 million. The increasedecrease in cash provided by operating activities was primarily driven by the following factors:
•The net income after adjusting for non-cash items increased operating cash flows by $4.4 million;
•Increases in cash provided by changes in prepaid expensesinventory for the ninesix months ended April 30, 2022 driven by timing of deposits and and increased insurance in fiscal year 2021, partially offset byJanuary 31, 2023 due to timing impacts in bulk and bottled wine supply management to support increases in demand in aggregate resulted in an increasea decrease to operating cash flow of $6.8$11.3 million;
•Our wholesale sales channel, generally subject to credit terms, saw an increase in net sales, which drove a corresponding increase in accounts receivable and resulted in a $11.6 million increase in operating cash flow;
•Changes in accounts payable and accrued expenses decreasedincreased operating cash flows $9.8$2.9 million due primarily to timing of invoice accruals and payments;
•Decreases in accrued compensation of $10.9 million based onpayments, predominately related to grape grower purchases during the timing of certain compensation-related payments resulted in a corresponding decrease in operating cash flow; andannual harvest period;
•Deferred revenues increased operating cash flows by $3.8$6.0 million primarily due to shipment timingan offering shift for wines sold through our DTC list member sales.channel; and
•Other current and long-term liabilities increased operating cash flows by $2.4 million primarily related to an increase in accrued interest.
Investing activities
For the ninesix months ended April 30, 2022,January 31, 2023, net cash used in investing activities was $24.8related to capital expenditures of $12.4 million compared to $11.4$23.3 million for the ninesix months ended April 30, 2021, an increase of $13.4 million, primarily due to vineyard
acquisitions completed duringJanuary 31, 2022. For the previous fiscal quarter, see Note 5 (Property and equipment). Capital expenditures were $24.9 million for the ninesix months ended April 30,January 31, 2022, we completed the purchase of three Napa County, California vineyards and $11.5 millionrelated assets for nine months ended April 30, 2021.a total of $14.5 million. From time to time, we evaluate wineries, vineyards and production facilities for potential opportunities to make strategic acquisitions to support our growth. Any such transactions may require us to make additional investments and capital expenditures in the future.
Financing activities
For the ninesix months ended April 30, 2022,January 31, 2023, net cash used byin financing activities was $18.6$1.6 million as compared to $31.4cash provided by financing activities of $5.0 million for the ninesix months ended April 30, 2021, an decrease of $12.8 million ofJanuary 31, 2022. For the six months ended January 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 million, partially offset by financing activities. The decrease was primarily the result of a decrease in net payments under our line of credit of $95.5$119.0 million, payments of long-term debt of $115.2 million and a $100payments of debt issuance costs of $2.4 million. For the six months ended January 31, 2022, net cash used in financing activities primarily included payments under our line of credit of $52.0 million dividend paid out in the prior year,and payments of long-term debt of $5.7 million, partially offset by $183.9 millionborrowings under our line of IPO proceeds.credit of $63.0 million.
Capital resources
Original Credit facilityFacility
On October 14, 2016, weMallard Buyer Corp, Selway Wine Company and certain other subsidiaries of The Duckhorn Portfolio, Inc. (collectively, the “Borrowers”) entered into the Original Credit Facility with a syndicated group of lenders. The Original Credit Facility providesprovided a combination of term and revolving line of credit features. The term and revolving line of credit borrowings have variable interest rates, based primarily on LIBORTerm SOFR based rate plus an applicable margin as defined in the First Lien LoanOriginal Credit Agreement. Interest iswas paid monthly or quarterly based on loan type. Our debt iswas collateralized by substantially all of our cash, trade accounts receivable, real and personal property. Pursuant to the terms and conditions of the First Lien LoanOriginal Credit Agreement, we have issued the instruments discussed below.
As of AprilEighth Amendment to the First Lien Loan and Security Agreement
On August 30, 2022, outstanding principal balancesthe Borrowers entered into an eighth amendment 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 facility. The maturity date for loans borrowed under the New Credit Agreement is November 4, 2027. See Note 7 (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 ranged from Term SOFR plus 100 basis points to Term SOFR plus 150 basis points depending on the debt instruments were $115.0 million foraverage availability of the revolving line of credit. The amount available to borrow on the revolving line of credit $6.0is 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 for theterm 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 $98.4facility provides an aggregate principle 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 January 31, 2023, there were no outstanding draws on the revolving line of credit, nor on the delayed draw term loan. The outstanding principal balance was $225.8 million for the term loan (tranche one) and $13.6 million for term loan (tranche two).as of January 31, 2023.
The First Lien LoanNew 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, 2022,January 31, 2023, we were notare in violation of anycompliance with all covenants. See Note 7 (Debt) to our Condensed Consolidated Financial Statements for additional information.
Revolving line of creditFirst Amendment to the Amended and Restated First Lien Loan and Security Agreement
Effective February 6, 2023, the Company entered into the First Amendment to the Amended and Restated First Lien Loan and Security Agreement. The revolving line of credit allows us to borrow up to a principal amount of $425.0 million (including a letter of credit sub-facility of the revolving loan facilitychanges in the aggregate of $15.0 millionamendment are administrative in nature and do not have a swingline sub-facility of the revolving loan facility in the aggregate of $15.0 million), with an incremental seasonal borrowing amount for harvest costs increasing the total amount to a maximum of $455.0 million. The revolving line of credit matures on August 1, 2023. The interest rate ranges from LIBOR plus 125 basis points to LIBOR plus 175 basis points dependingmaterial impact on the average availability of the revolving line of credit.
Capital expenditure loan
Company's outstanding debt or related debt covenants. The capital expenditure 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 August 1, 2023. As of April 30, 2022, the $25.0 million limit was fully drawn. This instrument has an interest rate of LIBOR plus 190 basis points.
Term loans
The first tranche of term loans was issuedamendment did not result in 2016 for a principal balance of $135.0 million with quarterly principal payments and the remaining unpaid principal and interest due upon maturity on August 1, 2023. This tranche of the term loans has an interest rate of LIBOR plus 190 basis points.
The second tranche of term loans, issuedany additional cash proceeds or changes in August 2018, allowed for a principal balance up to $25.0 million with quarterly principal payments and the remaining unpaid principal and interest due upon maturity on August 1, 2023. We drew $16.4 million of the second tranche of the term loan in November 2018. This tranche of the term loans has an interest rate of LIBOR plus 163 basis points.
Off-balance sheet arrangements
As of April 30, 2022,January 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 ninesix months ended April 30, 2022,January 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"Policies” in our Annual Report on Form 10-K for Fiscal 2021.2022.
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.
Emerging growth company status
We are an emerging growth company, as defined in the JOBS Act. Section 107
Item 3. Quantitative and qualitative disclosures about market risk.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 LIBORa Term SOFR based rate plus applicable margins or predetermined alternativesalternative rates, as applicable, pursuant to the terms of our New Credit Facility. As of April 30, 2022,January 31, 2023, our outstanding borrowings at variable interest rates totaled $231.0$225.8 million. An increase of 100 basis points in the effective interest rate applied to these borrowings would result in a $2.3$2.2 million increase in interest expense on an annualized basis and could have a material effect on our results of operation or 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 swapswaps in March 2020.2020 (subsequently amended in September 2022) and January 2023. See Note 98 (Derivative instruments) to our Condensed Consolidated Financial Statements for further information on theour interest rate swap.
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 monitor 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 outstanding foreign exchange forward contracts was sixtwelve months as of April 30, 2022.January 31, 2023. See Note 98 (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, 2022.January 31, 2023.
Commodity prices
The primary commodity in our product is grapes, and generally more than 85% of our input grapes are sourced from third party suppliers in the form of grapes or bulk wine. For these purchased grapes and bulk wine, prices are subject to many factors beyond our control, such as the yieldyields of differentvarious grape varietals 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 purchases 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 linelines to optimize the grapes available each harvest year.
Other raw materials we source include glass, corks and wine additives. We currently source these materials from multiple vendors. We have and will continue to 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 procedures.procedures
Disclosure controls and procedures
We maintain disclosure controls and procedures that are designed to ensureprovide reasonable assurance that information required to be disclosed in the reports that we file or submit under the 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, Report, our management, under the supervision of and with the participation of our principal executive officerChief Executive Officer and principal financial officer,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, 2022,January 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, 2022.January 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 proceedings.proceedings
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'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 factors.factors
For a discussion of our potential risks and uncertainties, please see the information under the heading "Risk Factors"“Risk Factors” in our Annual Report on Form 10-K for Fiscal 2021.2022. There have been no material changes since our previous 10-K filing.
Item 6. Exhibits.Exhibits
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Exhibit no. | | Exhibit description | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exhibit no. | | Exhibit description | | Incorporated by reference | | | | | Form | | Date | | Number | | File no. | | 3.1 | | | | 8-K | | March 22, 2021 | | 3.1 | | 001-40240 | | 3.2 | | | | 8-K | | March 22, 2021 | | 3.2 | | 001-40240 | | 4.1 | | | | S-1/A | | March 10, 2021 | | 4.1 | | 333-253412 | | 4.2 | | | | 10-K | | October 4, 2021 | | 4.2 | | 001-40240 | | 10.1 | | | | 8-K | | November 4, 2022 | | 10.1 | | 001-40240 | | 10.2* | | | | | | | | | | | | 31.1* | | | | | | | | | | | | 31.2* | | | | | | | | | | | | 32.1* | | | | | | | | | | | | 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* | | XBRL Taxonomy Extension Schema Document. | | | | | | | | | | 101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | | | | | 101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | | | | | 101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document. | | | | | | | | | | 101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | | | | | | 104* | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | | | | | | |
* Filed herewith |
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10.1 | | | | | | | | | | * |
31.1 | | | | | | | | | | * |
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32.1 | | | | | | | | | | * |
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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 | | XBRL Taxonomy Extension Schema Document. | | | | | | | | * |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | | | * |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | | | * |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. | | | | | | | | * |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | | | | * |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | | | | | | * |
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.
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| The Duckhorn Portfolio, Inc. |
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Date: June 2, 2022March 8, 2023 | By: | /s/ Alex Ryan |
| | Alex Ryan |
| | President, Chief Executive Officer and Chairman |
| | (Principal Executive Officer) |
| | |
Date: June 2, 2022March 8, 2023 | By: | /s/ Lori Beaudoin |
| | Lori Beaudoin |
| | Executive Vice President, Chief Financial Officer |
| | (Principal Financial Officer and Principal Accounting Officer) |