| Basis of Presentation and Significant Accounting Policies | Basis of Presentation and Significant Accounting Policies Basis of presentation The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and the regulations of the SEC. Principles of consolidation The consolidated financial statements include the accounts of The Duckhorn Portfolio, Inc. and its subsidiaries, including a consolidated variable interest entity (“VIE”) of which the Company has determined it is the primary beneficiary. All intercompany balances and transactions are eliminated in consolidation. Certain reclassifications to previously reported financial information have been made to conform to the current period presentation. Functional currency The Company and all subsidiary legal entities are domiciled in the U.S. The functional and reporting currency of the Company and its subsidiaries is the U.S. dollar. Accounting estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Operating segment The Company has one operating segment and one reportable segment. The Company’s Chief Operating Decision Maker (“CODM”) reviews operating performance and makes decisions to allocate resources at the consolidated company level. Revenue recognition The Company’s net sales reflect the sale of wine domestically in the U.S. to wholesale distributors, direct to trade accounts in California and DTC, as well as sales of wine to export distributors that sell internationally. In the year ended July 31, 2024, the Company made certain sales to Brown-Forman under the terms of the transitional services agreement (“TSA”) executed in connection with the Sonoma-Cutrer acquisition, see Note 17 (Related Party Transactions). The Company recognizes revenue when the performance obligation is fulfilled and control of the promised good is transferred to the customer in an amount that reflects the consideration for which the Company is expected to be entitled to receive in exchange for those products. Each contract includes a single performance obligation to transfer control of the product to the customer. Control is transferred when the product is either shipped or delivered, depending on the shipping terms, at which point the Company recognizes the transaction price for the product as revenue. The Company has elected to account for shipping and handling costs that are billed to customers as a fulfillment activity rather than as separate performance obligations. Shipping and handling costs are included in net sales in the Consolidated Statements of Operations. The Company has elected to record excise taxes as a reduction to net sales, which are recognized on the Consolidated Statements of Operations when the related product sale is recognized. Sales taxes that are collected from customers for remittance to governmental agencies are excluded from net sales. When the Company receives payment from a customer prior to transferring the product 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 DTC members for purchases 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. The transaction price includes reductions attributable to consideration given to customers through various incentive programs, including depletion-based incentives paid to distributors, volume discounts and pricing discounts on single transactions. This variable consideration is estimated and recognized as a reduction of the transaction price based on the expected amounts at the time of revenue recognition for the related sale. The determination of the reduction of the transaction price for variable consideration requires certain estimates and judgments that affect the amounts of revenue recognized and if a change to an estimate occurs in a future period, it is recorded as identified. The Company estimates this variable consideration using the expected value method by taking into account factors such as the nature of the incentive program, historical information, current consumer product trends and availability of actual results. The Company pays depletion-based incentives to its distributors for meeting specific depletion targets and reviews the allowances using a portfolio approach, grouping contracts with similar attributes. The allowances are reassessed at each reporting date to reflect changes in facts and circumstances that could impact allowance estimates. Volume pricing discounts are given for meeting volume levels on an individual contract basis. Each incentive is treated as a reduction to the transaction price at the time of revenue recognition. Due to the nature of the incentives, certain estimates may be reassessed if it is probable that a significant reversal of revenue will occur when the uncertainty is resolved. Consideration given to customers totaled $52.7 million, $57.5 million and $66.3 million for Fiscal 2024, 2023 and 2022, respectively, which is recognized as a reduction to net sales in the Consolidated Statements of Operations. There were no material changes in estimates for the periods then ended. Products are sold for cash or on credit terms. Credit terms are established in accordance with local and industry practices, and typically require payment within 30-90 days of delivery or shipment, as dictated by the terms of each agreement. The Company does not account for significant financing components as its payment terms are less than one year, and the Company determines the terms at contract inception. The Company’s sales terms do not allow for the right of return except for matters related to manufacturing defects, which are not material. Cost of sales Cost of sales includes all bulk wine production costs, winemaking, bottling, packaging, warehousing and shipping and handling costs. Costs associated with the Company’s leased vineyards or owned estate properties include annual farming costs and amortization of vineyard development expenditures. Costs incurred for wines that age longer than one year prior to sale, including winemaking and processing costs, continue to be capitalized into inventory until the wine is bottled and available for sale. Advertising costs Advertising costs, including direct and promotional marketing costs, are expensed as incurred and were $5.7 million, $6.5 million and $6.6 million for Fiscal 2024, 2023 and 2022, respectively. Advertising costs are recognized in selling, general and administrative expenses in the Consolidated Statements of Operations. Cash and cash equivalents Cash and cash equivalents include cash on hand and on deposit. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. There were no cash equivalents as of July 31, 2024 and 2023. Accounts receivable trade, net Accounts receivable trade, net consists of amounts owed to the Company for sales of the Company’s products on credit and are reported at net realizable value. Interest is accrued on past-due amounts when required by trade laws in a given jurisdiction. The Company maintains an allowance for credit losses for estimated losses resulting from the inability of its customers to make required payments. The Company determines this allowance based on historical credit loss experience, adjusted for asset-specific risk characteristics, current economic conditions and reasonable forecasts. Accounts receivable are written off when determined to be uncollectible. Recoveries of accounts receivable previously written off are recognized in income when received. The allowance for credit losses was $0.5 million at both July 31, 2024 and 2023. Charges related to recoveries and reductions related to credit loss in Fiscal 2024, 2023 and 2022 were immaterial. Inventories Inventory primarily includes bulk and bottled wine and is carried at the lower of cost (calculated using the first-in-first-out method) or net realizable value. The cost basis for inventory includes the costs related to winemaking. Inventory also includes deferred crop costs, which consist of vineyard and related farming costs incurred each harvest season. Such costs begin aggregating when one harvest is completed and end at the completion of the next harvest, spanning a period that can range from November to October of the subsequent calendar year, but may vary due to the variable nature of agriculture, including weather and other events. Consistent with industry practices, the Company classifies inventory as a current asset, although a substantial portion of inventory may be aged for periods longer than one year prior to being sold due to the specific aging requirements for a given wine variety and vintage. On an ongoing basis, the Company evaluates the cost estimate and assumptions. As required, 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. Aging inventory, prior to bottling, is classified as work in process. The Company reduces the carrying value of inventories that are obsolete or for which market conditions indicate cost will not be recovered to estimated net realizable value. The Company’s estimates of net realizable value are based on analysis and assumptions including, but not limited to, historical experience, as well as Management’s judgment with respect to future demand and market conditions. Reductions to the carrying value of inventories are recorded in cost of sales in the Consolidated Statements of Operations, in the period Management determines the conditions first arise which indicate the cost may not be recoverable. Property and equipment, net Property and equipment, net are reported at cost and are depreciated using the straight-line method using the following useful lives: Category of Property and Equipment Useful Lives (years) Buildings and improvements 4-42 Machinery and equipment 3-20 Vineyards and improvements 5-20 Barrels 1-2 Leasehold improvements are depreciated over the shorter of the useful life of the asset or the remaining term of the lease using the straight-line method. Expenditures for major repairs and maintenance which extend the useful lives of property and equipment are capitalized. All other maintenance expenditures, including planned major maintenance activities, are expensed as incurred. Gains or losses from property and equipment disposals are recognized in selling, general and administrative expenses in the Consolidated Statements of Operations. The Company capitalizes vineyard development costs when developing new vineyards or improving existing vineyards, whether owned or leased. These costs principally consist of the costs of the vines and expenditures related to labor and materials to prepare the vineyard and construct vine trellises. Interest is capitalized during the active construction period for major capital projects. Goodwill and intangible assets Goodwill arising from business combinations is determined as the excess of the fair value of consideration transferred, plus the fair value of any non-controlling interests in an acquiree, over the fair value of the identifiable net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets determined to have an indefinite useful life are not amortized but are tested for impairment at least annually or if events and circumstances indicate that the carrying value may not be recoverable. Impairments are recognized in selling, general and administrative expenses in the Consolidated Statements of Operations. Goodwill is tested for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. Management may elect not to perform the qualitative assessment and perform only a quantitative impairment test as of the measurement date. The Company selected June 30 of each fiscal year as the date to perform annual impairment testing. Indefinite-lived intangible assets include trade names and lane rights. The Company’s trade names provide value from the utility of the winery brands for the foreseeable future. Lane rights represent the Company’s rights to storage capacity at the Wine Service Cooperative for the life of the facility at guaranteed pricing. The Company’s impairment testing of the indefinite-lived intangible assets compares the fair value of each asset with its carrying value, with any excess of carrying value recognized as an impairment loss. Customer relationships are amortized on a straight-line basis over their estimated useful lives and that amortization is recognized in selling, general and administrative expenses. Customer relationships are subject to review for impairment when events or circumstances indicate that the carrying amount of an asset may not be recoverable. See Note 8 (Goodwill and Intangible Assets, net) for results of the annual impairment testing and a summary of goodwill and the indefinite and definite-lived intangible assets. Long-lived asset Long-lived assets deemed to have definite lives, which principally consist of property and equipment, customer relationships, and operating lease right-of-use assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company performs impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The assessment of impairment is based on the estimated undiscounted future cash flows from operating activities compared with the carrying value of the asset. If the undiscounted future cash flows of an asset are less than the carrying value, a write-down will be recorded, measured by the amount of the difference between the carrying value and the fair value of the asset. Long-lived assets held for sale are recorded at the lower of cost or fair value less costs to sell and are recorded within prepaid expenses and other current assets in the Consolidated Statements of Financial Position. The Company classifies an asset as held for sale if it commits to a plan to sell the asset within one year and actively markets the asset in its current condition for a price that is reasonable in comparison to its estimated fair value. In Fiscal 2024, the Company recognized a loss of $0.7 million related to certain property and equipment held for sale, recognized in selling, general and administrative expenses. As of July 31, 2024, the Company reported $1.3 million in assets held for sale within prepaid expenses and other current assets in the Consolidated Statements of Financial Position. No impairments were identified related to long-lived assets for Fiscal 2024 or 2023. Accounting for asset acquisitions The Company follows the guidance in Accounting Standards Codification (“ASC”) Topic 805, Business Combinations , for determining whether an acquisition meets the definition of a business combination or asset acquisition. For acquisitions that are accounted for as acquisitions of assets, the Company records the acquired tangible and intangible assets and assumed liabilities, if any, based on each asset’s and liability’s relative fair value at the acquisition date to the total purchase price plus capitalized acquisition costs. The method for determining relative fair value varies depending on the type of asset. See Note 4 (Acquisitions) for additional information. Debt issuance costs The Company incurred debt issuance costs associated with the debt facilities, including the revolving line of credit, as further described in Note 10 (Debt). Term loan debt issuance costs are presented as a reduction from the corresponding liability, long-term debt, net of current maturities and debt issuance costs, in the Consolidated Statements of Financial Position. Revolving credit debt issuance costs are classified in other assets in the Consolidated Statements of Financial Position, regardless of whether or not there are any outstanding borrowings under the revolving credit facility. Debt issuance costs are amortized to interest expense over the life of the loan to maturity using the straight-line method, which is not materially different from the effective interest method. Derivative instruments The Company recognizes derivative instruments as assets or liabilities on the Consolidated Statements of Financial Position and measures these instruments at fair value. The Company enters into derivative instruments to manage exposure to changes in interest rates and foreign currency fluctuations. The Company has certain derivative instruments subject to master netting agreements that provide for net-settlement of amounts payable or receivable related to multiple derivative transactions with the same counterparty. The Company presents all derivatives on a gross basis in the Consolidated Statements of Financial Position. 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 July 31, 2024 and 2023. Management has neither designated these instruments as cash-flow hedges nor elected hedge accounting. Changes in the consolidated fair value of these financial instruments are recognized in other income, net, in the Consolidated Statements of Operations, see Note 11 (Derivative Instruments) and Note 12 (Fair Value Measurements) for additional information. The Company does not enter into derivative agreements for trading or speculative purposes. Fair value measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial instruments are measured in the financial statements in accordance with an established fair value hierarchy, which emphasizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. See Note 12 (Fair Value Measurements) for the valuation methodologies used for instruments measured at fair value. Income taxes Income taxes are recognized using enacted tax rates and are accounted for based on the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the consolidated financial statement and tax bases of assets and liabilities at the applicable statutory tax rates. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company evaluates the realizability of its deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization include the Company’s forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings. Tax benefits from uncertain tax positions are recognized if it is more likely than not the tax positions will be sustained on examination by the applicable taxing authorities based on the technical merits of the position. The tax benefit is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. The Company’s income tax provision includes the net impact of changes in the liability for unrecognized tax benefits. Interest related to income tax matters is recognized in interest expense and penalties are reflected in selling, general and administrative expenses in the Consolidated Statements of Operations. See Note 13 (Income Taxes) for additional information. Leases Effective August 1, 2021, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) . Service arrangements are evaluated to determine whether they contain a lease at inception. Leases are classified as either finance leases or operating leases based on criteria in Topic 842. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s secured incremental borrowing rate. The Company’s incremental borrowing rate for a lease is the rate of interest it would pay to borrow on a collateralized basis over a similar term to the lease in a similar economic environment. The Company applied incremental borrowing rates on a lease-by-lease basis. Right-of-use assets also include any lease payments made and exclude lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company has elected not to recognize right-of-use assets and lease liabilities for short-term operating leases that have a term of one year or less. The Company recognizes expenses for short-term operating leases on a straight-line basis over the lease term. Certain of the Company’s operating leases have variable rental payments based on changes in a consumer price index or a production index that trigger rental increases. Additionally, certain of the Company’s operating leases include variable payments for items such as property taxes, insurance, maintenance and other operating expenses associated with leased assets. Certain grower purchase agreements under which the Company contracts for grapes to meet production needs contain variable payments based on tonnage yield, grape quality and grape prices. Variable lease payments are excluded from the calculations of the right-of-use assets and are recognized in the financial statements in the period in which the obligation is incurred and payment variability removed. Any variable payments related to grapes purchased for inventory production would generally be recognized during harvest as yield size and quality can be determined, and the Company accepts the grapes at a production facility. The cost of grapes purchased to produce wine is recognized in inventory until the wine is sold, and amounted to $85.7 million and $71.0 million in Fiscal 2024 and 2023, respectively. The Company monitors for triggering events or conditions that require a reassessment of its leases. When the reassessment requires a re-measurement of the lease liability, a corresponding adjustment is made to the carrying amount of the right-of-use asset. Additionally, the Company reviews relevant impairment indicators of its right-of-use assets in accordance with ASC Topic 360, Impairment or Disposal of Long-Lived Assets . Preferred stock The Company has 100,000,000 shares of $0.01 par value preferred stock authorized, none of which are issued and outstanding. Earnings per share In accordance with ASC Topic 260, Earnings Per Share , earnings per share is calculated by dividing net income by the weighted average number of ordinary shares outstanding during the period, excluding forfeitures. Diluted earnings per common share is computed using the weighted-average number of common shares outstanding and dilutive common shares, such as those issuable upon exercise of stock options and upon the vesting of restricted stock. See Note 18 (Earnings Per Share) for additional information. 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 . 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. Bootlegger’s Hill, which was acquired as part of the Kosta Browne acquisition, is a VIE and the Company is the primary beneficiary of that VIE. This conclusion considers the Company’s ownership percentage, which entitles the Company to receive most of the benefits and absorb most of the risk, as well as the ability to exercise significant influence over the operating and financial decisions of the VIE. The Company consolidates 100% of the operational results of Bootlegger’s Hill, while also reflecting on the Consolidated Statements of Operations and Financial Position the 23.8% non-controlling interest, which is held by outside investors at both Fiscal 2024 and 2023. At July 31, 2024 and 2023, the Company’s ownership percentage of the sole identified VIE was 76.2%. The total net assets of the VIE included on the Consolidated Statements of Financial Position were $2.3 million at both July 31, 2024 and 2023. The assets and liabilities, which may only be used to settle its own obligations, are primarily related to property, equipment and working capital accounts, which generally represent the amounts owed by or to the Company for grape sales under current contracts and farming costs. Business Combination On April 30, 2024, the Company completed the acquisition of Sonoma-Cutrer. See Note 4 (Acquisitions) for additional information. The acquisition was accounted for using the acquisition method of accounting prescribed by ASC Topic 805, Business Combinations , whereby the results of operations, including the revenues and earnings of Sonoma-Cutrer, are included in the financial statements from the date of acquisition. Assets acquired and liabilities assumed as of the date of acquisition are recognized at their fair values based on widely accepted valuation techniques in accordance with ASC Topic 820, Fair Value Measurements . Goodwill is recognized for the excess of the consideration transferred over the net fair values of assets acquired and liabilities assumed. Management’s assessment of qualitative factors affecting goodwill for each acquisition includes estimates of market share at the date of purchase, ability to grow in the market, synergy with existing Company operations and the payor profile in the markets. The fair value assigned to the intangible asset was determined using the income approach, specifically the relief from royalty method. The process for estimating fair values requires the use of significant estimates, assumptions and judgments, including determining the timing and estimates of future cash flows and developing appropriate discount and royalty rates. The estimates of fair value are based upon assumptions believed to be reasonable using the best information available. These assumptions are inherently uncertain and unpredictable and, as a result, actual results may differ materially from estimates. ASC Topic 805, Business Combinations, establishes a measurement period to provide the Company with a reasonable amount of time to obtain the information necessary to identify and measure various items in a business combination and cannot extend beyond one year from the acquisition date. Measurement period adjustments are recognized in the reporting period in which the adjustments are determined and calculated as if the accounting had been completed as of acquisition date. The Company expects to complete the final fair value determination of the assets acquired and liabilities assumed as soon as practicable within the measurement period, but not to exceed one year from the acquisition date. Significant customers and concentrations of credit risk The Company’s five largest customers, which are each wholesale customers, represented in total approximately 45%, 51% and 46% of net sales for Fiscal 2024, 2023 and 2022, respectively. There were no significant concentrations of revenue or credit risk related to DTC sales. Of the largest five customers, three wholesale customers each represented 10% or more of the Company’s net sales. The percentages for each of these significant customers for the periods presented are as follows: Fiscal years ended July 31, 2024 2023 2022 Customer A 14 % 18 % 16 % Customer B 12 % 16 % 14 % Customer C 10 % 10 % 9 % Financial instruments potentially subjecting the Company to concentrations of credit risk consist primarily of bank demand deposits in excess of Federal Deposit Insurance Corporation limits, as well as trade receivables. The majority of the Company’s wine sales are made through distributors. Receivables associated with such sales are not collateralized. The Company monitors credit risk associated with its customers on a regular basis and management is of the opinion that there is no significant or unusual credit exposure as of July 31, 2024. The same three wholesale customers, shown in the net sales table above, represent 10% or more of the Company’s trade accounts receivable balance for the periods presented. The percentages for each of these significant customers as of the periods presented are as follows: July 31, 2024 2023 Customer A 26 % 24 % Customer B 5 % 16 % Customer C 19 % 15 % Equity-based compensation Equity awards issued in exchange for services rendered by the Company’s employees, officers or directors are accounted for pursuant to ASC Topic 718, Compensation-Stock Compensation. The Company measures equity awards at fair value at their grant date. Compensation cost is recognized in selling, general and administrative expenses or is capitalized into inventory over the requisite service period (generally the vesting period), net of actual forfeitures as incurred. The Company estimates the fair value of certain awards using a Black-Scholes option pricing model. The Company values performance-based restricted stock units using a Monte Carlo simulation model. See Note 16 (Equity-Based Compensation) for additional information. Recently adopted accounting pronouncements In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”) to improve reportable segment disclosures, primarily through enhanced disclosures related to significant segment expenses regularly provided to the CODM and by requiring current annual disclosures to be provided in interim periods. Additionally, it requires public entities with a single reportable segment to provide all the disclosures provided by the standard. ASU 2023-07 will be effective for the Company beginning with the fiscal year ended July 31, 2025, and for interim periods beginning in the fiscal year ended July 31, 2026, on a retrospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its Consolidated Financial Statements and related disclosures. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvement to Income Tax Disclosures (“ASU 2023-09”) to enhance the transparency and decision usefulness of income tax disclosures, primarily requiring disaggregated information about a reporting entity ’ |
