The Duckhorn Portfolio(NAPA) - 2022 Q1 - Quarterly Report

PART I Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements and accompanying notes for the period Condensed Consolidated Statements of Financial Position (unaudited) Condensed Consolidated Statements of Financial Position (in thousands) | Metric | October 31, 2021 | July 31, 2021 | | :--- | :--- | :--- | | Total assets | $1,263,094 | $1,183,117 | | Total liabilities | $438,084 | $380,879 | | Total equity | $825,010 | $802,238 | | Cash | $5,247 | $4,244 | | Accounts receivable trade, net | $59,618 | $33,253 | | Inventories | $319,224 | $267,737 | | Accounts payable | $52,780 | $3,556 | | Accrued expenses | $50,690 | $21,557 | | Revolving line of credit, net | $108,679 | $121,348 | | Long-term debt, net | $111,887 | $114,625 | - Common stock outstanding remained at 115,046,793 shares for both October 31, 2021, and July 31, 2021[20] Condensed Consolidated Statements of Operations (unaudited) Condensed Consolidated Statements of Operations (in thousands, except per share amounts) | Metric | Three months ended Oct 31, 2021 | Three months ended Oct 31, 2020 | Change (YoY) | | :--- | :--- | :--- | :--- | | Net sales | $104,181 | $91,638 | +13.7% | | Cost of sales | $51,771 | $47,363 | +9.3% | | Gross profit | $52,410 | $44,275 | +18.4% | | Selling, general and administrative expenses | $23,158 | $16,805 | +37.8% | | Casualty loss, net | $49 | $1,555 | -96.8% | | Income from operations | $29,203 | $25,915 | +12.7% | | Interest expense | $1,606 | $3,580 | -55.1% | | Income before income taxes | $28,690 | $23,658 | +21.3% | | Net income attributable to The Duckhorn Portfolio, Inc | $21,273 | $17,523 | +21.4% | | Basic EPS | $0.18 | $0.17 | +5.9% | | Diluted EPS | $0.18 | $0.17 | +5.9% | Condensed Consolidated Statements of Changes in Equity (unaudited) Changes in Equity (in thousands) for the three months ended October 31, 2021 | Metric | Amount | | :--- | :--- | | Net income | $21,273 | | Equity-based compensation | $1,459 | | Total equity (Oct 31, 2021) | $825,010 | | Total equity (Jul 31, 2021) | $802,238 | Condensed Consolidated Statements of Cash Flows (unaudited) Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Three months ended Oct 31, 2021 | Three months ended Oct 31, 2020 | Change (YoY) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $22,747 | $2,487 | +$20,260 | | Net cash used in investing activities | $(5,896) | $(7,686) | +$1,790 | | Net cash (used in) provided by financing activities | $(15,848) | $252 | - $16,100 | | Net increase (decrease) in cash | $1,003 | $(4,947) | +$5,950 | | Cash - End of year | $5,247 | $1,305 | +$3,942 | Notes to Condensed Consolidated Financial Statements (unaudited) Note 1 Description of Business - The Duckhorn Portfolio, Inc produces luxury and ultra-luxury wines across brands including Duckhorn Vineyards, Paraduxx, Goldeneye, Migration, Decoy, Canvasback, Calera, Kosta Browne, Greenwing, and Postmark[28] - Revenue is generated through wholesale and DTC channels, with wholesale comprising sales to retailers and distributors[29] - In Q1 Fiscal 2022, a secondary offering involved existing shareholders selling 12,000,000 shares at $20.50 per share, with the Company not receiving any proceeds[32] Note 2 Significant Accounting Policies - The Condensed Consolidated Financial Statements are prepared in accordance with U.S GAAP and SEC Regulation S-X, and are unaudited[33][34] - The Company consolidates a Variable Interest Entity (VIE) where it is the primary beneficiary, holding 76.2% ownership[35][39] - As an 'emerging growth company,' the Company has elected to delay the adoption of new or revised accounting pronouncements until they are applicable to private companies[40][170] Note 3 Revenue Disaggregated Net Sales by Channel (Three months ended October 31) | Channel | 2021 | 2020 | | :--- | :--- | :--- | | Wholesale - distributors | 68.5 % | 73.1 % | | Wholesale - California direct to retail | 16.4 % | 14.3 % | | DTC | 15.1 % | 12.6 % | Deferred Revenue (Contract Liabilities) (in thousands) | Date | Balance | | :--- | :--- | | October 31, 2021 | $3,933 | | July 31, 2021 | $3,102 | | Revenue recognized from opening balance (3 months ended Oct 31, 2021) | $2,000 | Note 4 Inventories Inventories (in thousands) | Category | October 31, 2021 | July 31, 2021 | | :--- | :--- | :--- | | Finished goods | $112,438 | $121,423 | | Work in progress | $191,076 | $134,847 | | Raw materials | $15,710 | $11,467 | | Total | $319,224 | $267,737 | Note: Finished goods include Bottled wine and Merchandise. Work in progress includes Bulk wine, Packaging, and Overhead - Depreciation of $2.6 million was capitalized into inventory for the three months ended October 31, 2021[50] Note 5 Property and Equipment Property and Equipment, Net (in thousands) | Category | October 31, 2021 | July 31, 2021 | | :--- | :--- | :--- | | Land | $120,063 | $120,063 | | Buildings and improvements | $68,638 | $68,616 | | Vineyards and improvements | $29,164 | $29,164 | | Machinery and equipment | $50,711 | $49,607 | | Barrels | $24,654 | $26,349 | | Construction in progress | $10,834 | $5,682 | | Total Property and equipment, net | $244,397 | $240,939 | - Depreciation expense was $0.3 million for both the three months ended October 31, 2021, and 2020[51] Note 6 Other Intangible Assets Other Intangible Assets, Net (in thousands) | Category | October 31, 2021 | July 31, 2021 | | :--- | :--- | :--- | | Definite-lived intangible assets, net | $57,726 | $59,647 | | Indefinite-lived intangible assets, net | $140,900 | $140,900 | | Total other intangible assets, net | $198,626 | $200,547 | Note: Definite-lived assets include Customer relationships and Leasehold interests. Indefinite-lived assets include Trade names and Lane rights - Amortization expense was $1.9 million for both the three months ended October 31, 2021, and 2020[53] - The Company anticipates annual amortization of definite-lived intangible assets to be $7.7 million for the next five years[53] Note 7 Accrued Expenses Accrued Expenses (in thousands) | Category | October 31, 2021 | July 31, 2021 | | :--- | :--- | :--- | | Trade spend | $15,920 | $10,734 | | Bulk wine and other received not invoiced | $15,571 | $1,526 | | Barrel purchase | $998 | $936 | | Deferred compensation liability | $2,631 | $2,096 | | Income tax payable | $3,921 | $0 | | Accrued invoices and other accrued expenses | $11,649 | $6,265 | | Total | $50,690 | $21,557 | Note 8 Debt - The Company was in compliance with all financial covenants under its Credit Facility as of October 31, 2021[56] - Amortization related to debt issuance costs was $0.4 million for both the three months ended October 31, 2021, and 2020[57] - As of October 31, 2021, $314.0 million was available to draw under the revolving line of credit, with a weighted-average interest rate of 2.0% on the outstanding amount[58] Note 9 Derivative Instruments - The Company uses interest rate swap agreements and foreign currency forward contracts to manage exposure to interest rates and foreign currency movements, but does not apply hedge accounting[59][61] Derivative Instruments Notional Amounts (in thousands) | Instrument | October 31, 2021 | July 31, 2021 | | :--- | :--- | :--- | | Interest rate swap contracts | $100,000 | $100,000 | | Foreign currency forward contracts | $0 | $2,369 | | Total | $100,000 | $102,369 | Fair Value and Gains/Losses of Derivative Instruments (in thousands) | Metric | October 31, 2021 | July 31, 2021 | 3 months ended Oct 31, 2021 (Gain/Loss) | 3 months ended Oct 31, 2020 (Gain/Loss) | | :--- | :--- | :--- | :--- | :--- | | Interest rate swap contracts (Fair Value) | $(34) | $(480) | N/A | N/A | | Foreign currency forward contracts (Fair Value) | $0 | $5 | N/A | N/A | | Interest rate swap contracts (Gain/Loss) | N/A | N/A | $(446) | $(1,666) | | Foreign currency forward contracts (Gain/Loss) | N/A | N/A | $4 | $118 | | Total Gains/Losses | N/A | N/A | $(442) | $(1,548) | Note 10 Fair Value Measurements - The Company applies a fair value hierarchy (Level 1, 2, 3) for financial instruments, with most measurements using Level 2 inputs (observable market data)[65][66][67][69] Assets and Liabilities Measured at Fair Value (in thousands, Level 2 inputs) | Item | October 31, 2021 | July 31, 2021 | | :--- | :--- | :--- | | Deferred compensation plan asset | $1,764 | $1,719 | | Interest rate swap contracts (liability) | $34 | $480 | | Deferred compensation liability | $2,631 | $2,096 | | Foreign currency forward contracts (asset) | $0 | $5 | Note 11 Commitments and Contingencies - The Company leases approximately 150 acres of vineyard property, office space, and visitor centers under operating lease agreements expiring through December 2040[71] Future Minimum Operating Lease Payments (in thousands) | Fiscal Year | Amount | | :--- | :--- | | Remaining portion of 2022 | $4,122 | | 2023 | $4,124 | | 2024 | $4,082 | | 2025 | $3,962 | | 2026 | $2,637 | | Thereafter | $10,069 | | Total | $28,996 | - The Company contracted for approximately 34,000 tons of grapes at a cost of $68.1 million for Fiscal 2022, a significant increase from 12,000 tons at $26.5 million for Fiscal 2021[73] - As of October 31, 2021, there were no material contingent obligations requiring accrual or disclosure[76] Note 12 Equity-Based Compensation - On August 1, 2021, 133,076 restricted shares vested with a total fair value of $1.9 million; 266,158 shares are set to vest on August 1, 2022[78] Note 13 Casualty Loss - Wildfires in Q1 Fiscal 2021 caused smoke exposure to unharvested grapes, but the Company's owned/leased vineyards were not damaged[79] - Casualty loss expenses were immaterial for the three months ended October 31, 2021[79] Note 14 Earnings Per Share Earnings Per Share Reconciliation (in thousands, except share and per share amounts) | Metric | Three months ended Oct 31, 2021 | Three months ended Oct 31, 2020 | | :--- | :--- | :--- | | Net income attributable to The Duckhorn Portfolio, Inc | $21,273 | $17,523 | | Weighted average shares of common stock outstanding - basic | 115,046,793 | 101,713,460 | | Dilutive stock options and restricted stock | 349,233 | 0 | | Weighted average shares of common stock outstanding - assuming dilution | 115,396,026 | 101,713,460 | | Basic EPS | $0.18 | $0.17 | | Diluted EPS | $0.18 | $0.17 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of the business, an analysis of financial results, and discusses liquidity and capital resources Overview - The Duckhorn Portfolio is the premier scaled producer of luxury wines in North America, focusing on wines priced $15 or higher per 750ml bottle[86] - The company sells wines in all 50 states and over 50 countries, with prices ranging from $20 to $200 per bottle, under brands like Duckhorn Vineyards, Decoy, and Kosta Browne[87] - The omni-channel sales model includes wholesale and DTC, with DTC comprising approximately 15% of net sales in the first three months of Fiscal 2022[88] Key financial metrics Key Financial Metrics (in thousands) | Metric | Three months ended Oct 31, 2021 | Three months ended Oct 31, 2020 | | :--- | :--- | :--- | | Net sales | $104,181 | $91,638 | | Gross profit | $52,410 | $44,275 | | Net income attributable to The Duckhorn Portfolio, Inc | $21,273 | $17,523 | | Adjusted EBITDA | $38,089 | $33,722 | Adjusted EBITDA Reconciliation (in thousands) | Metric | Three months ended Oct 31, 2021 | Three months ended Oct 31, 2020 | | :--- | :--- | :--- | | Net income attributable to The Duckhorn Portfolio, Inc | $21,273 | $17,523 | | Interest expense | $1,606 | $3,580 | | Income tax expense | $7,377 | $6,136 | | Depreciation and amortization expense | $4,829 | $5,116 | | EBITDA | $35,085 | $32,355 | | Purchase accounting adjustments | $193 | $561 | | Transaction expenses | $1,745 | $0 | | Change in fair value of derivatives | $(442) | $(1,548) | | Equity-based compensation | $1,459 | $288 | | Loss on debt extinguishment | $0 | $272 | | IPO preparation costs | $0 | $196 | | Wildfire costs | $49 | $1,555 | | COVID-19 costs | $0 | $43 | | Adjusted EBITDA | $38,089 | $33,722 | Key operating metrics Net Sales Percentage by Channel (Three months ended October 31) | Channel | 2021 | 2020 | | :--- | :--- | :--- | | Wholesale - distributors | 68.5 % | 73.1 % | | Wholesale - California direct to retail | 16.4 % | 14.3 % | | DTC | 15.1 % | 12.6 % | Net Sales Growth Contribution (Three months ended October 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net sales growth | 13.7 % | 26.0 % | | Volume contribution | 7.5 % | 39.8 % | | Price / mix contribution | 6.2 % | (13.8)% | - Net sales growth in 2021 was driven by strong sales volume growth and a positive price/mix contribution, indicating a shift back toward pre-COVID-19 trends[104] Components of results of operation and key factors affecting our performance - Net sales growth is driven by leveraging brand strength, targeted portfolio evolution, distribution expansion, DTC channel investment, and strategic acquisitions[109] - The diversified sourcing model, with over 85% of production sourced from third-party growers and bulk wine, allows for optimizing gross profit[120] - The COVID-19 pandemic initially shifted sales from on-premise ultra-luxury to off-premise luxury wines, but on-premise and e-commerce sales are expected to remain strong[131][132] - Wildfires in Fiscal 2021 caused smoke exposure to grapes, but the company mitigated the impact and believes the future operational impact will be immaterial[133][134] - Purchase accounting adjustments from prior acquisitions resulted in lower pre-tax income due to reduced revenue and increased costs[134][136] Results of operations Consolidated Results of Operations (in thousands, except percentages) | Metric | Three months ended Oct 31, 2021 | % of Net Sales (2021) | Three months ended Oct 31, 2020 | % of Net Sales (2020) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $104,181 | 100.0 % | $91,638 | 100.0 % | | Cost of sales | $51,771 | 49.7 % | $47,363 | 51.7 % | | Gross profit | $52,410 | 50.3 % | $44,275 | 48.3 % | | Selling, general, and administrative expenses | $23,158 | 22.2 % | $16,805 | 18.3 % | | Casualty loss | $49 | 0.0 % | $1,555 | 1.7 % | | Income from operations | $29,203 | 28.0 % | $25,915 | 28.3 % | | Interest expense | $1,606 | 1.5 % | $3,580 | 3.9 % | | Other (income) expense, net | $(1,093) | (1.0)% | $(1,323) | (1.4)% | | Total other expenses | $513 | 0.5 % | $2,257 | 2.5 % | | Income before income taxes | $28,690 | 27.5 % | $23,658 | 25.8 % | | Income tax expense | $7,377 | 7.1 % | $6,136 | 6.7 % | | Net income attributable to The Duckhorn Portfolio, Inc | $21,273 | 20.4 % | $17,523 | 19.1 % | - Net sales increased by $12.5 million (13.7%) to $104.2 million, driven by volume growth and positive price/mix contribution[138] - Gross profit increased by $8.1 million (18.4%) to $52.4 million, with gross profit margin improving to 50.3% from 48.3%[140] - Selling, general and administrative expenses increased by $6.4 million (37.8%) to $23.2 million, due to expanded workforce, higher equity-based compensation, and public company costs[141] - Casualty loss decreased by $1.5 million (96.8%) to $49k, as the prior year included significant wildfire-related costs[144] - Total other expenses decreased by $1.7 million (77.3%) to $0.5 million, mainly due to lower interest expense and a gain on interest rate swaps[145] Liquidity and capital resources - The Company's primary cash needs are for working capital and expenditures, funded by operating cash flows and its Credit Facility[147] - As of October 31, 2021, the Company had $5.2 million in cash and $314.0 million available on its revolving line of credit[147] - Net cash provided by operating activities increased by $20.2 million to $22.7 million for the three months ended October 31, 2021[155] - Net cash used in financing activities shifted to $15.8 million for the three months ended October 31, 2021, compared to $0.3 million provided in the prior year[157] - Outstanding principal balances on debt instruments as of October 31, 2021, included $111.0 million for the revolving line of credit and $115.8 million for term loans[159] Off-balance sheet arrangements - As of October 31, 2021, the Company did not have any off-balance sheet arrangements that had, or are reasonably likely to have, a material effect on its financial condition[166] Critical accounting policies and estimates - There have been no material changes in the Company's critical accounting policies during the three months ended October 31, 2021[168] Recent accounting pronouncements - Refer to Note 2 (Basis of presentation and significant accounting policies) for additional information regarding recent accounting pronouncements[169] Emerging growth company status - The Company is an 'emerging growth company' and has elected to use the extended transition period for complying with new or revised accounting standards[170] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section outlines the company's exposure to market risks including interest rates, inflation, and commodity prices Interest rates - The Company is exposed to interest rate risk from $231.9 million in outstanding variable-rate borrowings as of October 31, 2021[172] - A 100 basis point increase in the effective interest rate would result in a $2.3 million increase in annual interest expense[172] - The Company uses an interest rate swap to mitigate exposure to fluctuations in interest rates[172] Inflation - Inflation has not had a material impact on the Company's business, results of operations, or financial condition to date[174] - The Company monitors inflation and attempts to minimize its effects through pricing strategies and cost reductions[174] Foreign currency - Revenues and costs are primarily denominated in U.S dollars, limiting significant foreign exchange risk[175] - The Company uses foreign exchange forward contracts to offset risks associated with Euro-denominated barrel purchases, with no outstanding contracts as of October 31, 2021[175] Commodity prices - The primary commodity risk is grapes, with over 85% sourced from third-party suppliers, and prices are subject to factors like yield, demand, and weather[177] - The Company diversifies its sources of supply and negotiates prices for raw materials but does not engage in commodity hedging[177][178] Item 4. Controls and procedures This section details the evaluation of disclosure controls and procedures and changes in internal control over financial reporting Disclosure controls and procedures - Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of October 31, 2021[180] - It was concluded that disclosure controls and procedures were effective in providing reasonable assurance that information required for SEC reports is timely and accurately reported[180][181] Changes in internal control over financial reporting - There were no changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company's internal control[182] Limitations on the effectiveness of controls - Disclosure controls and internal control over financial reporting are designed to provide reasonable, not absolute, assurance of achieving their objectives[183] - Management does not expect that control systems will prevent or detect all error and fraud[183] PART II Item 1. Legal proceedings The company is involved in routine legal proceedings not expected to have a material adverse effect on the business - The Company is involved in various legal proceedings arising from the normal course of business activities[186] - No current litigation is believed to have a material adverse effect on the Company's business, operating results, cash flows, or financial condition[186] Item 1A. Risk factors This section refers to the risk factors detailed in the Fiscal 2021 Annual Report on Form 10-K - For a discussion of potential risks and uncertainties, refer to the 'Risk Factors' section in the Annual Report on Form 10-K for Fiscal 2021[187] - There have been no material changes in risk factors since the previous 10-K filing[187] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including officer certifications and XBRL data - Exhibits include certifications from the CEO and CFO (pursuant to Sarbanes-Oxley Act) and various XBRL documents[188] Signatures This section contains the official signatures certifying the submission of the report - The report was signed on December 8, 2021, by Alex Ryan (President, CEO and Chairman) and Lori Beaudoin (EVP, CFO and Principal Accounting Officer)[192]