The Duckhorn Portfolio(NAPA) - 2024 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements Unaudited Q1 FY2024 financial statements reflect decreased net sales and income, with increased assets and liabilities Condensed Consolidated Statements of Operations (Unaudited) | Metric | Three months ended Oct 31, 2023 | Three months ended Oct 31, 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Net sales | $102,509 thousand | $108,171 thousand | -5.2% | | Gross profit | $53,853 thousand | $54,710 thousand | -1.6% | | Income from operations | $23,370 thousand | $28,971 thousand | -19.3% | | Net income attributable to The Duckhorn Portfolio, Inc. | $15,537 thousand | $19,815 thousand | -21.6% | | Diluted Earnings Per Share | $0.13 | $0.17 | -23.5% | Condensed Consolidated Statements of Financial Position (Unaudited) | Metric | October 31, 2023 | July 31, 2023 | | :--- | :--- | :--- | | Total current assets | $490,028 thousand | $387,530 thousand | | Total assets | $1,453,203 thousand | $1,347,682 thousand | | Total current liabilities | $157,486 thousand | $74,460 thousand | | Total liabilities | $494,436 thousand | $405,274 thousand | | Total stockholders' equity | $958,767 thousand | $942,408 thousand | Condensed Consolidated Statements of Cash Flows (Unaudited) | Metric | Three months ended Oct 31, 2023 | Three months ended Oct 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $18,066 thousand | $26,384 thousand | | Net cash used in investing activities | ($10,395) thousand | ($6,418) thousand | | Net cash provided by (used in) financing activities | $7,158 thousand | ($17,808) thousand | | Net increase in cash | $14,829 thousand | $2,158 thousand | Note 1: Description of Business The company produces luxury wines, generating revenue via wholesale and direct-to-consumer channels - The company produces luxury wines under brands such as Duckhorn Vineyards, Decoy, Goldeneye, and Kosta Browne[23] - Revenue is generated through two main channels: wholesale (to distributors and California retailers/restaurants) and direct-to-consumer (DTC) via clubs, website, and tasting rooms[24] Note 3: Revenue Net sales disaggregation highlights wholesale as largest segment and significant deferred revenue increase from DTC Net Sales by Channel | Channel | Q1 FY2024 (%) | Q1 FY2023 (%) | | :--- | :--- | :--- | | Wholesale - Distributors | 77.0% | 76.4% | | Wholesale - California direct to trade | 15.6% | 15.8% | | DTC | 7.4% | 7.8% | - Deferred revenue increased to $11.2 million at October 31, 2023, from $0.1 million at July 31, 2023, primarily due to cash collected from DTC channel sales ahead of shipment[38][39] Note 6: Debt Total debt, primarily from a Credit Facility, was $241.3 million as of October 31, 2023, with all covenants met Long-Term Debt Composition (in thousands) | Component | October 31, 2023 | July 31, 2023 | | :--- | :--- | :--- | | Revolving line of credit | $23,000 | $13,000 | | Term loan, first lien | $218,332 | $220,832 | | Total debt | $241,332 | $233,832 | - As of October 31, 2023, the company had $402.0 million of unused capacity under its revolving credit facility[52] Note 13: Subsequent Events The company agreed to acquire Sonoma-Cutrer Vineyards for approximately $400 million, closing expected in Q3 FY2024 - The company agreed to acquire Sonoma-Cutrer Vineyards, a specialist in luxury Chardonnay brands[80][81] - The purchase price is approximately $400.0 million, consisting of about $350.0 million in the Company's common stock (31,531,532 shares) and $50.0 million in cash[82] - The transaction is expected to close in the third quarter of Fiscal 2024, subject to regulatory approvals and customary closing conditions[83] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses Q1 FY2024 financial results, highlighting a 5.2% decrease in net sales, improved gross margin, and the pending Sonoma-Cutrer acquisition Overview Premier luxury wine producer outlines growth strategies: market share gains, portfolio evolution, channel expansion, and strategic acquisitions - Key growth drivers include gaining market share, evolving the product portfolio, expanding wholesale and DTC channels, and making strategic acquisitions[90] Key Financial Metrics (in thousands) | Metric | Q1 FY2024 | Q1 FY2023 | | :--- | :--- | :--- | | Net sales | $102,509 | $108,171 | | Gross profit | $53,853 | $54,710 | | Adjusted EBITDA | $34,713 | $35,665 | Results of Operations Q1 FY2024 net sales decreased 5.2% (lower volume); gross margin improved to 52.5%; SG&A expenses rose 18.4% (acquisition costs) - Net sales decreased by $5.7 million (5.2%) in Q1 FY2024, mainly due to negative volume contributions across all sales channels[125] - Gross margin increased to 52.5% from 50.6% in the prior-year period, attributed to cost of sales improvements and lower discounting[127] - SG&A expenses increased by $4.7 million (18.4%), largely due to higher transaction costs for the pending Sonoma-Cutrer acquisition and higher depreciation from the Geyserville winery purchase[128] Non-GAAP Financial Measures and Adjusted EBITDA Reconciliation Net income reconciled to Adjusted EBITDA, a non-GAAP measure, slightly decreased to $34.7 million in Q1 FY2024 Adjusted EBITDA Reconciliation (in thousands) | Line Item | Q1 FY2024 | Q1 FY2023 | | :--- | :--- | :--- | | Net income attributable to The Duckhorn Portfolio, Inc. | $15,537 | $19,815 | | Interest expense | 4,004 | 2,162 | | Income tax expense | 5,629 | 7,087 | | Depreciation and amortization expense | 7,329 | 5,757 | | EBITDA | 32,499 | 34,821 | | Transaction expenses | 3,236 | 162 | | Change in fair value of derivatives | (1,889) | (368) | | Other adjustments | 867 | 1,050 | | Adjusted EBITDA | $34,713 | $35,665 | Liquidity and Capital Resources Liquidity includes $21.2 million cash and $402.0 million available credit; operating cash flow decreased to $18.1 million due to working capital - As of October 31, 2023, the company had $21.2 million in cash and $402.0 million in undrawn capacity on its revolving line of credit[140] - Cash needs are greatest during the harvest season (August-November), and existing cash and credit facilities are deemed adequate for the next 12 months[141] - Net cash provided by operating activities decreased by $8.3 million year-over-year, driven by lower net income and changes in working capital, including higher inventory levels[149] Quantitative and Qualitative Disclosures About Market Risk Market risks include interest rates on $241.3 million variable debt and foreign currency, with grape prices remaining unhedged - The company has $241.3 million in variable-rate debt; a hypothetical 100 basis point increase in interest rates would increase annual interest expense by $2.4 million[164] - Foreign currency risk is managed using foreign exchange forward contracts for barrel purchases from France, typically with a duration of up to twelve months[166] - The primary commodity risk is the price of grapes, which is not hedged and is subject to factors like weather, demand, and harvest yields[168] Controls and Procedures Management concluded disclosure controls were effective as of October 31, 2023, with no material changes to internal control - The Chief Executive Officer and Chief Financial Officer concluded that as of October 31, 2023, the company's disclosure controls and procedures were effective[171] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls[172] PART II - OTHER INFORMATION Legal Proceedings The company is not currently involved in legal proceedings expected to materially affect its business - The company is not presently a party to any litigation that is expected to have a material adverse effect on its business[175] Risk Factors Risk factors updated: potential failure to complete Sonoma-Cutrer acquisition and risks from CEO transition - A new risk factor is the potential inability to complete the acquisition of Sonoma-Cutrer, which could prevent the company from realizing expected benefits and may result in a termination fee of approximately $5 million under certain conditions[177] - Another new risk involves the recent CEO transition, which could create uncertainty, divert resources, impact performance, and has led to temporary non-compliance with NYSE audit committee independence rules[178][179][181] Other Information Three company officers established Rule 10b5-1 equity trading plans during the quarter Rule 10b5-1 Trading Plans Adopted in Q1 FY2024 | Name | Position | Adoption Date | Duration of Agreement | Aggregate Securities to be Sold | | :--- | :--- | :--- | :--- | :--- | | Pete Przybylinski | EVP, Chief Sales Officer | Oct 6, 2023 | Jan 5, 2024 - Jun 30, 2024 | 140,000 | | Zachary Rasmuson | EVP, Chief Operating Officer | Oct 6, 2023 | Jan 5, 2024 - Jun 30, 2024 | 48,000 | Exhibits Exhibits filed with Form 10-Q include corporate documents and CEO/CFO certifications - The filing includes required certifications from the Chief Executive Officer (31.1) and Chief Financial Officer (31.2) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002[184] Signatures The report was signed on December 6, 2023, by the Interim CEO and CFO - The report was signed on December 6, 2023, by Deirdre Mahlan (Interim President, CEO, and Chairperson) and Jennifer Fall Jung (EVP, CFO)[189]