The Duckhorn Portfolio(NAPA) - 2024 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for the period ended April 30, 2024, detailing financial position, operations, equity, and cash flows, with notes on the Sonoma-Cutrer acquisition and its financial impacts Condensed Consolidated Statements of Financial Position This statement details the company's financial position, showing significant increases in total assets, liabilities, and stockholders' equity primarily due to the Sonoma-Cutrer acquisition Condensed Consolidated Statements of Financial Position (in thousands) | | April 30, 2024 | July 31, 2023 | | :--- | :--- | :--- | | Total current assets | $521,994 | $387,530 | | Property and equipment, net | $565,806 | $323,530 | | Goodwill | $483,818 | $425,209 | | Total assets | $1,793,464 | $1,347,682 | | Total current liabilities | $64,502 | $74,460 | | Revolving line of credit | $102,000 | $13,000 | | Long-term debt, net | $203,206 | $210,619 | | Total liabilities | $534,928 | $405,274 | | Total stockholders' equity | $1,258,536 | $942,408 | Condensed Consolidated Statements of Operations This statement presents the company's operating results, showing a slight increase in net sales for the three-month period but a decrease for the nine-month period, alongside a decline in net income due to higher expenses Condensed Consolidated Statements of Operations (in thousands, except per share data) | | Three months ended April 30, 2024 | Three months ended April 30, 2023 | Nine months ended April 30, 2024 | Nine months ended April 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $92,532 | $91,242 | $298,086 | $302,901 | | Gross profit | $51,443 | $50,511 | $163,614 | $160,407 | | Income from operations | $21,704 | $26,522 | $74,145 | $81,100 | | Net income attributable to The Duckhorn Portfolio, Inc. | $13,323 | $16,797 | $44,717 | $51,529 | | Diluted EPS | $0.12 | $0.15 | $0.39 | $0.45 | Condensed Consolidated Statements of Cash Flows This statement details cash flows, showing net cash used in operating activities for the nine months ended April 30, 2024, a significant decrease from the prior year, primarily due to increased inventories and the Sonoma-Cutrer acquisition Condensed Consolidated Statements of Cash Flows (in thousands) | | Nine months ended April 30, 2024 | Nine months ended April 30, 2023 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(409) | $51,753 | | Net cash used in investing activities | $(71,080) | $(14,111) | | Net cash provided by (used in) financing activities | $80,871 | $(4,732) | | Net increase in cash | $9,382 | $32,910 | | Cash - End of period | $15,735 | $36,077 | Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations of the financial statements, highlighting the Sonoma-Cutrer acquisition, shifts in sales channels, a new class-action lawsuit, increased debt, and a higher effective tax rate - On April 30, 2024, the Company acquired Sonoma-Cutrer for consideration valued at $317.5 million, consisting of $49.6 million in cash and 31.5 million shares of common stock valued at $267.1 million[48] - The acquisition added approximately $61.4 million in inventories, $244.8 million in net property and equipment, a $17.0 million indefinite-lived trade name, and $58.6 million in goodwill[52][59][61][62] Net Sales by Channel | Channel | Three months ended April 30, 2024 | Three months ended April 30, 2023 | | :--- | :--- | :--- | | Wholesale — Distributors | 60.4% | 68.6% | | Wholesale — California direct to trade | 16.0% | 17.5% | | DTC | 23.6% | 13.9% | - A putative class action lawsuit was filed on March 22, 2024, alleging wage and hour violations, with the potential loss not yet reasonably estimable[94] - The effective tax rate for the nine months ended April 30, 2024, was 29.3%, up from 26.3% in the prior year, primarily due to non-deductible transaction costs from the Sonoma-Cutrer acquisition[113][114] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, highlighting net sales trends, improved gross profit margin, increased SG&A expenses due to the Sonoma-Cutrer acquisition, and growth in Adjusted EBITDA, alongside liquidity and capital resources Key Financial Metrics (in thousands) | | Three months ended April 30, 2024 | Three months ended April 30, 2023 | Nine months ended April 30, 2024 | Nine months ended April 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $92,532 | $91,242 | $298,086 | $302,901 | | Gross profit | $51,443 | $50,511 | $163,614 | $160,407 | | Adjusted EBITDA | $37,726 | $35,820 | $115,174 | $110,298 | - The Sonoma-Cutrer acquisition, completed on April 30, 2024, for approximately $317.5 million, is expected to be accretive in the first full fiscal year with up to $10.0 million in run-rate synergies[144][145] - Gross profit margin increased to 54.9% for the nine months ended April 30, 2024, up from 53.0%, driven by lower discounts and favorable DTC offering timing[164] - Selling, general and administrative expenses increased by 12.8% for the nine months ended April 30, 2024, primarily due to higher transaction and integration costs from the Sonoma-Cutrer acquisition[169][170] - Net cash used in operating activities was $0.4 million for the nine months ended April 30, 2024, a $52.2 million decrease from the prior year, mainly due to increased inventory purchases and payment timing[196] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks including interest rate risk on variable-rate debt, foreign currency risk from Euro-denominated purchases, and commodity price risk for raw materials, which are managed through various strategies - The company faces interest rate risk on $315.3 million of variable-rate debt as of April 30, 2024, with a 100 basis point increase potentially raising annual interest expense by $3.1 million, partially mitigated by an interest rate swap[215] - Foreign currency risk, primarily from Euro-denominated barrel purchases, is mitigated using foreign exchange forward contracts[217] - Commodity price risk for grapes and raw materials is managed through diversified sourcing, varied supply contracts, and annual price negotiations, without commodity hedging[219][221] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of April 30, 2024, with new controls implemented for the Sonoma-Cutrer acquisition and no other material changes to internal controls - The CEO and CFO concluded that disclosure controls and procedures were effective at a reasonable assurance level as of April 30, 2024[223] - New controls related to accounting policies and procedures were implemented during the quarter for the Sonoma-Cutrer acquisition[224] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is involved in a putative class action lawsuit filed on March 22, 2024, alleging wage and hour violations, with the potential loss not yet reasonably estimable - On March 22, 2024, a former employee filed a putative class action lawsuit alleging wage and hour violations under the California Labor Code[228] - The claims primarily relate to alleged unpaid wages and missed meal and rest breaks, with the amount of any potential loss not yet reasonably estimable[228] Item 1A. Risk Factors This section updates risk factors, focusing on substantial non-recurring costs, integration challenges, and the potential unrealized benefits from the Sonoma-Cutrer acquisition, alongside the significant influence of major stockholders - The company has incurred and expects substantial non-recurring costs, including legal, advisory, and integration fees, associated with the Sonoma-Cutrer merger[231] - Integrating Sonoma-Cutrer may be more difficult, costly, or time-consuming than expected, risking that anticipated benefits and synergies may not be fully realized[233] - As of April 30, 2024, TSG and Brown-Forman affiliates owned approximately 41.8% and 21.4% of outstanding common stock, respectively, granting them significant influence over company decisions[236] Item 5. Other Information This section discloses the adoption of Rule 10b5-1 trading plans by two executive officers on April 9, 2024, for share sales between July and December 2024 Rule 10b5-1 Trading Plans Adopted in Q3 FY2024 | Name | Position | Adoption Date | Duration of Trading Agreement | Aggregate Number of Securities to be Sold | | :--- | :--- | :--- | :--- | :--- | | Pete Przybylinski | EVP, Chief Sales Officer | April 9, 2024 | July 9, 2024 - Dec 31, 2024 | 100,000 | | Zachary Rasmuson | EVP, Chief Operating Officer | April 9, 2024 | July 9, 2024 - Dec 31, 2024 | 70,000 | Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including the Sonoma-Cutrer merger agreement, amended bylaws, an employment agreement, and CEO/CFO certifications