THE DUCKHORN PORTFOLIO, INC. 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 2022.
Overview
The Duckhorn Portfolio is the premier scaled producer of luxury wines inNorth America . We offer a curated and comprehensive portfolio of luxury wines with suggested retail prices ranging from$20 to$200 per bottle. Our wines are available in all 50 states and over 50 countries under a world-class luxury portfolio of winery brands, includingDuckhorn Vineyards , Decoy, Goldeneye, Paraduxx, Migration, Canvasback, Calera,Kosta Browne , Greenwing and Postmark. We sell our wines to distributors outsideCalifornia and directly to trade accounts inCalifornia , which together comprise our wholesale channel. We also sell directly to consumers through our DTC channel, which includes eight tasting rooms, wine clubs and our multi-winery e-commerce website. Our powerful omni-channel sales model continues to drive strong margins by leveraging long-standing relationships.
Key financial metrics
We use net sales, gross profit and adjusted EBITDA to evaluate the performance of our business, identify trends in our business, prepare financial forecasts and make capital allocation decisions. We believe the following metrics are useful in evaluating our performance. Adjusted EBITDA should not be considered in isolation or as a substitute for any other financial information depicting our results prepared in accordance withU.S. GAAP. Certain judgments and estimates are inherent in our processes to calculate these key financial metrics. See "-Limitations of non-GAAP financial measures and adjusted EBITDA reconciliation" for additional information. Three months ended January 31, Six months ended January 31, (in thousands) 2023 2022 2023 2022 Net sales$ 103,488 $ 98,736 $ 211,659 $ 202,917 Gross profit$ 55,186 $ 49,477 $ 109,896 $ 101,887 Net income attributable to The Duckhorn$ 14,917 $ 17,932 Portfolio, Inc.$ 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, purchase accounting adjustments, transaction expenses, changes in the fair value of
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derivatives, equity-based compensation and certain other items which are not related to our core operating performance. Adjusted EBITDA is a key performance measure we use in evaluating our operational results. We believe adjusted EBITDA is a helpful measure to provide investors an understanding of how management regularly monitors our core operating performance, as well as how management makes operational and strategic decisions in allocating resources. We believe adjusted EBITDA also provides management and investors consistency and comparability with our past financial performance and facilitates period to period comparison of operations, as it eliminates the effects of certain variations unrelated to our 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 withU.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 trade accounts inCalifornia and through our DTC channel, respectively, as a percentage of our total net sales. We monitor net sales percentage across all 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 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 endedJanuary 31, 2023 , was impacted by a DTC offering shift into the second quarter of Fiscal 2023 compared to the first quarter of Fiscal 2022. In our wholesale business, we strengthened our market position and delivered volume growth during the six months endedJanuary 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 January 31, Six months ended January 31,
2023 2022 2023 2022
Net sales growth 4.8 % 18.0 % 4.3 % 15.8 %
Volume contribution (0.4) % 24.8 % 4.5 % 15.3 %
Price / mix contribution 5.2 % (6.8) % (0.2) % 0.5 %
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Price / mix contribution for the three months endedJanuary 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 for the quarter versus the prior year period. For the six months endedJanuary 31, 2023 , a relatively neutral price / mix contribution was impacted by the outsized volume growth of the wholesale channel and flat DTC channel performance, while benefiting from pricing increases that supported net sales growth. Despite lapping high growth rates we achieved in the prior year period, our focus on trade account growth was a primary driver of increased volume for the six months endedJanuary 31, 2023 . Wholesale performance was largely balanced in the channels, with on-premise slightly outpacing off-premise growth. Generally, on-premise expansion also drives increased sales in our ultra-luxury brands that sell at higher average sales prices and positively impact price / mix contribution. For the six months endedJanuary 31, 2022 , growth in net sales was mainly attributable to continued strong sales volume growth and a neutral price / mix contribution demonstrating the shift back toward pre-COVID-19 trends with the growth in our 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 inCalifornia , 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 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 ourCalifornia wholesale channel, to trade accounts nationally.
The following factors and trends in our business are expected to be key drivers of our net sales growth for the foreseeable future:
•Further leverage brand strength. Leverage 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 in a consolidating marketplace.
•Insightful and targeted portfolio evolution. Launch winery brand extensions and continue evolving and strategically broadening our portfolio.
•Distribution expansion and acceleration. Capture distribution growth
opportunities and accelerate sales to existing distributors and retail accounts
in
•Continued investment in DTC channel. 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. Disciplined evaluation of strategic acquisitions when opportunities arise to create stockholder value.
The primary market for our wines isthe United States , which represented approximately 94% of our net sales during the six months endedJanuary 31, 2023 . Accordingly, our results of operations are primarily dependent onU.S. consumer spending. 28
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Sales channels
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 trade accounts inCalifornia 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 in their respective territories. InCalifornia , where we make sales directly to trade accounts, we benefit from greater control over our sales and higher profit margins by selling directly to retailers in the state. Our wholesale channel constitutes a greater proportion of our net sales than our DTC channel. •DTC channel. Wines sold through our DTC channel are generally sold at suggested retail prices. DTC channel sales represent important direct connections with our customers. DTC channel sales growth will generally be favorable to price/mix contribution and gross profit margin in periods where that channel constitutes a greater proportion of net sales than in a 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. We routinely offer sales discounts and promotions through various programs to distributors around the country and to trade accounts inCalifornia . 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 to total sales in calculating net sales. While our promotional activities may result in some variability in net sales from quarter to quarter, historically, the impact of these activities on our results has generally been proportional to changes in total net sales.
Seasonality
Our net sales are typically highest in the first half of our fiscal year, predominantly 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. This dynamic generally results in lower average selling prices due to distributor and retail sales discounts and promotions in our wholesale channel. See "-Key operating metrics." In Fiscal 2022, our net sales in the first, second, third and fourth fiscal quarters represented approximately 28%, 26%, 25% and 21%, respectively, of our total net sales for the year.
Gross profit
Gross profit is equal to net sales minus 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.
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Agribusiness
We have developed a diversified sourcing and production model, supported by our eight wineries, world-class, and 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 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. 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 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.
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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 48 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.
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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 January 31, Six months ended January 31,
(in thousands, except
percentages) 2023 2022 2023 2022
Net sales $ 103,488 100.0 % $ 98,736 100.0 % $ 211,659 100.0 % $ 202,917 100.0 %
Cost of sales 48,302 46.7 49,259 49.9 101,763 48.1 101,030 49.8
Gross profit 55,186 53.3 49,477 50.1 109,896 51.9 101,887 50.2
Selling, general and
administrative expenses 29,579 28.6 23,845 24.1 55,318 26.1 47,052 23.1
Income from operations 25,607 24.7 25,632 26.0 54,578 25.8 54,835 27.0
Interest expense 2,684 2.6 1,636 1.7 4,846 2.3 3,242 1.6
Other expense (income), net 2,743 2.6 (338) (0.3) 2,656 1.3 (1,431) (0.7)
Total other expenses, net 5,427 5.2 1,298 1.3 7,502 3.5 1,811 0.9
Income before income taxes 20,180 19.5 24,334 24.6 47,076 22.2 53,024 26.1
Income tax expense 5,265 5.1 6,407 6.5 12,352 5.8 13,784 6.8
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 2 - 5 - 8 - (35) -
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 six months ended
Net sales
Three months ended January 31, Change Six months ended January 31, Change
(in thousands, except
percentages) 2023 2022 $ % 2023 2022 $ %
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 January 31, 2023 increased $4.8 million , or
4.8%, to $103.5 million compared to $98.7 million for the three months ended
January 31, 2022 . The increase in net sales for the three months ended January
31, 2023 was driven by positive price / mix contribution in our DTC channel
sales related to 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 six months ended January 31, 2023 increased $8.7 million , or
4.3%, to $211.7 million compared to $202.9 million for the six months ended
January 31, 2022 . The increase in net sales for the six months ended January 31,
2023 is primarily driven by volume growth and a neutral price/mix contribution,
driven by both volume and mix improvements in the wholesale channel and planned
pricing increases.
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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 decreased by $1.0 million , or 1.9%, to $48.3 million for the three
months ended January 31, 2023 compared to $49.3 million for the three months
ended January 31, 2022 . The decrease in cost of sales for the three months ended
January 31, 2023 was primarily driven by favorable brand mix.
Cost of sales increased by $0.7 million , or 0.7%, to $101.8 million for the six
months ended January 31, 2023 compared to $101.0 million for the six months
ended January 31, 2022 . The increase in cost of sales for the six months ended
January 31, 2023 was primarily driven by higher sales, partially offset by
favorable brand mix.
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 three months endedJanuary 31, 2023 compared to$49.5 million for the three months endedJanuary 31, 2022 . Gross profit increased$8.0 million , or 7.9%, to$109.9 million for the six months endedJanuary 31, 2023 compared to$101.9 million for the six months endedJanuary 31, 2022 . The increases in gross profit and gross margin for the three and six months endedJanuary 31, 2023 were primarily the result of brand and channel mix shifts and pricing increases that were net favorable to gross profit margin. 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 %
17.6 %
Selling, general and administrative expenses increased$5.7 million , or 24.0%, to$29.6 million for the three months endedJanuary 31, 2023 , compared to$23.8 million for the three months endedJanuary 31, 2022 . Selling, general and administrative expenses increased$8.3 million , or 17.6%, to$55.3 million for the six months endedJanuary 31, 2023 , compared to$47.1 million for the six months endedJanuary 31, 2022 . The increases in selling, general and administrative expenses for the three and six months endedJanuary 31, 2023 were largely attributable to higher professional fees, most of which we incurred in the second quarter. See "-Limitations of non-GAAP financial measures and adjusted EBITDA reconciliation" for additional information on transaction expenses 33
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reflected in operating expenses during the period. Selling, general and administrative expenses also reflect higher compensation costs, driven by strategic investments in our workforce to support future sales growth.
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 , to $5.4 million for the
three months ended January 31, 2023 , compared to $1.3 million for the three
months ended 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 January 31, 2023
compared to 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
Company's working capital needs;
•adjusted EBITDA does not reflect the significant interest expense, or the cash
requirements necessary to service interest or principal payments, on the
Company's debt;
•adjusted EBITDA does not reflect income tax payments that may represent a
reduction in cash 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 sales
through our diversified supply planning strategy and discipline over selling,
general and administrative expenses relative to our sales growth.
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The following table represents the reconciliation of adjusted EBITDA to net
income attributable to
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 impacts of business combination accounting for our acquisition by TSG, and certain other transactions consummated prior to Fiscal 2021, which resulted in fair value adjustments to inventory and long-lived assets. Purchase accounting adjustments in depreciation and amortization expense include amortization of intangible assets of$1.9 million for the three months endedJanuary 31, 2023 and 2022, and$3.8 million for the six months endedJanuary 31, 2023 and 2022. (b) Transaction expenses include legal services, professional fees and other due diligence expenses for all periods presented. Transaction expenses for the three and six months endedJanuary 31, 2022 also include the secondary offering completed inOctober 2021 . (c) See Note 8 (Derivative instruments) to our Condensed Consolidated Financial Statements for additional information. (d) See Note 11 (Equity-based compensation) to our Condensed Consolidated Financial Statements for additional information. (e) See Note 7 (Debt) to our Condensed Consolidated Financial Statements for additional information. 35
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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 ofJanuary 31, 2023 , we had$7.3 million in cash and$425.0 million in undrawn capacity on our revolving line of credit, subject to the terms of our New Credit Facility. 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 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 onNovember 4, 2027 . The calculated interest payment amounts use actual rates available as ofJanuary 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$20.4 million due in the following years. See our Condensed Consolidated Financial Statements for further information on our operating leases. We expect to be able to satisfy our liquidity needs for the next 12 months and beyond using cash generated from operations. If our cash needs change in the future, we may seek alternative or incremental funding sources to respond to changes in our business. To the extent required, we may seek to fund additional liquidity through debt or equity financing, although we can provide no assurance that such forms of capital will be available when needed, if at all, or available on terms that are acceptable. 36
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Cash flows
The following table presents the major components of net cash flows.
Six months ended January 31 ,
(in thousands) 2023 2022
Cash flows provided by (used in): Operating activities$ 18,097 $ 18,828 Investing activities (12,388) (23,336) Financing activities (1,584) 5,034 Net increase in cash $ 4,125$ 526
Comparison of the six months ended
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 six months endedJanuary 31, 2023 , net cash provided by operating activities was$18.1 million compared to$18.8 million for the six months endedJanuary 31, 2022 , a decrease of$0.7 million . The decrease in cash provided by operating activities was primarily driven by the following factors:
•Increases in inventory for the six months ended
•Changes in accounts payable and accrued expenses increased operating cash flows
•Deferred revenues increased operating cash flows by
•Other current and long-term liabilities increased operating cash flows by
Investing activities
For the six months endedJanuary 31, 2023 , net cash used in investing activities related to capital expenditures of$12.4 million compared to$23.3 million for the six months endedJanuary 31, 2022 . For the six months endedJanuary 31, 2022 , we completed the purchase of threeNapa County, California vineyards and related assets for 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. 37
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Financing activities
For the six months endedJanuary 31, 2023 , net cash used in financing activities was$1.6 million as compared to cash provided by financing activities of$5.0 million for the six months endedJanuary 31, 2022 . For the six months endedJanuary 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 the payments under our line of credit of$119.0 million , payments of long-term debt of$115.2 million and payments of debt issuance costs of$2.4 million . For the six months endedJanuary 31, 2022 , net cash used in financing activities primarily included payments under our line of credit of$52.0 million and payments of long-term debt of$5.7 million , partially offset by borrowings under our line of credit of$63.0 million .
Capital resources
Original Credit Facility
OnOctober 14, 2016 ,Mallard Buyer Corp ,Selway Wine Company and certain other subsidiaries ofThe Duckhorn Portfolio, Inc. (collectively, the "Borrowers") entered into the Original Credit Facility with a syndicated group of lenders. The Original Credit Facility provided 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 Term SOFR based rate plus an applicable margin as defined in the Original Credit Agreement. Interest was paid monthly or quarterly based on loan type. Our debt was collateralized by substantially all of our cash, trade accounts receivable, real and personal property. Pursuant to the terms and conditions of the Original Credit Agreement, we issued the instruments discussed below.
Eighth Amendment to the First
OnAugust 30, 2022 , the Borrowers entered into an eighth amendment to the FirstLien Loan and Security Agreement to extend the maturity date of all facilities toNovember 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 EffectiveNovember 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 isNovember 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 onNovember 4, 2027 . The interest rate ranged from Term SOFR plus 100 basis points to Term SOFR plus 150 basis points depending on the average availability of the revolving line of credit. The amount available to borrow on the revolving line of credit is subject to a monthly borrowing base calculation, based primarily on the Company's inventory and accounts receivable balances. 38
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Term Loans - 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 term loan facility provides an aggregate principle amount equal to$225.8 million , with quarterly principal payments and the remaining unpaid principal and interest due upon maturity onNovember 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 onNovember 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 ofJanuary 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 as ofJanuary 31, 2023 . The New 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 ofJanuary 31, 2023 , we are in compliance with all covenants. See Note 7 (Debt) to our Condensed Consolidated Financial Statements for additional information.
First Amendment to the Amended and Restated First
EffectiveFebruary 6, 2023 , the Company entered into the First Amendment to the Amended and Restated FirstLien Loan and Security Agreement. The changes in the amendment are administrative in nature and do not have a material impact on the Company's outstanding debt or related debt covenants. The amendment did not result in any additional cash proceeds or changes in commitment amounts.
Off-balance sheet arrangements
As ofJanuary 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 withU.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 six months endedJanuary 31, 2023 , as compared to those disclosed in the "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in our Annual Report on Form 10-K for Fiscal 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.
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