Monster Beverage Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Financial statements are unaudited. Amounts below are in U.S. dollars.
Business context
Monster primarily develops and sells energy drinks through its Monster Energy Drinks and Strategic Brands segments. In February 2022, it acquired CANarchy for approximately $330 million, entering craft beer and hard seltzers; CANarchy operates independently. The filing reports four segments: Monster Energy Drinks, Strategic Brands, Alcohol Brands, and Other.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $1.624 billion | $1.411 billion | $4.798 billion | $4.116 billion |
| Gross profit | $833.7 million | $789.2 million | $2.390 billion | $2.341 billion |
| Gross margin | 51.3% | 55.9% | 49.8% | 56.9% |
| Operating income | $417.9 million | $444.5 million | $1.190 billion | $1.385 billion |
| Operating margin | 25.7% | 31.5% | 24.8% | 33.6% |
| Net income | $322.4 million | $337.2 million | $890.0 million | $1.056 billion |
| Diluted EPS | $0.60 | $0.63 | $1.66 | $1.97 |
| Operating cash flow | — | — | $589.2 million | $928.0 million |
- Q3 sales rose 15.2%; energy-drink case volume increased 14.1%. Nine-month sales rose 16.6%; case volume increased 16.4%.
- Foreign exchange reduced sales by approximately $71.3 million in Q3 and $157.6 million over nine months. Excluding currency effects, sales growth was 20.2% and 20.4%, respectively.
- Cash and cash equivalents were $1.303 billion, short-term investments $1.347 billion, and long-term investments $72.4 million at September 30. Current assets were $4.697 billion versus current liabilities of $1.122 billion.
- Debt was limited: $6.3 million was outstanding on a $15 million China credit facility. The filing reports no other material borrowing.
- Nine-month operating cash flow fell to $589.2 million, mainly reflecting increases in inventory ($297.1 million) and accounts receivable ($202.4 million). Investing cash outflow was $57.7 million; financing cash outflow was $459.3 million, including $493.3 million of treasury-stock purchases.
Material changes versus prior comparable periods
- Despite higher sales, Q3 gross profit margin fell 4.6 percentage points and nine-month margin fell 7.1 points. Management cited higher ingredient, packaging, aluminum, co-packing, freight and logistics costs, as well as geographic and product mix.
- Operating expenses increased 20.6% in Q3 and 25.5% for nine months. Drivers included marketing and selling costs, freight and warehouse expense, payroll, and professional services. Nine-month 2021 expenses included a $16.9 million reversal related to an intellectual-property claim.
- Q3 net income declined 4.4%; nine-month net income declined 15.7%. Nine-month operating income declined 14.0%.
- Alcohol Brands generated $26.8 million of Q3 sales and $74.5 million for the post-acquisition period through September 30, but recorded operating losses of $10.3 million and $19.9 million, respectively. The acquired inventory fair-value step-up reduced nine-month operating income by approximately $4.0 million; all such inventory had been sold by September 30.
- Q3 energy-drink average net sales per case declined 0.7% to $8.72; the nine-month measure declined 1.3% to $8.79, reflecting currency and other mix effects.
Outlook, management commentary, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said it expects sufficient liquidity for at least the next 12 months and estimated capital expenditures, excluding share repurchases, of less than $200 million through September 30, 2023.
- Management continued price increases and reductions in promotions to address cost inflation. A U.S. price increase took effect September 1, 2022. It reported sequential gross-margin improvement from Q2, citing pricing, less reliance on imported cans, and inventory positioned closer to customers, while maintaining its priority of product availability.
- Key risks include inflation and the ability to pass costs through, supply-chain and aluminum-can availability, freight costs, foreign-exchange movements, consumer demand and discretionary spending, reliance on major bottlers and Coca-Cola system relationships, regulation and litigation, and successful integration and development of the alcohol business. COVID-19 and the Russia-Ukraine conflict remain monitored uncertainties; the conflict had no material Q3 impact, according to the company.
- Legal recoveries from VPX/Bang Energy were not recognized. A jury awarded Monster Energy Company approximately $293 million in September 2022; a separate arbitration award of $175 million plus a 5% royalty was confirmed by a court. VPX appealed the confirmation and filed for Chapter 11 in October. Monster said realization and timing remained uncertain as of November 4, 2022.
- Share repurchases totaled approximately $493.3 million in cash over nine months. A new $500 million authorization was approved November 2; total repurchase capacity was $682.8 million as of November 4.
Important facts for investors to verify
- Whether pricing, easing supply-chain costs and improved inventory positioning can restore gross margins without weakening volume growth.
- How much working capital remains tied up in rising inventory and receivables, and whether operating cash flow recovers.
- CANarchy’s path to profitability, including the causes and persistence of its operating losses.
- The status, collectability and potential timing of the VPX-related awards, which are not included in reported results.
- Future foreign-exchange impacts, major bottler/customer concentration, and the pace and price of further share repurchases.