Monster Beverage Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial statements are unaudited; amounts below are in U.S. dollars. The company develops and markets energy drinks through Monster Energy Drinks, Strategic Brands and Other segments.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1,093.9m | $1,104.0m | $2,156.0m | $2,050.0m |
| Gross profit / margin | $659.5m / 60.3% | $661.3m / 59.9% | $1,296.7m / 60.1% | $1,234.8m / 60.2% |
| Operating income / margin | $407.3m / 37.2% | $379.0m / 34.3% | $772.3m / 35.8% | $690.5m / 33.7% |
| Net income | $311.4m | $292.5m | $590.2m | $554.0m |
| Diluted EPS | $0.59 | $0.53 | $1.10 | $1.01 |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $440.5m | $454.8m |
- Q2 year-over-year: Sales fell 0.9%, while operating income rose 7.5% and net income rose 6.5%. Case sales declined 2.2% to 117.0m 192-ounce case equivalents; average net sales per case increased 1.2% to $9.30.
- First half year-over-year: Sales increased 5.2%, operating income 11.8% and net income 6.5%; case sales grew 5.3% to 232.6m. Average net sales per case was nearly flat at $9.22 versus $9.23.
- Segment mix: Q2 Monster Energy Drinks sales grew 0.8% to $1,027.7m, while Strategic Brands fell 24.7% to $59.6m. First-half Monster Energy Drinks sales grew 6.9% to $2,020.1m; Strategic Brands declined 16.9% to $124.1m. Other segment sales were $6.6m in Q2 and $11.7m for the half.
- Cash flows and liquidity: First-half operating cash flow was $440.5m. Investing activities provided $250.7m, principally reflecting investment sales, while financing activities used $553.6m, principally share repurchases. Cash and cash equivalents were $921.3m, short-term investments $250.8m and long-term investments $2.1m at June 30. Current assets were $2,371.5m and current liabilities $674.9m. Management said cash, operations and credit access should cover working capital and other needs for at least 12 months.
- Debt and obligations: No balance-sheet borrowing is identified in the presented statements; the company reported no borrowings on its $15m HSBC China working-capital line. Finance lease liabilities were $1.8m. Purchase commitments totaled $59.2m and contractual obligations, primarily sponsorships and marketing, totaled $182.1m. The filing does not provide a clear total debt figure beyond the stated lease liabilities and credit-line status.
Material changes and management commentary
- COVID-19 adversely affected Q2 sales, including through distributor inventory reductions, lower convenience and gas-channel foot traffic, and extended lockdowns affecting Strategic Brands, particularly in EMEA. Sales improved sequentially in the latter half of Q2 as some markets reopened. E-commerce, club, mass merchant and grocery business strengthened; on-premise food service remained challenged.
- Management attributed Q2 gross-margin improvement to product and geographic mix and lower input costs. Operating expenses fell 10.7%, mainly due to lower sponsorship and endorsement spending and travel and entertainment expenses during the pandemic. Some event costs may be deferred to future periods, but timing was uncertain.
- For the first half, operating expenses declined 3.7%; lower sponsorship, travel and distributor-termination costs were partly offset by higher payroll, freight and warehouse costs, a $4.0m Strategic Brand trademark impairment, and other expenses. The first-half effective tax rate rose to 23.5% from 20.4%, primarily due to a lower equity-compensation deduction.
- Foreign exchange reduced net sales by approximately $18.2m in Q2 and $28.6m in the first half. The company also cited a European trading dispute that temporarily delisted certain products and hurt EMEA sales.
- Management reported no current material supply shortages or expected material distribution impact from COVID-19 as of the filing date, but warned that prolonged pandemic effects could disrupt supply. It estimated capital expenditures, excluding repurchases, would likely be below $150m through June 30, 2021.
- The board authorized a $500m share repurchase plan in March 2020. Q2 purchases under that plan were 0.3m shares for $15.6m; $441.5m remained available as of August 6. Total first-half treasury-stock purchases were $595.8m.
Risks, contingencies and unusual items
- The duration and severity of COVID-19 effects remain uncertain. Risks include weaker consumer demand and discretionary spending, channel restrictions, delayed product launches and sampling, lower sponsorship opportunities, and potential supplier, co-packer or distributor disruptions.
- Customer and distributor concentration is relevant: Coca-Cola Consolidated represented about 13% of Q2 sales, Reyes Coca-Cola Bottling about 11%, and Coca-Cola European Partners about 8%.
- Accrued loss contingencies were approximately $17.5m. Management stated that litigation in aggregate was not expected to materially adversely affect financial position or results, based on information known to the company. Unrecognized tax benefits were approximately $3.0m, with $0.4m of accrued interest and penalties.
- Other notable exposures include foreign-currency risk, investment credit and market risks, regulatory and product-liability matters, competition, dependence on TCCC distribution relationships, and potential changes in consumer preferences or energy-drink regulation.
Important facts for investors to verify
- Whether sales and case volumes recover in convenience and gas channels, and whether the improvement seen late in Q2 continues.
- Whether Strategic Brands sales stabilize, particularly in EMEA, and how the European buying-group dispute affects distribution.
- Whether Q2 expense savings from cancelled or postponed events recur, or deferred sponsorship costs return in later periods.
- Whether accounts-receivable growth and working-capital movements affect cash conversion; first-half operating cash flow declined despite higher net income.
- How planned capital spending and continued repurchases affect liquidity, and whether management’s COVID-19 outlook and sub-$150m capex estimate remain valid.