Monster Beverage Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited results are compared with the corresponding 2017 periods. The company develops, markets and distributes energy drinks, sodas and beverage concentrates, principally through its Monster Energy Drinks segment.
Financial performance
| Metric | Q2 2018 | Change year over year | Six months 2018 | Change year over year |
|---|---|---|---|---|
| Net sales | $1,015.9 million | +12.0% | $1,866.8 million | +13.2% |
| Gross profit | $620.3 million | +6.3% | $1,135.5 million | +6.7% |
| Gross margin | 61.1% | 64.3% prior year | 60.8% | 64.5% prior year |
| Operating income | $357.6 million | +2.2% | $637.5 million | +3.8% |
| Operating margin | 35.2% | 38.6% prior year | 34.2% | 37.2% prior year |
| Net income | $270.1 million | +21.3% | $486.2 million | +21.4% |
| Diluted EPS | $0.48 | +$0.09 | $0.85 | +$0.16 |
| Operating cash flow | — | $501.3 million | $533.2 million prior year |
Case sales rose 13.2% in Q2 and 14.2% in the first half. Monster Energy Drinks segment sales increased 14.0% in Q2 and 15.2% for the first half; Strategic Brands sales declined 6.8% and 5.3%, respectively. International sales were 29% of Q2 net sales, compared with 27% a year earlier.
Gross-margin pressure reflected higher promotional allowances, input costs (including aluminum cans), product and geographic mix, and Monster Hydro production issues in the U.S. and EMEA. Operating expenses increased 12.5% in Q2 and 10.6% in the first half, including higher freight and warehouse, payroll, marketing and sponsorship costs.
Liquidity, capital allocation and obligations
- At June 30, cash and cash equivalents were $659.7 million and short-term investments were $211.1 million, versus $528.6 million and $672.9 million, respectively, at year-end 2017. Current assets were $1,828.7 million and current liabilities $614.2 million.
- Operating cash flow was $501.3 million for the first half, down from $533.2 million. Higher accounts receivable used $154.4 million of cash, partly offset by a $105.0 million decrease in prepaid income taxes.
- First-half investing activities provided $426.2 million, primarily reflecting net investment sales. Financing activities used $792.5 million, principally for share repurchases.
- The company repurchased approximately 10.6 million shares for $553.1 million during Q2 under its February and May programs; total first-half treasury-stock purchases were $805.1 million. After quarter-end, it authorized another $500 million program. No dividend guidance is stated.
- The filing reports $11.2 million outstanding, including interest, on a China working-capital credit line, included in accounts payable. It reports no material change in market risk. The company expected capital expenditures to be below $100 million through June 30, 2019.
- Contractual obligations totaled $221.5 million, including $154.2 million primarily for sponsorships and marketing, $50.0 million in raw-material purchase commitments, and $16.3 million in operating leases.
Changes, outlook and risks
- Tax and accounting: The lower U.S. statutory tax rate under the 2017 Tax Reform Act contributed to effective tax rates falling to 24.6% in Q2 and 24.0% for the first half, from 35.9% and 34.6%. The company said its tax accounting remained provisional and could change. ASC 606 adoption reduced reported net sales by $12.2 million in Q2 and $22.2 million for the first half by presenting certain TCCC commissions as deductions from sales rather than operating expenses; the filing reports no corresponding change in operating income from that reclassification. Prior-year results were not restated.
- Other unusual items: Distributor termination costs were $5.5 million in Q2 and $12.5 million in the first half, compared with $0.2 million and $20.1 million in the prior-year periods. Foreign exchange movements increased Q2 net sales by approximately $16.8 million and first-half net sales by $34.5 million.
- Outlook: No specific revenue or earnings forecast is provided. Management said available cash, operations and credit access should meet working-capital, investment and other needs for at least 12 months. It continued to emphasize product development and international expansion.
- Risks and contingencies: Key exposures include dependence on bottlers, distributors and large customers; TCCC’s refranchising and commercial arrangements; competition and energy-drink demand; regulation, taxation and product-safety scrutiny; input costs and supply availability; foreign exchange; and litigation. Product-liability suits allege injuries or deaths associated with Monster drinks; the company disputes the claims and expects no material adverse effect. Accrued loss contingencies were approximately $3.3 million.
Important facts for investors to verify
- Whether volume growth and demand persist, particularly in Monster Energy Drinks, and whether Strategic Brands sales stabilize.
- How much margin pressure from promotions, product/geographic mix, input costs and production issues continues.
- The comparability of reported sales and per-case metrics after ASC 606, and the final impact of Tax Reform Act accounting.
- Whether working-capital movements, especially receivables, affect future operating cash conversion.
- The pace and funding of repurchases, remaining authorization, and the effect on cash and share count.
- Developments in distributor relationships, customer concentration, product-related litigation and regulatory scrutiny.