Monster Beverage Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results. Monster develops and markets energy drinks, principally through its Monster Energy Drinks segment, with additional Strategic Brands and Other segments.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $1,016.2m | $909.5m | $2,883.0m | $2,558.7m |
| Gross profit | $607.7m | $569.7m | $1,743.2m | $1,634.1m |
| Operating income | $339.6m | $317.4m | $977.1m | $931.7m |
| Net income | $267.7m | $218.7m | $753.9m | $619.4m |
| Diluted EPS | $0.48 | $0.38 | $1.33 | $1.07 |
| Gross margin | 59.8% | 62.6% | 60.5% | 63.9% |
| Operating margin | 33.4% | 34.9% | 33.9% | 36.4% |
| Net margin | 26.3% | 24.1% | 26.2% | 24.2% |
Volume and mix: Case sales rose 15.4% in Q3 and 14.6% year to date. Monster Energy Drinks generated $935.1m of Q3 sales, up 13.0%; Strategic Brands sales were $74.4m, down 2.8%. International sales were $283.0m in Q3, approximately 28% of total sales.
Cash, liquidity and capital: Nine-month operating cash flow was $821.4m, versus $790.1m a year earlier. Capital expenditures were $49.9m. Cash and cash equivalents were $713.7m and short-term investments $457.9m at quarter-end. Current assets were $2,152.7m and current liabilities $656.4m. The filing reports $10.1m outstanding, including interest, on a working-capital credit line, recorded in accounts payable; it does not identify material funded debt elsewhere in the supplied text. Financing cash outflow was $782.2m, principally reflecting $805.1m of treasury-stock purchases.
Material changes and explanations
- Q3 net sales increased 11.7% and nine-month sales increased 12.7%; net income rose 22.4% and 21.7%, respectively. Management attributed sales growth primarily to higher Monster Energy drink volumes and consumer demand.
- Gross margin declined 2.8 percentage points in Q3 and 3.4 points year to date. Management cited higher aluminum-can, inbound-freight and other input costs; promotional allowances; product and geographic mix; and the revenue presentation effect of ASC 606. Operating margin also declined.
- The 2018 adoption of ASC 606 reduced reported net sales by $11.6m in Q3 and $33.8m year to date, principally by moving certain TCCC-related commissions from operating expenses to a reduction of sales. Management reported that, absent adoption, 2018 sales and operating expenses would each have been higher by those amounts; the change did not affect operating income.
- Q3 sales included an estimated $16.0m from customer purchases brought forward ahead of a November 1 price increase. Foreign exchange reduced Q3 sales by approximately $5.3m; it benefited nine-month sales by approximately $29.2m.
- The effective tax rate fell to 21.8% in Q3 and 23.3% year to date, from 31.9% and 33.7%. Management primarily attributed the decrease to the U.S. tax-rate reduction under the Tax Reform Act and lower foreign income subject to U.S. tax. Tax accounting effects remained provisional.
Outlook, risks and unusual items
- Management stated that available operating cash, cash resources and credit access should cover working-capital and other needs for at least the next 12 months. It estimated capital expenditures would be below $100m through September 30, 2019, subject to change with business opportunities. The filing provides no specific revenue or earnings forecast.
- Two share-repurchase programs authorized in 2018 each had a $500m ceiling. As of November 8, $196.7m remained under the May program and $500m under the August program.
- Monster and TCCC submitted an interpretation dispute over whether TCCC could market certain proposed energy products under a Coca-Cola-brand exception to their agreements to arbitration on October 31, 2018. TCCC said it suspended the proposed launch until April 2019; the filing says a potential loss range could not be estimated.
- The company faces product-liability claims alleging injury or death from Monster Energy drinks, along with other litigation. Management considered the claims without merit or did not expect aggregate litigation to materially affect financial position or results; accrued loss contingencies were approximately $1.4m.
- Key disclosed risks include input-cost inflation and supply availability, reliance on bottlers and large customers, distributor transitions, foreign-exchange exposure, changing consumer preferences and regulation of energy drinks. CCBCC Operations accounted for about 14% of sales and Reyes Coca-Cola Bottling about 13% in Q3.
- Distributor termination costs were $14.1m in Q3 and $26.6m year to date, down from $15.9m and $35.9m in the comparable periods. Deferred revenue from distribution arrangements totaled $363.2m at September 30.
Important facts for investors to verify
- How much of reported Q3 growth reflected underlying demand versus the estimated $16.0m of advance purchases ahead of the price increase.
- Whether volume growth can offset ongoing margin pressure from input costs, promotions and geographic/product mix.
- The effect of ASC 606’s commission presentation change when comparing 2018 with prior periods.
- Progress in the TCCC arbitration, distributor transitions and customer concentration, including the continuing importance of major bottlers.
- Future capital allocation: repurchases, planned capital spending and the company’s substantial cash and investment balances.
- Final tax effects under the Tax Reform Act and developments in product-liability and other litigation.