Monster Beverage Corporation — Q1 2017 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2017, compared with the same period in 2016. Monster develops and markets energy drinks and related beverages through Monster Energy Drinks, Strategic Brands, and Other segments. The company reported record first-quarter net sales. Unless noted, dollar amounts below are in millions.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $742.1 | $680.2 | +9.1% |
| Gross profit / gross margin | $480.9 / 64.8% | $423.1 / 62.2% | +13.7% profit; +2.6 percentage points |
| Operating expenses | $216.6 | $168.4 | +28.6% |
| Operating income / margin | $264.3 / 35.6% | $254.7 / 37.4% | +3.7% income; −1.8 percentage points |
| Net income / net margin | $178.0 / 24.0% | $163.9 / 24.1% | +8.6% income |
| Diluted earnings per share | $0.31 | $0.26 | +15.8% |
| Operating cash flow | $193.0 | $109.6 | +$83.4 |
- Sales volume was 80.0 million 192-ounce case equivalents, up 10.1%. Average net sales per case declined 1.6% to $9.21, primarily due to geographic mix.
- Cash and cash equivalents were $576.3 at March 31, 2017; short- and long-term investments totaled approximately $209.8. Current assets were $1,616.8 and current liabilities $469.8.
- Cash flow from investing activities was a use of $6.3, including $19.1 of property and equipment purchases; financing activities provided $12.9. The company reported $5.7 outstanding, including interest, under a Chinese working-capital credit line with a $9.0 limit. Capital lease obligations were $1.4.
Material changes and management commentary
- Monster Energy Drinks sales increased 7.5% to $668.6; Strategic Brands sales increased 16.4% to $68.0. Other sales were $5.5, versus none in Q1 2016.
- Gross margin improved partly from approximately $23.3 of raw-material savings following the 2016 acquisition of American Fruits & Flavors (AFF), and from product mix. Management said AFF also brought its primary flavor supplier in-house and secured key flavor intellectual property.
- Operating expenses rose $48.2, including distributor termination costs of $19.9 versus $3.4 a year earlier, higher payroll and stock compensation, sponsorships and endorsements, and commissions. The higher costs restrained operating-margin growth.
- The effective tax rate fell to 32.8% from 35.8%, which management attributed primarily to a greater share of profits in lower-tax foreign jurisdictions and increased equity-compensation deductions.
- TCCC subsidiaries accounted for approximately 34% of net sales, down from 46% a year earlier. Sales outside the U.S. rose to $190.9 from $149.1, or about 26% of sales versus 22%.
Outlook, risks, contingencies and unusual items
- Management said available operating cash, cash resources and credit access should meet working-capital and other needs for at least the next 12 months. Estimated capital expenditures, including real estate, were expected to be below $150 through March 31, 2018; future opportunities could change that estimate. No earnings or revenue guidance was provided.
- The company is constructing an approximately 1-million-square-foot warehouse in Rialto, California. Of the approximately $37.6 construction contract, $22.3 remained outstanding at quarter-end. Total disclosed contractual commitments were $235.9, including sponsorship and marketing commitments, leases, raw-material purchases and construction.
- A new share repurchase program of up to $500 was authorized in February 2017; no shares had been repurchased under it as of May 5, 2017.
- Risks highlighted include reliance on major customers and distributors, energy-drink demand and regulation, product-liability and consumer litigation, foreign-exchange exposure, competition, supply availability, and execution of distribution changes involving TCCC. Foreign-exchange movements reduced Monster Energy Drinks sales by about $4.7 and increased Strategic Brands sales by about $1.0.
- The New York Attorney General’s investigation continued: in January 2017 a court denied the company’s motion to quash a subpoena and ordered compliance; possible subsequent action and impact were unknown. The company also faces energy-drink personal-injury suits and other litigation; management believed these matters were not likely to have a material adverse effect. Accrued loss contingencies were approximately $1.5.
- The company identified no material change to its previously disclosed risk factors or market-risk disclosures. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether case-volume growth can continue while average net sales per case declines, and how geographic and product mix affect margins.
- Whether AFF-related cost savings persist and whether operating expenses, including distributor-transition costs, normalize.
- Progress and remaining costs for the Rialto warehouse and the company’s actual capital spending relative to its estimate.
- Developments in the New York Attorney General inquiry and product-liability or other litigation, including potential financial exposure.
- Changes in TCCC’s share of sales, distributor arrangements, and the company’s exposure to major customers and foreign currencies.
- The impact of adopting new accounting standards; the filing said the company was still evaluating their effects, particularly for revenue recognition effective January 1, 2018.