Monster Beverage Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Although the request identifies 2013 Q4, this filing reports full-year results; fourth-quarter figures are identified separately below. Amounts are U.S. dollars.
Business context
Monster develops, markets and distributes alternative beverages. Energy drinks are the core business: Monster Energy-branded drinks represented 92.5% of net sales, while the Direct Store Delivery segment represented 95.6%. The company relies on third-party manufacturers and a distributor network; Coca-Cola Refreshments USA accounted for approximately 29% of net sales.
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Gross sales (non-GAAP measure) | $2,586.5 million | $2,373.5 million | +9.0% |
| Net sales | $2,246.4 million | $2,060.7 million | +9.0% |
| Gross profit / margin | $1,172.9 million / 52.2% | $1,065.7 million / 51.7% | Margin +0.5 percentage points |
| Operating income / margin | $572.9 million / 25.5% | $550.6 million / 26.7% | Income +4.0%; margin down |
| Net income / net margin | $338.7 million / 15.1% | $340.0 million / 16.5% | Income −0.4%; margin down |
| Diluted earnings per share | $1.95 | $1.86 | +5.2% |
| Net cash from operating activities | $342.0 million | $287.7 million | +$54.4 million |
Case sales increased 9.1% to 221.3 million 192-ounce case equivalents; average net sales per case was nearly unchanged at $10.15. Monster Energy-branded drink gross sales rose $207.4 million and accounted for 97.4% of the total gross-sales increase. International gross sales were $580.6 million, approximately 23% of gross sales.
Fourth quarter: Net sales were $540.8 million versus $471.5 million in Q4 2012; net income was $76.1 million versus $68.0 million.
At year-end, cash and cash equivalents were $211.3 million, short-term investments $402.2 million and long-term investments $9.8 million. Working capital was $867.0 million, up from $546.5 million. The company reported no borrowings on its $10 million revolving credit line; debt consisted principally of $1.3 million in capital leases. Operating cash flow was partly offset by $339.8 million of net investing outflows, chiefly investment purchases, property and equipment, and intangible assets. Financing cash outflow was $17.9 million, including $67.6 million of share repurchases.
Material changes and unusual items
- Gross margin improved, but operating expenses rose 16.5% to $600.0 million, faster than net sales; operating margin consequently declined.
- Professional-service costs increased $19.4 million, including $15.9 million related to energy-drink regulatory matters and litigation. Distributor termination costs were $10.8 million, compared with $1.5 million in 2012.
- Foreign-currency transaction losses increased to $12.9 million from $3.7 million. The effective tax rate rose to 39.9% from 38.1%, partly due to valuation allowances on certain foreign deferred tax assets.
- The company repurchased approximately $67.6 million of stock in 2013. It paid no cash dividends and did not anticipate dividends in the foreseeable future.
Outlook, risks and contingencies
Management expected available operating cash, cash resources and its credit facility to fund working capital and planned needs for at least 12 months, and estimated 2014 capital expenditures would likely be below $100 million. It did not provide revenue, margin or earnings guidance. Management cited international expansion, product innovation and cost management as priorities, while noting slower growth in U.S. and European energy-drink markets.
Key risks include the company’s substantial dependence on energy drinks; competition and changing consumer preferences; caffeine- and energy-drink-related regulation, taxes, labeling and age restrictions; currency exposure; input-cost and supply availability; reliance on a concentrated customer base, third-party co-packers and distributors; and product-liability and advertising litigation.
Pending matters include product-liability suits, a state attorney general inquiry, false-advertising and consumer claims, and the San Francisco City Attorney action alleging unlawful labeling and marketing. The company denied the allegations and said it would defend the matters; for the San Francisco action, it stated that likelihood of an unfavorable outcome and any loss range could not be estimated. A securities class action was under settlement discussions, and management expected any completed settlement to be covered by insurance. The filing does not provide a clear quantified aggregate exposure for these proceedings.
Important facts for investors to verify
- Whether energy-drink volume growth can continue amid slower market growth and heightened regulatory and public-health scrutiny.
- Whether expense growth, legal and professional fees, distributor termination costs and higher taxes continue to pressure operating and net margins.
- Developments and financial exposure in the San Francisco action, product-related litigation and state attorney general inquiry.
- Customer and production concentration, including CCR’s approximately 29% share of net sales and dependence on third-party co-packers.
- Liquidity and investment quality, including auction-rate securities and the company’s stated capital-expenditure plans.