Monster Beverage Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; figures are unaudited. Monster develops, markets and sells alternative beverages. Energy drinks are the core business, sold mainly through its Direct Store Delivery (DSD) segment.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $592.6m | $462.1m | $1,047.2m | $818.6m |
| Gross profit / margin | $307.0m / 51.8% | $244.2m / 52.8% | $548.2m / 52.3% | $429.8m / 52.5% |
| Operating income / margin | $169.8m / 28.6% | $132.5m / 28.7% | $296.1m / 28.3% | $220.9m / 27.0% |
| Net income | $109.8m | $84.2m | $185.9m | $139.3m |
| Diluted EPS | $0.59 | $0.45 | $1.00 | $0.74 |
- Q2 net sales rose 28.2% year over year; six-month sales increased 27.9%. Case volume grew 29.9% in Q2 and 29.1% for the half-year. Average net sales per case fell 1.3% in Q2 and 0.9% for the half-year.
- Monster Energy-branded drinks accounted for 92.5% of Q2 net sales and drove about 98% of the Q2 net sales increase. DSD generated 95.8% of Q2 sales; Warehouse sales declined 3.4% in the quarter.
- Gross margin contracted in Q2, attributed to geographic mix, higher promotional allowances as a share of gross sales, and production variances and product damage, particularly in Japan and Korea. Six-month gross margin was also slightly lower. Operating expense as a share of sales improved, supporting higher six-month operating margin.
- At June 30, cash and cash equivalents were $419.2m and short- and long-term investments were $471.9m. Current assets were $1,414.3m versus current liabilities of $299.8m. No clear conventional funded-debt balance is presented; the filing lists $1.1m of capital lease obligations and $1.1m of debt principal payments for the half-year.
- Six-month operating cash flow was $110.1m, down from $124.0m. Receivables increased $87.8m and inventories $44.3m, absorbing cash; net income was $185.9m. Investing activities used $57.5m, financing activities provided $8.3m, and cash increased $59.8m.
Changes, outlook, and risks
- Management attributed growth mainly to higher volume from domestic and international demand and expansion into new markets; pricing was not a material driver. Q2 foreign exchange reduced gross sales by about 1%, while initial Japan launch inventory purchases added about 1%.
- New products introduced in the first half included Monster Rehab Tea + Orangeade + Energy, Ubermonster Energy Brew, and Hansen’s Coconut Water. International sales represented 23% of Q2 gross sales, up from 19% a year earlier.
- Management said available cash, operating cash generation and the revolving credit facility should fund working capital and planned needs for at least 12 months. Estimated capital expenditures through June 30, 2013 were less than $50m, subject to change. No specific earnings or revenue guidance was provided.
- Key exposures include dependence on Monster Energy and large customers (Coca-Cola Refreshments represented 28% of Q2 net sales), competition, distributor execution, international operating and currency risks, and raw-material and fuel costs. The company does not hedge commodity or foreign-exchange exposure.
- In July 2012, a state attorney general subpoenaed the company regarding Monster Energy advertising, marketing, promotion, ingredients, usage and sales. The inquiry was at an early stage; outcomes and potential effects were unknown. The filing also describes pending consumer and securities litigation; management said the loss range for the securities action could not be estimated. An appeal was pending in the Blue Sky settlement matter.
- Liquidity and valuation considerations include auction-rate securities: $28.3m face value had a $20.9m carrying value, with Level 3 estimates subject to unobservable assumptions. Q2 results may also reflect seasonality; the filing cautions that interim results may not indicate full-year performance.
Important facts for investors to verify
- Whether volume growth and international expansion persist, and how much sales growth depends on Monster Energy and initial distributor inventory orders.
- Whether promotional spending, product mix, geographic mix, and production issues continue to pressure gross margin and sales per case.
- Developments in the state attorney general inquiry, the Canadian labeling class action, and the securities litigation.
- Customer concentration and the company’s ability to manage receivables and inventory, given their substantial first-half cash use.
- Valuation, liquidity and recovery outlook for auction-rate securities, and actual capital spending versus management’s estimate.