Monster Beverage Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. The company develops, markets and sells alternative beverages, primarily energy drinks, through Direct Store Delivery (DSD) and Warehouse segments. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Net sales | $454.6 million | $356.4 million; up 27.5% |
| Gross profit / margin | $241.2 million / 53.1% | $185.5 million / 52.1% |
| Operating income / margin | $126.3 million / 27.8% | $88.5 million / 24.8% |
| Net income / net margin | $76.1 million / 16.7% | $55.0 million / 15.4%; net income up 38.3% |
| Diluted earnings per share | $0.41 | $0.29; up 39.7% |
| Operating cash flow | $36.8 million | $23.6 million |
| Cash and cash equivalents | $391.4 million at March 31 | $359.3 million at December 31, 2011 |
| Short- and long-term investments | $441.5 million at March 31 | $434.5 million at December 31, 2011 |
| Current assets / current liabilities | $1,284.5 million / $288.1 million | At March 31, 2012 |
| Debt and lease obligations | No material funded debt balance is presented; capital lease obligations were $1.3 million | Principal debt payments were $0.6 million in the quarter |
Investing activities used $20.0 million, including $14.5 million for property and equipment. Financing activities provided $2.6 million. Cash increased by $32.1 million during the quarter. Working-capital uses included increases in receivables and inventories and a decrease in accrued promotional allowances.
Material changes and business drivers
- Case sales rose 28.0% to 44.4 million 192-ounce case equivalents. Management attributed sales growth chiefly to higher Monster Energy volume from consumer demand in existing markets and international expansion; pricing had no material effect. Average net sales per case decreased 0.4% to $10.24.
- Energy drinks generated $418.9 million, or about 92% of net sales; Monster Energy represented 91.6% of net sales. DSD sales increased 28.8% to $431.2 million. Warehouse sales increased 8.0% to $23.4 million.
- Gross margin improved by 1.0 percentage point, which management attributed partly to operating efficiencies, product mix and lower costs for certain products. Operating expenses rose 18.3%, slower than sales growth, and declined as a share of net sales to 25.3% from 27.2%.
- Gross sales, a company-defined non-GAAP operating measure, increased 26.9% to $517.3 million. Promotional and other allowances rose 22.5% to $62.7 million, but decreased to 12.1% of gross sales from 12.6%.
- Sales outside the U.S. were $79.2 million, or 17.4% of net sales, versus $55.5 million, or 15.6%, a year earlier. Coca-Cola Refreshments represented approximately 30% of net sales in both periods.
Outlook, risks and unusual items
- Management expected cash and operating resources, together with the revolving credit facility, to cover working-capital, expansion and other needs for at least the next 12 months. Estimated capital expenditures were less than $50 million through March 31, 2013, subject to change with business opportunities. The filing does not provide a specific revenue or earnings forecast.
- Q1 launches included Monster Rehab Tea + Orangeade + Energy, Übermonster Energy Brew and Hansen’s Coconut Water. The company also acquired a Corona, California office building for $9.7 million for intended future headquarters use.
- Operating losses in international markets were $4.3 million, compared with $3.2 million a year earlier. The effective tax rate increased to 39.9% from 38.0%, primarily due to a full valuation allowance on a foreign subsidiary’s deferred tax assets and tax-rate differences on intercompany charges.
- Investment risks include credit, liquidity, market and interest-rate exposure. Auction-rate securities had a $21.9 million carrying value, including $3.3 million of available-for-sale securities and $18.6 million of trading securities; Level 3 fair values depend on model assumptions. The company redeemed the remaining $15.7 million par value under its 2010 auction-rate securities put option during the quarter.
- Commitments included $64.6 million of raw-material purchase obligations, $121.2 million of sponsorship and marketing obligations, and $17.6 million of operating leases. Most purchase commitments were expected to be satisfied within one year.
- Legal matters included a proposed settlement of the Blue Sky labeling class action, pending final approval, a Canadian consumer class action seeking CDN$25 million plus costs and interest, and securities litigation for which the potential loss could not be estimated. Management stated it did not expect the Blue Sky settlement or Canadian claim to materially affect the company; it intends to defend the securities action.
- Key risks identified by management include reliance on energy drinks and major customers, competition, consumer demand and regulatory scrutiny of energy drinks, international expansion and foreign exchange, distributor and co-packer performance, raw-material costs and availability, and litigation. The company did not hedge commodity or foreign-exchange exposure.
Investor facts to verify
- Whether Monster Energy growth and the improved gross and operating margins continued in subsequent quarters.
- Customer concentration: Coca-Cola Refreshments accounted for about 30% of net sales; assess the effect of any change in its purchasing or distribution relationship.
- Cash conversion and working-capital trends, especially receivables, inventories and promotional allowances.
- Valuation, liquidity and recovery prospects for auction-rate securities and related put options.
- Updates on litigation, the foreign subsidiary tax valuation allowance, and the company’s stated capital-expenditure outlook.