Monster Beverage Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; unaudited. Unless otherwise stated, dollar figures below are in U.S. dollars. The filing was signed November 6, 2023.
Business context
Monster develops and markets energy drinks and, to a lesser extent, craft beer, hard seltzers and flavored malt beverages. Its four reportable segments are Monster Energy Drinks, Strategic Brands, Alcohol Brands and Other. Monster Energy Drinks generated about 92% of Q3 net sales. The company completed its acquisition of substantially all Bang Energy assets on July 31, 2023.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Change |
|---|---|---|---|
| Net sales | $1.856bn | $1.624bn | +14.3% |
| Gross profit / margin | $983.8m / 53.0% | $833.7m / 51.3% | Margin +1.7 pts |
| Operating income / margin | $510.5m / 27.5% | $417.9m / 25.7% | +22.2% |
| Net income / margin | $452.7m / 24.4% | $322.4m / 19.8% | +40.4% |
| Diluted EPS | $0.43 | $0.30 | +41.3% |
| Metric | Nine months 2023 | Nine months 2022 | Change |
|---|---|---|---|
| Net sales | $5.410bn | $4.798bn | +12.8% |
| Gross profit / margin | $2.856bn / 52.8% | $2.390bn / 49.8% | Margin +3.0 pts |
| Operating income / margin | $1.519bn / 28.1% | $1.190bn / 24.8% | +27.6% |
| Net income / margin | $1.264bn / 23.4% | $890.0m / 18.5% | +42.0% |
| Diluted EPS | $1.19 | $0.83 | +43.3% |
Energy drink case sales rose 11.3% in Q3 and 9.1% in the nine-month period. Average net sales per energy-drink case increased 2.0% in Q3 and 2.2% year to date. Foreign exchange reduced net sales by approximately $29.2m in Q3 and $119.6m for the nine months; reported sales growth excluding currency effects was 16.1% and 15.2%, respectively.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $1.283bn, versus $589.2m in 2022; net income was $1.264bn. Accounts receivable growth used $218.8m of cash, partly offset by lower inventories and increases in payables and promotional accruals.
- Investing cash outflow was $360.0m, including $363.4m for Bang; financing cash outflow was $433.8m, primarily reflecting share repurchases. Cash and cash equivalents increased by $466.7m to $1.774bn.
- At September 30, cash and cash equivalents were $1.774bn, short-term investments $1.237bn and long-term investments $52.6m. Current assets were $5.312bn against current liabilities of $1.179bn.
- No amounts were outstanding on the company’s $15m credit facility. Finance-lease liabilities were $7.3m; the filing reports no material borrowings otherwise. Management said available cash, operating cash flow and credit access should cover needs for at least 12 months.
- Capital expenditures, excluding repurchases, were estimated at less than $500m through September 30, 2024. The company repurchased about $488.1m of stock during the nine months; $282.8m remained available under repurchase plans as of November 6, 2023.
Material changes and management commentary
- Management attributed margin improvement mainly to prior pricing actions, lower freight-in costs and lower aluminum-can costs. Q3 gross margin would have been 53.4% excluding a $7.8m Bang inventory fair-value step-up charge.
- Q3 net sales were a record for the company’s third fiscal quarter. Management cited higher worldwide energy-drink volumes and pricing as principal growth drivers.
- Bang contributed a reported $45.4m transaction gain in Q3 interest and other income. Bang acquisition costs were $8.0m in Q3 and $15.1m year to date; these, together with the inventory step-up, partly offset Q3 earnings growth.
- The Alcohol Brands segment reported a $11.7m Q3 operating loss and a $25.2m nine-month operating loss, attributed primarily to expansion expenses and infrastructure investment. The Beast Unleashed FMB sales were $19.0m in Q3 and $73.0m for the nine months.
- There was no numerical sales or earnings forecast in the supplied filing text. Management identified risks to its outlook including Bang integration and distribution, profitability of Alcohol Brands, input costs, consumer demand, foreign exchange, regulation and reliance on bottlers/distributors.
Acquisition, contingencies and other notable items
- The preliminary Bang purchase-price allocation included $209m of non-amortizing trademarks, $23m of customer relationships and $143.2m of property and equipment. The fair-value analysis was incomplete and may be adjusted. The company expects to finalize it within 12 months of closing.
- Monster’s approximately $422m allowed unsecured claims in the Bang bankruptcy, including claims related to prior awards, were not recognized as income or assets because the company said they were not yet realized or realizable. The bankruptcy plan was confirmed October 31, 2023. Monster also entered a Bang trademark agreement with Orange Bang, including a $12.5m payment and a 2.5% royalty on Monster’s sales of products bearing the Bang name.
- Purchase commitments for raw materials were approximately $269.9m and contractual obligations, primarily sponsorships and marketing, were approximately $451.3m at quarter-end. Management said ordinary-course litigation was not expected in aggregate to materially affect financial position or results; $0.3m of loss contingencies was accrued.
- Pricing, lower freight-in and aluminum costs supported gross margin, but the company remains exposed to investment-market, interest-rate, credit and currency risks. Approximately 40% of Q3 sales were outside the U.S.; Coca-Cola Europacific Partners represented about 14% of Q3 net sales.
Important facts for investors to verify
- Whether Bang integration, distribution through Monster’s bottler network and shelf-space retention deliver expected growth, and whether the preliminary acquisition accounting changes.
- Whether gross-margin gains from pricing and lower input costs persist, particularly as commodity, freight and promotional costs change.
- Whether the Alcohol Brands segment can improve from operating losses as expansion proceeds.
- How much of reported earnings growth reflects recurring operations versus the $45.4m Bang transaction gain, and how Bang costs and inventory step-up affect comparability.
- Whether working-capital needs, capital expenditures, share repurchases and the substantial supplier and marketing commitments remain consistent with management’s liquidity assessment.
- Developments in the Bang bankruptcy claims, Orange Bang royalty obligations, customer concentration and regulatory or litigation risks.