Monster Beverage Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Financial statements are unaudited. Monster develops and markets energy drinks through its Monster Energy Drinks, Strategic Brands and Other segments.
Financial performance
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,246.4m (+9.9%) | $1,133.6m | $3,402.4m (+6.9%) | $3,183.6m |
| Gross profit / margin | $736.5m / 59.1% | $673.0m / 59.4% | $2,033.2m / 59.8% | $1,907.8m / 59.9% |
| Operating income / margin | $458.6m / 36.8% | $395.4m / 34.9% | $1,230.9m / 36.2% | $1,085.9m / 34.1% |
| Net income | $347.7m (+16.3%) | $298.9m | $937.9m (+10.0%) | $852.9m |
| Diluted EPS | $0.65 | $0.55 | $1.75 | $1.56 |
| Operating cash flow | Not separately provided | Not separately provided | $949.2m | $821.1m |
- Q3 case volume increased 14.8% to 139.9m 192-ounce case equivalents; average net sales per case declined 4.4% to $8.85. For the nine-month period, volume rose 8.7% to 372.5m cases and average net sales per case fell to $9.08 from $9.24.
- Q3 sales growth was led by Monster Energy Drinks (+9.6%) and Strategic Brands (+12.0%). For the first nine months, Monster Energy Drinks grew 7.9%, while Strategic Brands declined 8.0%, primarily reflecting pandemic-related weakness, especially in EMEA.
- Operating expense was nearly flat in Q3 and down 2.4% year to date. Lower sponsorship, endorsement and travel costs helped margins; management said some postponed-event costs may be recognized in future periods, but could not estimate timing.
Liquidity, capital resources and other metrics
- At September 30, 2020, cash and cash equivalents were $1,074.7m, short-term investments $599.3m and long-term investments $20.6m. Current assets were $2,825.8m and current liabilities $773.8m.
- Cash from operations of $949.2m was offset by $140.5m of investing outflows and $532.9m of financing outflows, including $595.9m of treasury-stock purchases. Cash increased $276.8m during the nine months.
- The company reported no borrowing on its $15m HSBC China working-capital line at quarter-end. It paid $2.5m of debt principal during the nine months; finance lease liabilities were $1.2m. The balance sheet reports no separate material borrowing balance.
- Management expected capital expenditures, excluding share repurchases, to be less than $200m through September 30, 2021. It said operating cash, cash resources and credit access should cover expected needs for at least 12 months.
- The March 2020 share repurchase authorization was $500m; no shares were purchased under it in Q3, and $441.5m remained available as of November 6, 2020.
Outlook, risks and unusual items
- Monster reported record Q3 net sales and said pandemic effects were not materially adverse to Q3 sales overall, except in EMEA. It described a shift toward at-home consumption and e-commerce, club, mass-merchandiser and grocery channels, while food-service on-premise sales remained challenged.
- Management warned that renewed Northern Hemisphere restrictions, particularly in EMEA, could further affect demand. It reported no significant supply-chain shortages at filing, but was managing tight aluminum-can supply and cautioned that disruptions could arise.
- No specific earnings or revenue guidance was provided. Management emphasized that the pandemic’s duration and effects on demand, distribution, suppliers, marketing and innovation remained uncertain.
- An October 2020 transfer of foreign-subsidiary intangible assets is expected to produce a roughly $165m deferred tax asset and corresponding reduction in Q4 2020 income-tax provision. This is a subsequent event and does not change reported Q3 results.
- The company recorded $7m of impairment charges on a Strategic Brands trademark in the first nine months, including $3m in Q3. It also reported $16.6m of accrued loss contingencies at September 30.
- A September 2020 shareholder derivative complaint alleges fiduciary-duty and related violations concerning discrimination and diversity. The company believes the litigation is unlikely to have a material adverse effect and says it intends to seek dismissal.
- Three bottlers each represented roughly 11%–12% of Q3 sales; Coca-Cola European Partners represented about 11%. TCCC held approximately 19.3% of voting interests, and Monster disclosed significant distribution and commission arrangements with the Coca-Cola system.
Important facts for investors to verify
- Whether renewed COVID-19 restrictions, especially in EMEA, alter demand, channel mix or Strategic Brands performance.
- Whether aluminum-can availability, supply-chain continuity and postponed marketing costs affect future volume, margins or expenses.
- The Q4 and future-period accounting and cash-tax effects of the $165m deferred tax asset from the October intangible-asset transfer.
- Whether promotional allowances and geographic/product mix continue to pressure average net sales per case and gross margin.
- Developments in the derivative litigation, accrued contingencies, and reliance on major bottlers and TCCC-related distribution.
- Actual capital spending and repurchases relative to management’s stated plans and available liquidity.