Monster Beverage Corporation — Q3 2017 Form 10-Q
Period: Quarter and nine months ended September 30, 2017. Unaudited results; comparisons are with the corresponding 2016 periods. Dollar figures below are in millions, except per-share data.
Business context and reporting period
Monster develops and markets energy drinks, super sodas and related products. Its reportable segments are Monster Energy Drinks, Strategic Brands and Other. Q3 net sales were a record for the company’s third fiscal quarter. The Monster Energy Drinks segment generated 91% of Q3 sales; international sales were $260.1 million, about 29% of sales, up from $190.8 million and 24% a year earlier.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $909.5 | $788.0 | $2,558.7 | $2,295.6 |
| Gross profit / margin | $569.7 / 62.6% | $503.0 / 63.8% | $1,634.1 / 63.9% | $1,443.9 / 62.9% |
| Operating income / margin | $317.4 / 34.9% | $290.4 / 36.9% | $931.7 / 36.4% | $833.6 / 36.3% |
| Net income / margin | $218.7 / 24.1% | $191.6 / 24.3% | $619.4 / 24.2% | $539.7 / 23.5% |
| Diluted EPS | $0.38 | $0.33 | $1.07 | $0.89 |
| Operating cash flow | Not separately provided | Not separately provided | $790.1 | $420.7 |
Q3 case sales rose 16.2% to 96.2 million 192-ounce case equivalents; nine-month case sales rose 12.5% to 273.4 million. Average net sales per case declined 0.5% in Q3 to $9.40 and 1.1% for nine months to $9.30, primarily due to geographic mix.
At September 30, cash and cash equivalents were $465.6 million and short- and long-term investments totaled approximately $637.4 million. Current assets were $1,934.3 million versus current liabilities of $597.7 million (working capital of about $1,336.6 million). The balance sheet reports no significant conventional debt; $1.1 million, including interest, was outstanding under a Chinese working-capital line and included in accounts payable. Nine-month capital expenditures for property and equipment were $67.7 million.
Material changes versus prior comparable periods
- Q3 sales increased 15.4%; nine-month sales increased 11.5%. Management attributed most of the increase to higher Monster Energy brand sales and volume, reflecting domestic and international demand.
- Q3 gross margin fell 1.2 percentage points, primarily from geographic and product mix and higher costs. Nine-month gross margin rose 1.0 point, supported in part by AFF-related raw-material savings; those savings were $79.7 million in the first nine months of 2017.
- Operating expenses grew faster than Q3 sales, up 18.7%, including higher distributor termination costs, sponsorships, payroll and freight. Nine-month operating expenses increased 15.1%; operating margin was broadly stable at 36.4% versus 36.3%.
- Distributor termination costs were $15.9 million in Q3 versus $4.7 million, and $35.9 million for nine months versus $33.4 million. These costs relate to transferring distribution rights to TCCC’s network.
- Operating cash flow increased year over year, with the $125.0 million collection of the TCCC transaction receivable a significant contributor. Cash used in financing fell to $224.3 million from $1,993.6 million, reflecting much lower share repurchases than in 2016.
- TCCC wholly owned subsidiaries represented 14% of Q3 sales versus 41% a year earlier, and 21% of nine-month sales versus 43%, as territories shifted to independent bottlers under TCCC’s refranchising. This change in customer classification should be distinguished from underlying demand.
Outlook, commentary, risks and unusual items
- The filing gives no specific revenue or earnings guidance. Management said operating cash, resources and access to credit should cover working capital, expansion, capital needs, share repurchases and the warehouse project for at least 12 months. Estimated capital expenditures, including real estate, were likely to be less than $100 million through September 30, 2018, subject to change.
- The company began transitioning to its approximately 1-million-square-foot Rialto warehouse and expected it to be fully operational by December 31, 2017. Construction commitments outstanding were $6.2 million.
- The company repurchased 4.5 million shares in Q3 for $248.8 million under a $500 million program authorized in February 2017. The filing reported about $251.1 million of remaining authorization at quarter-end.
- Legal and regulatory exposures include personal-injury lawsuits alleging harm from Monster Energy drinks and a New York Attorney General inquiry. The company disputed the lawsuits and planned to defend them; it reported $4.7 million of accrued loss contingencies. The possible outcome of the Attorney General inquiry and any resulting impact were uncertain.
- Principal risks identified include dependence on distributors and large customers, TCCC’s refranchising and commercial relationship, energy-drink regulation and consumer health concerns, competition, product demand, supply and input costs, foreign-exchange exposure, and litigation. Management said there were no material changes to the risk factors in its latest Form 10-K.
- Topic 606 revenue recognition was scheduled to take effect January 1, 2018. The company had not yet determined the potential financial-statement impact or adoption method and expected to complete its evaluation by December 15, 2017.
- Seasonality remains relevant: management said beverage demand has generally been higher in warmer months, though energy drinks and international growth may moderate that pattern.
Most important facts for investors to verify
- Whether case-volume growth continues and offsets lower average sales per case and unfavorable geographic mix.
- Whether gross-margin performance holds as AFF-related savings, product mix and international growth evolve.
- How much operating cash flow depended on the one-time TCCC receivable collection and working-capital movements.
- Progress on the Rialto warehouse, planned capital spending and remaining share-repurchase authorization.
- Developments in TCCC’s refranchising, distributor relationships and customer concentration, including the role of CCBCC Operations.
- Updates on the New York inquiry, product litigation, tax examinations and the financial impact of adopting Topic 606.