Monster Beverage Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated financial statements; amounts below are in U.S. dollars. Figures are in millions unless stated otherwise.
Business context and reporting period
Monster develops and markets energy drinks and other beverages, primarily through its Monster Energy Drinks and Strategic Brands segments. The Coca-Cola Company (TCCC) distribution network is central to its sales: TCCC subsidiaries accounted for 41% of Q3 net sales and 43% of nine-month net sales. In April 2016, Monster acquired flavor supplier American Fruits & Flavors (AFF) for $688.5 million, bringing its primary flavor supplier in-house and acquiring key flavor intellectual property.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $788.0 | $756.6 | $2,295.6 | $2,077.1 |
| Gross profit / margin | $503.0 / 63.8% | $465.5 / 61.5% | $1,443.9 / 62.9% | $1,228.9 / 59.2% |
| Operating income / margin | $290.4 / 36.9% | $291.4 / 38.5% | $833.6 / 36.3% | $665.2 / 32.0% |
| Net income / margin | $191.6 / 24.3% | $174.6 / 23.1% | $539.7 / 23.5% | $408.0 / 19.6% |
| Diluted EPS, reported | $0.99 | $0.84 | $2.67 | $2.17 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $420.7 | $351.7 |
Q3 net sales rose 4.1%; management said growth would have been 5.7% after adjusting for approximately $11 million of customer advance purchases in Q3 2015 ahead of a price increase. Case volume increased 1.8% to 82.8 million 192-ounce equivalents, while average net sales per case increased 1.5% to $9.45. Q3 gross profit benefited from $23.3 million in AFF-related raw-material savings and product mix. Operating expenses rose 22.2%, mainly from higher payroll, sponsorship and endorsement, professional-service, marketing and distributor-termination costs, leaving operating income nearly flat year over year.
For the nine months, net sales grew 10.5% and case volume grew 17.3% to 243.0 million. Reported comparisons reflect the 2015 TCCC transaction, partial-period contribution from acquired Strategic Brands, disposal of Monster Non-Energy, and a $161.5 million 2015 divestiture gain. Operating income increased 25.3%; the comparison also benefited from $187.3 million lower distributor-termination costs. Nine-month net income grew 32.3%. Average net sales per case fell 6.3% to $9.40, primarily reflecting the greater contribution of lower-revenue-per-case Strategic Brands concentrates.
Liquidity, cash flow and capital allocation
At September 30, 2016, cash and cash equivalents were $341.5 million and short- and long-term investments totaled $267.2 million. Current assets were $1,550.0 million versus current liabilities of $472.6 million. Cash plus investments therefore totaled about $608.7 million. Cash declined from $2,175.4 million at year-end 2015, principally following the $2.0 billion share repurchase. The filing presents no conventional borrowing balance; it reports $1.3 million of capital-lease obligations.
Nine-month operating cash flow was $420.7 million, up from $351.7 million. Investing activities used $266.7 million, including the $688.5 million AFF acquisition, partly offset by investment maturities. Financing activities used $1,993.6 million, primarily for share repurchases. The company repurchased 12.8 million shares in June at $156 per share for $2.0 billion. A further authorization of up to $250 million was approved in August; no shares had been repurchased under it by September 30, though 0.1 million shares were purchased afterward.
Management said cash from operations, available cash and access to credit should cover working capital and planned needs for at least 12 months. It estimated capital expenditures, including property purchases, would be below $150 million through September 30, 2017, subject to change. The company bought approximately 49 acres in Rialto, California, for $39.1 million and entered into a $36.8 million construction contract for a planned warehouse and distribution facility.
Outlook, risks and unusual items
- The filing provides no numerical revenue or earnings guidance. Management described continued portfolio and international-market development, but cautioned that actual results could differ materially from forward-looking statements.
- Key risks include dependence on TCCC-related distribution and customers, successful transfer of distribution rights, consumer demand and competition, foreign exchange exposure, raw-material and co-packing availability, and energy-drink regulation and public scrutiny. Foreign-currency movements reduced Q3 net sales by approximately $2.6 million and nine-month net sales by approximately $19.0 million.
- Product-liability, consumer-class-action and government-inquiry matters remain outstanding. The San Francisco City Attorney case was set for trial in April 2017; the company disputes the claims. Management could not estimate a reasonably possible loss range for the principal proceedings. Accrued loss contingencies were approximately $2.1 million.
- Other commitments included $55.0 million of raw-material purchase commitments, $140.9 million of sponsorship and marketing obligations, and $18.6 million of operating leases. The Rialto construction contract is also a commitment.
- The effective tax rate fell to 33.8% in Q3 from 39.4%, partly due to deductions and a one-time benefit related to a prior-period domestic production deduction. Nine-month rates were 35.2% and 38.4%, respectively.
- Subsequent to quarter-end, the company approved a 3-for-1 stock split, with shares scheduled for distribution November 9, 2016. Split-adjusted diluted EPS was $0.33 for Q3 2016 and $0.89 for the first nine months of 2016.
Most important facts for investors to verify
- Whether underlying volume and sales growth continues after adjusting for prior-year advance purchases and the TCCC transaction’s effects on comparability.
- Whether AFF delivers sustained cost savings and whether the preliminary $688.5 million purchase-price allocation, including $618 million of non-amortizing flavor formulas, is finalized as expected.
- How TCCC’s role as distributor, customer and significant shareholder affects sales concentration, distribution transitions and future economics.
- Whether operating expenses, promotional allowances and share-based compensation continue to rise, and how they affect operating margins.
- Developments and potential financial effects of product-safety litigation, the San Francisco case and regulatory inquiries.
- The use of remaining cash, future repurchases, capital spending and the planned Rialto facility; also verify share and EPS comparisons on the post-split basis.