Monster Beverage Corporation — Q3 2015 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2015, compared with the same 2014 periods. On June 12, 2015, Monster completed its strategic transaction with The Coca-Cola Company (TCCC): Monster acquired TCCC’s global energy-drink business and brands, transferred its non-energy business to TCCC, issued TCCC approximately 34.0 million shares, and received $2.15 billion in cash consideration. The transaction changed the company’s segments and makes year-over-year comparisons less directly comparable.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $756.6 million | $636.0 million | $2,077.1 million | $1,859.3 million |
| Gross profit | $465.5 million | $341.9 million | $1,228.9 million | $1,008.0 million |
| Gross margin | 61.5% | 53.8% | 59.2% | 54.2% |
| Operating income | $291.4 million | $189.9 million | $665.2 million | $554.6 million |
| Net income | $174.6 million | $121.6 million | $408.0 million | $357.9 million |
| Diluted EPS | $0.84 | $0.70 | $2.17 | $2.06 |
- Q3 sales increased 19.0%, net income 43.6%, and diluted EPS 20.2%. Case sales rose 30.7% to 81.3 million 192-ounce case equivalents.
- Nine-month sales increased 11.7%, net income 14.0%, and diluted EPS 5.5%; case sales rose 15.2% to 207.1 million cases.
- Q3 operating margin was 38.5%, versus 29.9%. Nine-month operating margin was 32.0%, versus 29.8%.
- For the nine months, reported results included a $161.5 million gain on the Monster Non-Energy sale, $39.8 million of accelerated deferred-revenue recognition, and $220.7 million of distributor termination costs. The termination costs substantially increased operating expenses.
- Q3 sales benefited by an estimated $11 million from customer purchases ahead of an August price increase. Management reported foreign-exchange sales headwinds of $28.6 million in Q3 and $64.6 million for the nine months across Finished Products and Concentrate.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $47.8 million, down from $407.0 million. Management attributed the decline primarily to a $303.9 million excess tax benefit from stock-based compensation, alongside working-capital movements, including higher receivables and prepaid taxes.
- Investing activities used $408.7 million; financing activities provided $1,235.2 million, including $1,691.1 million from share issuance and $759.0 million of treasury-stock purchases. Cash increased by $870.4 million to $1,240.7 million.
- At September 30, cash and cash equivalents were $1,240.7 million, short-term investments $1,544.7 million, and long-term investments $34.4 million. Current assets were $3,750.6 million and current liabilities $504.6 million.
- No material conventional borrowing balance is presented on the balance sheet; capital lease obligations were $0.7 million. The filing reports $10.6 million of operating lease commitments.
- Stockholders’ equity was $4,654.6 million. The company repurchased $387.5 million of shares during Q3 under its repurchase plans and authorized a new $500 million program.
Outlook, risks and unusual items
- Management said available operating cash, cash resources and access to credit should cover working-capital and other needs for at least 12 months. It estimated capital expenditures would be less than $120 million through September 30, 2016. No specific revenue or earnings guidance was provided.
- As of November 6, 2015, about 89% of target U.S. case sales distribution rights had transitioned to TCCC’s network. $125 million remained in escrow; management considered achievement of the release milestones probable and expected further transition steps.
- CCR accounted for about 41% of net sales in Q3 and in the first nine months, creating significant customer concentration. TCCC became a shareholder with more than 10% of voting interests and a related-party distributor and commission recipient.
- Risks include execution and potential disruption from distribution changes, foreign-exchange exposure, customer concentration, product-safety and advertising litigation, and regulatory scrutiny of energy drinks. The San Francisco City Attorney case was set for trial beginning February 8, 2016; the company said it could not estimate a reasonably possible loss range. Accrued loss contingencies were approximately $2.8 million.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether distribution transitions meet escrow milestones and when the remaining $125 million is released.
- How underlying sales, margins and cash generation perform excluding transaction-related costs, deferred-revenue recognition, the sale gain, and Q3 advance purchases.
- Whether operating cash flow improves after the unusually large stock-compensation tax benefit and working-capital effects.
- Whether customer concentration, TCCC-related arrangements, and the new distribution model affect pricing, sales, costs or bargaining power.
- Developments in product-related litigation and regulatory inquiries, including any change in potential exposure.