Monster Beverage Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; unaudited. The company develops, markets and sells beverages, primarily energy drinks through its Direct Store Delivery (DSD) segment. Energy drinks generated 93% of Q3 net sales.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Year-to-date 2014 | Year-to-date 2013 |
|---|---|---|---|---|
| Net sales | $636.0m (+7.7%) | $590.4m | $1,859.3m (+9.0%) | $1,705.6m |
| Gross profit / margin | $341.9m / 53.8% | $307.5m / 52.1% | $1,008.0m / 54.2% | $895.8m / 52.5% |
| Operating income / margin | $189.9m / 29.9% | $151.4m / 25.6% | $554.6m / 29.8% | $438.2m / 25.7% |
| Net income | $121.6m (+31.9%) | $92.2m | $357.9m (+36.3%) | $262.6m |
| Diluted EPS | $0.70 | $0.53 | $2.06 | $1.51 |
Q3 case volume rose 5.1% to 62.2m 192-ounce case equivalents; average net sales per case increased 2.5% to $10.22. Management attributed growth mainly to higher Monster Energy volume from domestic and international demand and new markets, with some contribution from price increases. Gross margin improved with lower sweetener and other input costs, pricing, product mix, production efficiencies and lower promotional allowances as a share of gross sales. Operating expenses declined 2.6% in Q3 and 0.9% year to date. The effective tax rate fell to 35.6% in Q3 and 35.4% year to date, partly reflecting profits in certain foreign subsidiaries with valuation allowances on deferred tax assets.
- Cash flow: Nine-month operating cash flow was $407.0m, versus $275.8m a year earlier. Investing used $223.0m; financing provided $17.1m. Cash and equivalents increased by $197.0m to $408.3m.
- Liquidity and assets: Cash plus short- and long-term investments totaled about $1,025m at September 30, 2014. Current assets were $1,617.5m and current liabilities $370.6m. Total assets were $1,862.9m.
- Debt: The balance sheet reports no material borrowings; the filing lists $0.7m of capital-lease obligations. Nine-month debt principal payments were $1.3m.
- Segment and customer mix: DSD produced $609.9m of Q3 sales; Warehouse sales were $26.0m. Coca-Cola Refreshments USA accounted for 28% of Q3 net sales and 29% year to date. International sales were 24% of Q3 gross sales.
Material changes and strategic transaction
- Q3 net sales increased 7.7%, operating income 25.4%, and net income 31.9% year over year. Year-to-date net sales rose 9.0% and net income 36.3%.
- Monster and Coca-Cola signed definitive agreements on August 14, 2014 for a strategic energy-drink relationship, subject to closing conditions and then expected to close in early 2015. The arrangement contemplated Coca-Cola receiving approximately 16.7% of NewCo, transferring its global energy-drink brands to NewCo, and Monster transferring specified non-energy beverage brands to Coca-Cola. Coca-Cola was to pay Monster $2.15bn net, including $625m in escrow pending distribution-rights milestones; the companies also planned expanded distribution through Coca-Cola’s network.
- Warehouse sales declined 3.5% year to date, mainly from lower volume of Hubert’s lemonades and apple juice, partly offset by higher aseptic-juice sales. DSD sales increased 9.6% year to date.
Outlook, risks and contingencies
- Management said available cash, operating cash flow and access to credit should fund working capital, expansion and other expected needs for at least 12 months. Estimated capital expenditures were less than $120m through September 30, 2015, subject to change with business opportunities. No specific revenue or earnings guidance was provided.
- Management cited seasonality, competition, demand and product mix, raw-material and packaging costs, international expansion and foreign-exchange exposure as risks. The company uses short-term currency forwards as economic hedges, not for speculation; management viewed a hypothetical 10% adverse currency move as not significant.
- Energy-drink safety, marketing and labeling are subject to litigation and regulatory scrutiny. The New York Attorney General issued a second subpoena; the company moved to quash it, and the outcome and potential impact were unknown. San Francisco’s unfair-competition case was set for a February 2016 bench trial; the company disputed the allegations and could not estimate the likelihood or range of loss. Related consumer and product-safety suits also remained pending.
- A proposed securities-litigation settlement would be funded by insurers for $16.25m and, if approved, would not affect results of operations. The company reported accrued loss contingencies of $18.0m and insurance-reimbursement receivables of $16.25m at September 30, 2014. It stated that litigation in aggregate was not expected to materially adversely affect financial position or results, while acknowledging uncertainty in specific matters.
- Other commitments included $37.0m of raw-material purchase commitments, $70.6m of sponsorship and marketing obligations, and $13.3m of operating leases. The filing identifies investment credit, liquidity, market and interest-rate risks.
Important facts for investors to verify
- Whether and when the Coca-Cola transaction closed, whether its cash payment and escrow milestones were realized, and the resulting ownership, brand and distribution arrangements.
- Whether sales growth, case volume and margin improvements continued, particularly given the company’s reliance on energy drinks and its large customer concentration.
- Developments and potential financial effects of energy-drink litigation, the New York inquiry and other regulatory scrutiny.
- Cash conversion and working-capital trends, including accounts receivable, promotional allowances and the company’s planned capital spending.
- Future performance of the Warehouse segment and the impact of the planned non-energy brand transfer.