Monster Beverage Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; unaudited. Comparisons are with the same 2012 periods. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions.
Business context and financial performance
Monster develops, markets and sells beverages through Direct Store Delivery (DSD), principally energy drinks, and Warehouse, principally juice-based and soda beverages. Energy drinks generated 92.7% of Q3 net sales. Coca-Cola Refreshments USA accounted for approximately 29% of net sales in both the quarter and year-to-date period.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $590.4m | $541.9m | $1,705.6m | $1,589.2m |
| Gross profit | $307.5m | $273.6m | $895.8m | $821.8m |
| Gross margin | 52.1% | 50.5% | 52.5% | 51.7% |
| Operating expenses | $156.0m | $132.9m | $457.6m | $385.0m |
| Operating income | $151.4m | $140.7m | $438.2m | $436.7m |
| Operating margin | 25.6% | 26.0% | 25.7% | 27.5% |
| Net income | $92.2m | $86.1m | $262.6m | $272.0m |
| Diluted EPS | $0.53 | $0.47 | $1.51 | $1.47 |
| Operating cash flow | Not separately reported for the quarter | $275.8m | $218.0m |
Liquidity, cash flow and capital
- At September 30, 2013, cash and cash equivalents were $287.0m and investments were $325.3m; total cash and investments were $612.4m. Current assets were $1,278.5m versus current liabilities of $438.3m.
- Cash from operations for the nine months rose to $275.8m from $218.0m. Working-capital uses included a $104.7m increase in accounts receivable and a $46.7m increase in inventory.
- Investing activities used $246.7m, including purchases of investments, $32.6m of property and equipment, and $9.0m of intangible additions. Financing activities provided $33.7m; the company repurchased $13.4m of shares during the period.
- The filing shows no conventional debt balance on the balance sheet; it reports $1.2m of capital lease obligations. Management said available cash, operations and its revolving credit facility should fund needs for at least 12 months. Estimated capital expenditures through September 30, 2014 were less than $100m, subject to change.
Changes versus prior comparable periods
- Q3 net sales increased 8.9%; case volume increased 8.4%. Management attributed growth mainly to higher Monster Energy volumes and expansion in international markets, with pricing not a material driver. Gross sales, a company-defined non-GAAP measure, rose 8.6%.
- Q3 gross margin improved 1.6 percentage points, but operating margin declined 0.4 points as operating expenses rose 17.4%, faster than sales. Q3 net income increased 7.0%.
- For the first nine months, sales rose 7.3% and gross margin improved 0.8 points, while operating margin fell 1.8 points. Operating income was nearly flat and net income declined 3.5%, reflecting higher operating expenses, foreign-exchange losses and a higher effective tax rate.
- Q3 DSD sales increased, while Warehouse sales declined 7.9% and its contribution margin was negative $2.2m. For the nine months, Warehouse sales increased 5.3%, but contribution margin turned negative.
Outlook, commentary, risks and unusual items
- Management cited less robust Monster Energy growth in U.S. and European markets as a factor in the slower Q3 gross-sales growth rate than in Q3 2012. The filing does not provide specific sales or earnings guidance.
- Operating expenses included $10.7m of distributor termination costs for the nine months (versus $0.6m a year earlier), and professional-service cost increases tied partly to regulatory matters and litigation. Q3 also included a $2.5m non-routine indirect-tax provision. Nine-month foreign-currency transaction losses were $9.3m.
- Energy-drink labeling and safety are significant regulatory and litigation risks. The company disclosed a state attorney general inquiry, San Francisco City Attorney litigation, product-related class actions and a wrongful-death lawsuit; outcomes and, for some matters, potential loss ranges could not be estimated. The company disputes the claims and says it will defend them.
- The company was seeking U.K. tax-authority guidance on possible VAT treatment of certain sales. Estimated maximum potential pass-through VAT was $47.1m; management said any related VAT adjustment would have no income-statement effect, while a penalty was possible but not expected to be material.
- Other disclosed exposures include $34.9m of raw-material purchase commitments, $74.9m of sponsorship and marketing obligations, and $16.7m of operating lease commitments. Auction-rate securities include Level 3 valuations based on unobservable inputs, creating valuation and liquidity risk.
- Management reported disclosure controls were adequate and effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Monster Energy volume growth can sustain sales growth, particularly in the U.S. and Europe, and how international expansion affects profitability and foreign-exchange exposure.
- Whether elevated operating expenses, distributor transition costs and legal or regulatory spending continue to pressure margins and earnings.
- The status and potential financial consequences of energy-drink safety, labeling, advertising and product-liability matters; several loss outcomes were not estimable in this filing.
- Cash conversion and working-capital trends, especially receivables and inventories, alongside the planned capital expenditure level and share-repurchase activity.
- The concentration of sales through Coca-Cola Refreshments USA and the valuation, redemption and liquidity of auction-rate securities.