Celsius Holdings, Inc. — Q1 2024 Form 10-Q Summary
Business context and reporting period
Celsius develops, markets, sells and distributes functional energy drinks and liquid supplements in the United States and selected international markets. The company operates as one reportable segment. This unaudited filing covers the three months ended March 31, 2024, compared with the three months ended March 31, 2023.
PepsiCo remained the primary U.S. distribution partner and accounted for 59.2% of revenue. Pepsi also became the exclusive Canadian distributor in January 2024. The company entered or announced distribution arrangements with Suntory for the United Kingdom, Ireland, Australia, New Zealand and France.
Key financial metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $355.7 million | $259.9 million | Up 37% |
| Gross profit | $182.2 million | $113.8 million | Up 60% |
| Gross margin | 51.2% | 43.8% | Up approximately 7.4 percentage points |
| Income from operations | $83.2 million | $44.9 million | Up 85% |
| Operating margin | 23.4% | 17.3% | Improved |
| Net income | $77.8 million | $41.2 million | Up 89% |
| Net income attributable to common stockholders | $64.8 million | $31.5 million | Up 106% |
| Basic diluted EPS | $0.28 / $0.27 | $0.14 / $0.13 | Improved |
| Operating cash flow | $134.6 million | $(13.8) million | Improved by $148.4 million |
Revenue growth was driven primarily by North America, which increased 37% to $339.5 million, supported by gains in distribution points and SKUs per location. Europe increased 63% to $14.1 million, while Asia-Pacific revenue declined 46% to $0.7 million.
SG&A increased 44% to $99.0 million, including higher marketing, storage and distribution, employee and consulting costs. Advertising expense increased to approximately $46.5 million from $31.0 million. Interest income increased to $9.6 million from $4.9 million because of higher cash balances and market yields.
Balance sheet, liquidity and capital resources
- Cash and cash equivalents were $879.5 million at March 31, 2024, up from $756.0 million at December 31, 2023.
- Working capital was approximately $999.8 million, compared with $928.3 million at year-end 2023.
- Total assets were $1.65 billion and total liabilities were $483.5 million.
- The filing does not report conventional funded debt. Lease liabilities were approximately $2.0 million in aggregate, and Series A preferred stock held by Pepsi was presented as $824.5 million of mezzanine equity, with a $550.0 million liquidation preference.
- Operating cash flow was $134.6 million; investing cash flow was $(4.5) million, primarily for property and equipment; financing cash flow was $(5.9) million, primarily due to $6.8 million of preferred dividends.
- Cash resources were described by management as sufficient for short- and long-term needs. Purchase commitments were $73.0 million and long-term contractual obligations were approximately $42.5 million at March 31, 2024.
Material changes versus the prior comparable period
- Revenue increased $95.8 million, while gross profit increased $68.4 million and gross margin expanded materially.
- Operating income increased $38.3 million despite a $30.1 million increase in SG&A.
- Net income attributable to common stockholders more than doubled, although preferred dividends and participating preferred allocations reduced earnings available to common stockholders.
- Operating cash flow changed from a $13.8 million use to a $134.6 million source, principally due to operational growth and favorable timing of cash receipts associated with Pepsi-related sales.
- Inventory declined to $197.5 million from $229.3 million at December 31, 2023, while accrued promotional allowances increased to $129.2 million from $99.8 million.
- Promotional allowances deducted from revenue increased to $95.0 million from $65.5 million.
- The company entered into Amendment No. 1 to its Pepsi distribution agreement on March 23, 2024, establishing an incentive program. The filing states that the ultimate impact on revenue and margin depends on achieving the program’s intended outcomes.
Guidance, outlook, commentary and risks
The filing does not provide quantitative full-year revenue, earnings or margin guidance. Management emphasized continued expansion of the Pepsi relationship, international distribution and product innovation. Sales in Australia and New Zealand and France are expected to begin in the fourth quarter of 2024.
- Customer concentration is significant: Pepsi represented 59.2% of Q1 revenue and 67.9% of accounts receivable at March 31, 2024. Costco represented 10.2% of revenue.
- The company identified exposure to raw-material and packaging costs, including aluminum cans and sweeteners, and generally does not hedge commodity prices.
- A material weakness in internal control over financial reporting, involving revenue recognition, promotional allowances and inventories, was not fully remediated as of March 31, 2024. Disclosure controls were therefore deemed ineffective.
- The SEC continues a non-public fact-finding inquiry initiated in 2021. The company cannot predict its duration, scope, results or potential impact.
- A derivative action was refiled in April 2024 after related actions were dismissed or remained stayed. The company believes the claims lack merit but is negotiating a potential settlement.
- In the Strong Arm Productions litigation, the company faces a jury judgment of $82.6 million plus interest. It is appealing, believes the full judgment is not probable, and has accrued an amount at the low end of an estimated $2.1 million to $82.6 million range plus interest.
- Other risks include dependence on distributors and co-packers, demand forecasting, competition, regulatory or labeling actions involving energy drinks, advertising and endorsement risks, international expansion, cybersecurity and management of rapid growth.
Important facts for investors to verify
- Whether the Pepsi incentive program improves or pressures revenue, gross margin and promotional allowances.
- The sustainability of the 51% gross margin and the extent to which lower input and freight costs persist.
- Progress toward remediating the material weakness in revenue, promotional allowance and inventory controls.
- The status and potential financial exposure of the Strong Arm appeal and refiled derivative litigation.
- Pepsi’s continuing distribution performance and the effect of customer concentration on receivables and liquidity.
- Execution and initial sales timing for the Suntory-led international expansions.
- Whether operating cash flow remains strong after considering inventory, receivables, promotional allowances and planned growth investments.