Monster Beverage Corporation — FY2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020; it is not a standalone Q4 filing. Monster develops, markets and distributes energy drinks, primarily through third-party bottlers and co-packers. Its principal segments are Monster Energy Drinks, Strategic Brands and Other. The company reported record annual net sales and record Q4 net sales despite COVID-19 disruption.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $4.599 billion | $4.201 billion | +9.5% |
| Gross profit / margin | $2.724 billion / 59.2% | $2.519 billion / 60.0% | Gross profit +8.2%; margin down 0.8 percentage points |
| Operating income / margin | $1.633 billion / 35.5% | $1.403 billion / 33.4% | +16.4% |
| Net income / margin | $1.410 billion / 30.7% | $1.108 billion / 26.4% | +27.2% |
| Diluted EPS | $2.64 | $2.03 | +30.0% |
| Net cash from operating activities | $1.364 billion | $1.114 billion | +$250 million |
- Case sales rose 12.5% to 504.8 million 192-ounce case equivalents, while average net sales per case fell 2.8% to $9.06.
- FY2020 net sales were $4.305 billion for Monster Energy Drinks (+10.3%), $266.4 million for Strategic Brands (-3.1%), and $27.0 million for Other (+23.7%). International sales were $1.51 billion, about 33% of total sales.
- Q4 net sales were $1.196 billion versus $1.017 billion in Q4 2019; Q4 net income was $471.7 million versus $255.0 million. Q4 gross profit was $690.7 million.
- At year-end, cash and cash equivalents were $1.180 billion and investments were $925.6 million, for $2.106 billion combined. Working capital was $2.39 billion. Total assets were $6.203 billion and stockholders’ equity was $5.161 billion.
- The filing reports no outstanding borrowings under its credit facilities at December 31, 2020. Available facilities included a $10 million revolving line and a $15 million China working-capital line. Lease liabilities and purchase commitments remain; the filing does not present material funded debt.
- FY2020 investing cash outflow was $472.5 million and financing cash outflow was $526.1 million, primarily reflecting investment purchases and $595.9 million of common-stock repurchases. Capital expenditures, excluding repurchases, were estimated at approximately $150 million through December 31, 2021.
Material changes versus the prior year
- Volume growth, led by Monster Energy and Reign, drove higher sales; COVID-19 weighed on demand, particularly in Q2 and in Strategic Brands markets in EMEA. Strategic Brands revenue declined 3.1%.
- Gross margin fell to 59.2%, primarily from product returns, related inventory provisions and costs, and geographic sales mix. Excluding those product-return impacts, management reported a 59.6% gross margin.
- Operating expenses declined 2.2%, mainly due to lower sponsorship, endorsement and travel costs during the pandemic, partly offset by higher payroll, digital marketing, and outbound freight and warehouse costs.
- The effective tax rate fell to 13.3% from 21.8%, principally due to a non-recurring $165.1 million tax benefit from an intra-entity transfer of intangible assets. This benefit materially contributed to net-income growth.
- Net sales were reduced by $15.2 million for product returns relating to a European formulation issue affecting a limited number of products and a labeling issue for one product in Japan. Foreign-exchange movements reduced sales by approximately $48.2 million.
Outlook, commentary, risks and unusual items
- Monster does not provide financial guidance. Management said available cash, operations and its credit facility should meet working-capital, expansion, repurchase and capital needs for at least the next 12 months.
- Management reported that supply chains remained intact and it did not foresee a material COVID-related impact on co-packing or distribution as of the filing date, but aluminum cans remained in tight supply. Renewed restrictions, channel shifts, delayed innovation and supply disruptions could affect future results.
- The company depends heavily on The Coca-Cola Company’s bottler network for distribution. Major bottlers are also significant customers; Coca-Cola Consolidated represented about 12% and Reyes Coca-Cola Bottling about 11% of FY2020 net sales.
- Other notable risks include intense competition, energy-drink regulation and taxes, product-safety and reputational exposure, raw-material and co-packing constraints, foreign-exchange movements, and consumer preference changes. The company generally does not hedge commodity input costs.
- Legal matters include a derivative action alleging discrimination and inadequate diversity oversight; motions to dismiss were pending, with a hearing scheduled for Q2 2021. Management did not expect the litigation in aggregate to materially affect financial position or results. Accrued loss contingencies were approximately $18.4 million at year-end.
- An $8.7 million intangible-asset impairment was recorded in 2020. Goodwill was $1.332 billion and other intangible assets were $1.059 billion at year-end. The company pays no cash dividend and continued its share-repurchase program.
Important facts for investors to verify
- How much FY2020 earnings growth depended on the one-time $165.1 million tax benefit, and what normalized tax rate may apply going forward.
- Whether volume growth can be sustained while average net sales per case and gross margin are under pressure.
- How COVID-19 restrictions and aluminum-can availability affect demand, product launches, distribution and margins in 2021.
- Whether reliance on Coca-Cola’s distribution network and a small number of large bottlers creates meaningful commercial or customer-concentration risk.
- Developments in the product-return matters, the derivative litigation and other regulatory or product-related proceedings.