Monster Beverage Corporation — Q1 2018 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. Monster develops and sells energy drinks, sodas and related products through its Monster Energy Drinks, Strategic Brands and Other segments. Monster Energy-branded drinks generated 91.6% of net sales.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $850.9 million | $742.1 million | +14.7% |
| Gross profit | $515.3 million | $480.9 million | +7.2% |
| Gross margin | 60.6% | 64.8% | −4.2 percentage points |
| Operating income | $279.9 million | $264.3 million | +5.9% |
| Operating margin | 32.9% | 35.6% | −2.7 percentage points |
| Net income | $216.1 million | $178.0 million | +21.4% |
| Diluted EPS | $0.38 | $0.31 | +23.1% |
| Operating cash flow | $148.9 million | $193.0 million | −22.8% |
- Case sales rose 15.4% to 92.3 million 192-ounce case equivalents; average net sales per case declined 0.4% to $9.17.
- Monster Energy Drinks segment sales increased 16.7% to $780.5 million. Strategic Brands sales declined 3.3% to $65.8 million; Other sales declined 15.9% to $4.7 million.
- At March 31, cash and cash equivalents were $511.4 million, short- and long-term investments totaled $588.7 million, and current assets were $2.04 billion against current liabilities of $534.0 million. The company reported $10.6 million outstanding, including interest, on a China working-capital credit line; it is included in accounts payable.
- Q1 investing cash flow was positive $75.9 million, mainly reflecting investment sales; financing cash flow was negative $246.0 million, primarily from share repurchases. Cash declined $17.3 million to $511.4 million.
Material changes and notable items
- Sales growth primarily reflected higher Monster Energy drink volume and consumer demand. Foreign exchange increased net sales by approximately $17.7 million.
- Gross margin pressure reflected higher promotional allowances, geographic and product mix, increased freight-in, aluminum and sucralose costs, and Monster Hydro production issues in the U.S. and EMEA. Promotional allowances rose 35.1% to $139.7 million, or 14.1% of gross sales versus 12.2% a year earlier.
- Operating expenses increased 8.6% to $235.3 million, including higher freight and warehousing, payroll and marketing costs; lower distributor termination costs partly offset the increases. Termination costs were $7.0 million versus $19.9 million.
- The effective tax rate fell to 23.3% from 32.8%, primarily due to the lower U.S. federal tax rate under the Tax Reform Act. Related tax accounting remained provisional; the company reported no additional measurement-window adjustments in Q1.
- Adoption of ASC 606 reduced reported Q1 net sales and operating expenses by $9.9 million each, with no stated impact on operating income. Prior-year results were not restated, so reported sales comparisons are not fully on the same accounting basis.
- The company repurchased 4.3 million shares for $249.9 million under its prior authorization, exhausting that plan, and authorized a new $250 million repurchase program. No shares had been repurchased under the new plan as of May 10, 2018.
Outlook, risks and contingencies
- Management said operating cash, cash resources and credit access should be sufficient for working-capital and other needs for at least the next 12 months. Estimated capital expenditures, including real estate, were expected to be less than $100 million through March 31, 2019; this estimate could change with business opportunities.
- The filing gives no specific revenue or earnings guidance. Management notes beverage seasonality, with sales typically lower in the first and fourth quarters, although energy drinks may be less seasonal.
- Key risks include demand and competition, customer or distributor concentration and changes to Coca-Cola’s bottling network, regulatory scrutiny of energy drinks and ingredients, product-liability claims, commodity and packaging costs, foreign exchange, and the company’s ability to sustain growth and manage international operations.
- Monster faces personal-injury lawsuits alleging harm from consumption of its energy drinks; it disputes the claims and intends to defend them. Other litigation includes consumer, intellectual-property and former-distributor matters. Accrued loss contingencies were approximately $1.6 million. The company said the outcome of the New York Attorney General inquiry remained uncertain, but intended to omit it from future reports due to inactivity.
- Commitments included $56.5 million of raw-material purchase obligations, $170.2 million of contractual obligations primarily for sponsorships and marketing, and $16.4 million of operating leases.
Most important facts for investors to verify
- Whether volume growth persists and promotional allowances, mix, input costs and production issues continue to weigh on gross margin.
- How much reported growth reflects foreign exchange and the ASC 606 presentation change, rather than underlying comparable sales performance.
- Whether distributor transitions and reliance on major bottlers—including Coca-Cola-related distributors—affect sales, execution or customer concentration.
- Whether operating cash flow recovers from the year-over-year decline, and how cash deployment through repurchases compares with investment and capital-spending needs.
- Developments in energy-drink regulation, product-liability litigation, the New York inquiry and provisional tax accounting.