Monster Beverage Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited results are compared with the corresponding 2016 periods. Monster develops and markets energy drinks, super sodas and related products through three reportable segments: Monster Energy Drinks, Strategic Brands and Other.
Financial performance
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Net sales | $907.1m | $827.5m | $1,649.2m | $1,507.7m |
| Gross profit | $583.5m | $517.8m | $1,064.4m | $940.9m |
| Gross margin | 64.3% | 62.6% | 64.5% | 62.4% |
| Operating income | $350.0m | $288.5m | $614.3m | $543.2m |
| Operating margin | 38.6% | 34.9% | 37.2% | 36.0% |
| Net income | $222.6m | $184.2m | $400.6m | $348.1m |
| Diluted EPS | $0.39 | $0.30 | $0.69 | $0.56 |
- Growth and volumes: Net sales rose 9.6% in Q2 and 9.4% in H1. Case sales increased 11.0% in Q2 and 10.6% in H1. Management attributed growth principally to greater domestic and international demand for Monster Energy products; Strategic Brands sales also grew.
- Margins and costs: Higher gross margins reflected raw-material cost savings from the 2016 AFF acquisition and domestic product mix, partly offset by geographic mix and other cost increases. AFF-related savings were approximately $27.5m in Q2 and $50.8m in H1 versus 2016. Lower distributor termination costs also benefited Q2 operating results: $0.2m versus $25.3m in Q2 2016. H1 termination costs were $20.1m versus $28.7m.
- Pricing and currency: Average net sales per case declined 1.2% in Q2 and 1.4% in H1, primarily due to geographic mix. Foreign exchange reduced Monster Energy Drinks sales by about $8.3m in Q2 and $12.9m in H1.
- Cash flow: H1 operating cash flow was $533.2m, compared with $247.6m in 2016. The 2017 figure included collection of a $125.0m TCCC transaction receivable and a $60.7m decrease in prepaid income taxes. Investing activities used $154.7m, mainly for investment purchases; financing provided $17.5m. Cash and cash equivalents increased to $777.7m from $377.6m at year-end.
- Liquidity and debt: At June 30, cash and cash equivalents were $777.7m, short-term investments $323.9m and long-term investments $48.6m. Current assets were $1,880.1m and current liabilities $561.2m. The filing reports $6.0m outstanding, including interest, on a China working-capital facility with a $9.0m limit; it is included in accounts payable. No other material borrowing is identified in the provided filing text.
Changes and business developments
- Monster reported record second-quarter net sales. Monster Energy Drinks generated $815.3m of Q2 sales; Strategic Brands generated $85.6m. H1 sales were $1,483.8m and $153.7m, respectively.
- International sales were $247.9m in Q2 and $438.8m in H1, up from $200.2m and $349.3m. Sales outside the U.S. represented approximately 27% of Q2 sales, compared with 24% a year earlier.
- Gross margin expansion and lower Q2 distributor termination costs contributed to faster operating-income growth than sales growth. H1 operating expenses increased 13.2%, primarily from payroll, sponsorships and endorsements, and commissions.
- TCCC-owned subsidiaries represented 17% of Q2 net sales and 25% of H1 sales, down from 42% and 44% in 2016, respectively, as certain territories transitioned to independent TCCC bottlers under North America Refranchising.
Outlook, commitments and risks
- Management said existing cash, operating cash flow and access to credit should be sufficient for working capital, growth, capital spending, share repurchases and the warehouse project for at least 12 months. Estimated capital expenditures, including real estate, were expected to be below $150m through June 30, 2018; this is an estimate, not formal earnings guidance.
- The company was constructing a roughly 1-million-square-foot warehouse in Rialto, California. The construction contract was about $37.6m, with $17.1m remaining at June 30. Other disclosed commitments included $32.6m of raw-material purchase commitments, $146.0m primarily for sponsorships and marketing, and $18.3m of operating leases.
- A new share repurchase plan authorized up to $500m in February 2017; no shares had been repurchased under it as of August 8, 2017.
- Key risks include dependence on distributors and large customers, execution of TCCC distribution transitions, consumer demand and competition, foreign exchange, input costs and supply availability, and energy-drink regulation and public scrutiny. The filing describes product-liability lawsuits and other litigation; management said it believed the personal-injury claims were without merit. A New York Attorney General subpoena dispute remained unresolved, and the possible action and impact were unknown. Accrued loss contingencies were approximately $1.5m.
- Management cited seasonality, with beverage demand generally higher in warmer months. The company was evaluating new accounting standards, including revenue recognition Topic 606, effective for it beginning January 1, 2018; it could not yet estimate the impact.
Important facts for investors to verify
- Whether volume growth and AFF-related raw-material savings persist, and how geographic mix affects per-case revenue and margins.
- Whether TCCC distribution changes affect customer concentration, sales execution or commissions; also track TCCC-related receivables and transactions.
- Whether operating cash flow remains strong excluding the $125.0m TCCC receivable collection and other working-capital movements.
- Progress and total spending on the Rialto warehouse, capital expenditures and any use of the $500m repurchase authorization.
- Developments in the New York Attorney General inquiry, product-liability litigation and regulatory scrutiny of energy drinks.