Monster Beverage Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Financial statements are unaudited. Monster develops, markets and sells alternative beverages; energy drinks accounted for 92.2% of Q2 net sales. Unless stated otherwise, amounts below are USD millions.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $630.9 (+6.5%) | $592.6 | $1,115.2 (+6.5%) | $1,047.2 |
| Gross profit / margin | $336.3 / 53.3% | $307.0 / 51.8% | $588.3 / 52.8% | $548.2 / 52.3% |
| Operating income / margin | $179.4 / 28.4% | $169.8 / 28.6% | $286.7 / 25.7% | $296.1 / 28.3% |
| Net income / margin | $106.9 / 16.9% | $109.8 / 18.5% | $170.4 / 15.3% | $185.9 / 17.8% |
| Diluted EPS | $0.62 | $0.59 | $0.98 | $1.00 |
| Operating cash flow | Not separately presented for the quarter | $99.7 | $110.1 |
Liquidity, cash flow and balance sheet
- At June 30, cash and cash equivalents were $283.8 million and short- and long-term investments totaled $160.2 million. Current assets were $1,093.8 million and current liabilities $346.2 million.
- First-half investing cash outflow was $70.6 million; financing cash inflow was $31.0 million. Cash increased $61.3 million from year-end 2012.
- Accounts receivable rose to $342.2 million from $236.0 million at year-end; inventories increased to $233.5 million from $203.1 million. The increase in receivables was a major use of operating cash.
- The balance sheet presents no borrowings; it reports $1.6 million in capital lease obligations due within one year. Management also refers to a revolving credit line, but the supplied filing text does not clearly state its size or outstanding balance.
Material changes and management commentary
- Q2 case volume increased 7.1%; first-half volume increased 7.3%. Average net sales per case declined 0.6% in Q2 and 0.8% in the first half. Management attributed sales growth mainly to higher Monster Energy volume, demand and international expansion; pricing had no material impact.
- Q2 gross margin improved, which management attributed mainly to product mix and lower costs for certain containers. Operating expenses grew 14.3% in Q2 and 19.6% in the first half, outpacing sales growth. First-half operating income fell 3.2% and net income fell 8.4% year over year.
- Higher expenses included distributor termination costs ($10.3 million in the first half), increased professional services, freight and marketing. Professional-service cost increases included $7.2 million related to energy-drink regulatory matters and litigation in the first half.
- Foreign-currency transaction losses were $3.6 million in Q2 and $8.3 million in the first half, principally related to Australia, Japan, South Africa and Europe. The first-half effective tax rate rose to 39.5% from 37.3%.
- Coca-Cola Refreshments USA accounted for about 29% of Q2 net sales and 30% of first-half net sales. International customers accounted for approximately 23% of first-half gross sales.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management said cash, operating cash flow and the revolving credit line should cover working-capital and other needs for at least 12 months, and estimated capital expenditures would likely be below $100 million through June 30, 2014.
- Management identified risks including slower demand, competition, distributor changes, foreign exchange exposure, supply and commodity costs, and regulatory restrictions or adverse consumer response affecting energy drinks. It cautioned that quarterly results may be seasonal and are not necessarily indicative of full-year results.
- Product-safety, labeling, advertising and consumer-protection matters include a state attorney general inquiry, San Francisco City Attorney litigation, a wrongful-death lawsuit and other putative class actions. The Company disputes the claims; for the San Francisco matter, it said it could not assess the likelihood of an unfavorable outcome or estimate a potential loss.
- Purchase commitments were $49.4 million; sponsorship and other contractual obligations were $84.4 million; operating lease commitments were $17.5 million. The Company recorded $1.3 million of unrecognized tax benefits and $0.4 million of related interest and penalties.
- The Company began transitioning Monster Energy product labeling and marketing from dietary supplements to conventional foods in Q1 2013 and said it did not expect the change to be costly.
Key facts for investors to verify
- Whether sales growth and improved gross margin persist while operating expenses continue to rise faster than sales.
- Receivables and inventory growth, and the effect of working-capital needs on operating cash flow.
- Developments in energy-drink regulatory investigations and litigation, including potential financial or operating consequences.
- Exposure to Coca-Cola Refreshments USA as a major customer and to foreign-currency losses as international sales expand.
- Current borrowing capacity and any outstanding balance under the revolving credit line, which are not clear in the provided filing text.