Monster Beverage Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Financial statements are unaudited and prepared under U.S. GAAP. Comparisons are with Q1 2012 unless noted; amounts below are in U.S. dollars.
Business context
Monster develops, markets, sells and distributes alternative beverages. Its Direct Store Delivery (DSD) segment is primarily energy drinks; its Warehouse segment is primarily juice-based and soda beverages. Energy drinks generated 91.9% of Q1 2013 net sales. The company introduced several products during the quarter, including Monster Mini’s, Muscle Monster Energy Shakes and Monster Energy Ultra Blue.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Gross sales, net of discounts and returns | $555.0 million | $517.3 million | +7.3% |
| Net sales | $484.2 million | $454.6 million | +6.5% |
| Gross profit / margin | $252.0 million / 52.1% | $241.2 million / 53.1% | Profit +4.5%; margin down 1.0 percentage point |
| Operating expenses | $144.7 million | $114.9 million | +26.0% |
| Operating income / margin | $107.3 million / 22.2% | $126.3 million / 27.8% | Income -15.0%; margin down 5.6 points |
| Net income | $63.5 million | $76.1 million | -16.6% |
| Diluted EPS | $0.37 | $0.41 | -10.4% |
| Operating cash flow | $45.9 million | $36.8 million | +$9.1 million |
Case sales rose 7.6% to 47.7 million 192-ounce case equivalents, while average net sales per case fell 1.0% to $10.14. Monster Energy brand net sales accounted for nearly all of the net sales increase. DSD sales were $460.2 million (+6.7%); Warehouse sales were $24.0 million (+2.7%). International net sales were $106.3 million, versus $79.2 million.
Cash and cash equivalents were $242.5 million at March 31, 2013, and short- and long-term investments totaled $115.8 million. Current assets were $936.7 million and current liabilities $329.8 million, giving working capital of about $606.9 million. Total assets were $1.147 billion. The filing lists $0.6 million of capital-lease obligations and $0.3 million of debt principal payments in the quarter; it does not provide a clear total debt balance in the supplied text.
Investing activities used $15.4 million and financing activities used $11.1 million. The company repurchased $13.4 million of stock during Q1. Accounts receivable growth was a significant operating cash use, partly offset by a reduction in prepaid income taxes and increases in accrued promotional allowances and other liabilities.
Changes, outlook and significant matters
- Sales growth was slower than in Q1 2012: management attributed the deceleration mainly to less robust North American Monster Energy growth and lower Worx Energy shot sales, partly offset by international growth. Gross sales were a record for the first quarter, according to management.
- Profitability weakened despite higher sales. Management cited geographic mix for the gross-margin decline and higher operating costs for lower operating income. Operating expenses included $8.3 million of distributor termination costs, up from $0.1 million, and $4.9 million of increased professional-service costs, including $3.0 million related to regulatory matters and litigation.
- Foreign-currency transaction losses rose to $4.7 million from $0.5 million, primarily related to Japan and South Africa. A $2.6 million net gain on investments and put options partly offset other expenses.
- No specific revenue or earnings guidance is provided. Management expected available operating cash, cash resources and the revolving credit line to meet needs for at least 12 months, and estimated capital expenditures would likely be below $50 million through March 31, 2014, subject to change with business opportunities.
- Management noted seasonal demand patterns, with beverage sales historically lower in the first and fourth quarters. Risks include slower demand, competition, distribution changes, input costs, foreign exchange, customer concentration and regulatory or legal action concerning energy-drink marketing, labeling and safety. Coca-Cola Refreshments USA accounted for about 30% of net sales in both comparison periods.
- The company began transitioning Monster Energy, Hansen’s and Blue Energy products from dietary-supplement to conventional-food labeling in Q1; management did not expect the labeling change to be significant in cost. Worx Energy shots would remain labeled as dietary supplements.
- Legal and regulatory matters include consumer and product-safety litigation, a state attorney-general inquiry, securities litigation, and San Francisco City Attorney proceedings concerning energy-drink marketing and safety. The company disputes the allegations and intends to defend itself; it stated that potential losses in certain matters could not be estimated. The filing also reports that two earlier derivative cases were dismissed in March, while a new derivative complaint was filed May 3, 2013. The April and May developments occurred after quarter-end.
- The November 2012 repurchase authorization was exhausted in Q1. A new $200 million program was authorized April 7, 2013; no shares had been purchased under it as of May 10.
Investor verification points
- Check whether sales and case-volume growth can recover while promotional allowances continue to grow faster than gross sales.
- Track gross and operating margins, particularly the effects of geographic mix, distributor costs and elevated professional and legal expenses.
- Assess working-capital conversion and receivables: Q1 operating cash flow exceeded the prior year but remained below net income.
- Review the outcome and potential financial impact of energy-drink safety, marketing, labeling and shareholder litigation; the filing does not quantify possible losses for several matters.
- Monitor dependence on Coca-Cola Refreshments USA and the execution and profitability of international expansion.
- Confirm capital spending, repurchases under the new authorization, and the availability and terms of the referenced revolving credit line; those terms are not clear in the supplied filing text.