Monster Beverage Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Financial statements are unaudited; amounts below are in U.S. dollars. Monster develops and markets energy drinks and, following its February 2022 acquisition of CANarchy, craft beer and hard seltzers.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $1.655B | $1.462B | $3.174B | $2.706B |
| Gross profit | $779.9M | $836.8M | $1.557B | $1.552B |
| Gross margin | 47.1% | 57.2% | 49.0% | 57.4% |
| Operating income | $373.0M | $526.0M | $772.4M | $940.1M |
| Operating margin | 22.5% | 36.0% | 24.3% | 34.7% |
| Net income | $273.4M | $403.8M | $567.6M | $719.0M |
| Diluted EPS | $0.51 | $0.75 | $1.06 | $1.34 |
- Q2 net sales rose 13.2%; energy-drink case sales increased 14.1%. On a foreign-currency-adjusted basis, net sales grew 16.9%. Management called Q2 net sales a record for the second quarter.
- Q2 sales growth primarily reflected higher Monster Energy drink volume and consumer demand, with some contribution from pricing actions and reduced promotions. Foreign exchange reduced reported Q2 sales by approximately $53.4M.
- Q2 cost of sales increased 40.0%, outpacing revenue growth. Management cited freight and fuel, ingredients and packaging, aluminum cans, co-packing, sales mix and production inefficiencies. Q2 gross profit fell 6.8% despite higher sales.
- Q2 operating expenses rose 30.9%, including higher distribution, payroll, travel, sponsorship and marketing costs. The prior-year comparison included a $16.9M reversal of an accrual for an intellectual-property claim.
- For the first half, sales grew 17.3%, while gross profit was nearly flat and net income fell 21.1%. Foreign exchange reduced first-half sales by approximately $86.3M; currency-adjusted sales increased 20.5%.
Segments and acquisition
- Q2 Monster Energy Drinks sales were $1.538B, up 12.5%; Strategic Brands sales were $79.1M, down 9.0%; and Other sales were $6.0M, down 24.4%.
- Alcohol Brands contributed $32.4M of Q2 sales and recorded a $4.7M operating loss. Its first-half sales were $47.7M and operating loss was $9.6M; this segment reflects CANarchy only from its February 17, 2022 acquisition date.
- Monster acquired CANarchy for approximately $330.4M in cash, entering craft beer and hard seltzer. Management said CANarchy would operate independently. The acquisition added $81.3M of goodwill and identifiable brand and customer-related intangibles.
Cash flow, liquidity and debt
- First-half operating cash flow was $130.7M, versus $586.6M a year earlier. Management attributed the decline chiefly to working-capital investment, including increases of $299.1M in inventory and $289.2M in receivables.
- First-half investing cash flow was a $5.7M use, including $329.5M for CANarchy and $99.4M of property and equipment purchases, partly offset by net proceeds from investment sales. Financing cash flow was a $269.0M use, primarily reflecting $296.5M of share repurchases.
- At June 30, cash and cash equivalents were $1.132B, short-term investments $1.338B and long-term investments $64.1M. Current assets were $4.697B against current liabilities of $1.094B. Cash plus short-term investments totaled about $2.470B.
- The filing reports $11.7M outstanding on a $15.0M HSBC China credit facility; it does not show material conventional long-term borrowings on the balance sheet. Total stockholders’ equity was $6.809B.
- Inventory increased to $885.9M from $593.4M at year-end 2021. Accounts receivable increased to $1.176B from $896.7M.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management said it expected substantial liquidity and sufficient resources for working capital and other needs through at least the next 12 months. Estimated capital expenditures, excluding repurchases, were expected to be below $200M through June 30, 2023, subject to change.
- To address inflation and cost pressure, Monster said it was implementing a U.S. price increase effective September 1, 2022, and planning increases in certain international markets in the second half of 2022. It also cited pricing actions and reduced promotions as mitigation efforts.
- Key risks include continued commodity, freight, fuel and packaging cost inflation; supply-chain constraints and production disruptions; foreign-exchange movements; COVID-19 impacts; consumer demand and discretionary spending; reliance on bottlers and major customers; regulation; and execution and integration risks in alcohol beverages. Russia and Ukraine together represented approximately 1.1% of 2021 sales; the conflict had no material reported Q2 impact, but management continued to monitor it.
- At June 30, purchase commitments were approximately $339.1M and contractual obligations, primarily sponsorships and marketing, were $332.2M. Management believed pending litigation in aggregate was not likely to materially affect financial position or results; recorded loss contingencies were $0.2M.
- A court confirmed a $175M arbitration award in favor of Monster Energy Company and Orange Bang against Vital Pharmaceuticals, plus a 5% royalty on future Bang-branded product sales. VPX appealed. Monster said it would not recognize the award or royalties until realized or realizable; collection and timing remain uncertain.
- Monster disclosed a disputed potential exposure of up to approximately $74.2M relating to TCCC commissions, fees and marketing contributions for 2015–2020. No amount was recognized in the financial statements.
- The company repurchased approximately 3.3M shares for $284.1M during Q2 at an average $86.53 per share. A new $500M repurchase authorization was approved in June; no purchases under that plan occurred by quarter-end.
Most important facts for investors to verify
- Whether announced price increases offset input, freight and distribution inflation without materially weakening volume or demand.
- Whether the sharp margin compression and lower operating cash flow improve as supply costs and working capital normalize.
- CANarchy’s subsequent sales, operating performance, integration progress and cash requirements.
- The status and potential collectability of the VPX award and royalties, and the outcome of the disputed TCCC-related claim.
- Customer and bottler concentration, foreign-exchange exposure, inventory growth and the pace of further share repurchases.