Monster Beverage Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Financial statements are unaudited. Monster develops, markets, sells and distributes energy drinks and concentrates through its Monster Energy Drinks, Strategic Brands and Other segments.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $946.0 million | $850.9 million | +11.2% |
| Gross profit / gross margin | $573.5 million / 60.6% | $515.3 million / 60.6% | Profit +11.3% |
| Operating income / operating margin | $311.5 million / 32.9% | $279.9 million / 32.9% | Income +11.3% |
| Net income / net margin | $261.5 million / 27.6% | $216.1 million / 25.4% | Income +21.0% |
| Diluted EPS | $0.48 | $0.38 | +26.7% |
| Operating cash flow | $123.4 million | $148.9 million | Down $25.5 million |
| Cash and cash equivalents | $618.3 million | $637.5 million at Dec. 31, 2018 | Down $19.2 million |
| Short-term investments | $263.7 million | $320.7 million at Dec. 31, 2018 | Down $57.0 million |
At March 31, cash plus short-term investments totaled $882.0 million. Current assets were $1.91 billion and current liabilities were $631.0 million. The company reported $9.8 million outstanding, including interest, on its China working-capital credit line; the filing does not identify other material borrowings. Cash used in financing was $188.0 million, primarily for share repurchases. Capital expenditures were $8.5 million.
Material changes and operating performance
- Case sales rose 9.7% to 101.3 million 192-ounce case equivalents. Average net sales per case increased 1.3% to $9.29.
- Monster Energy Drinks segment sales increased 11.5% to $870.4 million; Strategic Brands sales rose 6.9% to $70.3 million; Other sales were $5.3 million. International sales were $284.1 million, approximately 30% of total sales, versus $242.1 million and 28% a year earlier.
- Management attributed growth principally to higher volume and consumer demand, including Reign Total Body Fuel, launched in March 2019. A November 2018 price increase contributed approximately $28.2 million to Q1 sales. Foreign-exchange movements reduced sales by approximately $22.0 million.
- Gross margin and operating margin were unchanged year over year. Pricing supported gross margin, offset by geographic mix and higher input costs. Operating expenses rose 11.4%, including higher payroll, sponsorship and endorsement spending, professional fees, and distributor termination costs.
- The effective tax rate fell to 16.8% from 23.3%, primarily due to increased equity-compensation deductions and a greater share of profits in lower-tax foreign jurisdictions. Net income growth also reflected the higher gross profit and lower tax provision.
Outlook, risks and unusual items
- Management said cash from operations, cash resources and credit access should cover working capital and planned needs for at least the next 12 months. It estimated capital expenditures would likely be below $100 million through March 31, 2020, subject to change with business opportunities. No earnings or revenue guidance was provided.
- Operating cash flow declined despite higher net income, notably reflecting increased accounts receivable, inventory and prepaid income taxes. The company cited seasonal patterns, with beverage sales generally lower in the first and fourth quarters, though energy drinks may be less seasonal.
- Q1 distributor termination costs were $10.7 million, compared with $7.0 million a year earlier. Deferred revenue recognized from distribution agreements was $14.2 million, compared with $11.2 million.
- The company repurchased 2.6 million shares for $139.0 million under its August 2018 plan. It also bought 1.4 million shares from employees for $83.8 million in connection with option exercises or withholding taxes. A new $500 million repurchase authorization was approved in February 2019; $520.6 million remained available across the plans as of May 3, 2019.
- Key risks include dependence on major bottlers and distributors, including Coca-Cola network partners; competition and energy-drink regulation or consumer health concerns; product liability and other litigation; foreign-exchange exposure; and supply, input-cost and customer-demand risks.
- Monster and Coca-Cola are in arbitration over whether Coca-Cola may market certain energy drinks under a contractual brand exception. The company said a reasonably possible loss range could not be estimated. It also faces product-injury lawsuits, which it considers without merit; management does not expect the disclosed litigation, in aggregate, to materially affect financial position or results. Purchase commitments were approximately $37.0 million and sponsorship and other contractual obligations approximately $178.4 million at quarter-end.
- Adoption of the new lease standard on January 1, 2019 added $26.3 million of operating lease right-of-use assets and $22.6 million of lease liabilities; income-statement and cash-flow effects were immaterial.
Important facts for investors to verify
- Whether volume growth and new-product contribution, particularly Reign, continue, and how the U.S./Canada price increase affects demand and margins.
- Whether working-capital investment, especially accounts receivable and inventory, continues to constrain operating cash flow.
- Developments in the Coca-Cola arbitration, bottler transitions and customer concentration; three bottlers each represented approximately 9%–13% of Q1 sales.
- Progress on repurchases, remaining authorization and cash deployment, alongside the company’s capital-spending estimate and contractual commitments.
- Changes in tax rate, foreign-exchange effects, input costs, regulation and product-liability litigation.