Monster Beverage Corporation (MNST) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results; comparisons are with the corresponding 2018 periods. Dollar amounts below are in millions unless stated otherwise.
Business context and performance
Monster develops, markets, sells and distributes energy drinks and concentrates. Its three reportable segments are Monster Energy Drinks, Strategic Brands and Other. Monster Energy Drinks accounted for 93.6% of Q3 net sales. Management reported record third-quarter sales and cited continued portfolio expansion, including Reign Total Body Fuel, and further development of distribution markets.
Financial results
| Metric | Q3 2019 | Q3 2018 | Change | Nine months 2019 | Nine months 2018 | Change |
|---|---|---|---|---|---|---|
| Net sales | $1,133.6 | $1,016.2 | +11.6% | $3,183.6 | $2,883.0 | +10.4% |
| Gross profit | $673.0 | $607.7 | +10.8% | $1,907.8 | $1,743.2 | +9.4% |
| Operating income | $395.4 | $339.6 | +16.5% | $1,085.9 | $977.1 | +11.1% |
| Net income | $298.9 | $267.7 | +11.6% | $852.9 | $753.9 | +13.1% |
| Diluted EPS | $0.55 | $0.48 | +14.0% | $1.56 | $1.33 | +16.9% |
Margins: Gross margin was 59.4% in Q3 versus 59.8% a year earlier, and 59.9% for the nine months versus 60.5%. Operating margin was 34.9% versus 33.4% in Q3 and 34.1% versus 33.9% year to date. Net margin was 26.4% versus 26.3% in Q3 and 26.8% versus 26.2% year to date.
Sales drivers and mix: Case sales rose 9.7% in Q3 to 121.9 million 192-ounce equivalents and 9.4% year to date to 342.7 million. Average net sales per case increased 1.8% in Q3 to $9.25 and 1.1% year to date to $9.24. Price increases contributed approximately $31.6 million to Q3 net sales and $89.2 million year to date; unfavorable currency effects reduced sales by approximately $12.2 million and $60.1 million, respectively. Reign, price increases and higher Monster brand volumes supported Monster Energy Drinks growth. Strategic Brands sales decreased 10.9% in Q3 and 1.9% year to date.
International sales were $379.8 million in Q3, up 34.2% from $283.0 million, and represented approximately 34% of sales versus 28% a year earlier. Year-to-date international sales were approximately $1.01 billion, or 32% of sales versus 28%.
Cash flow, liquidity and capital allocation
For the nine months, operating cash flow was $821.1 million, essentially flat with $821.4 million in 2018. Net income increased, but cash flow was affected by higher accounts receivable ($179.8 million use) and inventories ($44.9 million use), among other working-capital movements. Investing activities used $328.2 million, compared with $154.1 million provided in 2018, reflecting investment purchases and sales. Financing activities used $405.3 million, primarily share repurchases.
At September 30, cash and cash equivalents were $717.6 million, short-term investments $587.4 million and long-term investments $14.4 million, totaling about $1.32 billion. Current assets were $2.36 billion and current liabilities $714.2 million. The balance sheet reports no debt line item; the company had no borrowings outstanding on its $15 million China working-capital credit line. It made $12.8 million of debt principal payments during the first nine months.
Share repurchases totaled $477.7 million in cash during the first nine months. The company exhausted the August 2018 plan and continued repurchases under the February 2019 plan. On November 6, 2019, the board authorized an additional $500 million plan; combined availability under the new and February plans was $536.6 million as of that date.
Outlook, commentary and notable items
- Management said available cash, operating cash generation 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 $150 million through September 30, 2020, subject to change with business opportunities. No specific revenue or earnings guidance was provided.
- The company agreed to acquire a manufacturing plant and adjoining land in Ireland for $12.0 million, with closing expected in late December 2019. It also agreed to buy land in San Fernando, California, for $33.7 million to build a production facility for consolidating AFF operations; the purchase price was paid in October 2019.
- Gross margin pressure was attributed mainly to geographic and product mix, partly offset by pricing and lower input costs. Operating expenses rose with payroll, marketing, sponsorships and professional services; lower distributor termination costs partly offset increases.
- The Q3 effective tax rate rose to 25.0% from 21.8%, mainly due to taxes in certain foreign jurisdictions and a lower equity compensation deduction; the 2018 comparison included a nonrecurring tax benefit. The nine-month rate declined to 22.1% from 23.3%, primarily due to higher equity compensation deductions.
- Risks highlighted include dependence on The Coca-Cola Company and its bottling network, distributor and customer concentration, energy-drink regulation and product-liability litigation, competition, foreign currency and international-market exposure, input and packaging supply costs, and consumer health concerns. The company reported personal-injury lawsuits alleging harm from Monster drinks; it disputes the claims and intends to defend them. Accrued loss contingencies were approximately $2.0 million.
- Purchase commitments for raw materials were $29.3 million; contractual obligations, primarily sponsorships and marketing, were $171.6 million. Management reported no material change in risk factors or market risk, and said disclosure controls were effective.
Most important facts for investors to verify
- Whether growth in case volumes, Reign sales and international markets persists, and how much future growth depends on price increases.
- Whether product and geographic mix continue to weigh on gross margin, and the effects of currency movements and input costs.
- Working-capital trends, especially accounts receivable and inventory, given flat operating cash flow despite higher net income.
- Customer and bottler concentration, including the continued importance of Coca-Cola network relationships and refranchising effects.
- Use of the expanded repurchase authorization relative to planned capital spending, including the Ireland and California projects.
- Developments in product-liability and other litigation, energy-drink regulation, and tax examinations or uncertain tax positions.