Monster Beverage Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Unless stated otherwise, amounts are U.S. dollars.
Business context
Monster develops, markets and distributes energy drinks and beverage concentrates. Its three reportable segments are Monster Energy Drinks, Strategic Brands and Other. The business relies on third-party bottlers and co-packers; TCCC-affiliated bottlers are its primary U.S. and international distribution network. Monster Energy Drinks generated 92.9% of FY 2019 net sales.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net sales | $4.201 billion | $3.807 billion | +10.3% |
| Gross profit / margin | $2.519 billion / 60.0% | $2.295 billion / 60.3% | Profit +9.7%; margin −0.3 percentage points |
| Operating income / margin | $1.403 billion / 33.4% | $1.284 billion / 33.7% | Income +9.3%; margin −0.3 percentage points |
| Net income / net margin | $1.108 billion / 26.4% | $993.0 million / 26.1% | Income +11.6% |
| Diluted EPS | $2.03 | $1.76 | +15.2% |
| Case sales | 448.8 million | 410.9 million | +9.2% |
| Cash from operations | $1.114 billion | $1.162 billion | −4.1% |
Fourth-quarter 2019 net sales were $1.017 billion, gross profit $610.8 million and net income $255.0 million, compared with $924.2 million, $552.2 million and $239.1 million, respectively, in Q4 2018.
Cash and cash equivalents were $798.0 million, with short- and long-term investments of $546.0 million, at year-end. Working capital was $1.66 billion, versus $1.20 billion a year earlier. The company reported no borrowings under its revolving credit facilities at year-end. The filing does not report material funded debt; it does disclose finance lease liabilities of approximately $1.5 million.
Investing activities used $326.7 million and financing activities used $628.5 million in FY 2019. Financing outflows principally reflected $707.3 million of treasury-stock purchases; the company also received $92.4 million from stock option exercises. It paid no cash dividends.
Material changes and management commentary
- Monster Energy Drinks segment sales rose 11.6% to $3.904 billion, supported by Reign Total Body Fuel, higher volume and U.S. and Canadian price increases. Strategic Brands sales fell 3.8% to $274.9 million.
- Price increases contributed approximately $101.9 million to FY 2019 net sales. Foreign exchange movements reduced sales by approximately $69.2 million.
- Gross margin declined, which management attributed mainly to geographic and product mix; price increases partly offset the pressure. Operating expenses rose 10.3%, including higher payroll, professional fees, sponsorships and marketing.
- Management identifies international expansion, innovation, cost management and improving segment margins as priorities. It estimates FY 2020 capital expenditures at approximately $150 million, excluding share repurchases, and expects operating cash and available resources to meet needs for at least the next 12 months.
- The company repurchased approximately 11.0 million shares under its authorized plans during 2019 for about $622.9 million, excluding employee share withholding purchases. A new $500 million repurchase plan was authorized in November 2019; no shares had been purchased under it by year-end.
Outlook, risks and unusual items
- The company does not provide formal guidance for revenue, margins, expenses or earnings. Its outlook is subject to competition, changing consumer preferences, regulatory developments and execution risks.
- Monster’s dependence on TCCC’s distribution system increased as U.S. territories transitioned to TCCC network bottlers. TCCC launched Coca-Cola Energy in Europe in 2019 and the U.S. in 2020, creating potential competition for distributor attention and market share. TCCC held approximately 19% of Monster’s voting interests.
- Regulatory risks include possible caffeine or ingredient restrictions, age limits, labeling requirements and excise taxes. A Mexican tax change effective January 1, 2020 broadened the definition of taxable energy drinks. Product-safety litigation and negative publicity could also affect demand; management says it intends to defend the claims.
- Supply and production risks include reliance on a limited number of suppliers and co-packers, potential ingredient and packaging shortages, and short-duration or terminable co-packing arrangements. The filing notes potential business and supply-chain disruption from the then-recent COVID-19 outbreak, including exposure to sourcing and operations in China.
- FY 2019 operating expenses included a $15.5 million provision related to an intellectual-property claim concerning use of the Hubert Hansen name. Accrued loss contingencies totaled approximately $15.5 million at year-end. The company also faced ongoing personal-injury, consumer and intellectual-property litigation; management did not expect the matters in aggregate to materially affect financial position or results.
- Foreign currency movements adversely affected sales; foreign currency transaction losses were $4.1 million. The company uses short-term currency forwards for limited exposure but generally does not hedge commodity or input-cost risks.
Important facts for investors to verify
- Whether Monster Energy Drinks and Reign sustain volume growth, and whether Strategic Brands’ sales decline continues.
- Whether gross and operating margins stabilize as sales mix, input costs, freight and promotional spending evolve.
- How TCCC’s distribution relationship and Coca-Cola Energy launches affect shelf access, distributor focus and competition.
- Whether supplier, co-packer and China-related risks affect product availability, costs or the stated capital expenditure outlook.
- Developments in product-liability and intellectual-property matters, including the $15.5 million provision and accrued contingencies.
- Cash conversion and working-capital trends, particularly rising inventory and accounts receivable, alongside continued buybacks.