Monster Beverage Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited consolidated results; comparisons are with Q1 2019 unless otherwise noted. The company develops and markets energy drinks, primarily through its Monster Energy Drinks, Strategic Brands and Other segments. Dollar figures below are in U.S. dollars.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $1,062.1 million | $946.0 million | +12.3% |
| Gross profit / margin | $637.2 million / 60.0% | $573.5 million / 60.6% | Profit +11.1%; margin −0.6 percentage points |
| Operating income / margin | $365.0 million / 34.4% | $311.5 million / 32.9% | Income +17.2% |
| Net income / margin | $278.8 million / 26.3% | $261.5 million / 27.6% | Income +6.6% |
| Diluted earnings per share | $0.52 | $0.48 | +8.2% |
| Operating cash flow | $191.1 million | $123.4 million | +54.9% |
- Net sales growth was led by Monster Energy Drinks: $992.5 million, up 14.0%. Strategic Brands sales fell 8.2% to $64.5 million; Other sales were $5.1 million.
- Case sales rose 14.1% to 115.6 million 192-ounce case equivalents. Average net sales per case declined 1.6% to $9.14, reflecting foreign exchange and higher promotional allowances.
- Gross margin narrowed due mainly to geographic mix and increased promotional allowances as a share of gross sales; lower input costs and product mix partly offset the decline. Operating margin improved as operating expenses grew more slowly than sales.
- The effective tax rate increased to 23.8% from 16.8%, primarily because of a lower equity compensation deduction. Net income growth consequently lagged operating income growth.
- Operating cash flow increased despite a $147.7 million accounts-receivable cash use. Investing activities provided $280.0 million, largely reflecting net investment sales; financing activities used $546.0 million, primarily for share repurchases. Cash and equivalents decreased $96.1 million to $701.8 million.
Balance sheet, debt and liquidity
- At March 31, 2020, cash and cash equivalents were $701.8 million, short-term investments $233.5 million and long-term investments $13.9 million. Combined cash and investments totaled approximately $949.3 million.
- Total current assets were $2.05 billion versus current liabilities of $701.5 million, implying a current ratio of approximately 2.9. Total assets were $4.88 billion and stockholders’ equity was $3.87 billion.
- The filing reports no borrowings outstanding under its $15 million HSBC China working-capital line. Finance lease liabilities were $2.2 million; operating lease liabilities were $28.1 million. No other material funded debt is reported in the provided filing text.
- Management said available cash, operating cash flow and credit access should cover working-capital and other expected needs for at least 12 months. It estimated capital expenditures, excluding repurchases, of less than $150 million through March 31, 2021.
- Contractual obligations totaled $306.6 million, including $200.5 million of sponsorship and other commitments, $70.5 million of raw-material purchase commitments, and lease payments. Most purchase commitments were due within one year.
Material changes, outlook and risks
- COVID-19: The pandemic had no material adverse effect on Q1 net or gross sales, but April sales were materially adversely affected. Management reported Q2 impacts from reduced convenience/gas and food-service on-premise activity; e-commerce, club, mass merchandiser and grocery business remained stable at the time of filing. The duration and severity were uncertain.
- Management said it did not then foresee a material supply-chain impact and reported no raw-material or finished-product shortages, while warning that prolonged pandemic-related disruption could affect suppliers, co-packers and bottler/distributors.
- New-product launches and planned retail distribution were disrupted, including postponed spring retail schematics. The company said it was working with bottlers/distributors to reprioritize launches as conditions normalize.
- Monster Energy Drinks sales benefited from higher volume, wider distribution and demand for Reign products. Foreign exchange reduced reported net sales by approximately $10.4 million. Promotional allowances, commissions and other expenses rose 20.4% to $174.0 million, faster than gross sales growth of 13.4%.
- Unusual items included a $3.0 million Strategic Brand trademark impairment charge. Distributor termination costs were $0.04 million versus $10.7 million in Q1 2019; deferred distribution-agreement revenue recognized in sales was $10.6 million versus $14.2 million.
- The company repurchased $559.2 million of stock for cash during Q1. A new $500 million March 2020 authorization was approved; $441.5 million remained available as of May 8, 2020. Repurchases are discretionary and compete with other uses of cash.
- Key risks include the uncertain COVID-19 impact on demand, especially in convenience/gas and on-premise channels; dependence on major bottlers/distributors and Coca-Cola system relationships; customer concentration; foreign exchange; regulation and product-liability litigation; and potential supply, raw-material and distribution disruption.
- The company was defending energy-drink personal-injury claims and other litigation. Management believed the matters would not likely have a material adverse effect; accrued loss contingencies were approximately $15.6 million at quarter-end. In April, it agreed to acquire a leased U.K. office building for approximately $10 million, with closing expected in mid-May.
Important facts for investors to verify
- Subsequent-quarter sales, orders and channel trends, especially the extent and persistence of COVID-19-related declines in convenience/gas and food service.
- Whether volume growth continues to translate into revenue and profit growth given foreign-exchange effects, promotional spending and the lower average net sales per case.
- Accounts receivable and cash conversion, and whether operating cash flow remains sufficient alongside ongoing repurchases and capital spending.
- The pace and price of future repurchases under the remaining authorization and their effect on liquidity and share count.
- Any material change in supply-chain continuity, major-customer or bottler relationships, litigation contingencies, or impairment risk.