Monster Beverage Corp quarterly report, Q2 FY2020

Monster Beverage Corporation — Q2 2020 Form 10-Q

Reporting period: Three and six months ended June 30, 2020. Financial statements are unaudited; amounts below are in U.S. dollars. The company develops and markets energy drinks through Monster Energy Drinks, Strategic Brands and Other segments.

Financial results

MetricQ2 2020Q2 2019Six months 2020Six months 2019
Net sales$1,093.9m$1,104.0m$2,156.0m$2,050.0m
Gross profit / margin$659.5m / 60.3%$661.3m / 59.9%$1,296.7m / 60.1%$1,234.8m / 60.2%
Operating income / margin$407.3m / 37.2%$379.0m / 34.3%$772.3m / 35.8%$690.5m / 33.7%
Net income$311.4m$292.5m$590.2m$554.0m
Diluted EPS$0.59$0.53$1.10$1.01
Operating cash flowNot separately stated for the quarterNot separately stated for the quarter$440.5m$454.8m
  • Q2 year-over-year: Sales fell 0.9%, while operating income rose 7.5% and net income rose 6.5%. Case sales declined 2.2% to 117.0m 192-ounce case equivalents; average net sales per case increased 1.2% to $9.30.
  • First half year-over-year: Sales increased 5.2%, operating income 11.8% and net income 6.5%; case sales grew 5.3% to 232.6m. Average net sales per case was nearly flat at $9.22 versus $9.23.
  • Segment mix: Q2 Monster Energy Drinks sales grew 0.8% to $1,027.7m, while Strategic Brands fell 24.7% to $59.6m. First-half Monster Energy Drinks sales grew 6.9% to $2,020.1m; Strategic Brands declined 16.9% to $124.1m. Other segment sales were $6.6m in Q2 and $11.7m for the half.
  • Cash flows and liquidity: First-half operating cash flow was $440.5m. Investing activities provided $250.7m, principally reflecting investment sales, while financing activities used $553.6m, principally share repurchases. Cash and cash equivalents were $921.3m, short-term investments $250.8m and long-term investments $2.1m at June 30. Current assets were $2,371.5m and current liabilities $674.9m. Management said cash, operations and credit access should cover working capital and other needs for at least 12 months.
  • Debt and obligations: No balance-sheet borrowing is identified in the presented statements; the company reported no borrowings on its $15m HSBC China working-capital line. Finance lease liabilities were $1.8m. Purchase commitments totaled $59.2m and contractual obligations, primarily sponsorships and marketing, totaled $182.1m. The filing does not provide a clear total debt figure beyond the stated lease liabilities and credit-line status.

Material changes and management commentary

  • COVID-19 adversely affected Q2 sales, including through distributor inventory reductions, lower convenience and gas-channel foot traffic, and extended lockdowns affecting Strategic Brands, particularly in EMEA. Sales improved sequentially in the latter half of Q2 as some markets reopened. E-commerce, club, mass merchant and grocery business strengthened; on-premise food service remained challenged.
  • Management attributed Q2 gross-margin improvement to product and geographic mix and lower input costs. Operating expenses fell 10.7%, mainly due to lower sponsorship and endorsement spending and travel and entertainment expenses during the pandemic. Some event costs may be deferred to future periods, but timing was uncertain.
  • For the first half, operating expenses declined 3.7%; lower sponsorship, travel and distributor-termination costs were partly offset by higher payroll, freight and warehouse costs, a $4.0m Strategic Brand trademark impairment, and other expenses. The first-half effective tax rate rose to 23.5% from 20.4%, primarily due to a lower equity-compensation deduction.
  • Foreign exchange reduced net sales by approximately $18.2m in Q2 and $28.6m in the first half. The company also cited a European trading dispute that temporarily delisted certain products and hurt EMEA sales.
  • Management reported no current material supply shortages or expected material distribution impact from COVID-19 as of the filing date, but warned that prolonged pandemic effects could disrupt supply. It estimated capital expenditures, excluding repurchases, would likely be below $150m through June 30, 2021.
  • The board authorized a $500m share repurchase plan in March 2020. Q2 purchases under that plan were 0.3m shares for $15.6m; $441.5m remained available as of August 6. Total first-half treasury-stock purchases were $595.8m.

Risks, contingencies and unusual items

  • The duration and severity of COVID-19 effects remain uncertain. Risks include weaker consumer demand and discretionary spending, channel restrictions, delayed product launches and sampling, lower sponsorship opportunities, and potential supplier, co-packer or distributor disruptions.
  • Customer and distributor concentration is relevant: Coca-Cola Consolidated represented about 13% of Q2 sales, Reyes Coca-Cola Bottling about 11%, and Coca-Cola European Partners about 8%.
  • Accrued loss contingencies were approximately $17.5m. Management stated that litigation in aggregate was not expected to materially adversely affect financial position or results, based on information known to the company. Unrecognized tax benefits were approximately $3.0m, with $0.4m of accrued interest and penalties.
  • Other notable exposures include foreign-currency risk, investment credit and market risks, regulatory and product-liability matters, competition, dependence on TCCC distribution relationships, and potential changes in consumer preferences or energy-drink regulation.

Important facts for investors to verify

  • Whether sales and case volumes recover in convenience and gas channels, and whether the improvement seen late in Q2 continues.
  • Whether Strategic Brands sales stabilize, particularly in EMEA, and how the European buying-group dispute affects distribution.
  • Whether Q2 expense savings from cancelled or postponed events recur, or deferred sponsorship costs return in later periods.
  • Whether accounts-receivable growth and working-capital movements affect cash conversion; first-half operating cash flow declined despite higher net income.
  • How planned capital spending and continued repurchases affect liquidity, and whether management’s COVID-19 outlook and sub-$150m capex estimate remain valid.