Monster Beverage Corporation — Q2 2019 Form 10-Q
Business context and period. Unaudited results cover the quarter and six months ended June 30, 2019, compared with the same 2018 periods. Monster develops and markets energy drinks and concentrates across Monster Energy Drinks, Strategic Brands and Other segments. Unless noted, dollar amounts below are in millions.
Financial performance
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Net sales | $1,104.0 | $1,015.9 | $2,050.0 | $1,866.8 |
| Gross profit | $661.3 | $620.3 | $1,234.8 | $1,135.5 |
| Gross margin | 59.9% | 61.1% | 60.2% | 60.8% |
| Operating income | $379.0 | $357.6 | $690.5 | $637.5 |
| Operating margin | 34.3% | 35.2% | 33.7% | 34.2% |
| Net income | $292.5 | $270.1 | $554.0 | $486.2 |
| Diluted EPS | $0.53 | $0.48 | $1.01 | $0.85 |
- Q2 net sales grew 8.7%; case sales rose 8.7% to 119.6 million 192-ounce case equivalents. H1 sales grew 9.8%; case sales increased 9.1% to 220.9 million.
- H1 operating cash flow was $454.8 million, down from $501.3 million. The $204.4 million increase in accounts receivable was the largest operating cash use; net income was $554.0 million.
- H1 investing cash flow was negative $56.0 million, versus positive $426.2 million in 2018, reflecting investment purchases and sales. Financing cash outflow was $151.4 million, including $223.4 million of treasury-stock purchases.
- At June 30, cash and cash equivalents were $888.2 million, short-term investments $358.0 million and long-term investments $7.0 million. Current assets were $2,326.8 million and current liabilities $705.5 million. No significant funded debt is reported; $3.4 million, including interest, was outstanding on a China working-capital line.
Material changes and drivers
- Q2 Monster Energy Drinks segment sales rose 9.6% to $1,019.1 million, led by Reign, introduced in Q1, and U.S./Canada price increases. Strategic Brands sales declined 0.8% to $79.1 million; Other sales declined 12.6% to $5.8 million.
- Price increases contributed approximately $31.3 million to Q2 sales and $59.5 million to H1 sales. Foreign exchange reduced sales by approximately $25.9 million in Q2 and $47.9 million in H1.
- Gross margin contracted year over year in both periods. Management cited favorable pricing and lower aluminum costs, more than offset by geographic and product mix and higher costs for certain other inputs.
- Operating expenses increased 7.5% in Q2 and 9.3% in H1, including higher payroll, professional services, marketing and sponsorship expenses. H1 net income growth also benefited from a lower effective tax rate: 20.4% versus 24.0%.
- International sales represented approximately 31% of Q2 and H1 sales, up from 29% in 2018. Three customers each accounted for about 10%–13% of sales, indicating meaningful customer concentration.
Outlook, risks and unusual items
- Management said available cash, operations and credit access should cover working capital and other needs for at least 12 months. It estimated capital expenditures would be below $100 million through June 30, 2020, subject to change with business opportunities. No specific revenue or earnings guidance was provided.
- The company reported record second-quarter sales and continued portfolio and distribution expansion, including Q2 launches Nalu Refresh and Predator Energy Mean Green. Results are seasonal, with beverage demand generally higher in warmer months.
- Key risks include reliance on TCCC and its bottling network, distributor transitions, foreign-exchange exposure, competitive and input-cost pressures, energy-drink regulation and health-related scrutiny, product-liability litigation, and dependence on major customers. Management said risk factors were not materially changed from the 2018 Form 10-K.
- An arbitration panel ruled on June 28, 2019 that three TCCC energy drinks qualify for an exception to the parties’ non-compete provision and may be marketed and sold by TCCC. Monster also faces energy-drink personal-injury suits; it considers the claims without merit and expects no material adverse effect. Accrued loss contingencies were approximately $2.3 million.
- Purchase commitments for raw materials were $43.1 million; contractual obligations, primarily sponsorships and marketing, were $175.0 million. The company had $342.2 million of deferred revenue, recognized over time, including $24.8 million in H1 sales.
- Share repurchases totaled $223.4 million in H1, largely occurring in Q1; no shares were bought under authorized plans in Q2. As of August 7, $520.6 million remained available under repurchase authorizations.
Important facts for investors to verify
- Whether Reign and other product launches sustain case-volume growth, and how much future growth depends on pricing rather than volume.
- Whether gross-margin pressure from product/geographic mix and other input costs persists, and whether price increases can offset it.
- Receivables growth and cash conversion: H1 operating cash flow declined despite higher earnings.
- Exposure to TCCC, distributor changes and customer concentration, including the commercial impact of the arbitration ruling.
- Progress and potential financial exposure from product-liability and other legal matters, and changes in accrued contingencies.
- Capital allocation, including future repurchases, and actual capital spending relative to management’s estimate.