Monster Beverage Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter filing; fourth-quarter figures are noted separately below. All amounts are U.S. dollars.
Business context
Monster develops and markets energy drinks and related beverages. Its Monster Energy Drinks segment generated 90.5% of 2017 net sales; Strategic Brands acquired from The Coca-Cola Company (TCCC) generated 8.9%. The company relies on third-party bottlers and co-packers for production and on TCCC’s network as a major distribution partner.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $3,369.0 million | $3,049.4 million | +10.5% |
| Gross profit | $2,137.7 million | $1,942.0 million | +10.1% |
| Gross margin | 63.5% | 63.7% | -0.2 percentage points |
| Operating income | $1,198.8 million | $1,085.3 million | +10.5% |
| Operating margin | 35.6% | 35.6% | Unchanged |
| Net income | $820.7 million | $712.7 million | +15.2% |
| Diluted EPS | $1.42 | $1.19 | +19.7% |
| Operating cash flow | $987.7 million | $701.4 million | +$286.4 million |
- Case volume rose 12.2% to 360.0 million 192-ounce case equivalents, while average net sales per case fell 1.6% to $9.30, primarily due to geographic mix.
- Cash and cash equivalents were $528.6 million; short- and long-term investments totaled $675.3 million. Working capital was $1,526.0 million, up from $961.7 million.
- Debt was limited: $6.0 million outstanding under a China working-capital facility and $1.3 million of capital lease obligations. The $10.0 million Comerica revolver had no borrowings.
- Fourth-quarter 2017 net sales were $810.4 million, gross profit $503.6 million and net income $201.3 million. Diluted EPS was $0.35.
Material changes and unusual items
- Monster Energy brand net sales increased $287.4 million and accounted for most of the annual sales increase. Strategic Brands net sales rose 10.0% to $299.8 million.
- Gross margin edged down as international sales mix and certain costs offset raw-material savings associated with the 2016 AFF acquisition. Operating expenses rose 9.6%, including higher payroll, sponsorships, commissions and freight; distributor termination costs declined by $44.3 million.
- The company recorded provisional Tax Reform Act charges of $39.8 million from revaluing deferred tax assets and $2.1 million for deemed repatriation. Management said the final tax effects could differ as its analysis continued.
- Distributor termination costs were $35.4 million in 2017; $43.4 million of deferred revenue was recognized during the year, including $0.6 million accelerated recognition tied to distributor terminations.
- Share repurchases totaled $249.9 million under the 2017 plan, plus $111.2 million of employee share withholding-related purchases. A further $500 million was available under the 2017 and newly authorized 2018 plans. The company paid no cash dividends and did not anticipate doing so in the foreseeable future.
Outlook, risks and contingencies
- No formal revenue, earnings or margin guidance was provided. Management estimated 2018 capital expenditures of approximately $100 million, excluding share repurchases, and expected available cash, operations and its credit facility to cover needs for at least 12 months.
- Management cited international expansion, innovation, cost control and profitable growth as priorities. It also identified opportunities from broader distribution and new products, but cautioned that outcomes depend on demand, product mix and execution.
- Key exposures include dependence on TCCC distribution and large customers; intense competition; energy-drink regulation, taxes and health-related criticism; foreign exchange; and volatile or constrained raw materials and packaging supplies.
- Retort-capacity constraints had limited Java Monster and Muscle Monster production into the fourth quarter of 2017. The company also warned that limited suitable co-packers could make a prolonged production disruption consequential.
- The company is defending personal-injury and other product-related lawsuits and has complied with a New York Attorney General subpoena; the outcome of any further action was unknown. Accrued loss contingencies were approximately $1.9 million at year-end.
- TCCC accounted for approximately 18% of net sales in 2017, down from 41% in 2016 following bottler territory refranchising, and owned approximately 18% of the company’s shares. The company reported no goodwill or intangible-asset impairments in 2017.
Important facts for investors to verify
- Whether volume growth and international expansion can continue without further pressure on average selling price and gross margin.
- Whether TCCC-affiliated and refranchised bottlers maintain effective distribution, and how customer concentration changes over time.
- Whether co-packing capacity, especially for retort products, is sufficient to meet demand and avoid recurring supply constraints.
- The final impact of the Tax Reform Act and the resolution or evolution of product litigation and regulatory inquiries.
- Whether reported operating cash generation remains strong after investment needs, working-capital changes and share repurchases.