Monster Beverage Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Unless otherwise stated, amounts below are in U.S. dollars and millions. Comparisons are with Q1 2013.
Business context
Monster develops, markets and sells alternative beverages through two segments: Direct Store Delivery (DSD), principally energy drinks, and Warehouse, principally juice-based and soda beverages. Energy drinks generated $499.0 million, or about 93% of net sales. DSD accounted for 95.9% of net sales. Products are manufactured by third-party bottlers and co-packers. Coca-Cola Refreshments USA represented approximately 31% of net sales, a significant customer concentration.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Gross sales | $613.7 | $555.0 | +10.6% |
| Net sales | $536.1 | $484.2 | +10.7% |
| Gross profit / margin | $286.8 / 53.5% | $252.0 / 52.1% | Margin +1.4 pts |
| Operating income / margin | $148.9 / 27.8% | $107.3 / 22.2% | Income +38.7% |
| Net income / margin | $95.3 / 17.8% | $63.5 / 13.1% | Income +50.0% |
| Diluted EPS | $0.55 | $0.37 | +49.0% |
| Operating cash flow | $136.4 | $45.9 | +$90.5 |
Case sales increased 8.7% to 51.9 million 192-ounce case equivalents; average net sales per case rose 1.8% to $10.32. The effective tax rate was 36.1%, versus 39.8%.
At March 31, cash and cash equivalents were $312.0 million and short- and long-term investments totaled $447.1 million. Current assets were $1,355.2 million and current liabilities $380.4 million. The balance sheet reports no conventional borrowings; contractual capital lease obligations were $0.7 million. Stockholders’ equity was $1,102.7 million.
Investing activities used $43.9 million, primarily reflecting net investment purchases and capital spending; financing activities provided $7.7 million, principally from employee option exercises and related tax benefits. Cash increased $100.7 million during the quarter to $312.0 million.
Material changes and management commentary
- Net sales growth was driven mainly by Monster Energy drinks and higher volume from domestic and international demand and expansion into new markets; pricing changes were not material. Monster Energy gross sales rose $55.3 million and represented 94.2% of total gross-sales growth.
- Gross margin improved through product mix and production efficiencies. Operating expenses declined 4.7%, partly because distributor termination costs fell from $8.3 million to approximately $0.01 million; higher freight, professional-service and payroll expenses partly offset the decline.
- DSD net sales increased 11.8% to $514.4 million. Warehouse net sales fell 9.5% to $21.8 million, primarily due to lower Hubert’s lemonade volume.
- Management said available operating cash, cash resources and the revolving credit facility should cover working capital and other needs for at least 12 months. Estimated capital expenditures were expected to be less than $100 million through March 31, 2015, subject to change with business opportunities. No specific revenue or earnings guidance was provided.
- Management noted seasonal patterns, with beverage sales typically lower in the first and fourth quarters, and cautioned that quarterly results may not indicate full-year performance.
Risks, contingencies and unusual items
- HMRC had not provided conclusive guidance on UK VAT treatment for certain sales. The company recorded an $8.7 million VAT receivable and matching payable for the period beginning October 3, 2013. Potential pass-through VAT for the earlier period was estimated at up to $47.1 million; penalties could also be assessed. The company said any penalty was not expected to materially affect its financial position, results or liquidity.
- A proposed settlement of federal securities litigation, signed April 16, 2014, would provide $16.25 million from insurers, subject to court approval. The company said it would not affect results of operations.
- Product-safety, advertising and labeling litigation and government inquiries remain significant uncertainties. In the San Francisco matter, the company stated it could not estimate the likelihood of an unfavorable outcome or a potential loss range. The company denied the allegations and intended to defend itself.
- Other notable exposures include $31.3 million of raw-material purchase commitments, $92.9 million of sponsorship and marketing commitments, and $14.8 million of operating lease commitments. A state attorney general inquiry was ongoing.
- Investment risks include auction-rate securities valued using Level 3 models; $14.5 million of auction-rate securities were held at March 31, 2014. Foreign-exchange risk is managed in part with short-term contracts; management considered a hypothetical 10% adverse currency move not significant.
Important facts for investors to verify
- Whether sales and margin growth continued beyond this seasonally weaker first quarter, and how much growth came from volume, product mix and international expansion.
- Customer concentration and distributor dependence, particularly the contribution from Coca-Cola Refreshments USA.
- Developments in the UK VAT matter, including HMRC’s position and any potential penalty exposure.
- Outcomes of product-safety and marketing litigation and regulatory inquiries, especially the San Francisco action and FDA-related matters.
- Approval and completion of the insurer-funded securities settlement, and whether cash generation and planned capital spending remain consistent with management’s outlook.