Monster Beverage Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited consolidated results; dollar amounts below are in millions unless noted. Monster develops, markets and sells alternative beverages, primarily energy drinks. Its Direct Store Delivery (DSD) segment accounted for 95.3% of Q3 net sales; Warehouse accounted for 4.7%.
Financial performance
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $541.9 | $474.7 | $1,589.2 | $1,293.3 |
| Gross profit / margin | $273.6 / 50.5% | $250.3 / 52.7% | $821.8 / 51.7% | $680.1 / 52.6% |
| Operating income / margin | $140.7 / 26.0% | $132.1 / 27.8% | $436.7 / 27.5% | $353.0 / 27.3% |
| Net income | $86.1 | $82.4 | $272.0 | $221.7 |
| Diluted EPS | $0.47 | $0.44 | $1.47 | $1.18 |
- Q3 net sales increased 14.2%; nine-month sales increased 22.9%. Case volume rose 18.0% in Q3 and 25.0% year to date. Growth was principally from Monster Energy drinks, increased consumer demand and expansion into international markets.
- Q3 gross margin declined 2.2 percentage points year over year, reflecting geographic mix, higher promotional allowances, production variances and product damage, particularly in Europe and Asia. Nine-month gross margin declined 0.9 points. Q3 operating margin also fell, while nine-month operating margin edged higher.
- Q3 net income grew 4.6%, slower than sales, in part because of higher operating expenses and a higher effective tax rate (39.0% versus 37.2%). Nine-month net income rose 22.7%; the effective tax rate was 37.8% versus 37.2%.
- Cash flow, 9M: Operating cash flow was $218.0, down from $233.0. Investing activities provided $79.0 versus $170.7 used in the prior-year period, largely reflecting investment maturities and purchases. Financing used $375.7, principally for share repurchases. Cash decreased $76.3 to $283.1.
- Liquidity and debt: Short- and long-term investments totaled $327.5 at September 30; cash plus investments were approximately $610.5. Current assets were $1,128.9 and current liabilities $317.0 (current ratio approximately 3.6). The filing reports no material debt balance; capital lease obligations were $0.9. The company also referenced a revolving credit facility, but the supplied filing text does not state its availability or draw balance clearly.
Material changes and business drivers
- Q3 gross sales, a company-defined non-GAAP measure, reached a record $632.3, up 15.4%; net sales growth was lower as promotional and other allowances increased 23.2% to $90.4. Allowances were 14.3% of gross sales versus 13.4%.
- Average net sales per case fell 3.3% in Q3 to $9.92, mainly due to higher allowances and product/geographic mix. Foreign exchange reduced Q3 sales by about 2%; the nine-month impact on net sales was about 1%.
- Warehouse Q3 sales declined 7.0% to $25.7; DSD sales increased 15.5% to $516.3. Coca-Cola Refreshments USA represented approximately 28% of Q3 net sales and 29% for the nine months, creating customer concentration exposure.
- The company repurchased 6.9 million shares during the quarter and nine-month period for $397.5, excluding commissions, at an average $57.99 per share. Cash-flow-statement purchases were $386.8; $10.7 of treasury stock purchases remained in accounts payable. Subsequent to quarter-end, another 1.9 million shares were repurchased, exhausting the $500 million authorization.
Outlook, risks and contingencies
- Management provided no specific revenue or earnings guidance. It estimated capital expenditures would likely be below $50 million through September 30, 2013, subject to change, and believed operating cash, existing resources and the credit facility would fund needs for at least 12 months.
- Management cited slower Q3 gross-sales growth versus the prior year, associated with less robust U.S. energy-market growth, lower sales of certain products, Canadian distributor inventory realignment, unfavorable currency and weaker Warehouse sales. New international markets partly offset these factors. Beverage sales are typically seasonal, with lower sales in the first and fourth quarters.
- Key exposures include dependence on energy drinks and major distributors/customers; foreign exchange; execution and profitability in international markets; input, freight and production costs; consumer demand and competition; and regulatory scrutiny of energy-drink advertising, ingredients, labeling and sales.
- In July 2012, the company received a state attorney general subpoena concerning its Monster Energy products; the inquiry was at an early stage and outcome unknown. A wrongful-death/product-liability lawsuit was filed October 17, 2012, after quarter-end, alleging a teenager’s death followed consumption of two 24-ounce drinks. The company disputed the claims and said it would defend them. New derivative suits and an ongoing securities class action also remained unresolved; potential losses in the securities action could not be estimated. A Blue Sky settlement had final approval but was subject to an appeal.
- At quarter-end, commitments included $66.2 of raw-material purchases, $72.3 of sponsorship and marketing obligations, and $15.8 of operating leases. The company acquired an adjacent office building in October 2012 for $18.8, after the reporting date.
Most important facts for investors to verify
- Whether growth and case-volume trends persisted, and whether promotional allowances, mix and international production issues continued to pressure margins.
- Cash conversion and working-capital requirements: receivables increased $70.5 and inventory $38.6 in the first nine months, while operating cash flow declined year over year.
- Use of capital and liquidity after substantial buybacks, completion of the repurchase authorization, and the October property purchase; confirm credit-facility terms and availability.
- Developments in the attorney general inquiry, product-liability and shareholder litigation, including potential effects on demand, costs, reputation or financial exposure.
- Customer concentration, particularly Coca-Cola Refreshments USA, and the company’s ability to grow international sales while managing currency and regulatory risks.