Monster Beverage Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone Q4 report; quarterly figures are included below. Monster develops, markets and distributes energy drinks and concentrates through three reportable segments: Monster Energy Drinks, Strategic Brands and Other.
Financial performance and position
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Net sales | $3.807 billion | $3.369 billion | +13.0% |
| Gross profit | $2.295 billion | $2.138 billion | +7.4% |
| Gross margin | 60.3% | 63.5% | -3.2 percentage points |
| Operating income | $1.284 billion | $1.199 billion | +7.1% |
| Operating margin | 33.7% | 35.6% | -1.9 percentage points |
| Net income | $993.0 million | $820.7 million | +21.0% |
| Diluted EPS | $1.76 | $1.42 | +23.8% |
| Operating cash flow | $1.162 billion | $987.7 million | Increased |
- Unit case sales grew 14.1% to 410.9 million. Monster Energy Drinks segment sales were $3.498 billion, up 14.8%; Strategic Brands sales were $285.8 million, down 4.7%; Other sales were $22.9 million, up 6.1%.
- Net sales were reduced by approximately $42.2 million under adoption of ASC 606, which moved certain TCCC-related commissions from operating expenses to a reduction of revenue. Excluding this presentation effect, 2018 average net sales per case was $9.31 versus $9.30 in 2017.
- Gross margin pressure reflected higher aluminum, inbound freight and other input costs, product and geographic mix, higher promotional allowances, and the ASC 606 presentation change. International sales generally carry lower gross margins.
- Cash and cash equivalents were $637.5 million and short-term investments $320.7 million at year-end, together $958.2 million, down from $1.204 billion. Working capital was $1.20 billion, down from $1.53 billion, primarily reflecting share repurchases. Total assets were $4.527 billion and stockholders’ equity $3.611 billion.
- Financing activities used $1.316 billion, principally for $1.342 billion of share repurchases. Investing activities provided $273.0 million, largely reflecting investment maturities and sales, partly offset by purchases and $61.9 million of property and equipment.
- Debt was limited: no borrowings on the $10 million Comerica revolver; $11.7 million was outstanding, including interest, on a China working-capital facility and included in accounts payable. Capital-lease debt was $0.8 million.
- FY 2018 Q4 net sales were $924.2 million, gross profit $552.2 million, net income $239.1 million and diluted EPS $0.43. Q4 2017 comparatives were $810.4 million, $503.6 million, $201.3 million and $0.35, respectively.
Material changes versus the prior year
- Record annual net sales rose 13.0%, led by Monster Energy brand volume growth and increased domestic and international demand; case volume increased 14.1%.
- Profitability increased in dollars, but gross and operating margins contracted. Cost of sales rose 22.8%, faster than sales, while operating expenses rose 7.8%.
- Net income growth outpaced operating income growth in part because the effective tax rate declined to 23.2% from 31.7%, principally reflecting the lower U.S. federal corporate tax rate and less foreign income subject to U.S. tax.
- International gross sales rose to $1.36 billion from $1.09 billion and increased to 31% of gross sales from 28%. Net sales outside the U.S. were $1.09 billion, approximately 29% of net sales.
- TCCC subsidiaries’ share of Monster’s net sales fell to approximately 3% from 18%, reflecting TCCC’s North America refranchising and territory transfers; sales to independent TCCC bottlers and related parties remain commercially important.
Outlook, commentary and risks
- Management identifies international expansion, innovation, profitable growth and cost management as priorities. The company does not provide formal financial guidance. It estimated 2019 capital expenditures of approximately $100 million, excluding repurchases, and said operating cash, existing resources and its revolving credit facility should cover needs for at least 12 months.
- Management highlighted efforts to improve per-case procurement and production costs, localize co-packing to reduce freight, and control promotional and other expenses. Sales and marketing expenditure increased approximately 1.1% in 2018.
- A key uncertainty is arbitration with TCCC over whether TCCC may launch three Coca-Cola-branded energy products under an exception to non-compete provisions. Monster disputes that interpretation; a decision was expected in Q2 2019, and TCCC said the proposed launch was suspended until April 2019.
- Major risks include dependence on TCCC’s distribution network and other large bottlers, energy-drink competition, potential restrictions or taxes on caffeine and sweetened beverages, product-related litigation and negative health publicity, commodity and packaging costs, limited co-packing capacity, supply interruptions, foreign-exchange exposure and international-market risks.
- Personal-injury and other product-related lawsuits are ongoing. Management says it intends to defend them and does not expect the matters in aggregate to materially harm results; accrued loss contingencies were approximately $0.06 million at year-end. The filing also notes a New York Attorney General inquiry begun in 2012, whose outcome was uncertain.
- The board authorized a further $500 million repurchase program in February 2019; $520.6 million in total authorization was available as of February 26, 2019. Monster does not anticipate cash dividends in the foreseeable future.
- The company reported effective disclosure controls and internal control over financial reporting; the auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Assess whether volume growth can continue while gross margin recovers from higher input costs, international mix and promotional spending.
- Track the TCCC arbitration outcome, any product launches and the performance of the refranchised bottler network.
- Reconcile reported revenue and margins with the $42.2 million ASC 606 impact and the increase in promotional allowances.
- Review the cash and investment balance alongside the scale and pace of buybacks, planned capital spending and working-capital needs.
- Monitor regulatory developments, product litigation, supplier and co-packer capacity, and the company’s substantial goodwill and intangible-asset balances.