01—Abstract
Summary
Summary of the 10-K filed March 1, 2013. Cited figures are marked; the original filing is the authoritative source.
Monster Beverage Corporation (MNST, formerly Hansen Natural) reported record 2012 results, with gross sales of $2,373.5 milliona (up 21.7%) and net sales of $2,060.7 million (up 21.0%).
Operating income rose 20.6% to $550.6 millionb and net income rose 18.8% to $340.0 million, or $1.86 per diluted share. The Monster Energy brand drove the growth, generating roughly 98% of the increase in gross sales. Case sales grew 23.2% to 202.9 million cases, while the average net sales per case declined 1.8% to $10.16 due to higher promotional allowances and mix.
Gross margin slipped to 51.7% from 52.5%, reflecting product and geographic mix, higher promotional spend, and losses in international operations. Capital allocation was a major theme in 2012. The company repurchased about $737 millionc of its stock, exhausting its 2011-2012 program and most of a new $250 million November 2012 program.
Cash and investments fell to roughly $341 milliond from about $795 million a year earlier, and working capital dropped to $546.5 million. The company also has no dividend policy and reports no funded debt beyond small capital leases. Operating cash flow declined to $287.7 million from $333.8 million, largely due to inventory and tax-related working capital changes.
Investors should weigh meaningful regulatory and litigation risks. These include a state attorney general subpoena, a wrongful death lawsuit tied to Monster Energy consumption, a San Francisco false advertising inquiry, a securities class action with a class certification hearing set for April 2013, derivative suits, and proposed energy drink restrictions and taxes in several U.S. cities and foreign countries. Concentration risk is also significant: energy drinks represent about 95% of net sales, and Coca-Cola Refreshments accounts for roughly 28% of net sales.
02—Key points
Key Highlights
- Record gross sales of $2.37 billion (+21.7%) and net sales of $2.06 billion (+21.0%), driven almost entirely by Monster Energy brand growth (98% of gross sales increase).
- Operating income of $550.6 million (+20.6%) and net income of $340.0 million (+18.8%); diluted EPS of $1.86 (+21.1%), reflecting a 2-for-1 stock split in February 2012.
- Gross margin contracted to 51.7% from 52.5% due to mix, higher promotional allowances (13.2% of gross sales vs. 12.7%), and international production variances.
- Share repurchases totaled roughly $737 million in 2012, exhausting the 2011-2012 program and leaving $13.4 million remaining under the November 2012 program after subsequent purchases.
- Cash and investments declined to about $341 million from roughly $795 million; the company carries essentially no debt beyond $0.5 million of capital leases.
- Energy drinks account for about 95% of net sales (DSD segment 95.4%), and Coca-Cola Refreshments represents about 28% of net sales, creating concentration risk.
- Material legal and regulatory exposure includes a state attorney general subpoena, a product liability wrongful death suit, a securities class action (class certification hearing April 1, 2013), derivative suits, and proposed energy drink sales restrictions and excise taxes.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Monster Beverage kept $0.17.
- Revenue$2.06B100.0%
- Cost of revenue−$995.0M48.3%
- Gross profit$1.07B51.7%
- Operating costs−$515.0M25.0%
- Operating income$550.6M26.7%
- Interest, other & tax−$210.6M10.2%
- Net income$340.0M16.5%
Where FY2012 revenue went
$2.06B- Cost of revenue: $995.0M, 48% of revenue
- Operating costs: $515.0M, 25% of revenue
- Net income: $340.0M, 17% of revenue
- Interest, other & tax: $210.6M, 10% of revenue
Kept 17% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed March 1, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $2.06B$1.70B | +21.0% |
| Cost of Revenue | $995.05M$808.92M | +23.0% |
| Gross Profit | $1.07B$894.31M | +19.2% |
| Operating Expenses | $515.03M$437.89M | +17.6% |
| Operating Income | $550.62M$456.42M | +20.6% |
| Net Income | $340.02M$286.22M | +18.8% |
| EPS (Basic) | $0.16$0.14 | +21.0% |
| EPS (Diluted) | $0.15$0.13 | +21.6% |
| Shares Outstanding (Basic) | 2.08B2.11B | −1.4% |
| Shares Outstanding (Diluted) | 2.20B2.24B | −1.9% |
05—Questions
Frequently Asked Questions
How did Monster's core business perform in 2012?
Monster Energy drove nearly all of the growth. Gross sales of Monster Energy brand drinks reached $2,205.0 million, adding about $416 million year over year, and case volume rose 23.2% to 202.9 million cases. Net sales per case fell 1.8% to $10.16 due to higher promotional allowances and mix shifts toward lower-priced international products.
Is Monster's profitability holding up as sales grow?
Operating margin was essentially flat at 26.7% versus 26.8% in 2011, and net margin was 16.5% versus 16.8%. Gross margin declined about 80 basis points to 51.7%, mainly due to geographic and product mix, higher promotional spending, and losses in Europe and Asia. Operating expenses were held to 25.0% of net sales, down from 25.7%.
What are the biggest risks investors should watch?
The main risks are regulatory and legal. These include state and city restrictions on energy drink sales, container size limits, caffeine caps, excise taxes, and a state attorney general investigation into advertising. Litigation includes a wrongful death suit, false advertising class actions, and a securities class action alleging channel stuffing. Heavy dependence on energy drinks and on Coca-Cola distributors for about 28% of sales adds further concentration risk.
What is the company doing with its excess cash?
Monster is returning capital through share buybacks rather than dividends, which the company says it does not expect to pay. In 2012 it repurchased about $737 million of stock at an average price around $50 to $57 per share. It also bought two Corona, California office buildings for about $28.5 million combined, with one building held for sale, and expects capital expenditures below $50 million for 2013.
06—Continue