01—Abstract
Summary
Summary of the 10-K filed March 3, 2014. Cited figures are marked; the original filing is the authoritative source.
Monster Beverage Corporation (MNST) reported record 2013 results, with gross sales up 9.0% to $2,586.5 milliona and net sales up 9.0% to $2,246.4 million.
Net income was essentially flat at $338.7 millionb (down 0.4%), and diluted EPS rose 5.2% to $1.95, helped by a 10% reduction in diluted share count from aggressive buybacks. Growth was almost entirely driven by the Monster Energy brand, which accounted for about 97% of the gross sales increase, though management noted that growth decelerated from 21.7% in 2012 to 9.0% in 2013, mainly due to softer U.S. and European energy drink demand. Gross margin improved modestly to 52.2% of net sales, but operating income grew only 4.0% as operating expenses rose 16.5%, driven by legal and regulatory costs, distributor termination payments, and sponsorships.
Operating margin compressed to 25.5% from 26.7%. The balance sheet strengthened, with cash, equivalents and investments of about $623 millionc, working capital of $867 million, and no debt beyond small capital leases. Operating cash flow rose to $342.0 million.
The company repurchased roughly $67.6 milliond of stock in 2013 (versus $727.7 million in 2012) and has no dividend. The principal investor concern is regulatory and litigation risk around energy drinks: a wrongful death suit, a San Francisco City Attorney Unfair Competition Law action, a state attorney general subpoena, a securities class action expected to settle largely through insurance, and proposed age restrictions, caffeine limits, excise taxes and container-size rules in multiple jurisdictions. Concentration is also notable, as Coca-Cola Refreshments USA accounted for about 29% of net sales.
02—Key points
Key Highlights
- Record gross sales of $2,586.5 million (+9.0%) and net sales of $2,246.4 million (+9.0%); Monster Energy brand drove roughly 97% of the gross sales increase.
- Growth decelerated sharply from 21.7% in 2012 to 9.0% in 2013, attributed to slower Monster Energy growth in the U.S. and European energy drink markets.
- Operating income rose only 4.0% to $572.9 million; operating margin fell to 25.5% from 26.7% as operating expenses grew 16.5% to $600.0 million.
- Net income of $338.7 million was essentially flat (-0.4%); diluted EPS rose 5.2% to $1.95, supported by a roughly 5% lower diluted share count year over year.
- Gross margin improved to 52.2% of net sales from 51.7%, driven by product mix and lower container costs.
- Strong liquidity: $623.4 million in cash and investments, $867.0 million working capital, operating cash flow of $342.0 million, and no meaningful debt.
- Concentration and regulatory risk: Coca-Cola Refreshments USA represented about 29% of net sales, and the company faces product liability suits, a San Francisco City Attorney action, a state AG investigation, and proposed energy drink restrictions and taxes.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2013, Monster Beverage kept $0.15.
- Revenue$2.25B100.0%
- Cost of revenue−$1.07B47.8%
- Gross profit$1.17B52.2%
- Operating costs−$600.0M26.7%
- Operating income$572.9M25.5%
- Interest, other & tax−$234.3M10.4%
- Net income$338.7M15.1%
Where FY2013 revenue went
$2.25B- Cost of revenue: $1.07B, 48% of revenue
- Operating costs: $600.0M, 27% of revenue
- Net income: $338.7M, 15% of revenue
- Interest, other & tax: $234.3M, 10% of revenue
Kept 15% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2013filed March 3, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $2.25B$2.06B | +9.0% |
| Cost of Revenue | $1.07B$995.05M | +7.9% |
| Gross Profit | $1.17B$1.07B | +10.1% |
| Operating Expenses | $600.01M$515.03M | +16.5% |
| Operating Income | $572.92M$550.62M | +4.0% |
| Net Income | $338.66M$340.02M | −0.4% |
| EPS (Basic) | $0.17$0.16 | +3.6% |
| EPS (Diluted) | $0.16$0.15 | +4.8% |
| Shares Outstanding (Basic) | 2.00B2.08B | −4.0% |
| Shares Outstanding (Diluted) | 2.08B2.20B | −5.3% |
05—Questions
Frequently Asked Questions
Why did Monster's revenue growth slow in 2013 compared with 2012?
Management attributed the slowdown from 21.7% growth in 2012 to 9.0% in 2013 mainly to less robust growth of the Monster Energy line in the U.S. and European energy drink markets. Growth in 2012 had also been boosted by the Japan launch, which had no 2011 comparable.
What is driving the increase in operating expenses?
Operating expenses rose $85.0 million (16.5%) to $600.0 million. Key drivers included $19.4 million in higher professional service costs (of which $15.9 million related to regulatory and litigation matters concerning Monster Energy), $13.7 million in higher payroll, $11.9 million in higher outbound freight and warehouse costs, $9.3 million in distributor termination costs, and $7.3 million in higher sponsorship and endorsement spending.
How significant are the legal and regulatory risks for investors?
They are material and ongoing. The company faces a wrongful death lawsuit tied to Monster Energy consumption, a San Francisco City Attorney Unfair Competition Law suit with no estimable loss range, a state attorney general subpoena, and false advertising class actions. Management believes most claims lack merit and that the securities class action settlement will be fully insured. Legislative risks include proposed age limits, caffeine caps, excise taxes, and container-size restrictions in several U.S. and international jurisdictions.
How is Monster returning capital to shareholders?
Monster does not pay cash dividends. In 2013 it repurchased about $67.6 million of stock in cash terms (about 1.2 million shares), far below the $727.7 million repurchased in 2012. A $200 million repurchase program authorized in April 2013 had about $145.8 million remaining at year-end, and the company also had about $54 million of 2013 repurchases under that program.
How concentrated is Monster's customer base?
Coca-Cola Refreshments USA (CCR), a Direct Store Delivery distributor, accounted for approximately 29% of 2013 net sales, consistent with 28% in 2012 and 29% in 2011. Full-service beverage distributors represented about 63% of gross sales. Losing or reducing purchases from CCR or other large distributors could have a material adverse effect on results.
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