01—Abstract
Summary
Summary of the 10-K filed March 2, 2015. Cited figures are marked; the original filing is the authoritative source.
Monster Beverage's 2014 10-K reports a record year, with net sales up 9.7% to $2,464.9 milliona, gross profit up 14.2% to $1,339.8 million (54.4% of net sales versus 52.2% in 2013), and operating income up 30.5% to $747.5 million.
Net income rose 42.7% to $483.2 millionb, and diluted EPS was $2.77 versus $1.95. The Monster Energy brand drove nearly all growth, accounting for about 93% of net sales and roughly 98.5% of the increase in gross sales. Operating expenses fell 1.3% as a share-driven decline in distributor termination costs offset higher freight and sponsorship spending.
Cash and investments reached about $1.19 billionc, operating cash flow was $585.6 million, and the company has no debt beyond small capital leases. The filing's dominant story is the pending TCCC Transaction, expected to close in Q2 2015. Coca-Cola will take about 16.7% of the new holding company NewCo and pay a net $2.15 billion in cash (up to $625 million held in escrow pending distribution milestones).
Monster will transfer its non-energy brands (Hansen's Natural Sodas, Peace Tea, Hubert's Lemonade, and juices) to Coca-Cola and receive Coca-Cola's global energy drink brands (NOS, Full Throttle, Burn, Relentless, and others). In February 2015 the company sent termination notices to most U.S. Anheuser-Busch distributors, with estimated transition costs of about $280 milliond, mostly recognized in Q1 2015, and about $38.2 million of deferred revenue will be recognized as the terminated distributors' rights end. Investors should weigh this transition's execution risk, roughly 64 distributors contesting the terminations, and a shift to greater dependence on Coca-Cola's distribution network.
Litigation and regulatory exposure remain significant. The Anais Fournier wrongful-death suit is set for trial in August 2015, and the San Francisco City Attorney's Unfair Competition Law case is set for a bench trial in February 2016. The company is also responding to a New York Attorney General subpoena and faces false advertising class actions.
Management says these matters are without merit, but no loss range can be estimated for the San Francisco matter. Concentration is high: Coca-Cola Refreshments USA accounted for about 29% of net sales.
02—Key points
Key Highlights
- Record net sales of $2.46 billion (+9.7%) and gross profit of $1.34 billion (+14.2%), with gross margin expanding to 54.4% from 52.2%
- Operating income rose 30.5% to $747.5 million, and operating margin reached 30.3% versus 25.5% in 2013
- Net income increased 42.7% to $483.2 million; diluted EPS was $2.77 versus $1.95 in 2013
- Monster Energy brand sales of $2.65 billion in gross sales drove about 98.5% of the company's gross sales growth; case volume rose 7.6% to 238.3 million cases
- TCCC Transaction (expected to close Q2 2015): Coca-Cola takes ~16.7% of NewCo and pays a net $2.15 billion, with $625 million in escrow tied to distribution milestones; Monster transfers its non-energy brands to Coca-Cola
- Distribution transition costs estimated at $280 million, with about 64 AB Distributors contesting termination rights, creating execution risk
- Litigation overhang: Fournier wrongful-death trial set for August 2015; San Francisco City Attorney bench trial set for February 2016; NY Attorney General inquiry ongoing
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Monster Beverage kept $0.20.
- Revenue$2.46B100.0%
- Cost of revenue−$1.13B45.6%
- Gross profit$1.34B54.4%
- Operating costs−$592.3M24.0%
- Operating income$747.5M30.3%
- Interest, other & tax−$264.3M10.7%
- Net income$483.2M19.6%
Where FY2014 revenue went
$2.46B- Cost of revenue: $1.13B, 46% of revenue
- Operating costs: $592.3M, 24% of revenue
- Net income: $483.2M, 20% of revenue
- Interest, other & tax: $264.3M, 11% of revenue
Kept 20% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed March 2, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $2.46B$2.25B | +9.7% |
| Cost of Revenue | $1.13B$1.07B | +4.8% |
| Gross Profit | $1.34B$1.17B | +14.2% |
| Operating Expenses | $592.30M$600.01M | −1.3% |
| Operating Income | $747.50M$572.92M | +30.5% |
| Net Income | $483.19M$338.66M | +42.7% |
| EPS (Basic) | $0.24$0.17 | +41.9% |
| EPS (Diluted) | $0.23$0.16 | +41.5% |
| Shares Outstanding (Basic) | 2.01B2.00B | +0.3% |
| Shares Outstanding (Diluted) | 2.09B2.08B | +0.5% |
05—Questions
Frequently Asked Questions
What is the TCCC Transaction and how will it change Monster's business?
Monster and The Coca-Cola Company agreed to a long-term energy drink partnership in which Monster will reorganize under a new holding company, NewCo. Coca-Cola will receive about 16.7% of NewCo and pay a net $2.15 billion in cash, of which up to $625 million is escrowed pending distribution milestones. Coca-Cola will transfer its energy drink brands (NOS, Full Throttle, Burn, Relentless, and others) to NewCo, while Monster transfers its non-energy brands (Hansen's sodas, Peace Tea, Hubert's Lemonade, and juices) to Coca-Cola. After closing, Monster becomes an energy-drink-only company, and its distribution moves largely to Coca-Cola's bottler network.
Why did Monster send termination notices to Anheuser-Busch distributors, and what does it cost?
In February 2015, Monster sent termination notices to most U.S. Anheuser-Busch distributors, effective at various dates beginning in March 2015, so their territories can move to Coca-Cola's distribution network. The company estimates transition costs of about $280 million, mostly recognized in Q1 2015, and expects about $38.2 million of deferred revenue to be recognized in Q1 2015. Approximately 64 distributors are challenging the terminations in arbitration, and the company believes those challenges lack merit.
How concentrated is Monster's customer base and revenue?
Monster is highly concentrated. Coca-Cola Refreshments USA accounted for about 29% of net sales in 2014, 2013, and 2012. The DSD segment, which is primarily energy drinks, generated 96.1% of net sales, and Monster Energy brand drinks represented 93.3% of net sales. Outside the U.S., sales were about 21.7% of net sales. The planned TCCC transition is expected to increase dependence on Coca-Cola's distribution system.
What are the most significant legal risks disclosed?
The most material items are: (1) the Anais Fournier wrongful-death lawsuit over alleged consumption of two 24-ounce Monster Energy drinks, with trial scheduled for August 21, 2015; (2) the San Francisco City Attorney's Unfair Competition Law action seeking civil penalties and injunctive relief, with a bench trial set for February 8, 2016, for which no loss range can be estimated; and (3) a New York Attorney General investigation, with a motion to quash a second subpoena argued March 17, 2015. Monster also faces false advertising and product safety class actions. Accrued loss contingencies were about $3.7 million at year-end 2014, down from $17.0 million in 2013.
How strong is Monster's balance sheet and cash generation?
Monster ended 2014 with $370.3 million in cash and equivalents and $824.1 million in short- and long-term investments, roughly $1.19 billion in total. Operating cash flow rose to $585.6 million from $342.0 million. Working capital was $1,337.7 million, and the company has no meaningful debt, with only $0.4 million of capital leases and an undrawn $10 million credit line. It made $8.2 million of share repurchases in 2014 and no repurchases under its $200 million program. Most cash was held in U.S. investments; $117.8 million was held by foreign subsidiaries. After the TCCC closing, management expects to return substantial cash to shareholders through buybacks.
06—Continue