01—Abstract
Summary
Summary of the 10-K filed February 29, 2016. Cited figures are marked; the original filing is the authoritative source.
Monster Beverage's FY2015 10-K shows a transformative year driven by the TCCC Transaction, completed June 12, 2015.
Monster received a $2.15 billiona cash payment from The Coca-Cola Company, issued TCCC roughly 34.0 million shares (about 16.7% of the company post-issuance), acquired TCCC's global energy drink brands (NOS, Full Throttle, Burn, Mother, Relentless, Play, etc.), and transferred its non-energy business (Hansen's, Peace Tea, and others) to TCCC. Reported net sales rose 10.5% to a record $2,722.6 million, gross margin expanded to 60.0% from 54.4%, and net income grew 13.2% to $546.7 million, or $2.84 diluted EPS. Results were reduced by $224.0 million of distributor termination costs, which were expensed in operating expenses, while the $161.5 million gain on the sale of Monster Non-Energy and $39.8 million of accelerated deferred revenue recognition were one-time items that flattered results.
The balance sheet changed dramatically. Cash and investments rose to about $2.9 billionb, including $2,175.4 million in cash and cash equivalents and $760 million in short- and long-term investments, and total assets reached $5.68 billion, up from $1.94 billion. Goodwill of $1.28 billion and intangibles of $428 million now appear on the balance sheet.
Operating cash flow fell sharply to $208.0 millionc from $585.6 million, largely because of a $314.7 million excess tax benefit and a $302.4 million deferred tax change, so investors should look past headline net income when assessing cash generation. Management signaled capital return: a $1.75 billion repurchase authorization was approved on February 24, 2016, and an acquisition of flavor supplier American Fruits & Flavors for $690 million was agreed. Key risks include heavy dependence on TCCC for distribution, since TCCC accounted for about 42% of net sales, and continued regulatory and litigation exposure.
The San Francisco City Attorney unfair competition suit is set for trial in April 2017, a New York Attorney General inquiry is ongoing, and multiple personal injury and false advertising suits are pending. Energy drink category regulation, including age limits, caffeine caps and excise taxes, remains an industry-wide headwind.
02—Key points
Key Highlights
- Record FY2015 net sales of $2,722.6 million, up 10.5%, with Monster Energy brand sales of $2,518.5 million and 274.6 million 192-ounce case equivalents, up 15.3%
- Gross margin expanded to 60.0% from 54.4%, driven by Concentrate segment mix, lower Other-segment sales, and sweetener and raw material cost benefits
- Net income of $546.7 million (diluted EPS $2.84) benefited from a $161.5 million gain on sale of Monster Non-Energy, partly offset by $224.0 million in distributor termination costs
- TCCC Transaction brought $2.15 billion in cash (of which $125 million is in escrow pending distribution transition milestones) plus the KO Energy brands, with ~89% of U.S. target case sales transitioned as of February 29, 2016
- Cash, equivalents and investments of roughly $2.9 billion; operating cash flow fell to $208.0 million from $585.6 million, primarily due to tax-related timing items
- Capital return and M&A: $1.75 billion new buyback authorized February 24, 2016, plus a $690 million agreement to acquire flavor supplier American Fruits & Flavors
- Concentrated risk profile: TCCC accounted for about 42% of net sales, and the San Francisco City Attorney case is scheduled for bench trial in April 2017
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, Monster Beverage kept $0.20.
- Revenue$2.72B100.0%
- Cost of revenue−$1.09B40.0%
- Gross profit$1.63B60.0%
- Operating costs−$738.6M27.1%
- Operating income$893.7M32.8%
- Interest, other & tax−$346.9M12.7%
- Net income$546.7M20.1%
Where FY2015 revenue went
$2.72B- Cost of revenue: $1.09B, 40% of revenue
- Operating costs: $738.6M, 27% of revenue
- Net income: $546.7M, 20% of revenue
- Interest, other & tax: $346.9M, 13% of revenue
Kept 20% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 29, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $2.72B$2.46B | +10.5% |
| Cost of Revenue | $1.09B$1.13B | −3.1% |
| Gross Profit | $1.63B$1.34B | +21.8% |
| Operating Expenses | $900.12M$592.30M | +52.0% |
| Operating Income | $893.65M$747.50M | +19.6% |
| Net Income | $546.73M$483.19M | +13.2% |
| EPS (Basic) | $0.24$0.24 | +1.0% |
| EPS (Diluted) | $0.24$0.23 | +3.3% |
| Shares Outstanding (Basic) | 2.27B2.01B | +12.9% |
| Shares Outstanding (Diluted) | 2.31B2.09B | +10.5% |
05—Questions
Frequently Asked Questions
How did the TCCC Transaction change Monster's business model and financial profile?
Monster became a pure-play energy drink company. It gained TCCC's global energy brands (NOS, Full Throttle, Burn, Mother, Relentless, Play, and others) and sold its non-energy brands to TCCC. It also received $2.15 billion in cash and issued TCCC about 16.7% of its shares. Goodwill of $1.28 billion and intangibles of $428 million now sit on the balance sheet, and TCCC's distribution network replaced many third-party distributors.
Is the 2015 earnings growth sustainable, given the one-time items?
Not entirely. Results included a $161.5 million one-time gain on the Monster Non-Energy sale and $39.8 million of accelerated deferred revenue recognition, while operating expenses absorbed $224.0 million of distributor termination costs. Investors should evaluate underlying performance excluding these items. Gross margin expansion and Monster brand growth of about 8.8% in Finished Products are more representative of core trends.
Why did operating cash flow decline so sharply in 2015?
Operating cash flow was $208.0 million versus $585.6 million in 2014. Net income was higher, but the cash flow statement deducted a $314.7 million excess tax benefit from stock option exercises and a $302.4 million change in deferred income taxes, and it included a $77.3 million increase in accounts receivable. Partly offsetting these, income taxes payable rose by $415.4 million. Much of the drop reflects tax timing rather than weaker operations.
What are the most significant legal and regulatory risks?
The San Francisco City Attorney's Unfair Competition Law suit, which alleges mislabeling and unsafe marketing to minors, has a bench trial set for April 2017. The New York Attorney General inquiry remains unresolved, and there are multiple product liability and false advertising suits. Management believes the claims lack merit and that losses cannot currently be estimated, with only about $2.8 million in accrued loss contingencies. Broader energy drink regulation, including age restrictions, caffeine limits, and excise taxes, is an ongoing industry risk.
What does the 2016 capital allocation outlook look like?
Management expects capital expenditures of approximately $2.8 billion through December 31, 2016, including the American Fruits & Flavors acquisition ($690 million, expected to close in Q1 2016) and additional share repurchases. The board authorized a new $1.75 billion repurchase program on February 24, 2016, in addition to about $250 million remaining under the 2015 plan. The company also plans to acquire 49 acres in Rialto, CA for about $39 million to build a 1,000,000 square-foot distribution facility.
06—Continue