01—Abstract
Summary
Summary of the 10-K filed March 1, 2017. Cited figures are marked; the original filing is the authoritative source.
Monster Beverage's FY2016 10-K (filed March 1, 2017) shows a year of record results: net sales rose 12.0% to $3,049.4 milliona, gross margin expanded to 63.7% from 60.0%, and net income grew 30.4% to $712.7 million (diluted EPS $1.19, up 25.6%).
Growth was driven by the Monster Energy® brand, which contributed roughly $229 millionb of the sales increase, and by the Strategic Brands acquired from The Coca-Cola Company (TCCC) in the June 2015 transaction, which added $272.5 million in sales. Operating income rose 21.4% to $1,085.3 million. Comparisons with 2015 are distorted by $224 million of distributor termination costs and a $161.5 million one-time gain on the sale of non-energy brands in that year, so the 2016 operating margin of 35.6% is a cleaner read on the underlying business.
The balance sheet changed substantially. The company spent about $2.25 billionc repurchasing stock, including a $2.0 billion modified Dutch auction at $52.00 per share, and paid $688.5 million to acquire flavor supplier American Fruits & Flavors. Cash and investments fell from $2.94 billion to about $0.60 billion, and working capital dropped to $961.7 million.
Operating cash flow remained strong at $701.4 milliond. A new $500 million buyback authorization was approved on February 28, 2017. The company also reports no debt beyond small capital leases.
Key risks for investors are concentration and dependence on TCCC, which accounted for about 41% of 2016 net sales and owns roughly 18% of the shares, along with product-liability and state attorney general investigations, rising sugar and caffeine regulation and excise taxes, and co-packer capacity constraints for Java Monster and Muscle Monster. The San Francisco City Attorney UCL case was settled in January 2017 without a fine or admission of liability, though the company agreed to maintain certain marketing practices through December 2018.
02—Key points
Key Highlights
- Record net sales of $3,049.4 million, up 12.0% year over year, with case volume up 16.9% to 321.0 million 192-ounce cases.
- Gross margin expanded 370 basis points to 63.7%, driven by Strategic Brands mix, lower raw material costs, and AFF raw material savings.
- Operating income of $1,085.3 million (35.6% margin) rose 21.4%, despite $79.8 million of distributor termination costs in 2016 versus $224.0 million in 2015.
- Net income of $712.7 million rose 30.4%; diluted EPS of $1.19 (post three-for-one split) was up 25.6%.
- Returned about $2.25 billion to shareholders through stock repurchases, including a $2.0 billion Dutch auction at $52.00 per share; a new $500 million program was authorized February 28, 2017.
- Cash, cash equivalents and investments fell to $600.5 million from $2.94 billion after buybacks and the $688.5 million AFF acquisition, though operating cash flow was a healthy $701.4 million.
- TCCC is a major customer (about 41% of net sales) and an 18% shareholder, creating concentration and influence risks that management highlights throughout the filing.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, Monster Beverage kept $0.23.
- Revenue$3.05B100.0%
- Cost of revenue−$1.11B36.3%
- Gross profit$1.94B63.7%
- Operating costs−$856.7M28.1%
- Operating income$1.09B35.6%
- Interest, other & tax−$372.7M12.2%
- Net income$712.7M23.4%
Where FY2016 revenue went
$3.05B- Cost of revenue: $1.11B, 36% of revenue
- Operating costs: $856.7M, 28% of revenue
- Net income: $712.7M, 23% of revenue
- Interest, other & tax: $372.7M, 12% of revenue
Kept 23% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed March 1, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $3.05B$2.72B | +12.0% |
| Cost of Revenue | $1.11B$1.09B | +1.6% |
| Gross Profit | $1.94B$1.63B | +19.0% |
| Operating Expenses | $856.66M$900.12M | −4.8% |
| Operating Income | $1.09B$893.65M | +21.4% |
| Net Income | $712.68M$546.73M | +30.4% |
| EPS (Basic) | $0.30$0.24 | +24.7% |
| EPS (Diluted) | $0.30$0.24 | +25.3% |
| Shares Outstanding (Basic) | 2.35B2.27B | +3.8% |
| Shares Outstanding (Diluted) | 2.40B2.31B | +3.8% |
05—Questions
Frequently Asked Questions
What drove Monster's revenue growth in 2016?
Net sales grew $326.8 million, or 12.0%. Monster Energy® brand sales contributed about $229.4 million of the increase, driven by higher domestic and international volume. Strategic Brands, acquired from TCCC in June 2015, contributed $272.5 million for the full year compared with $143.3 million in the partial 2015 period. These gains were partly offset by the absence of non-energy brand sales that were sold to TCCC, which had contributed $60.8 million in 2015.
Why did gross margin improve so much?
Gross margin rose to 63.7% from 60.0%. Management attributes the change to a richer mix from the Strategic Brands segment, which carries higher gross margins than the Monster Energy® Drinks segment; the exit of lower-margin non-energy brands; lower costs for certain raw materials; raw material savings from the AFF acquisition, which brought the primary flavor supplier in-house; and changes in product mix.
How should investors view the 2015 comparisons?
The 2015 results include two large one-time items. The company recorded $224.0 million of distributor termination costs, which depressed operating expenses that year, and a $161.5 million gain on the sale of Monster Non-Energy to TCCC, which boosted operating income. Excluding these, 2016 operating income growth looks more modest than the reported 21.4%, so the underlying trend is better judged on gross profit and operating margin than on headline year-over-year changes.
How concentrated is Monster's business with TCCC and what are the risks?
TCCC subsidiaries accounted for approximately 41% of 2016 net sales, and TCCC owned about 18% of outstanding shares as of February 10, 2017. TCCC also nominated two board members and holds certain change-of-control rights. The company has transitioned most U.S. distribution to TCCC's bottler network, so Monster depends heavily on TCCC's distribution performance and strategic priorities. A decision by TCCC to reduce purchases or change its focus could materially affect results.
What are the main regulatory and legal risks disclosed?
Monster faces product liability suits alleging wrongful death or injury, a New York Attorney General investigation (a court ruled in January 2017 to compel compliance with a second subpoena), and growing regulation of energy drinks, including excise taxes such as Berkeley's $0.01 per ounce tax and Saudi Arabia's planned 100% selective tax, age restrictions, caffeine limits, and proposed labeling requirements. The San Francisco City Attorney case was settled in January 2017 with no fine or admission of liability, but the company agreed to maintain certain marketing and labeling practices through December 31, 2018.
06—Continue