Why did operating margin decline even though sales and profits grew?

Operating margin fell to 33.7% from 35.6% because gross margin dropped to 60.3% from 63.5%. Management attributed this to higher input costs (principally aluminum cans, freight, and other inputs), a shift toward lower-margin international sales, a less favorable domestic product mix, and $42.2M in commissions that ASC 606 reclassified from operating expenses into a reduction of net sales. Operating expenses grew more slowly than sales, which partly offset the gross margin decline.

How much of Monster's business depends on Coca-Cola (TCCC)?

TCCC's influence is significant even though its direct share of net sales fell to 3% in 2018 from 18% in 2017 as territories were refranchised to independent bottlers. TCCC network bottlers now distribute the Monster brand across most U.S. territories and are the preferred international partners. Major customers include CCBCC Operations (13% of net sales), Reyes Coca-Cola Bottling (12%), and Coca-Cola European Partners (10%). TCCC also holds about 19% of the stock and can influence change-of-control transactions.

What is the status of the TCCC arbitration and why does it matter?

TCCC has developed three energy products that it believes fall under an exception in the agreements that otherwise restrict TCCC from competing in energy drinks. Monster believes the exception does not apply. The matter went to AAA arbitration on October 31, 2018, with a decision expected in Q2 2019. TCCC has suspended the launch until April 2019. Management says the relief sought is limited and no reasonable loss range can be estimated, but a loss could allow a large competitor to enter the energy category through Coca-Cola's bottling network.

What are the main regulatory risks for energy drink sales?

Governments are considering or have enacted several measures: excise taxes on sweetened beverages and energy drinks (for example, a 100% selective tax in Saudi Arabia, the UAE, and Bahrain; Hungary's excise tax; and U.S. local taxes), age restrictions on sales (for example, under-18 bans in Latvia, Lithuania, and Turkey), caffeine limits, container size limits, and warning labels. California's Proposition 65 and new FDA added-sugar labeling rules effective January 2020 also add compliance costs. The New York Attorney General has an ongoing inquiry into marketing, and the company is a defendant in personal injury lawsuits alleging injury from its products.

How is the company returning capital to shareholders?

Monster does not pay cash dividends. Instead, it has returned capital through share repurchases, buying back roughly $1.34 billion of stock in 2018 across four programs. Management stated that repurchases are a principal recurring use of cash and that it retains flexibility for expansion, including international growth. As of February 26, 2019, $520.6M remained available under the August 2018 program and the new February 2019 program. Capital expenditures are estimated at about $100M through 2019, and the company does not expect to repatriate most foreign cash ($341.8M of its $637.5M cash is held by foreign subsidiaries).

MNST 10-K FY2018 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 28, 2019. Cited figures are marked; the original filing is the authoritative source.

Monster Beverage (MNST) closed 2018 with record results: net sales rose 13.0% to $3.81 billion^a, driven by a 14.1% increase in case sales to 410.9 million cases, with the Monster Energy brand (91.7% of net sales) growing to $3.49 billion.

Operating income grew 7.1% to $1.28 billion^b, but operating margin compressed to 33.7% from 35.6% as gross margin fell to 60.3% from 63.5%, reflecting higher input costs (notably aluminum), unfavorable geographic mix from faster international growth, and the $42.2 million net sales reduction from adopting ASC 606. Net income increased 21.0% to $993.0 million and diluted EPS rose 23.8% to $1.76, helped by a lower effective tax rate of 23.2% (versus 31.7%) following U.S. tax reform. Capital returns were the dominant use of cash.

Operating cash flow was $1.16 billion^c, and the company repurchased $1.34 billion of stock during 2018, which reduced working capital to $1.20 billion from $1.53 billion and shrank shareholders' equity to $3.61 billion. The board authorized another $500 million buyback in February 2019, bringing total available authorization to $520.6 million. Cash and short-term investments totaled roughly $958 million at year-end, with no funded debt.

The key investor consideration is concentration risk. Coca-Cola Company (TCCC) owns about 19%^d of the stock and has two board nominees, and TCCC's distribution network is now the company's primary channel.

The company also faces an AAA arbitration with TCCC over three planned Coca-Cola-branded energy products, with a decision expected in Q2 2019, and ongoing regulatory pressure on energy drinks (taxes, age limits, caffeine limits) plus personal injury lawsuits. Management's ability to sustain volume growth while defending margins and navigating TCCC relations will largely determine the next phase of performance.

02—Key points

Key Highlights

Record net sales of $3.81B (+13.0% YoY), with case volume up 14.1% to 410.9M cases; Monster Energy brand represented 91.7% of net sales
Net income rose 21.0% to $993.0M; diluted EPS of $1.76 (+23.8%), aided by a 23.2% effective tax rate vs. 31.7% in 2017
Gross margin contracted to 60.3% from 63.5% due to aluminum and other input cost inflation, international mix, and ASC 606 commissions
Repurchased $1.34B of common stock in 2018; $520.6M authorization available including a new $500M program approved February 2019
TCCC owns ~19% of shares, has two board nominees, and its distribution network is the company's primary channel, creating significant concentration risk
Pending AAA arbitration with TCCC over three Coca-Cola-branded energy products; decision expected Q2 2019, with TCCC launch suspended until April 2019
Strong liquidity: $637.5M cash, $320.7M short-term investments, and no funded debt; operating cash flow of $1.16B

03—One dollar

Follow one dollar

Of each $1.00 of revenue in FY2018, Monster Beverage kept $0.26.

Revenue$3.81B100.0%100.0%
Cost of revenue−$1.51B39.7%39.7%
Gross profit$2.30B60.3%60.3%
Operating costs−$1.01B26.6%26.6%
Operating income$1.28B33.7%33.7%
Interest, other & tax−$290.6M7.6%7.6%
Net income$993.0M26.1%26.1%

10-KFY2018filed February 28, 2019Computed from this filing’s revenue, gross profit, operating income and net income · right columngrey figure: share of revenue

Where FY2018 revenue went

$3.81B

Cost of revenue: $1.51B, 40% of revenue
Operating costs: $1.01B, 27% of revenue
Net income: $993.0M, 26% of revenue
Interest, other & tax: $290.6M, 7.6% of revenue

Kept 26% as net income

Full revenue history →

04—Financials

Financial Highlights

10-KFY2018filed February 28, 2019

Revenue$3.81B60.3% Gross Margin Net Income$993.00M26.1% Net Margin EPS (Diluted)$0.44 Total Assets$4.53B Cash & Equivalents$637.51M Free Cash Flow$1.10B

Financial Statements

FY2018 against FY2017

Line item	FY2018FY2017	FY2017	Change
Revenue	$3.81B$3.37B	$3.37B	+13.0%
Cost of Revenue	$1.51B$1.23B	$1.23B	+22.8%
Gross Profit	$2.30B$2.14B	$2.14B	+7.4%
Operating Expenses	$1.01B$938.90M	$938.90M	+7.8%
Operating Income	$1.28B$1.20B	$1.20B	+7.1%
Net Income	$993.00M$820.68M	$820.68M	+21.0%
EPS (Basic)	$0.45$0.36	$0.36	+22.8%
EPS (Diluted)	$0.44$0.35	$0.35	+23.9%
Shares Outstanding (Basic)	2.23B2.27B	2.27B	−1.7%
Shares Outstanding (Diluted)	2.26B2.31B	2.31B	−2.2%

05—Questions

Frequently Asked Questions

Why did operating margin decline even though sales and profits grew?
Operating margin fell to 33.7% from 35.6% because gross margin dropped to 60.3% from 63.5%. Management attributed this to higher input costs (principally aluminum cans, freight, and other inputs), a shift toward lower-margin international sales, a less favorable domestic product mix, and $42.2M in commissions that ASC 606 reclassified from operating expenses into a reduction of net sales. Operating expenses grew more slowly than sales, which partly offset the gross margin decline.
How much of Monster's business depends on Coca-Cola (TCCC)?
TCCC's influence is significant even though its direct share of net sales fell to 3% in 2018 from 18% in 2017 as territories were refranchised to independent bottlers. TCCC network bottlers now distribute the Monster brand across most U.S. territories and are the preferred international partners. Major customers include CCBCC Operations (13% of net sales), Reyes Coca-Cola Bottling (12%), and Coca-Cola European Partners (10%). TCCC also holds about 19% of the stock and can influence change-of-control transactions.
What is the status of the TCCC arbitration and why does it matter?
TCCC has developed three energy products that it believes fall under an exception in the agreements that otherwise restrict TCCC from competing in energy drinks. Monster believes the exception does not apply. The matter went to AAA arbitration on October 31, 2018, with a decision expected in Q2 2019. TCCC has suspended the launch until April 2019. Management says the relief sought is limited and no reasonable loss range can be estimated, but a loss could allow a large competitor to enter the energy category through Coca-Cola's bottling network.
What are the main regulatory risks for energy drink sales?
Governments are considering or have enacted several measures: excise taxes on sweetened beverages and energy drinks (for example, a 100% selective tax in Saudi Arabia, the UAE, and Bahrain; Hungary's excise tax; and U.S. local taxes), age restrictions on sales (for example, under-18 bans in Latvia, Lithuania, and Turkey), caffeine limits, container size limits, and warning labels. California's Proposition 65 and new FDA added-sugar labeling rules effective January 2020 also add compliance costs. The New York Attorney General has an ongoing inquiry into marketing, and the company is a defendant in personal injury lawsuits alleging injury from its products.
How is the company returning capital to shareholders?
Monster does not pay cash dividends. Instead, it has returned capital through share repurchases, buying back roughly $1.34 billion of stock in 2018 across four programs. Management stated that repurchases are a principal recurring use of cash and that it retains flexibility for expansion, including international growth. As of February 26, 2019, $520.6M remained available under the August 2018 program and the new February 2019 program. Capital expenditures are estimated at about $100M through 2019, and the company does not expect to repatriate most foreign cash ($341.8M of its $637.5M cash is held by foreign subsidiaries).

06—Continue

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