Energy drink backlash, legal fees slash Monster's profits

Profits sacked by $3 million in legal and other costs related to regulatory matters and litigation concerning company's energy drinks.    

Monster Beverage Corp. reported financial results for the first quarter ended March 31, 2013.

Gross sales for the 2013 first quarter increased 7.3 percent to $555.0 million from $517.3 million in the same period last year.

Net sales for the three-months ended March 31, 2013 increased 6.5 percent to $484.2 million from $454.6 million a year ago.

Gross profit, as a percentage of net sales, for the 2013 first quarter was 52.1 percent, compared with 53.1 percent for the comparable 2012 quarter. Operating expenses for the 2013 first quarter increased to $144.7 million from $114.9 million in the same quarter last year. Operating expenses as a percentage of net sales were 29.9 percent for the 2013 first quarter, compared with 25.3 percent in the same quarter last year.

Distribution costs as a percentage of net sales were 4.6 percent for the 2013 first quarter, compared with 4.3 percent in the same quarter last year.

Selling expenses as a percentage of net sales for the 2013 first quarter were 13.5 percent, compared with 12.3 percent in the same quarter a year ago.

General and administrative expenses as a percentage of net sales for the 2013 first quarter were 11.8 percent, compared with 8.7 percent for the corresponding quarter last year. Stock-based compensation (a non-cash item) was $7.0 million in the first quarter of 2013, compared with $6.6 million for the first quarter of 2012.

Operating income for the 2013 first quarter decreased 15.0 percent to $107.3 million from $126.3 million in the comparable 2012 quarter.

The effective tax rate for the 2013 first quarter was 39.8 percent, compared with 39.9 percent in the same quarter last year.

Net income for the 2013 first quarter decreased 16.6 percent to $63.5 million from $76.1 million in the same quarter last year.

Net income per diluted share decreased 10.4 percent to $0.37 from $0.41 per diluted share in the 2012 comparable quarter.

Net sales for the Company's DSD segment for the 2013 first quarter increased 6.7 percent to $460.2 million from $431.2 million for the same period in 2012.

Gross sales to customers outside the United States rose to $130.7 million in the 2013 first quarter, compared with $100.6 million in the corresponding quarter in 2012.

During the 2013 first quarter, the Company purchased 256,820 shares of its common stock at an average purchase price of $51.99, which exhausted the availability under the share repurchase plan authorized by the Board of Directors in November 2012. In April 2013, the Company's Board of Directors authorized a new $200 million share repurchase program. No shares have been repurchased pursuant to the new share repurchase program.

Factors impacting profitability
The results for the first quarter were impacted by changes to certain of the Company's distribution partners, foreign currency transaction losses, and legal and other costs related to regulatory matters and litigation concerning the advertising, marketing, promotion, ingredients, usage, safety and sale of the Company's Monster Energy® brand energy drinks.

As a result of the distributor transitions, the Company incurred termination obligations amounting to $8.3 million and $0.1 million during the quarters ended March 31, 2013 and 2012, respectively, relating to the termination of certain of its prior distributors.

Such termination costs have been expensed in full and are included in operating expenses for the quarters ended March 31, 2013 and 2012, respectively.

Pursuant to new distribution agreements, the Company recorded a net amount of $8.2 million in the 2013 first quarter, consisting of amounts to be received from new distributors relating to the costs of terminating the Company's prior distributors.

Such amounts have been accounted for as deferred revenue and will be recognized as revenue ratably over the anticipated life of the respective distribution agreements, generally 20 years.

During the first quarters of 2013 and 2012, the Company incurred foreign currency transaction losses of $4.7 million and $0.5 million, respectively, which are included in other (expense) income. The increase in foreign currency transaction losses during the first quarter of 2013 was primarily related to the Company's operations in Japan and South Africa.

During the first quarter of 2013, the Company incurred increased professional service costs of $4.9 million, net of insurance reimbursements, of which $3.0 million related to regulatory matters and litigation concerning the advertising, marketing, promotion, ingredients, usage, safety and sale of the Company's Monster Energy brand energy drinks.

Rodney C. Sacks, chairman and CEO, said: "While we are pleased to report another quarter of sales growth, there were a number of exceptional costs that affected profitability in the quarter. Despite the single digit category growth rates we are seeing, the Monster Energy brand continued to grow in excess of category growth, both in North America and Europe. Monster Energy Zero Ultra, launched in the third quarter of 2012, has gained considerable traction, and has become our second best-selling product. We are continuing to plan launches in new international markets," Sacks said: "We reiterate that our energy drinks are safe, based on both our and the industry's long track record and the scientific evidence supporting the safety of our ingredients. More than 50 billion cans of energy drinks have been sold and safely consumed worldwide over the past 25 years, including more than 9 billion Monster Energy brand energy drinks."

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