Hansen Natural Corporation (now Monster Beverage Corporation) — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010; financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise. The filing was submitted under the name Hansen Natural Corporation.
Business context and performance
The company develops, markets and sells energy drinks and other beverages. Its Direct Store Delivery (DSD) segment is primarily energy drinks; its Warehouse segment is primarily juice-based and soda beverages. Products are manufactured by third-party bottlers and co-packers. Monster Energy sales are a major driver of results.
| Metric | Q2 2010 | Q2 2009 | H1 2010 | H1 2009 |
|---|---|---|---|---|
| Gross sales | $415.3 | $345.8 | $685.9 | $624.7 |
| Net sales | $365.7 | $300.3 | $603.8 | $544.5 |
| Gross profit / margin | $193.4 / 52.9% | $161.8 / 53.9% | $317.9 / 52.6% | $292.0 / 53.6% |
| Operating income / margin | $109.7 / 30.0% | $92.8 / 30.9% | $160.5 / 26.6% | $158.6 / 29.1% |
| Net income | $63.8 | $57.3 | $96.4 | $98.9 |
| Diluted EPS | $0.69 | $0.60 | $1.04 | $1.04 |
| Case sales (millions of 192-ounce equivalents) | 35.9 | 29.3 | 60.1 | 52.7 |
Financial position, cash flow and capital
- At June 30, cash and cash equivalents were $409.9 million, short-term investments $61.7 million and long-term investments $59.5 million. Total assets were $964.9 million; stockholders’ equity was $678.5 million.
- Current liabilities were $158.9 million, including $87.5 million accounts payable and $19.3 million income taxes payable. Debt was minimal: $0.135 million current debt, no borrowings on the $10 million revolving credit facility, and $0.2 million of letters of credit outstanding. The facility runs through June 2012; the company reported compliance with its covenants.
- For H1, operating cash flow was $126.7 million, versus $31.0 million in 2009; investing cash flow was negative $31.1 million and financing cash flow negative $12.1 million. Cash increased $81.6 million to $409.9 million.
- Operating cash flow benefited from increases in accounts payable, accrued liabilities and income taxes payable, while receivables and inventory growth used cash. H1 inventory rose to $139.2 million from $108.1 million at year-end.
- H1 investing included $4.4 million of property and equipment purchases and $6.3 million of intangible additions. Management estimated capital expenditures would likely be below $20 million through June 2011, subject to change with business opportunities.
- The board authorized up to $200 million of share repurchases in March. The company bought 624,721 shares during Q2 for an average $37.68 per share; approximately $176.4 million remained authorized at quarter-end.
Changes versus the prior comparable periods
- Q2 net sales grew 21.8%, driven mainly by higher Monster Energy volume and sales of Nitrous Monster Energy and Peace Tea. Case volume rose 22.6%; average net sales per case declined 0.6% to $10.20, reflecting product and geographic mix.
- H1 net sales rose 10.9%, while case volume increased 13.9%; average net sales per case fell 2.7% to $10.05. Management said 2009 fourth-quarter customer advance purchases—related to a new distributor marketing contribution program and the planned SAP transition—reduced the year-over-year H1 comparison.
- Gross margin fell 1.0 percentage point in both Q2 and H1, attributed mainly to lower-margin DSD products and geographic mix. H1 operating expenses increased 18.0%, faster than sales, and operating margin declined 2.5 percentage points.
- Q2 net income increased 11.4%; H1 net income declined 2.5%, despite higher sales, primarily reflecting higher operating expenses and taxes. H1 tax expense included a $4.2 million increase from a full valuation allowance against a foreign subsidiary’s deferred tax asset.
- DSD generated 93.3% of Q2 net sales and 92.5% of H1 net sales. Warehouse sales declined 8.9% in Q2 and 9.4% in H1. One customer, Coca-Cola Enterprises, accounted for 35% of Q2 and 36% of H1 net sales.
Outlook, risks, contingencies and unusual items
- No specific revenue or earnings guidance is provided. Management described international expansion and new products as growth priorities and said seasonal beverage sales generally tend to be lower in the first and fourth quarters.
- European and Australian operations recorded operating losses of $4.3 million in Q2 and $8.2 million in H1, compared with $1.7 million and $0.9 million, respectively, in 2009.
- Auction-rate securities remained illiquid after failed auctions. At June 30, the company reported $87.3 million face value and $76.2 million fair value of these securities, using Level 3 valuation models. It recorded a $4.1 million other-than-temporary credit impairment and a $2.4 million temporary impairment; additional impairment remains possible. A put arrangement covers $54.2 million par value, with staged sale rights beginning March 2011 and full sale rights from March 2013. The put option was valued at $4.1 million at quarter-end.
- Material legal matters include a certified U.S. consumer class action over Blue Sky product-origin labeling; a Canadian putative class action concerning Monster Energy labeling, seeking CDN$20 million general and CDN$5 million punitive damages; securities and derivative litigation (dismissed with leave to amend at the time of filing); and the company’s FINRA arbitration concerning auction-rate securities. The company said it intended to defend the consumer and shareholder claims. Management stated that ordinary-course litigation was not expected, in aggregate, to materially adversely affect results or financial position.
- Other commitments included $16.7 million of raw-material purchase commitments and $51.1 million of noncancelable contracts, primarily sponsorships and marketing. Risks cited include competition, customer and distributor concentration, commodity and packaging costs, foreign-market execution and currency exposure, regulation, litigation, and SAP-system stabilization. The filing reported disclosure controls as adequate and effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth and volume gains continued after Q2, and whether weaker average realized pricing and gross margins persisted.
- Customer concentration, especially Coca-Cola Enterprises’ share of sales, and the impact of distributor or customer changes.
- Cash-flow quality: the extent to which H1 operating cash flow depended on increases in payables, accruals and tax liabilities.
- Recoverability and liquidity of auction-rate securities, assumptions behind Level 3 valuations and the put option, and any subsequent redemptions or impairments.
- Developments in the Blue Sky and Canadian consumer cases, amended shareholder complaints and the FINRA arbitration.
- International operating losses, the foreign deferred-tax-asset valuation allowance, and spending under repurchase, marketing and capital plans.