Business Context and Reporting Period
Company: Hansen Natural Corporation (now Monster Beverage Corp.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Hansen Natural Corporation is a holding company that develops, markets, and distributes "alternative" beverages, primarily through its consolidated subsidiary Hansen Beverage Company (HBC). The company operates two reportable segments: Direct Store Delivery (DSD), which focuses on energy drinks (notably the Monster Energy brand), and Warehouse, which focuses on juice-based and soda beverages (Hansen's, Blue Sky). In 2009, the DSD segment accounted for 91.9% of consolidated net sales. The company does not manufacture products directly but relies on third-party bottlers and co-packers.
Key Financial Metrics
| Metric (in thousands) | 2009 | 2008 |
|---|---|---|
| Gross Sales | $1,309,335 | $1,182,876 |
| Net Sales | $1,143,299 | $1,033,780 |
| Gross Profit | $612,316 | $538,794 |
| Gross Margin | 53.6% | 52.1% |
| Operating Income | $337,309 | $163,591 |
| Net Income | $208,716 | $108,032 |
| Diluted EPS | $2.21 | $1.11 |
| Cash & Cash Equivalents | $328,349 | $256,801 |
| Total Debt | $206 | $959 |
| Working Capital | $501,775 | $373,990 |
Note: Debt consists primarily of capital leases. The company had no outstanding borrowings on its $10 million revolving credit facility as of December 31, 2009.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 10.6% to $1.14 billion, driven primarily by volume growth in Monster Energy drinks and new product introductions (e.g., Monster Energy Import, Nitrous Monster Energy). International sales grew significantly to $168.0 million (12.8% of gross sales) from $94.2 million in 2008.
- Profitability Surge: Net income nearly doubled, increasing 93.2% to $208.7 million. Operating income rose 106.2% to $337.3 million.
- Expense Reduction: Operating expenses decreased 26.7% to $275.0 million. This was largely due to a $116.2 million decrease in costs associated with terminating distributors compared to the prior year (which included a one-time $118.1 million charge in 2008).
- Investment Impairment: The company recorded a $3.9 million other-than-temporary impairment charge related to auction rate securities, compared to $0.5 million in 2008. Total impairment on these securities was $12.1 million, with $7.7 million classified as temporary.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook: Management highlighted "Profitable Growth," "Cost Management," and an "Efficient Capital Structure" as key value drivers. The company expects to continue expanding distribution domestically and internationally, with a focus on energy drinks. Capital expenditures are estimated to be less than $20.0 million through December 2010.
Unusual Items:
- Distributor Termination Costs: While 2008 included a massive $118.1 million charge for terminating distributors (DPS Group), 2009 included only $1.9 million in such costs. Conversely, the company recognized $8.2 million in deferred revenue related to new distribution agreements in 2009.
- Auction Rate Securities: The company holds $96.4 million face value of auction rate securities. Auctions failed in 2009, limiting liquidity. The company does not anticipate this will materially affect working capital but notes the risk of additional impairments if credit markets deteriorate.
Risks and Contingencies:
- Customer Concentration: Coca-Cola Enterprises (CCE) accounted for approximately 27% of net sales in 2009. Wal-Mart accounted for 9%.
- Supply Chain: The company relies entirely on third-party bottlers. Disruptions in specific facilities (e.g., for Monster Energy or aseptic juices) could significantly impact revenue.
- Legal Proceedings: The company is defending against securities class action and derivative litigation regarding alleged misstatements about distribution agreements and promotional expenses. Additionally, there is a pending class action in Canada regarding Monster Energy labeling.
- Regulatory: Risks include potential changes in FDA regulations regarding serving sizes and nutrition labeling, as well as California Proposition 65 warning requirements.
Investor Verification Checklist
- Distributor Concentration: Verify the stability of the relationship with CCE (27% of sales) and the impact of the proposed CCE/TCCC transaction on distribution.
- Auction Rate Securities Liquidity: Assess the current fair value and liquidity status of the $84.3 million investment in auction rate securities and the potential for further impairment charges.
- Legal Exposure: Monitor the status of the consolidated securities class action and derivative litigation, as well as the Canadian labeling class action.
- Raw Material Costs: Track the cost of aluminum cans, PET bottles, and juice concentrates, as the company does not hedge these commodity risks.
- International Expansion: Evaluate the success of new distribution agreements in Australia, Mexico, and Europe, which drove the increase in foreign sales to 12.8% of gross sales.