Monster Beverage Corp quarterly report, Q1 FY2011

Business context and reporting period

Hansen Natural Corporation (the issuer named in this filing; the filing does not use the Monster Beverage Corp. name) reported unaudited results for the three months ended March 31, 2011, compared with the same period in 2010. Its Direct Store Delivery (DSD) segment is primarily energy drinks; its Warehouse segment is primarily juice-based and soda beverages. Energy drinks accounted for $327.6 million of first-quarter net sales.

Financial performance and liquidity

Sales growth was mainly volume-driven: case sales rose 43.3% to 34.7 million 192-ounce case equivalents, while average net sales per case increased 4.5% to $10.28, largely from product mix. Management said pricing changes were not a material growth driver. Gross sales rose 50.6%; promotional and other allowances increased 57.7% to $51.2 million.

At March 31, cash and cash equivalents were $295.5 million and short- and long-term investments totaled approximately $329.4 million. Total assets were $1.132 billion, current liabilities $155.2 million, and stockholders’ equity $853.6 million. The balance sheet reports $1.6 million of current debt, principally capital lease obligations. The $10 million revolving credit line was undrawn; $0.2 million of letters of credit were outstanding. The company repurchased 0.7 million shares for $38.9 million during the quarter.

Material changes versus the prior comparable period

• Net sales increased $118.3 million; Monster Energy brand drinks contributed $115.7 million of that increase. DSD sales rose 54.1%, while Warehouse sales grew 3.5%; Warehouse contribution margin was negative $0.3 million.
• Operating expenses increased 31.6% to $97.1 million, but fell as a share of net sales, from 31.0% to 27.2%, supporting higher operating margin. Gross margin edged down 0.2 percentage points.
• Operating cash flow declined despite higher earnings, principally reflecting a $47.6 million increase in accounts receivable and a $19.5 million increase in inventories. Investing cash outflow was $48.5 million; financing cash outflow was $34.7 million, mainly from share repurchases.
• International net sales increased to $55.5 million from $29.4 million and represented 15.6% of net sales, versus 12.3%. CCR, which took over the former CCE distribution operations, represented approximately 30% of sales, compared with CCE at 35% in Q1 2010.

Outlook, commentary, risks and unusual items

• Management expected cash resources, operating cash flow and the credit facility to cover working capital and other anticipated needs for at least 12 months. It estimated capital expenditures would likely be below $30 million through March 2012, subject to change with business opportunities.
• Planned international launches included Portugal, Greece, Cyprus and the Baltic States in the first half of 2011, with additional markets in Central and Eastern Europe, South America and Asia targeted for the second half. New products introduced in the quarter included Monster Rehab and Peace Tea “Caddy Shack.” No specific full-year revenue or earnings guidance was provided.
• Investment liquidity remains a notable risk: auction-rate securities had failed auctions, limiting near-term liquidity. At quarter-end, the company held $78.6 million face value of these securities; available-for-sale securities had a $7.2 million impairment, of which $5.0 million was deemed other-than-temporary and $2.2 million temporary. The company reported that $13.6 million par value was redeemed through its put option after quarter-end. Management warned further impairments were possible.
• Key operating risks cited included reliance on Monster Energy sales, competitive pressure, raw-material and packaging costs, customer and distributor concentration, international expansion and currency exposure, and regulatory or consumer criticism of energy drinks. The company did not hedge commodity or foreign-exchange risks.
• Pending matters included consumer class actions concerning Blue Sky labeling and Monster product warnings, securities and derivative litigation alleging prior-period misstatements and channel stuffing, and the company’s FINRA arbitration concerning auction-rate securities. Management said it intended to defend the matters; the filing states that potential losses in the securities class action could not be estimated.
• Other notable items: the effective tax rate rose to 38.0% from 37.1%; foreign operations generated combined operating losses of $3.1 million. The first-quarter adoption of new revenue-arrangement guidance was reported as having no material financial effect.

Important facts for investors to verify

• Whether sales and case-volume growth continued after Q1, and how much depended on Monster Energy products and the comparison against prior-year advance purchases.
• Accounts-receivable and inventory growth, subsequent collections, and the effect of working-capital needs on cash generation.
• Realized recoveries and remaining exposure from auction-rate securities, including any further impairments or changes in put-option valuation.
• CCR’s continuing distribution role and the company’s exposure to major customers and distributors.
• Progress and costs of international launches, as well as the status and potential consequences of the disclosed litigation.
• Use of the remaining share-repurchase authorization and actual capital expenditures relative to management’s estimate.