Hansen Natural Corporation (now Monster Beverage Corporation) — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. The filing is under the name Hansen Natural Corporation; the financial statements are unaudited and prepared under U.S. GAAP.
Business context and results
The company develops, markets and sells alternative beverages, principally Monster Energy drinks. Its Direct Store Delivery (DSD) segment is primarily energy drinks; its Warehouse segment is primarily juice-based and soda beverages. Management attributed growth mainly to higher energy-drink volume, consumer demand in existing markets and international expansion, rather than pricing. Monster Rehab and Peace Tea Caddy Shack were introduced during the first half.
| Metric | Q2 2011 | Q2 2010 | H1 2011 | H1 2010 |
|---|---|---|---|---|
| Net sales | $462.1m | $365.7m | $818.6m | $603.8m |
| Gross profit / margin | $244.2m / 52.8% | $193.4m / 52.9% | $429.8m / 52.5% | $317.9m / 52.6% |
| Operating income / margin | $132.5m / 28.7% | $109.7m / 30.0% | $220.9m / 27.0% | $160.5m / 26.6% |
| Net income | $84.2m | $63.8m | $139.3m | $96.4m |
| Diluted EPS | $0.90 | $0.69 | $1.49 | $1.04 |
| Operating cash flow | — | $124.0m | $126.7m |
Financial position and material changes
- Q2 net sales grew 26.4%; H1 net sales grew 35.6%. Energy drinks accounted for approximately 92% of the Q2 net-sales increase and 95% of the H1 increase. Case volume rose 23.5% in Q2 and 31.4% in H1.
- Gross margin was nearly flat year over year, while operating margin fell 1.3 percentage points in Q2, reflecting operating expenses growing faster than sales, particularly selling and marketing costs. H1 operating margin improved 0.4 points.
- H1 net income rose 44.5%, but operating cash flow was slightly lower than in the prior-year period. Receivables reduced H1 operating cash flow by $61.3m as accounts receivable increased.
- At June 30, cash and cash equivalents were $418.2m and short- and long-term investments were $311.4m. Current assets were $1,054.1m versus current liabilities of $161.9m. The balance sheet reported a $1.3m current portion of debt; the company had no borrowings on its $10m revolving credit line.
- H1 investing cash outflow was $34.9m, including $12.3m for property and equipment; financing cash outflow was $27.1m, including $38.9m of treasury-stock purchases. The company repurchased 0.7m shares at an average $54.88 and had $137.6m remaining under its repurchase authorization.
- CCR, a DSD customer, represented about 30% of Q2 and 29% of H1 net sales. International customers represented 16.9% of Q2 and 16.3% of H1 net sales.
Outlook, risks and unusual items
- Management said available cash, investments, operating cash flow and the credit line should be sufficient for working capital and other needs for at least 12 months. It estimated capital expenditures would likely be below $30m through June 2012, subject to change with business opportunities. No revenue or earnings guidance was provided.
- Key risks include dependence on Monster Energy sales and major distributors/customers; competition and consumer demand; costs and availability of ingredients, packaging and fuel; international expansion, currency and regulatory risks; and the ability to manage receivables and inventory.
- The company held auction-rate securities with $65m face value, which remained exposed to failed auctions and limited near-term liquidity. It recorded a $5m other-than-temporary credit-loss impairment on available-for-sale auction-rate securities; further impairment remained possible. Management did not expect the liquidity constraints to materially affect working capital, citing other available liquidity.
- Operating losses in newer and existing markets in Europe, the Middle East, Africa, Australia and Brazil were $5.7m in Q2 and $8.8m in H1. Q2 operating expenses included $1.6m related to a legal settlement and $1.0m of insurance reimbursements.
- Significant litigation included a pending consumer class action concerning Blue Sky labeling, a Canadian putative class action concerning Monster labeling, and securities litigation alleging, among other things, channel stuffing. The securities class-action dismissal motion remained pending; a derivative action had been dismissed with prejudice, with an appeal filed. The company said it would vigorously defend the matters; the potential loss range for the securities class action could not be estimated. The Oppenheimer auction-rate-securities dispute was dismissed with prejudice after an agreement on terms acceptable to the company; terms were not disclosed.
- Management identified no material change to the risk factors in its 2010 Form 10-K and reported disclosure controls as adequate and effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether subsequent filings show continued energy-drink volume growth and how promotional allowances and operating expenses affect margins.
- Receivables growth, cash conversion and customer concentration, especially CCR’s share of sales.
- Realization, liquidity and valuation of auction-rate securities and related put options, including any further impairment.
- Developments and potential financial exposure in the securities and consumer litigation.
- Actual capital expenditures and share repurchases compared with management’s stated expectations and remaining authorization.