Hansen Natural Corporation (now Monster Beverage Corp.) — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing is an annual report, not a standalone fourth-quarter filing; it also provides unaudited quarterly results, including Q4 2010.
Business context
The company develops, markets, sells and distributes alternative beverages. Energy drinks dominate its business: the Direct Store Delivery (DSD) segment, primarily energy drinks, generated 93.0% of net sales; the Warehouse segment, primarily juice-based and soda beverages, generated 7.0%. Products are made by third-party bottlers and co-packers. Monster Energy products were sold in more than 57 countries and territories.
Financial performance and liquidity
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Gross sales (management measure) | $1,488.5 million | $1,309.3 million | +13.7% |
| Net sales | $1,303.9 million | $1,143.3 million | +14.1% |
| Gross profit / margin | $680.2 million / 52.2% | $612.3 million / 53.6% | Profit +11.1%; margin down 1.4 points |
| Operating income / margin | $347.8 million / 26.7% | $337.3 million / 29.5% | +3.1%; margin down 2.8 points |
| Net income / diluted EPS | $212.0 million / $2.28 | $208.7 million / $2.21 | Net income +1.6%; diluted EPS +3.4% |
| Operating cash flow | $229.0 million | $156.2 million | +$72.9 million |
| Cash, cash equivalents and investments | $643.7 million | $427.7 million | +$216.0 million |
| Working capital | $769.3 million | $501.8 million | +$267.5 million |
| Debt | $0.274 million | $0.206 million | Low; no revolving-credit borrowings |
Cash flow from investing was negative $212.5 million, largely reflecting investment purchases, property and equipment, and trademark additions. Financing provided $9.2 million; the company repurchased $23.5 million of stock during the year. It had a $10 million revolving credit facility, unused at year-end, and stated that available cash and expected operating cash flows should fund needs for at least the next 12 months.
Changes versus the prior year
- Case sales increased 17.3% to 129.0 million 192-ounce case equivalents, while average net sales per case declined 2.8% to $10.11, reflecting product and geographic mix.
- Growth was led by Monster Energy drinks, Peace Tea, and Extra Strength Nitrous Technology products. Warehouse-segment net sales fell 7.0% to $91.3 million; DSD net sales rose 16.0% to $1,212.6 million.
- Higher raw-material costs, production variances, and product and geographic mix reduced gross margin. Operating expenses rose 20.9%, including higher payroll, professional fees, sponsorships, freight, and point-of-sale costs.
- Net income growth was modest despite higher sales: operating income rose only 3.1%, and the effective tax rate increased to 39.3% from 37.8%.
- FY2009 sales included an estimated 1% benefit from customer advance purchases ahead of a new distributor marketing-contribution program and SAP transition. Management said this affected the comparison.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance was provided. Management identified domestic and international expansion, new products, packaging, pricing, and distribution as growth opportunities. Estimated 2011 capital expenditures were less than $30 million, subject to change.
- Management reported rising 2011 costs for cans, PET bottles, fuel, sugar, juice concentrates, supplements, and other ingredients; it had secured a large portion of anticipated 2011 sugar and apple-juice-concentrate needs. The company generally does not hedge commodity or foreign-currency exposure and may not be able to pass cost increases to customers.
- Customer and distribution concentration is significant: CCE-related entities accounted for approximately 28% of 2010 net sales. The filing also highlights reliance on major bottlers and distributors, including Coca-Cola system bottlers, and on third-party co-packers; alternative capacity is limited for some products.
- Auction-rate securities remained illiquid after failed auctions. At year-end, their face value was $79.6 million and fair value totaled $68.3 million; valuation used Level 3 models and the company recorded impairments. A put arrangement covers $54.2 million par value, with staged sale rights beginning March 2011 and full rights available from March 2013. Further impairment is possible.
- Pending matters included consumer class actions involving Blue Sky product-origin labeling and Canadian Monster Energy labeling, securities and derivative litigation alleging, among other claims, “channel stuffing,” and the company’s FINRA arbitration concerning auction-rate securities. The company said it intended to defend the cases; outcomes were uncertain.
- Other risks include energy-drink criticism and potential sales restrictions, obesity-related regulation or taxes, competition, changing consumer preferences, economic weakness, seasonality, product quality or recall exposure (the company did not maintain recall insurance), and raw-material or production interruptions. Mexico imposed a 25% excise tax on energy drinks effective January 1, 2011; the company said it adjusted caffeine levels in products sold there.
- The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification points
- Check whether case-volume growth and new-product sales can continue, and whether the lower average price per case and declining margins persist.
- Assess the ability to offset inflation in packaging, ingredients, fuel, and co-packing costs through pricing, sourcing, or efficiency.
- Monitor the concentration of sales through CCE-related and other major distributors, and the continuity and capacity of co-packing arrangements.
- Review auction-rate-security valuations, the put provider’s capacity to perform, redemption timing, and any further impairment charges.
- Track the status and potential financial effects of the disclosed consumer, securities, derivative, and FINRA proceedings.
- Reconcile gross sales, a company-defined measure, with GAAP net sales and promotional allowances; also distinguish annual results from the unaudited fourth-quarter figures.