Business Context and Reporting Period
Company: Hansen Natural Corporation (Parent of Monster Beverage Corp.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2009
Business Overview: The Company develops, markets, and sells alternative beverages, primarily energy drinks under the Monster Energy brand, as well as juice-based and soda beverages. Operations are divided into two segments: Direct Store Delivery (DSD), which accounts for the vast majority of revenue, and Warehouse.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Net Sales | $307,929 | $852,385 |
| Gross Profit | $165,032 | $457,040 |
| Gross Margin % | 53.6% | 53.6% |
| Operating Income | $92,915 | $251,475 |
| Net Income | $56,505 | $155,359 |
| Diluted EPS | $0.60 | $1.63 |
| Cash & Equivalents (Sep 30, 2009) | $317,657 | |
| Short-Term Investments | $30,187 | |
| Long-Term Investments | $87,969 | |
| Total Debt (Current Portion) | $381 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 8.1% for the quarter and 9.4% for the nine-month period compared to 2008. This was driven primarily by volume growth in Monster Energy drinks and new product launches (Monster Energy Import, Nitrous, X-Presso Monster-Hammer).
- Profitability: Operating income rose 13.6% for the quarter and 24.0% for the nine-month period. Gross margins improved due to a favorable product mix shift toward higher-margin DSD products and lower raw material costs (specifically apple juice concentrate).
- Investment Impairments: The Company recorded a $3.9 million other-than-temporary impairment charge on auction rate securities for the nine-month period, compared to none in the prior year. Total other income/expense turned negative due to this charge and lower interest income.
- Cash Flow: Net cash provided by operating activities decreased to $123.2 million for the nine-month period (from $136.2 million in 2008), largely due to a $99.2 million reduction in accrued distributor terminations and a $46.2 million increase in accounts receivable.
Guidance, Outlook, and Risks
- Outlook: Management expects cash from operations and the existing $10 million revolving credit facility to be sufficient for working capital and expansion needs for the next 12 months. Capital expenditures are estimated to be under $20 million through September 2010.
- Investment Liquidity Risk: The Company holds approximately $88.2 million in auction rate securities (Level 3 assets) which have failed to auction. While management does not anticipate a material effect on liquidity, there is a risk of further impairments if credit markets deteriorate or ratings are downgraded.
- Legal Proceedings:
- Securities Litigation: A consolidated class action and derivative suit allege false statements regarding distribution agreements and financial reporting. The Company intends to vigorously defend these claims.
- Consumer Litigation: A class action in Canada alleges misleading labeling regarding adverse reactions to energy drinks. A class action in California regarding Blue Sky beverage labeling was remanded for further proceedings.
- Trademark Victory: The Ninth Circuit affirmed a lower court order enforcing a settlement against National Beverage Company regarding the "Freek" energy drink trade dress.
- Customer Concentration: One customer (Coca-Cola Enterprises) accounted for approximately 30% of net sales for both the three- and nine-month periods ended September 30, 2009.
Investor Verification Checklist
- Auction Rate Securities: Verify the current fair value and liquidity status of the $88.2 million investment in auction rate securities and the potential for future impairment charges.
- Customer Concentration: Assess the risk associated with reliance on a single distributor (Coca-Cola Enterprises) for 30% of total sales.
- Legal Exposure: Monitor the status of the consolidated securities class action and derivative litigation, which could result in significant damages or governance reforms.
- Product Mix: Confirm the sustainability of the gross margin expansion driven by the shift toward Monster Energy drinks versus lower-margin Java Monster and juice products.
- Working Capital: Review the significant increase in accounts receivable ($46.2 million) and the decrease in accrued distributor terminations to ensure cash flow stability.