Monster Beverage Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Amounts below are in U.S. dollars; per-share figures reflect the subsequent two-for-one stock split. The company, formerly Hansen Natural Corporation, changed its name to Monster Beverage Corporation in January 2012.
Business context
Monster develops, markets, sells and distributes alternative beverages. Its Direct Store Delivery (DSD) segment, primarily energy drinks, generated 94.4% of FY2011 net sales; Warehouse, primarily juice-based and soda beverages, generated 5.6%. Monster Energy-branded drinks accounted for 91.2% of net sales. Products are manufactured by third-party bottlers and co-packers, and Monster Energy products were sold in approximately 70 countries and territories.
Financial performance
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Gross sales, company-defined measure | $1,950.5 million | $1,488.5 million | +31.0% |
| Net sales | $1,703.2 million | $1,303.9 million | +30.6% |
| Gross profit / margin | $894.3 million / 52.5% | $680.2 million / 52.2% | Margin +0.3 percentage points |
| Operating income / margin | $456.4 million / 26.8% | $347.8 million / 26.7% | Income +31.2% |
| Net income / margin | $286.2 million / 16.8% | $212.0 million / 16.3% | Income +35.0% |
| Diluted EPS | $1.53 | $1.14 | +34.5% |
| Case sales (192-ounce equivalents) | 164.7 million | 129.0 million | +27.6% |
| Operating cash flow | $333.8 million | $229.0 million | +$104.8 million |
Growth was driven primarily by higher Monster Energy volumes in existing domestic and international markets and new international markets; management said pricing changes were not a material driver. Monster Energy contributed $446.7 million of the $462.0 million increase in gross sales. Promotional and other allowances rose 34.0% to $247.3 million. Sales and marketing expenditures increased approximately 46.8%.
Fourth-quarter 2011 net sales were $410.0 million versus $318.7 million; gross profit was $214.2 million versus $164.4 million; net income was $64.5 million versus $49.1 million; and diluted EPS was $0.35 versus $0.26.
Cash, debt and liquidity
- At December 31, 2011, cash and cash equivalents were $359.3 million and short- and long-term investments totaled $434.5 million. Working capital was $916.6 million, compared with $769.3 million a year earlier.
- Operating cash flow was $333.8 million; investing activities used $173.0 million and financing activities used $154.2 million. Financing outflows included $176.4 million of share repurchases.
- The company had no borrowings on its $10 million revolving credit line at year-end. Debt consisted principally of $1.1 million in capital leases. Management said available cash, investments and expected operating cash flow should meet needs for at least the next 12 months.
- Management estimated FY2012 capital expenditures would likely be less than $40 million, subject to change with business opportunities. The company authorized a new $250 million repurchase program in October 2011; no purchases under that program were reported for FY2011.
Changes, outlook and risks
- DSD net sales rose 32.6% to $1,608.3 million; Warehouse net sales rose 4.0% to $94.9 million. International gross sales increased to $381.0 million from $240.6 million, or approximately 20% of gross sales versus 16% in 2010.
- Gross margin edged higher, while operating expenses grew slightly faster than sales and operating margin was broadly stable. Operating losses in new and existing international markets were $15.4 million in 2011, versus $9.2 million in 2010.
- Management identified international expansion, product innovation, profitable growth and cost management as priorities. The filing provides no specific revenue or earnings guidance. It noted rising 2012 costs for apple juice concentrate, sugar, PET bottles, fuel and certain ingredients, while reporting that it had secured much of its 2012 aluminum can and sugar requirements and part of its apple concentrate needs.
- Key exposures include dependence on energy drinks and Monster Energy, intense competition, changing consumer preferences and health concerns, possible energy-drink restrictions or taxes, commodity and packaging cost inflation, foreign-exchange exposure, and reliance on major distributors, customers and third-party co-packers. CCR represented approximately 29% of FY2011 net sales.
- Investment liquidity remains a notable issue: auction-rate securities had a $44.8 million face value and $35.9 million amortized cost at year-end; auctions had failed since 2008. Management did not expect this to materially impair liquidity but warned further impairment could be required. FY2011 included a $0.8 million net loss related to investments and put options.
- Legal matters included a proposed settlement, preliminarily approved in February 2012, of the Blue Sky labeling class action; final approval was pending. A Canadian Monster Energy labeling class action sought CDN$20 million in general damages plus CDN$5 million punitive damages. A securities class action remained unresolved, with potential losses not estimable; the related derivative appeal was dismissed in February 2012.
- The company reported effective disclosure controls and internal control over financial reporting; Deloitte issued unqualified opinions on the financial statements and internal controls. A 2010 balance-sheet presentation was adjusted to show certain receivables and promotional allowances gross; the filing states there was no effect on total operating cash flow.
Important facts for investors to verify
- Whether Monster Energy volume growth and international expansion continue, given the high concentration of sales in energy drinks.
- Whether increased promotional spending and input costs affect margins, and whether cost increases can be passed through to customers.
- Distributor and customer concentration, especially CCR’s share of net sales, and the effectiveness of distribution partners.
- The realizable value and timing of recovery for auction-rate securities, and any further impairment charges.
- Developments in the securities and Canadian consumer litigation, and final approval and financial terms of the Blue Sky settlement.
- Execution of the 2012 capital-spending estimate, new share-repurchase authorization and stated liquidity expectations.