Business context and reporting period
Issuer: Hansen Natural Corporation and subsidiaries (the filing’s registrant name; the request identifies Monster Beverage Corp). This unaudited Form 10-Q covers the quarter ended September 30, 2011, and the nine months then ended, compared with the same periods in 2010. The business sells energy and other beverages through Direct Store Delivery (DSD) and Warehouse segments.
Key financial results
Amounts are in millions of U.S. dollars, except per-share data and case volumes.
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $474.7 | $381.5 | $1,293.3 | $985.3 |
| Gross profit / margin | $250.3 / 52.7% | $197.9 / 51.9% | $680.1 / 52.6% | $515.8 / 52.4% |
| Operating income / margin | $132.1 / 27.8% | $107.6 / 28.2% | $353.0 / 27.3% | $268.0 / 27.2% |
| Net income / margin | $82.4 / 17.4% | $66.5 / 17.4% | $221.7 / 17.1% | $162.9 / 16.5% |
| Diluted EPS | $0.88 | $0.72 | $2.37 | $1.75 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $233.0 | $170.8 |
Balance sheet, liquidity and capital allocation
- At September 30, cash and cash equivalents were $287.2 million and short-term investments were $412.3 million; long-term investments were $26.7 million. Cash plus short-term investments totaled $699.4 million.
- Current assets were $1,038.7 million against current liabilities of $165.9 million. Stockholders’ equity was $932.5 million; total assets were $1,218.4 million.
- Current debt was $1.0 million. The company reported no borrowings on its $10 million revolving credit line; $0.3 million of letters of credit were outstanding. The line was effective through June 1, 2012.
- Nine-month investing cash outflow was $170.7 million, including $19.9 million of property and equipment purchases. Financing cash outflow was $129.1 million, driven by $149.0 million of share repurchases. Cash declined $67.7 million during the period.
- The board authorized a further $250 million repurchase program in October 2011 after the prior $200 million program was exhausted. The company also agreed to purchase a Corona office building for approximately $8.2 million, subject to closing conditions.
Material changes versus the prior comparable period
- Q3 net sales increased 24.4%; nine-month sales increased 31.3%. Management attributed growth primarily to higher Monster Energy sales volumes, consumer demand and international expansion; pricing changes were not material.
- Case sales rose 22.2% in Q3 and 27.9% year to date. Average net sales per case increased 1.8% in Q3 and 2.6% year to date, mainly from a mix shift toward higher-priced products.
- Monster Energy accounted for approximately 95.5% of the Q3 net-sales increase and 95.4% of the nine-month increase. Energy drinks generated $1,186.7 million, or most of nine-month sales.
- Gross margin improved modestly, but Q3 operating margin declined to 27.8% from 28.2% as operating expenses grew 30.8%, faster than sales. Nine-month operating margin was broadly stable.
- Operating cash flow rose to $233.0 million from $170.8 million. Receivables increased $39.2 million and inventories increased $11.8 million, partly offset by higher payables and accrued liabilities.
- International sales grew: 9M sales outside the U.S. were $226.0 million, 17.5% of net sales versus $138.5 million and 14.1% in 2010. CCR, a DSD customer, represented approximately 29% of 2011 net sales.
Outlook, risks, contingencies and unusual items
- Management planned additional Monster Energy launches in South America, Central and Eastern Europe, and Asia during 2012. It expected capital expenditures to be less than $30 million through September 2012, while noting plans and business opportunities could change that estimate. No specific earnings or revenue guidance was provided.
- Management said cash, investments, expected operating cash flows and the credit line should be sufficient for working capital and planned needs for at least 12 months. The company reported failed auctions in its auction-rate securities portfolio and warned of limited near-term liquidity and possible further impairments if market, issuer or credit conditions deteriorate. At September 30 it held auction-rate securities with $48.6 million face value and $39.4 million amortized cost; the filing describes Level 3 valuations and impairments.
- Commodity and packaging costs, fuel, competition, distributor relationships, consumer demand, foreign exchange, international expansion and regulation of energy drinks were identified as risks. The company did not hedge commodity or currency exposure.
- Litigation includes a certified Blue Sky beverage labeling class action, with trial set for July 2012; a Canadian putative class action alleging labeling omissions and claiming CDN$20 million general and CDN$5 million punitive damages; and a securities class action whose dismissal motion remained pending. A derivative action had been dismissed with prejudice and was on appeal. The company disputed the claims; the securities litigation loss range could not be estimated.
- Failed auction-rate securities and related put options generated fair-value and impairment effects, including a $5.0 million other-than-temporary impairment of available-for-sale securities disclosed in the notes. The company also reported a net $0.8 million loss related to investments and put options in other expense for Q3 and nine months.
- Management stated disclosure controls were adequate and effective, with no material change in internal control over financial reporting during the quarter. Results are unaudited, and management cautioned interim results may not indicate full-year performance.
Important facts for investors to verify
- Confirm the issuer and corporate-name continuity: this filing is for Hansen Natural Corporation, not titled Monster Beverage Corp.
- Track whether sales and margins remain driven by energy-drink volume and product mix, and whether promotional allowances and selling expenses continue to rise faster than sales.
- Assess customer and distribution concentration, particularly CCR’s approximately 29% share of net sales, and the execution of international expansion.
- Review auction-rate security liquidity, Level 3 valuation assumptions, put-option counterparty performance and potential further impairment exposure.
- Follow developments in the Blue Sky, Canadian and securities litigation, as well as the derivative appeal, and evaluate possible financial consequences.
- Verify subsequent share repurchases, the new $250 million authorization, planned capital spending and the proposed office-building purchase against cash generation and liquidity.