01—Abstract
Summary
Summary of the 10-K filed March 31, 2003. Cited figures are marked; the original filing is the authoritative source.
This is Hansen Natural Corporation's (NASDAQ SmallCap: HANS) 10-K for fiscal 2002, filed March 31, 2003.
The company was later renamed Monster Beverage Corporation, so the filing refers to Hansen, not Monster. Hansen markets alternative beverages, including natural sodas, energy drinks, juices, and Blue Sky and Junior Juice brands, through third-party co-packers. Gross sales rose 15.8% to $115.5 milliona and net sales rose 14.1% to $92.0 million, driven mainly by the Monster energy drink, launched in April 2002, along with Natural Sodas, E2O Energy Water, Energade, and apple juice.
Gross margin was stable at 36.1%, but operating expenses grew 19.9% as selling expenses rose 29.9%, so operating income fell slightly to $5.3 millionb from $5.6 million. Net income was essentially flat at $3.0 million, or $0.29 per diluted share. The company's balance sheet is modest.
Total assets were about $40.5 millionc, shareholders' equity was $28.4 million, and debt was $3.8 million, mostly a Comerica revolving line of credit. Operating cash flow fell to $2.7 million from $5.2 million because receivables grew. Working capital improved to $15.0 million.
Two risks stand out for investors: customer concentration, since Costco accounted for about 18% of sales, and a shift in how promotional spending is reported. Under EITF 01-9, adopted in 2002, roughly $14.8 milliond of promotional payments were reclassified from SG&A to a reduction of net sales. Prior-year figures were restated, so year-over-year comparisons are on a consistent basis.
Insiders, led by CEO Rodney Sacks and director Hilton Schlosberg, control about 42% of shares. The company has a small public float, with nonaffiliate market value of about $23 million, and it has never paid dividends.
02—Key points
Key Highlights
- Record 2002 sales: gross sales of $115.5 million (+15.8%) and net sales of $92.0 million (+14.1%), led by the Monster energy drink, which launched in April 2002.
- Profitability was flat: net income of $3.03 million ($0.29 diluted EPS) was essentially unchanged from 2001, as a 19.9% rise in operating expenses offset gross profit growth of 15.2%.
- Gross margin held at 36.1% of net sales (35.8% in 2001), but higher promotional spending and coupon costs limited gains.
- Operating cash flow weakened to $2.7 million from $5.2 million, mainly due to higher accounts receivable.
- Customer concentration: Costco accounted for about 18% of 2002 sales, and retailers made up 56% of revenue.
- Balance sheet is conservative: about $3.8 million of debt, $28.4 million of equity, and $15.0 million of working capital, though cash is minimal at $0.5 million.
- Insider control and thin trading: insiders hold about 42% of shares, the float is small (nonaffiliate market value about $23 million), and the stock trades on NASDAQ SmallCap with no dividend policy.
03—Questions
Frequently Asked Questions
What drove Hansen's sales growth in 2002?
The main driver was the Monster energy drink, launched in April 2002 in a 16-ounce can. Growth also came from Natural Sodas, E2O Energy Water, Energade sports drinks, apple juice, and soy smoothies. Sales of Signature Soda, Hard e, functional drinks, teas, and some smoothies declined.
Why did net income not grow despite higher sales?
Gross profit rose $4.3 million, but operating expenses rose $4.7 million, mostly from selling expenses that increased 29.9% on higher freight, storage, advertising, and point-of-sale spending. Operating income therefore dipped to $5.3 million from $5.6 million, and net income stayed at about $3.0 million.
Did the reclassification of promotional spending change the reported results?
Yes. Starting in 2002, the company adopted EITF 01-9, which moved about $14.8 million of promotional payments and allowances from SG&A into a reduction of net sales. This lowers reported net sales and SG&A but does not change net income. Prior-year figures were restated to match, so the 2002 vs. 2001 comparison is consistent.
How much risk does the company face from a single customer or supplier?
Risk is significant. Costco represented about 18% of 2002 sales, and losing or reducing that account would materially hurt results. Production is outsourced to third-party bottlers, and some products, including the 8.3-ounce energy cans and sucralose, rely on a single manufacturer or a limited number of packers. Disruptions could affect revenue from those products.
What legal matters could affect investors?
Hansen is suing SoBe and its affiliates, including PepsiCo, for patent and trademark infringement over its rolling-rack shelf structure. SoBe disputes the claim and asserts a settlement. A separate December 2002 class complaint in California challenges products labeled as containing ginseng, and the company says siberian ginseng is not a material ingredient. The company also has a trademark dispute with Skyy Spirits and Miller Brewing over Blue Sky. Management believes none will have a material adverse effect.
04—Continue