What drove the revenue growth in 2003?

The increase was primarily due to sales of the Monster Energy drink, introduced in April 2002, including its low-carb version launched in 2003. Natural sodas, particularly diet varieties, the Energy Deuce drink, Junior Juice, and apple juice also contributed. Sales of 8.3-ounce energy drinks, smoothies, E2O Energy Water, and Energade declined.

Is the company's profitability improving sustainably?

Gross margin improved to 39.7% from 36.1%, aided by a richer mix of higher-margin products. However, promotional payments and allowances rose sharply (total discounts and allowances reached $28.1 million, up from $23.4 million), and management expects pressure from rising glass, plastic and aluminum costs. The WIC apple juice contract is expected to carry lower margins than the traditional juice business.

How concentrated is the customer base and supply chain?

Costco accounted for about 15% of 2003 sales, and the loss of or reduced purchases by Costco or another major customer could materially hurt results. The company outsources all manufacturing to third-party bottlers and co-packers, several of which are on month-to-month terms. Certain inputs, including sucralose and 8.3-ounce energy drink cans, come from a single supplier.

What legal risks should investors be aware of?

The company is in settlement talks with The Coca-Cola Company and its Odwalla unit over the Monster trademark, and says it will pursue the matter vigorously if no settlement is reached. A trial against Skyy Spirits and Miller Brewing over the Blue Sky trademark was scheduled for April 2004. Tree Top has petitioned to overturn the WIC apple juice award. Management says none of these is expected to have a material adverse effect.

MNST 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 30, 2004. Cited figures are marked; the original filing is the authoritative source.

Hansen Natural Corporation (NASDAQ Small-Cap: HANS; now Monster Beverage) reported record 2003 results driven by its Monster Energy drink, launched in April 2002.

Gross sales rose 19.9% to $138.5 million^a and net sales rose 19.9% to $110.4 million. Gross margin improved to 39.7% from 36.1%, and operating income nearly doubled to $9.8 million from $5.3 million. Net income reached $5.9 million, or $0.55 per diluted share, versus $3.0 million ($0.29) in 2002.

Part of the margin gain came from a higher mix of higher-margin products, though promotional payments and allowances rose. The balance sheet strengthened: shareholders' equity grew to $35.0 million, long-term debt fell to $0.4 million^b from $3.6 million, and the Comerica revolving line had no drawn balance at year-end. Operating cash flow was $5.5 million.

Inventory rose to $17.6 million^c from $11.6 million, which absorbed cash and is a watch item. The company also plans to expand its national sales force in 2004, has won a lower-margin California WIC apple juice contract (which a competitor is protesting), and launched the Lost energy drink in early 2004.

Key risks include heavy dependence on energy drinks and on Costco (about 15%^d of 2003 sales), co-packer concentration, rising glass, plastic and aluminum costs, and pending litigation with The Coca-Cola Company over the Monster trademark and with Skyy Spirits over Blue Sky. Management and directors control roughly 44% of shares, and the company has never paid dividends.

02—Key points

Key Highlights

Record 2003 net sales of $110.4 million, up 19.9%, led by the Monster Energy drink (launched April 2002) and natural sodas.
Gross profit rose 31.7% to $43.8 million, and gross margin expanded to 39.7% from 36.1%.
Operating income nearly doubled to $9.8 million from $5.3 million, a rise of 85.6%.
Net income of $5.9 million, or $0.55 per diluted share, versus $0.29 in 2002.
Balance sheet strengthened: long-term debt reduced to $0.4 million and the revolving credit line undrawn at year-end; equity reached $35.0 million.
Working capital rose to $17.2 million, but inventory climbed 52% to $17.6 million, a cash use to monitor.
Concentration and litigation risk: Costco represented about 15% of sales, and the Monster name is contested by Coca-Cola's Odwalla unit.

03—Questions

Frequently Asked Questions

What drove the revenue growth in 2003?
The increase was primarily due to sales of the Monster Energy drink, introduced in April 2002, including its low-carb version launched in 2003. Natural sodas, particularly diet varieties, the Energy Deuce drink, Junior Juice, and apple juice also contributed. Sales of 8.3-ounce energy drinks, smoothies, E2O Energy Water, and Energade declined.
Is the company's profitability improving sustainably?
Gross margin improved to 39.7% from 36.1%, aided by a richer mix of higher-margin products. However, promotional payments and allowances rose sharply (total discounts and allowances reached $28.1 million, up from $23.4 million), and management expects pressure from rising glass, plastic and aluminum costs. The WIC apple juice contract is expected to carry lower margins than the traditional juice business.
How concentrated is the customer base and supply chain?
Costco accounted for about 15% of 2003 sales, and the loss of or reduced purchases by Costco or another major customer could materially hurt results. The company outsources all manufacturing to third-party bottlers and co-packers, several of which are on month-to-month terms. Certain inputs, including sucralose and 8.3-ounce energy drink cans, come from a single supplier.
What legal risks should investors be aware of?
The company is in settlement talks with The Coca-Cola Company and its Odwalla unit over the Monster trademark, and says it will pursue the matter vigorously if no settlement is reached. A trial against Skyy Spirits and Miller Brewing over the Blue Sky trademark was scheduled for April 2004. Tree Top has petitioned to overturn the WIC apple juice award. Management says none of these is expected to have a material adverse effect.

04—Continue

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