What drove Hansen's exceptional revenue growth in 2005?

Growth was driven primarily by volume increases in Monster Energy drinks (launched in 2002, with lo-carb, Assault, and Khaos variants added over time) and Lost energy drinks (launched January 2004). Joker Mad Energy, Rumba energy juice, and apple juice and juice blends contributed to a lesser extent. Declines in Hansen's natural sodas, Hansen's energy drinks, Energade, and canned smoothies partly offset these gains. The company also expanded its national sales force and distribution outside California, which accounted for 62% of gross sales in 2005.

How concentrated is the business, and what are the main risks?

The business is concentrated in energy drinks, which made up 77.4% of 2005 net sales, and particularly in Monster Energy. One customer represented about 18% of sales. The company relies on third-party bottlers and co-packers, most of which operate on month-to-month arrangements, and on a single supplier for sucralose. Competition is intense from larger companies such as Coca-Cola, PepsiCo, and Red Bull, and the company's products could lose market share or face price erosion. The company carries no product recall insurance.

What is the outlook for margins and costs in 2006?

Management said that higher costs for PET plastic bottles, aluminum cans, high fructose corn syrup, sucrose, juice concentrates, energy, freight, and glass are expected to continue to pressure gross margins in 2006. The company does not use hedging or derivative instruments to manage these input costs. It also said that capital expenditures should be under $5 million through December 2006, and it committed to purchase a minimum volume of 24-ounce cans from Rexam for 2006 through 2009, with a maximum liability of $4.3 million if it falls short.

Who controls the company, and does it pay dividends?

Co-founders Rodney Sacks (Chairman and CEO) and Hilton Schlosberg (Vice Chairman, CFO, and COO) may be deemed to control about 21.2% and 20.9% of outstanding common stock, respectively, through direct holdings and several limited partnerships. Together with other executives and directors, insiders hold about 31.4%, which gives them significant influence over elections and major transactions. The company has never paid cash dividends and does not anticipate doing so in the foreseeable future. Its stock was split two-for-one in August 2005, and the stock price rose sharply during 2005, reaching a Q4 high of $86.71 on a split-adjusted basis.

Are there any material legal proceedings?

Two matters were disclosed. The Flathead Lake Monster litigation, which concerned use of the 'Monster' mark by North American Beverage Company and a related counterclaim, was settled in December 2005 on terms the company describes as favorable. A separate motion by Barrington Capital Corporation and Sandburg Financial Corporation seeks to add Hansen and its subsidiaries as judgment debtors on a 1996 default judgment against the unrelated Hansen Foods, Inc. Management strongly disputes the motion and believes it lacks merit, and the company does not expect it to have a material adverse effect.

MNST 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 15, 2006. Cited figures are marked; the original filing is the authoritative source.

Hansen Natural Corporation (NASDAQ: HANS; the filing predates the company's later rename to Monster Beverage and its MNST ticker) reported record fiscal 2005 results driven by its Monster Energy and Lost energy drinks.

Net sales rose 93.5% to $348.9 million^a from $180.3 million, and gross profit rose 118.7% to $182.5 million, lifting gross margin to 52.3% from 46.3%. Operating income grew to $103.4 million from $33.9 million, and net income reached $62.8 million, or $2.59 per diluted share, versus $20.4 million, or $0.86, in 2004. The energy drink (DSD) segment accounted for 77.4% of net sales, so results depend heavily on one product category and a few brands.

The balance sheet strengthened considerably. Cash and cash equivalents reached $61.7 million^b, working capital was $107.1 million, and the company had no borrowings under its $7.8 million Comerica credit line. Operating cash flow was $54.6 million.

Stockholders' equity rose to $125.5 million^c from $58.6 million. The company has never paid cash dividends and does not plan to. Management expects input cost pressure (PET, aluminum, high fructose corn syrup, juice concentrates, freight) to weigh on gross margins in 2006, and it flagged sucralose supply limits and co-packer capacity constraints as operational risks.

Key risks include dependence on the energy drink category and Monster Energy, a single customer representing about 18%^d of sales, reliance on outsourced bottlers and co-packers, and concentrated insider ownership (Rodney Sacks and Hilton Schlosberg together may be deemed to control about 21.2% and 20.9%, respectively, of shares outstanding). Management also expects the adoption of SFAS 123(R) in 2006 to have a material effect on reported earnings. The Flathead Lake Monster trademark dispute was settled in December 2005 on terms the company considers favorable, while a separate Barrington Capital motion to add the company as a judgment debtor is being vigorously opposed.

02—Key points

Key Highlights

Record 2005 net sales of $348.9 million, up 93.5% year over year, with case volume up 62.0% to 48.2 million cases and average net price per case up 19.5% to $7.24
Gross margin expanded to 52.3% from 46.3%, driven by higher-margin Monster Energy and Lost energy drink sales, partly offset by higher promotional allowances
Net income of $62.8 million ($2.59 diluted EPS) versus $20.4 million ($0.86) in 2004; operating margin improved to 29.6% from 18.8%
Energy drinks (DSD segment) represented 77.4% of net sales, creating significant concentration risk around Monster Energy
Balance sheet strengthened: cash of $61.7 million, working capital of $107.1 million, stockholders' equity of $125.5 million, and no borrowings under the $7.8 million credit line
Management expects raw material and packaging cost inflation to pressure gross margins in 2006; sucralose supply is subject to volume limits, and SFAS 123(R) adoption is expected to be material
One customer accounted for about 18% of 2005 sales (13% in 2004), and insiders Sacks and Schlosberg together may be deemed to control roughly 42% of shares

03—Questions

Frequently Asked Questions

What drove Hansen's exceptional revenue growth in 2005?
Growth was driven primarily by volume increases in Monster Energy drinks (launched in 2002, with lo-carb, Assault, and Khaos variants added over time) and Lost energy drinks (launched January 2004). Joker Mad Energy, Rumba energy juice, and apple juice and juice blends contributed to a lesser extent. Declines in Hansen's natural sodas, Hansen's energy drinks, Energade, and canned smoothies partly offset these gains. The company also expanded its national sales force and distribution outside California, which accounted for 62% of gross sales in 2005.
How concentrated is the business, and what are the main risks?
The business is concentrated in energy drinks, which made up 77.4% of 2005 net sales, and particularly in Monster Energy. One customer represented about 18% of sales. The company relies on third-party bottlers and co-packers, most of which operate on month-to-month arrangements, and on a single supplier for sucralose. Competition is intense from larger companies such as Coca-Cola, PepsiCo, and Red Bull, and the company's products could lose market share or face price erosion. The company carries no product recall insurance.
What is the outlook for margins and costs in 2006?
Management said that higher costs for PET plastic bottles, aluminum cans, high fructose corn syrup, sucrose, juice concentrates, energy, freight, and glass are expected to continue to pressure gross margins in 2006. The company does not use hedging or derivative instruments to manage these input costs. It also said that capital expenditures should be under $5 million through December 2006, and it committed to purchase a minimum volume of 24-ounce cans from Rexam for 2006 through 2009, with a maximum liability of $4.3 million if it falls short.
Who controls the company, and does it pay dividends?
Co-founders Rodney Sacks (Chairman and CEO) and Hilton Schlosberg (Vice Chairman, CFO, and COO) may be deemed to control about 21.2% and 20.9% of outstanding common stock, respectively, through direct holdings and several limited partnerships. Together with other executives and directors, insiders hold about 31.4%, which gives them significant influence over elections and major transactions. The company has never paid cash dividends and does not anticipate doing so in the foreseeable future. Its stock was split two-for-one in August 2005, and the stock price rose sharply during 2005, reaching a Q4 high of $86.71 on a split-adjusted basis.
Are there any material legal proceedings?
Two matters were disclosed. The Flathead Lake Monster litigation, which concerned use of the 'Monster' mark by North American Beverage Company and a related counterclaim, was settled in December 2005 on terms the company describes as favorable. A separate motion by Barrington Capital Corporation and Sandburg Financial Corporation seeks to add Hansen and its subsidiaries as judgment debtors on a 1996 default judgment against the unrelated Hansen Foods, Inc. Management strongly disputes the motion and believes it lacks merit, and the company does not expect it to have a material adverse effect.

04—Continue

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