How much of Hansen's 2006 growth came from Monster Energy, and how concentrated is the business?

Monster Energy is the core driver. The DSD segment, which is primarily energy drinks, produced 85% of 2006 net sales ($514.3M of $605.8M), up from about 73% in 2005. The 10-K attributes growth mainly to Monster Energy, including the Monster Energy Khaos line introduced in 2005. This concentration is a major risk factor, since a decline in Monster sales would significantly hurt revenue and earnings.

Why was the 10-K filed late, and what could the legal issues mean for shareholders?

The filing was delayed by a special committee investigation into historical stock option grant dating from 2001 to 2006. The committee found no willful misconduct, but it did identify inadequate internal controls and roughly $1.3M in cumulative unrecorded non-cash compensation expense. Shareholder class actions and derivative suits seek unspecified damages, and an SEC informal inquiry is ongoing. The 10-K does not estimate potential losses, so the financial outcome is uncertain. The late filings also triggered Nasdaq notices and a one-year S-3 registration restriction.

Is the company's profitability sustainable given rising input costs and the new distributor structure?

Profitability is strong, with a 26.2% operating margin in 2006, but both pressures are real. Input costs for aluminum, PET, sweeteners, and juice concentrates rose in 2006 and continued into 2007, and the company does not use hedges. Operating margin fell from 29.6% in 2005 because general and administrative expenses rose sharply, partly from one-time distributor termination costs of $12.7M and about $8.3M of stock compensation. The $20.9M in AB distributor payments is deferred and will be recognized as revenue over about 20 years, so it adds to future revenue without boosting near-term cash income.

How strong is the balance sheet, and what did the company do with its cash?

The balance sheet is conservative. Total assets were $308.4M and stockholders' equity was $225.1M, up from $125.5M. The company had no borrowings on its credit line at year-end and $136.8M in cash and short-term investments. In 2006 it repurchased 1.0 million shares at an average of $27.70 for $27.7M and spent about $2.7M on property and equipment. Management believes operating cash flow and existing liquidity will cover needs for at least the next twelve months.

MNST 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed June 6, 2007. Cited figures are marked; the original filing is the authoritative source.

This Form 10-K from Hansen Natural Corporation (ticker HANS, later renamed Monster Beverage Corporation, MNST) covers fiscal 2006 and was filed late, on June 5-6, 2007, because of an internal review of historical stock option grant practices.

Results were strong. Net sales rose 73.6% to $605.8 million^a, driven mainly by the Monster Energy brand within the Direct Store Delivery (DSD) segment, which made up 85% of net sales. Gross margin held at 52.3%, operating income grew 53% to $158.6 million, and net income rose 56% to $97.9 million, or $0.99 per diluted share.

Operating cash flow was $76.4 million^b, and the company ended the year with $136.8 million in cash and short-term investments, no outstanding borrowings, and working capital of $212.3 million. The main investor concerns are governance and legal, not operations. The company faces securities class actions, shareholder derivative suits, and an SEC informal inquiry tied to stock option dating.

It also received several Nasdaq staff determinations for late filings, and it will be ineligible to use Form S-3 for one year, which limits its ability to raise capital quickly. Business risks include heavy dependence on energy drinks and on Monster Energy in particular, customer concentration (Cadbury Schweppes Bottling Group 19%^c and Wal-Mart 12% of net sales), reliance on third-party co-packers, and rising costs for aluminum cans, PET bottles, sweeteners, and juice concentrates that management expects to pressure 2007 gross margins. The company also changed its distribution model.

Anheuser-Busch distributors paid $20.9 million^d to cover termination of prior distributors, recorded as deferred revenue and recognized over a 20-year term. Management expenses that were also high in 2006: distributor termination costs of $12.7 million, a $27.7 million share repurchase, and $8.3 million of stock-based compensation under SFAS 123R. Overall, the filing shows a fast-growing, highly profitable beverage company whose near-term risk depends on resolving its legal and filing issues.

02—Key points

Key Highlights

Record 2006 results: net sales up 73.6% to $605.8M, gross profit up 73.4% to $316.6M at a stable 52.3% gross margin, and net income up 56.0% to $97.9M ($0.99 diluted EPS).
Monster Energy drove growth. The DSD energy drink segment generated $514.3M, or 85% of net sales, up 95.6%. Case sales rose 50.9% to 72.7 million cases, and the average net price per case increased 15% to $8.33.
Strong liquidity: $136.8M in cash and short-term investments, no outstanding debt on the $10M Comerica credit line, and $76.4M of operating cash flow, with capital expenditures under $3M.
Serious governance and legal exposure: securities class actions, shareholder derivative suits, and an SEC inquiry related to stock option dating. The special committee found no willful misconduct, but the matters remain unresolved.
Listing and capital-access risk: multiple Nasdaq late-filing notices, and the company will be ineligible to use Form S-3 for one year, which could hinder raising capital.
Customer and supplier concentration: Cadbury Schweppes Bottling Group (19%) and Wal-Mart (12%) account for a large share of sales, and key inputs such as sucralose come from single suppliers.
Margin pressure ahead: management expects rising aluminum, PET, sweetener, juice, and freight costs to keep pressuring gross margins in 2007, and the company does not hedge these commodity exposures.

03—Questions

Frequently Asked Questions

How much of Hansen's 2006 growth came from Monster Energy, and how concentrated is the business?
Monster Energy is the core driver. The DSD segment, which is primarily energy drinks, produced 85% of 2006 net sales ($514.3M of $605.8M), up from about 73% in 2005. The 10-K attributes growth mainly to Monster Energy, including the Monster Energy Khaos line introduced in 2005. This concentration is a major risk factor, since a decline in Monster sales would significantly hurt revenue and earnings.
Why was the 10-K filed late, and what could the legal issues mean for shareholders?
The filing was delayed by a special committee investigation into historical stock option grant dating from 2001 to 2006. The committee found no willful misconduct, but it did identify inadequate internal controls and roughly $1.3M in cumulative unrecorded non-cash compensation expense. Shareholder class actions and derivative suits seek unspecified damages, and an SEC informal inquiry is ongoing. The 10-K does not estimate potential losses, so the financial outcome is uncertain. The late filings also triggered Nasdaq notices and a one-year S-3 registration restriction.
Is the company's profitability sustainable given rising input costs and the new distributor structure?
Profitability is strong, with a 26.2% operating margin in 2006, but both pressures are real. Input costs for aluminum, PET, sweeteners, and juice concentrates rose in 2006 and continued into 2007, and the company does not use hedges. Operating margin fell from 29.6% in 2005 because general and administrative expenses rose sharply, partly from one-time distributor termination costs of $12.7M and about $8.3M of stock compensation. The $20.9M in AB distributor payments is deferred and will be recognized as revenue over about 20 years, so it adds to future revenue without boosting near-term cash income.
How strong is the balance sheet, and what did the company do with its cash?
The balance sheet is conservative. Total assets were $308.4M and stockholders' equity was $225.1M, up from $125.5M. The company had no borrowings on its credit line at year-end and $136.8M in cash and short-term investments. In 2006 it repurchased 1.0 million shares at an average of $27.70 for $27.7M and spent about $2.7M on property and equipment. Management believes operating cash flow and existing liquidity will cover needs for at least the next twelve months.

04—Continue

← View all 10-K filings