01—Abstract
Summary
Summary of the 10-K filed March 2, 2009. Cited figures are marked; the original filing is the authoritative source.
Hansen Natural Corporation (the filing's registrant name; the ticker was HANS in 2009, and the company later became Monster Beverage Corp, MNST) reported record FY2008 results on the top line but a sharp profit decline.
Net sales rose 14.3% to $1,033.8 milliona and gross sales rose 15.3% to $1,182.9 million, driven by Monster Energy and Java Monster. Net income fell 27.7% to $108.0 million, and diluted EPS dropped to $1.11 from $1.51. Operating income fell 29.2% to $163.6 million, and operating margin compressed from 25.5% to 15.8%.
The decline was driven mainly by $118.1 millionb of one-time distributor termination costs as the company moved its energy drink distribution to Coca-Cola Company bottlers and Anheuser-Busch distributors. The company recorded $113.0 million of new deferred revenue tied to these agreements, recognized over roughly 20 years, which will support future reported revenue. Q4 2008 was a net loss of $23.4 million.
The balance sheet remains strong, with $256.8 millionc in cash, $118.7 million in short- and long-term investments, and $374.0 million of working capital. However, $112.5 million face value of auction rate securities is impaired: $14.9 million was written down, and the securities are largely illiquid. Operating cash flow rose to $199.5 million.
The company repurchased $103.5 milliond of stock in 2008 under a $200 million authorization. Concentration risk is high: energy drinks made up 90.7% of net sales, Dr. Pepper Snapple (a terminated distributor) accounted for 13% of 2008 sales, and Wal-Mart accounted for 11%.
The company also faces securities class actions, a shareholder derivative suit tied to the 2007 class period, a $5.0 million-plus distributor arbitration claim, and insurance litigation. For investors, the central question is whether the 2008 distributor restructuring produces durable, higher-margin distribution through large bottlers, and whether Monster's momentum in energy drinks can offset the litigation, auction rate securities exposure, and dependence on a single product category.
02—Key points
Key Highlights
- Net sales rose 14.3% to $1,033.8 million, and gross sales reached a record $1,182.9 million, up 15.3%, led by Monster Energy and Java Monster.
- Net income fell 27.7% to $108.0 million (diluted EPS $1.11 vs. $1.51) as operating income declined 29.2% to $163.6 million, mainly due to $118.1 million of distributor termination costs.
- New distribution agreements with Coca-Cola bottlers and Anheuser-Busch distributors generated $113.0 million of deferred revenue, recognized ratably over about 20 years.
- Energy drinks represented 90.7% of net sales, and Dr. Pepper Snapple (13%) and Wal-Mart (11%) were the largest customers, creating meaningful concentration risk.
- Liquidity is strong, with $256.8 million in cash and $118.7 million in investments, but $112.5 million face value of auction rate securities is illiquid and $14.9 million was impaired.
- Operating cash flow rose to $199.5 million from $135.5 million, and the company repurchased $103.5 million of its stock during 2008.
- Securities class actions and a shareholder derivative suit allege misleading statements in 2007-2008, and the company faces a Gate City distributor arbitration claim exceeding $5.0 million.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, Monster Beverage kept $0.10.
- Revenue$1.03B100.0%
- Cost of revenue−$495.0M47.9%
- Gross profit$538.8M52.1%
- Operating costs−$375.2M36.3%
- Operating income$163.6M15.8%
- Interest, other & tax−$55.6M5.4%
- Net income$108.0M10.5%
Where FY2008 revenue went
$1.03B- Cost of revenue: $495.0M, 48% of revenue
- Operating costs: $375.2M, 36% of revenue
- Net income: $108.0M, 10% of revenue
- Interest, other & tax: $55.6M, 5.4% of revenue
Kept 10% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed March 2, 2009Financial Statements
| Revenue | $1.03B |
| Cost of Revenue | $494.99M |
| Gross Profit | $538.79M |
| Operating Expenses | $375.20M |
| Operating Income | $163.59M |
| Net Income | $108.03M |
| EPS (Basic) | $0.05 |
| EPS (Diluted) | $0.05 |
| Shares Outstanding (Basic) | 2.22B |
| Shares Outstanding (Diluted) | 2.34B |
05—Questions
Frequently Asked Questions
Why did profits fall in 2008 even though sales grew more than 14%?
Operating expenses rose $138.2 million, or 58.3%, to $375.2 million. About $102.9 million of the increase came from one-time costs to terminate prior distributors and move to new bottler and Anheuser-Busch distribution arrangements. Other increases included sponsorships, endorsements, sampling, and freight. Gross margin held roughly steady at 52.1%, so the profit decline came almost entirely from operating expenses.
Will the distributor termination costs recur?
The company says the $118.1 million of termination costs in 2008 was incurred to restructure distribution, and it recorded $113.0 million of related deferred revenue. Accrued distributor terminations were $102.3 million at year-end, so some payments will flow through 2009 cash flow. Management has not guaranteed that no further restructuring costs will occur, and it is also expanding into Europe and Mexico, which carries its own costs.
How exposed is the company to auction rate securities?
At year-end 2008 the company held $112.5 million face value of auction rate securities. It redeemed $8.1 million at par after year-end, and it recorded a $14.9 million impairment, of which $14.4 million was deemed temporary and recorded in other comprehensive loss and $0.5 million was other-than-temporary. The remaining $89.6 million fair value is classified as long-term, and the company has filed arbitration claims against Citigroup and Oppenheimer to recover losses.
How concentrated is the business in energy drinks and in a few customers?
Energy drinks, mainly Monster Energy, accounted for 90.7% of 2008 net sales in the DSD segment, so any decline in Monster demand would materially affect results. Customer concentration is also high: Dr. Pepper Snapple (terminated November 2008) accounted for 13% of net sales, and Wal-Mart accounted for 11%. Sales now flow largely through Coca-Cola bottlers and Anheuser-Busch distributors, which also sell competing brands.
What legal and governance risks should investors watch?
Two securities class actions and a shareholder derivative suit allege misleading statements about inventory loading, declining non-core sales, and Java Monster production shortfalls during May to November 2007. The derivative suit names current and former officers and directors. The company also faces a Gate City arbitration claim over more than $5.0 million, a dispute with insurer St. Paul over unpaid D&O coverage, and CEO Rodney Sacks and CFO Hilton Schlosberg together control up to 22.1% of stock. The company says the complaints are without merit and it will defend them vigorously.
06—Continue