01—Abstract
Summary
Summary of the 10-K filed March 1, 2011. Cited figures are marked; the original filing is the authoritative source.
This is the fiscal 2010 Form 10-K of Hansen Natural Corporation, the name Monster Beverage Corp (MNST) used before its 2012 rename, filed March 1, 2011.
Hansen reported record results driven by its Monster Energy franchise. Gross sales rose 13.7% to $1,488.5 milliona and net sales rose 14.1% to $1,303.9 million. Case sales grew 17.3% to 129.0 million cases, but the average net price per case fell 2.8% to $10.11 on a shift toward lower-priced products and geographic mix.
Operating income grew only 3.1% to $347.8 millionb because operating expenses rose 20.9%, driven by payroll, professional fees, SAP implementation, sponsorships and freight. Operating margin fell to 26.7% from 29.5%, and gross margin slipped to 52.2% from 53.6%. Net income rose 1.6% to $212.0 million, and diluted EPS was $2.28 versus $2.21.
The DSD segment, which is primarily energy drinks, generated 93.0% of net sales. Balance sheet strength is a clear positive. Cash and equivalents were $354.8 millionc and short- and long-term investments were $288.8 million, for total liquidity of about $643.7 million.
Working capital rose to $769.3 milliond, operating cash flow was $229.0 million, and the company has no debt beyond small capital leases and an undrawn $10 million credit line. Hansen bought back $23.5 million of stock in 2010 and had $176.4 million remaining under its authorization. It pays no dividends.
Risks include roughly $79.6 million (face value) of auction rate securities still illiquid, with a $54.2 million put option exercisable from March 2011. Other risks include customer concentration (Coca-Cola Enterprises, now part of TCCC's bottler network, was about 28% of net sales), heavy reliance on energy drinks and on third-party co-packers, and rising input costs for aluminum, PET, sugar and juice concentrates. Litigation is the main overhang.
The filing describes a securities class action and a shareholder derivative suit, both alleging misleading statements and channel stuffing, with hearings on motions to dismiss set for April 14, 2011. Other cases include a certified California class action over Blue Sky labeling, a Canadian class action seeking roughly CDN$25 million including punitive damages, and an FINRA arbitration against Oppenheimer over auction rate securities. Management calls all of these meritless.
Insiders Rodney Sacks and Hilton Schlosberg together hold about 20% of shares, giving them significant voting control. International sales were 16% of gross sales, with Europe, Australia and Brazil operations still loss-making (a $9.2 million operating loss in 2010).
02—Key points
Key Highlights
- Record 2010 results: gross sales of $1,488.5 million (+13.7%) and net sales of $1,303.9 million (+14.1%), led by Monster Energy and Java Monster volume growth; case sales rose 17.3% to 129.0 million.
- Profitability lagged sales growth: operating income rose only 3.1% to $347.8 million, operating margin fell to 26.7% from 29.5%, and operating expenses jumped 20.9% to $332.4 million.
- Gross margin compression: gross profit margin fell to 52.2% from 53.6%, reflecting higher raw material and packaging costs, production variances, and a lower average net price per case ($10.11, down 2.8%).
- Net income of $212.0 million (+1.6%) and diluted EPS of $2.28 (vs. $2.21), with an effective tax rate up to 39.3% due partly to a $3.4 million valuation allowance on a foreign subsidiary.
- Strong liquidity: $643.7 million in cash and investments, $769.3 million working capital, $229.0 million operating cash flow, and virtually no debt.
- Concentrated distribution and product base: DSD (primarily energy drinks) was 93.0% of net sales, and Coca-Cola Enterprises accounted for about 28% of net sales.
- Material litigation and auction rate securities exposure: securities and derivative suits, a Canadian class action, and about $79.6 million (face) in illiquid auction rate securities, with a $54.2 million put option exercisable from March 2011.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, Monster Beverage kept $0.16.
- Revenue$1.30B100.0%
- Cost of revenue−$623.7M47.8%
- Gross profit$680.2M52.2%
- Operating costs−$332.4M25.5%
- Operating income$347.8M26.7%
- Interest, other & tax−$135.8M10.4%
- Net income$212.0M16.3%
Where FY2010 revenue went
$1.30B- Cost of revenue: $623.7M, 48% of revenue
- Operating costs: $332.4M, 25% of revenue
- Net income: $212.0M, 16% of revenue
- Interest, other & tax: $135.8M, 10% of revenue
Kept 16% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2010filed March 1, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $1.30B$1.14B | +14.1% |
| Cost of Revenue | $623.70M$530.98M | +17.5% |
| Gross Profit | $680.24M$612.32M | +11.1% |
| Operating Expenses | $332.43M$275.01M | +20.9% |
| Operating Income | $347.81M$337.31M | +3.1% |
| Net Income | $212.03M$208.72M | +1.6% |
| EPS (Basic) | $0.10$0.10 | +3.4% |
| EPS (Diluted) | $0.09$0.09 | +3.2% |
| Shares Outstanding (Basic) | 2.12B2.16B | −1.6% |
| Shares Outstanding (Diluted) | 2.23B2.27B | −1.7% |
05—Questions
Frequently Asked Questions
Why did operating income grow so much more slowly than sales in 2010?
Net sales grew 14.1%, but operating expenses grew 20.9% to $332.4 million, or 25.5% of net sales versus 24.1% in 2009. Drivers included $15.0 million in higher payroll (including $2.8 million more stock compensation), $13.4 million in higher professional fees and SAP implementation costs, $11.2 million more in sponsorships, $9.6 million in higher freight and warehousing, and $6.2 million more in point-of-sale materials. Gross margin also fell to 52.2% from 53.6%, which together cut operating margin to 26.7% from 29.5%.
How much cash does Hansen have, and does it have debt?
At December 31, 2010 the company held $354.8 million in cash and equivalents and $288.8 million in short- and long-term investments. Debt is minimal, consisting of $0.3 million in capital leases, and the $10 million Comerica revolving line was undrawn. Operating cash flow was $229.0 million, and the company continued buying back stock with $23.5 million repurchased in 2010 under a $200 million authorization that had $176.4 million remaining.
What are the auction rate securities risks?
At year-end 2010 Hansen held auction rate securities with a face value of $79.6 million (amortized cost $70.7 million), valued at $68.3 million on a Level 3 basis. Of these, $54.2 million (par) are covered by an ARS agreement giving Hansen the right to sell up to $13.6 million at par starting March 22, 2011, with further installments through 2013. Hansen recorded a $3.8 million put option asset and a $7.4 million impairment in the available-for-sale portfolio. The company says it does not expect a material liquidity impact, but further impairments are possible if issuers' credit deteriorates.
What legal proceedings could materially affect investors?
The most significant matters are a federal securities class action and a shareholder derivative suit, both alleging false statements and channel stuffing during November 2006 to November 2007, with motion-to-dismiss hearings set for April 14, 2011. A certified California class action over the Blue Sky labeling claim is set for trial in March 2011, and a Canadian class action seeks CDN$20 million in damages plus CDN$5 million in punitive damages. The company says it believes all of these claims are without merit and plans a vigorous defense. The filing does not quantify a probable loss.
06—Continue