Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

 

For the quarterly period ended March 31, 2012

Commission File Number 0-18761

 

 

MONSTER BEVERAGE CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

Delaware

39-1679918

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

550 Monica Circle, Suite 201

Corona, California 92880

(Address of principal executive offices) (Zip code)

 

 

(951) 739 – 6200

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  X    No __

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes    No __

 

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer x

Accelerated filer o

Non-accelerated filer o (Do not check if smaller reporting company)

Smaller reporting company o

 

 

Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

 

Yes ___    No  _ X__

 

The Registrant had 176,207,845 shares of common stock, par value $0.005 per share, outstanding as of April 26, 2012.

 



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

MARCH 31, 2012

 

 

INDEX

 

 

Part I.

FINANCIAL INFORMATION

Page No.

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of
March 31, 2012 and December 31, 2011

3

 

 

 

 

Condensed Consolidated Statements of Income for the
Three-Months Ended March 31, 2012 and 2011

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income
for the Three-Months Ended March 31, 2012 and 2011

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the
Three-Months Ended March 31, 2012 and 2011

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial
Condition and Results of Operations

27

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

 

 

 

Item 4.

Controls and Procedures

41

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

42

 

 

 

Item 1A.

Risk Factors

44

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

 

 

 

Item 3.

Defaults Upon Senior Securities

44

 

 

 

Item 4.

Mine Safety Disclosures

44

 

 

 

Item 5.

Other Information

44

 

 

 

Item 6.

Exhibits

45

 

 

 

 

Signatures

45

 

2



Table of Contents

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2012 AND DECEMBER 31, 2011

(In Thousands, Except Par Value) (Unaudited)

 

 

 

March 31, 2012

 

December 31,
2011

 

ASSETS

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

Cash and cash equivalents

 

  $

391,438

 

 

  $

359,331

 

Short-term investments

 

419,588

 

 

411,282

 

Trade accounts receivable, net

 

255,712

 

 

218,072

 

Distributor receivables

 

712

 

 

669

 

Inventories

 

179,127

 

 

155,613

 

Prepaid expenses and other current assets

 

19,654

 

 

20,912

 

Prepaid income taxes

 

1,804

 

 

370

 

Deferred income taxes

 

16,428

 

 

16,428

 

Total current assets

 

1,284,463

 

 

1,182,677

 

 

 

 

 

 

 

 

INVESTMENTS

 

21,864

 

 

23,194

 

PROPERTY AND EQUIPMENT, net

 

55,689

 

 

45,151

 

DEFERRED INCOME TAXES

 

56,003

 

 

58,576

 

INTANGIBLES, net

 

49,132

 

 

48,396

 

OTHER ASSETS

 

3,594

 

 

4,405

 

Total Assets

 

  $

1,470,745

 

 

  $

1,362,399

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

Accounts payable

 

  $

134,035

 

 

  $

113,446

 

Accrued liabilities

 

42,517

 

 

31,966

 

Accrued promotional allowances

 

56,943

 

 

87,746

 

Deferred revenue

 

11,751

 

 

11,583

 

Accrued compensation

 

6,569

 

 

10,353

 

Income taxes payable

 

36,302

 

 

10,996

 

Total current liabilities

 

288,117

 

 

266,090

 

 

 

 

 

 

 

 

DEFERRED REVENUE

 

115,300

 

 

117,151

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

Common stock - $0.005 par value; 240,000 shares authorized; 200,649 shares issued and 176,197 outstanding as of March 31, 2012; 198,729 shares issued and 174,277 outstanding as of December 31, 2011

 

1,003

 

 

994

 

Additional paid-in capital

 

238,908

 

 

229,301

 

Retained earnings

 

1,244,743

 

 

1,168,644

 

Accumulated other comprehensive income (loss)

 

908

 

 

(1,547

)

Common stock in treasury, at cost; 24,452 shares as of March 31, 2012 and December 31, 2011, respectively

 

(418,234

)

 

(418,234

)

Total stockholders’ equity

 

1,067,328

 

 

979,158

 

Total Liabilities and Stockholders’ Equity

 

  $

1,470,745

 

 

  $

1,362,399

 

 

 

See accompanying notes to condensed consolidated financial statements

 

3



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE-MONTHS ENDED MARCH 31, 2012 AND 2011

(In Thousands, Except Per Share Amounts) (Unaudited)

 

 

 

Three-Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

 

NET SALES

 

  $

454,605

 

 

  $

356,419

 

 

 

 

 

 

 

 

COST OF SALES

 

213,436

 

 

170,882

 

 

 

 

 

 

 

 

GROSS PROFIT

 

241,169

 

 

185,537

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

114,884

 

 

97,082

 

 

 

 

 

 

 

 

OPERATING INCOME

 

126,285

 

 

88,455

 

 

 

 

 

 

 

 

OTHER INCOME:

 

 

 

 

 

 

Interest and other (expense) income, net

 

(50

)

 

4

 

Gain on investments and put option, net (Note 3)

 

396

 

 

297

 

Total other income

 

346

 

 

301

 

 

 

 

 

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

126,631

 

 

88,756

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

50,532

 

 

33,713

 

 

 

 

 

 

 

 

NET INCOME

 

  $

76,099

 

 

  $

55,043

 

 

 

 

 

 

 

 

NET INCOME PER COMMON SHARE:

 

 

 

 

 

 

Basic

 

  $

0.44

 

 

  $

0.31

 

Diluted

 

  $

0.41

 

 

  $

0.29

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS:

 

 

 

 

 

 

Basic

 

174,832

 

 

177,858

 

Diluted

 

185,262

 

 

187,248

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE-MONTHS ENDED MARCH 31, 2012 AND 2011

(In Thousands) (Unaudited)

 

 

 

 

Three-Months Ended
March 31,

 

 

 

2012

 

2011

 

Net income, as reported

 

  $

76,099

 

 

  $

55,043

 

Other comprehensive income:

 

 

 

 

 

 

Change in unrealized gain on available-for-sale securities, net of tax

 

-

 

 

101

 

Foreign currency translation adjustments

 

2,455

 

 

728

 

Comprehensive income

 

  $

78,554

 

 

  $

55,872

 

 

 

 

See accompanying notes to condensed consolidated financial statements

 

5



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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE-MONTHS ENDED MARCH 31, 2012 AND 2011

(In Thousands) (Unaudited)

 

 

 

Three-Months Ended

 

 

 

March 31, 2012

 

March 31, 2011

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

 

  $

76,099

 

 

  $

55,043

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Amortization of trademark

 

12

 

 

12

 

Depreciation and other amortization

 

4,956

 

 

3,581

 

Gain on disposal of property and equipment

 

(39

)

 

(74

)

Stock-based compensation

 

6,571

 

 

3,779

 

Loss (gain) on put option

 

1,391

 

 

(20

)

Gain on investments, net

 

(1,787

)

 

(278

)

Deferred income taxes

 

2,574

 

 

-

 

Tax benefit from exercise of stock options

 

(492

)

 

(190

)

Effect on cash of changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

(33,867

)

 

(51,722

)

Distributor receivables

 

(43

)

 

397

 

Inventories

 

(34,128

)

 

(19,548

)

Prepaid expenses and other current assets

 

257

 

 

(4,015

)

Prepaid income taxes

 

(1,216

)

 

9,802

 

Accounts payable

 

16,201

 

 

21,418

 

Accrued liabilities

 

14,058

 

 

6,278

 

Accrued promotional allowances

 

(34,034

)

 

(17,844

)

Accrued distributor terminations

 

(76

)

 

(393

)

Accrued compensation

 

(3,836

)

 

(2,417

)

Income taxes payable

 

25,784

 

 

20,921

 

Deferred revenue

 

(1,615

)

 

(1,117

)

Net cash provided by operating activities

 

36,770

 

 

23,613

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Maturities of held-to-maturity investments

 

141,806

 

 

41,950

 

Sales of available-for-sale investments

 

29,891

 

 

4,551

 

Sales of trading investments

 

15,750

 

 

1,000

 

Purchases of held-to-maturity investments

 

(190,635

)

 

(80,894

)

Purchases of available-for-sale investments

 

(2,001

)

 

(6,774

)

Purchases of property and equipment

 

(14,542

)

 

(6,523

)

Proceeds from sale of property and equipment

 

164

 

 

207

 

Additions to intangibles

 

(749

)

 

(1,996

)

Decrease (increase) in other assets

 

302

 

 

(26

)

Net cash used in investing activities

 

(20,014

)

 

(48,505

)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Principal payments on debt

 

(610

)

 

(249

)

Tax benefit from exercise of stock options

 

492

 

 

190

 

Issuance of common stock

 

2,722

 

 

4,247

 

Purchases of common stock held in treasury

 

-

 

 

(38,862

)

Net cash provided by (used in) financing activities

 

2,604

 

 

(34,674

)

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

12,747

 

 

229

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

32,107

 

 

(59,337

)

CASH AND CASH EQUIVALENTS, beginning of period

 

359,331

 

 

354,842

 

CASH AND CASH EQUIVALENTS, end of period

 

  $

391,438

 

 

  $

295,505

 

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

  $

14

 

 

  $

10

 

Income taxes

 

  $

23,491

 

 

  $

2,870

 

 

See accompanying notes to condensed consolidated financial statements

 

6



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE-MONTHS ENDED MARCH 31, 2012 AND 2011

(In Thousands) (Unaudited) (Continued)

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS

 

The Company entered into capital leases for the acquisition of promotional vehicles of $0.8 million and $1.6 million for the three-months ended March 31, 2012 and 2011, respectively.

 

 

See accompanying notes to condensed consolidated financial statements.

 

7



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

1.                                    BASIS OF PRESENTATION

 

Reference is made to the Notes to Consolidated Financial Statements, in Monster Beverage Corporation and Subsidiaries (the “Company”  or “Hansen Natural Corporation”) Annual Report on Form 10-K for the year ended December 31, 2011 (“Form 10-K”) for a summary of significant accounting policies utilized by the Company and its consolidated subsidiaries and other disclosures, which should be read in conjunction with this Quarterly Report on Form 10-Q (“Form 10-Q”).

 

The Company’s condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and Securities and Exchange Commission (“SEC”) rules and regulations applicable to interim financial reporting.  They do not include all the information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP.  The information set forth in these interim condensed consolidated financial statements for the three-months ended March 31, 2012 and 2011 is unaudited and reflects all adjustments, which include only normal recurring adjustments and which in the opinion of management are necessary to make the interim condensed consolidated financial statements not misleading.  Results of operations for periods covered by this report may not necessarily be indicative of results of operations for the full year.

 

The preparation of financial statements in conformity with GAAP necessarily requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from these estimates.

 

As disclosed in the Company’s Form 10-K, management concluded that its presentation of accounts receivable, net of certain promotional allowances as of December 31, 2010, should be adjusted to present such receivables and accrued expenses on a gross basis with regard to those customers for which the Company does not allow net settlement. Such adjustment did not change total net cash provided by operating activities in the condensed consolidated statement of cash flows for the three-months ended March 31, 2011. However, the following line items within net cash flows from operating activities were adjusted as follows for the three-months ended March 31, 2011; (i) accounts receivable by ($4.1) million; (ii) accounts payable by $17.9 million; (iii) accrued liabilities by $4.0 million; and (iv) accrued promotional allowances by ($17.8) million. See Item 2, “Management Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations” for additional discussion of the Company’s promotional allowances.

 

2.                                    RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. ASU 2011-05 became effective for the Company on January 1, 2012. The adoption of ASU 2011-05 did not have any impact on the Company’s financial position, results of operations or liquidity.

 

8



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards (“IFRS”).  ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. ASU 2011-04 became effective for the Company on January 1, 2012. The adoption of ASU 2011-04 did not have any impact on the Company’s financial position, results of operations or liquidity.

 

3.                                    INVESTMENTS

 

The following table summarizes the Company’s investments at:

 

9



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

March 31, 2012

 

Amortized
Cost

 

Gross
Unrealized
Holding
Gains

 

Gross
Unrealized
Holding
Losses

 

Fair
Value

 

Continuous
Unrealized
Loss Position
less than 12
Months

 

Continuous
Unrealized
Loss Position
greater than 12
Months

 

Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

  $

402

 

  $

-

 

  $

-

 

  $

402

 

  $

-

 

  $

-

 

Certificates of deposit

 

37,594

 

-

 

-

 

37,594

 

-

 

-

 

Municipal securities

 

330,546

 

-

 

89

 

330,457

 

89

 

-

 

U.S. government agency securities

 

19,988

 

-

 

1

 

19,987

 

1

 

-

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

31,058

 

-

 

-

 

31,058

 

-

 

-

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

3,310

 

-

 

-

 

3,310

 

-

 

-

 

Total

 

  $

422,898

 

  $

-   

 

  $

90

 

422,808

 

  $

90

 

  $

-

 

Trading

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

-

 

 

 

 

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

18,554

 

 

 

 

 

Total

 

 

 

 

 

 

 

  $

441,362

 

 

 

 

 

 

December 31, 2011

 

Amortized
Cost

 

Gross
Unrealized
Holding
Gains

 

Gross
Unrealized
Holding
Losses

 

Fair
Value

 

Continuous
Unrealized
Loss Position
less than 12
Months

 

Continuous
Unrealized
Loss Position
greater than 12
Months

 

Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

  $

8,034

 

  $

5

 

  $

-

 

  $

8,039

 

  $

-

 

  $

-

 

Certificates of deposit

 

29,034

 

1

 

-

 

29,035

 

-

 

-

 

Corporate bonds

 

2,022

 

-

 

-

 

2,022

 

-

 

-

 

Municipal securities

 

284,605

 

-

 

64

 

284,541

 

64

 

-

 

U.S. government agency securities

 

16,005

 

2

 

-

 

16,007

 

-

 

-

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

58,924

 

-

 

-

 

58,924

 

-

 

-

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

3,320

 

-

 

-

 

3,320

 

-

 

-

 

Total

 

  $

401,944

 

  $

8

 

  $

64

 

401,888

 

  $

64

 

  $

-

 

Trading

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

12,658

 

 

 

 

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Auction rate securities

 

 

 

 

 

 

 

19,874

 

 

 

 

 

Total

 

 

 

 

 

 

 

  $

434,420

 

 

 

 

 

 

 

During the three-months ended March 31, 2012 and the year ended December 31, 2011, realized gains or losses recognized on the sale of investments were not significant.

 

10



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

The Company recognized a net gain through earnings on its trading securities as follows:

 

 

 

Three-Months Ended
March 31,

 

 

 

2012

 

2011

 

Gain on transfer from available-for-sale to trading

 

  $

-

 

  $

-

 

Gain on trading securities sold

 

1,034

 

126

 

Gain on trading securities held

 

753

 

152

 

Gain on trading securites

 

  $

1,787

 

  $

278

 

 

 

The Company’s investments at March 31, 2012 and December 31, 2011 in U.S. Treasuries, certificates of deposit, corporate bonds, municipal securities, U.S. government agency securities and variable rate demand notes (“VRDNs”) carry investment grade credit ratings. VRDNs are floating rate municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest. All of the put options are secured by a pledged liquidity source. While they are classified as marketable investment securities, the put option allows the VRDNs to be liquidated at par on a same day, or generally, on a seven day settlement basis.  A portion of the Company’s investments at March 31, 2012 and December 31, 2011 in municipal, educational or other public body securities with an auction reset feature (“auction rate securities”) also carry investment grade credit ratings.

 

The following table summarizes the underlying contractual maturities of the Company’s investments at:

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

 

Less than 1 year:

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

  $

402

 

  $

402

 

  $

8,034

 

  $

8,039

 

Certificates of deposit

 

37,594

 

37,594

 

29,034

 

29,035

 

Corporate bonds

 

-

 

-

 

2,022

 

2,022

 

Municipal securities

 

330,546

 

330,457

 

284,605

 

284,541

 

U.S. government agency securities

 

19,988

 

19,987

 

16,005

 

16,007

 

Due 1 - 10 years:

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

-

 

-

 

5,775

 

5,775

 

Due 11 - 20 years:

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

6,801

 

6,801

 

12,716

 

12,716

 

Auction rate securities

 

5,350

 

5,350

 

5,158

 

5,158

 

Due 21 - 30 years:

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

18,082

 

18,082

 

27,902

 

27,902

 

Auction rate securities

 

16,514

 

16,514

 

25,134

 

25,134

 

Due 31 - 40 years:

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

6,175

 

6,175

 

12,532

 

12,532

 

Auction rate securities

 

-

 

-

 

5,559

 

5,559

 

Total

 

  $

441,452

 

  $

441,362

 

  $

434,476

 

  $

434,420

 

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

 

4.                                    FAIR VALUE OF CERTAIN FINANCIAL ASSETS AND LIABILITIES

 

Accounting Standards Codification (“ASC”) 820 provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The three levels of inputs required by the standard that the Company uses to measure fair value are summarized below.

 

·                Level 1: Quoted prices in active markets for identical assets or liabilities.

 

·              Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

 

·                Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

ASC 820 requires the use of observable market inputs (quoted market prices) when measuring fair value and requires a Level 1 quoted price to be used to measure fair value whenever possible.

 

The following tables present the Company’s held-to-maturity investments at amortized costs as well as the fair value of the Company’s financial assets that are recorded at fair value on a recurring basis, segregated among the appropriate levels within the fair value hierarchy at:

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

March 31, 2012

 

 Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

$

112,725

 

$

-

 

$

-

 

$

112,725

 

Money market funds

 

258,096

 

-

 

-

 

258,096

 

U.S. Treasuries

 

402

 

-

 

-

 

402

 

Certificates of deposit

 

-

 

42,197

 

-

 

42,197

 

Municipal securities

 

-

 

346,560

 

-

 

346,560

 

U.S. government agency securities

 

-

 

19,988

 

-

 

19,988

 

Variable rate demand notes

 

-

 

31,058

 

-

 

31,058

 

Auction rate securities

 

-

 

-

 

21,864

 

21,864

 

Put option related to auction rate securities

 

-

 

-

 

1,649

 

1,649

 

Total

 

$

371,223

 

$

439,803

 

$

23,513

 

$

834,539

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

370,821

 

$

20,617

 

$

-

 

$

391,438

 

Short-term investments

 

402

 

419,186

 

-

 

419,588

 

Investments

 

-

 

-

 

21,864

 

21,864

 

Other assets

 

-

 

-

 

1,649

 

1,649

 

Total

 

$

371,223

 

$

439,803

 

$

23,513

 

$

834,539

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

$

81,879

 

$

-

 

$

-

 

$

81,879

 

Money market funds

 

230,029

 

-

 

-

 

230,029

 

U.S. Treasuries

 

8,034

 

-

 

-

 

8,034

 

Certificates of deposit

 

-

 

69,078

 

-

 

69,078

 

Corporate bonds

 

-

 

2,022

 

-

 

2,022

 

Municipal securities

 

-

 

291,984

 

-

 

291,984

 

U.S. government agency securities

 

-

 

16,005

 

-

 

16,005

 

Variable rate demand notes

 

-

 

58,924

 

-

 

58,924

 

Auction rate securities

 

-

 

-

 

35,852

 

35,852

 

Put options related to auction rate securities

 

-

 

-

 

3,041

 

3,041

 

Total

 

$

319,942

 

$

438,013

 

$

38,893

 

$

796,848

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

311,908

 

$

47,423

 

$

-

 

$

359,331

 

Short-term investments

 

8,034

 

390,590

 

12,658

 

411,282

 

Investments

 

-

 

-

 

23,194

 

23,194

 

Prepaid expenses and other current assets

 

-

 

-

 

873

 

873

 

Other assets

 

-

 

-

 

2,168

 

2,168

 

Total

 

$

319,942

 

$

438,013

 

$

38,893

 

$

796,848

 

 

 

The majority of the Company’s short-term investments are classified within Level 1 or Level 2 of the fair value hierarchy.  The Company’s valuation of its Level 1 investments, which include money market funds and U.S. Treasuries, is based on quoted market prices in active markets for identical securities. The Company’s valuation of its Level 2 investments, which include

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

certificates of deposit, corporate bonds, municipal securities, U.S. government agency securities and VRDNs, is based on other observable inputs, specifically a valuation model which utilized vendor pricing for similar securities. There were no transfers between Level 1 and Level 2 measurements during the three-months ended March 31, 2012, and there were no changes in the Company’s valuation techniques.

 

The Company’s Level 3 assets are comprised of auction rate securities and put options. The Company’s Level 3 valuation utilized a mark-to-model approach which included estimates for interest rates, timing and amount of cash flows, credit and liquidity premiums, as well as expected holding periods for the auction rate securities. These assumptions are typically volatile and subject to change as the underlying data sources and market conditions evolve. A significant change in any single input could have a significant valuation impact, however, no single input has a more significant impact on valuation than another. There were no changes in the Company’s valuation techniques of its Level 3 assets during the three-months ended March 31, 2012.

 

The following table presents quantitative information related to the significant unobservable inputs utilized in the Company’s Level 3 recurring fair value measurements as of March 31, 2012.

 

 

 

 

 

Valuation Technique

 

Unobservable Input

 

Range (Weighted Average)

Auction Rate Securities:

 

 

 

 

 

 

Trading

 

Discounted cash flow

 

Maximum rate probability

 

0.02%-6.68% (1.04%)

 

 

 

 

Principal returned probability

 

81.84%-95.79% (87.93%)

 

 

 

 

Default probability

 

4.08%-12.29% (11.03%)

 

 

 

 

Liquidity risk

 

3.50%-3.50% (3.50%)

 

 

 

 

Recovery rate

 

60-80 (60.76)

Auction Rate Securities:

 

 

 

 

 

 

Available-for-sale

 

Market comparable bonds

 

Market price

 

51-64 (55)

 

 

 

 

 

 

 

Put Options

 

Discounted cash flow

 

Counterparty risk

 

1.79%-2.50% (2.15%)

 

 

At March 31, 2012, the Company held auction rate securities with a face value of $29.1 million (amortized cost basis of $21.9 million). A Level 3 valuation was performed on the Company’s auction rate securities as of March 31, 2012 resulting in a fair value of $3.3 million for the Company’s available-for-sale auction rate securities (after a $5.0 million impairment) and $18.6 million for the Company’s trading auction rate securities (after a $2.2 million impairment), which are included in long-term investments.

 

In June 2011, the Company entered into an agreement (the “2011 ARS Agreement”), related to $24.5 million of par value auction rate securities (the “2011 ARS Securities”).  Under the 2011 ARS Agreement, the Company has the right to sell the 2011 ARS Securities including all accrued but unpaid interest thereon (the “2011 Put Option”) as follows: (i) on or after July 1, 2013, up to $1.0 million aggregate par value; (ii) on or after October 1, 2013, up to an additional $1.0 million aggregate par value; and (iii) in quarterly installments thereafter based on a formula of the then

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

outstanding 2011 ARS Securities, as adjusted for normal market redemptions, with full sale rights available on or after April 1, 2016. The 2011 ARS Securities will continue to accrue interest until redeemed through the 2011 Put Option, or as determined by the auction process, or should the auction process fail, the terms outlined in the prospectus of the respective 2011 ARS Securities. Under the 2011 ARS Agreement, the Company has the obligation, should it receive written notification from the put issuer, to sell the 2011 ARS Securities at par plus all accrued but unpaid interest. During the three-months ended March 31, 2012, no 2011 ARS Securities were redeemed through normal market channels ($3.7 million of par value 2011 ARS Securities were redeemed at par through normal market channels during the year ended December 31, 2011). The 2011 Put Option does not meet the definition of derivative instruments under ASC 815.  Therefore, the Company elected the fair value option under ASC 825-10 in accounting for the 2011 Put Option. As of March 31, 2012, the Company recorded $1.6 million as the fair market value of the 2011 Put Option, included in other assets in the condensed consolidated balance sheet.

 

In March 2010, the Company entered into an agreement (the “2010 ARS Agreement”), related to $54.2 million of par value auction rate securities (the “2010 ARS Securities”).  Under the 2010 ARS Agreement, the Company had the right, but not the obligation, to sell the 2010 ARS Securities including all accrued but unpaid interest thereon (the “2010 Put Option”), under various terms. During the three-months ended March 31, 2012, the remaining $15.7 million of par value 2010 ARS Securities were redeemed at par through the exercise of the 2010 Put Option, which exhausted the Company’s rights under the 2010 ARS Agreement (as of December 31, 2011, $38.5 million of par value 2010 ARS Securities had been redeemed at par through the exercise of the 2010 Put Option as well as through normal market channels).

 

The Company holds additional auction rate securities that do not have a related put option.  These auction rate securities continue to be classified as available-for-sale securities.  The Company intends to retain such investments until the earlier of the anticipated recovery in market value or maturity.

 

The net effect of (i) the revaluation of the 2011 Put Option and the 2010 Put Option as of March 31, 2012; (ii) the revaluation of the Company’s trading auction rate securities as of March 31, 2012; (iii) the redemption at par of certain 2010 ARS Securities, including those redeemed at par through the exercise of the 2010 Put Option; and (iv) a recognized gain resulting from the redemption at par of a previously other-than-temporary impaired security; resulted in a gain of $0.4 million, which is included in other income for the three-months ended March 31, 2012. The net effect of (i) the revaluation of the 2010 Put Option as of March 31, 2011; (ii) the revaluation of the Company’s trading auction rate securities as of March 31, 2011; (iii) the redemption at par of certain 2010 ARS Securities; and (iv) a recognized gain resulting from the redemption at par of a previously other-than-temporary impaired security during the first fiscal quarter of 2011; resulted in a gain of $0.3 million, which is included in other income for the three-months ended March 31, 2011.

 

The following table provides a summary reconciliation of the Company’s financial assets that are recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three-months ended:

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

 

 

March 31, 2012

 

March 31, 2011

 

 

 

Auction
Rate
Securities

 

Put Options

 

Auction
Rate
Securities

 

Put Options

 

Opening Balance

 

$

35,852

 

$

3,041

 

$

68,252

 

$

3,768

 

Transfers into Level 3

 

-

 

-

 

-

 

-

 

Transfers out of Level 3

 

-

 

-

 

-

 

-

 

Total gains (losses) for the period:

 

 

 

 

 

 

 

 

 

Included in earnings

 

1,787

 

(1,392)

 

278

 

20

 

Included in other comprehensive income

 

-

 

-

 

164

 

-

 

Settlements

 

(15,775)

 

-

 

(1,050)

 

-

 

Closing Balance

 

$

21,864

 

$

1,649

 

$

67,644

 

$

3,788

 

 

5.                                    INVENTORIES

 

Inventories consist of the following at:

 

 

 

March 31,
2012

 

December 31,
2011

 

Raw materials

 

$       58,332

 

$        51,103

 

Finished goods

 

120,795

 

104,510

 

 

 

$     179,127

 

$      155,613

 

 

6.                                    PROPERTY AND EQUIPMENT, Net

 

Property and equipment consist of the following at:

 

 

 

March 31,
2012

 

December 31,
2011

 

Land

 

$         3,888

 

$          3,626

 

Leasehold improvements

 

2,213

 

2,132

 

Furniture and fixtures

 

2,006

 

2,000

 

Office and computer equipment

 

7,087

 

6,727

 

Computer software

 

9,317

 

9,303

 

Equipment

 

36,569

 

33,286

 

Buildings

 

12,609

 

3,211

 

Vehicles

 

23,710

 

21,827

 

 

 

97,399

 

82,112

 

Less: accumulated depreciation and amortization

 

(41,710)

 

(36,961)

 

 

 

$       55,689

 

$        45,151

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

7.                                     INTANGIBLES, Net

 

Intangibles consist of the following at:

 

 

 

March 31,
2012

 

December 31,
2011

 

Amortizing intangibles

 

$         1,060

 

$           1,059

 

Accumulated amortization

 

(517)

 

(504)

 

 

 

543

 

555

 

Non-amortizing intangibles

 

48,589

 

47,841

 

 

 

$       49,132

 

$         48,396

 

 

All amortizing intangibles have been assigned an estimated useful life and such intangibles are amortized on a straight-line basis over the number of years that approximate their respective useful lives ranging from one to 25 years (weighted-average life of 20 years).  Amortization expense was $0.01 million for both the three-months ended March 31, 2012 and 2011, respectively.

 

8.                                    DISTRIBUTION AGREEMENTS

 

Amounts received pursuant to new and/or amended distribution agreements entered into with certain distributors, relating to the costs associated with terminating agreements with the Company’s prior distributors, have been accounted for as deferred revenue in the accompanying condensed consolidated balance sheets and are recognized as revenue ratably over the anticipated life of the respective distribution agreement, generally 20 years. Revenue recognized was $2.5 million and $1.8 million for the three-months ended March 31, 2012 and 2011, respectively.

 

9.                                    COMMITMENTS AND CONTINGENCIES

 

The Company has purchase commitments aggregating approximately $64.6 million at March 31, 2012, which represent commitments made by the Company and its subsidiaries to various suppliers of raw materials for the production of its products. These obligations vary in terms, but are generally satisfied within one year.

 

The Company has contractual obligations aggregating approximately $121.2 million, which are related primarily to sponsorships and other marketing activities.

 

The Company has operating lease commitments aggregating approximately $17.6 million, which are related primarily to warehouse and office space.

 

In March 2012, the Company acquired an approximately 75,425 square foot, free standing, three-story office building, including the real property thereunder and improvements thereon, located in Corona, CA for a purchase price of $9.7 million. The Company intends to complete the necessary improvements thereon and occupy the building as the Company’s new corporate headquarters at some time in the future.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

Litigation – In September 2006, Christopher Chavez purporting to act on behalf of himself and a certain class of consumers filed an action in the Superior Court of the State of California, County of San Francisco, against the Company and its subsidiaries for unfair business practices, false advertising, violation of California Consumers Legal Remedies Act (“CLRA”), fraud, deceit and/or misrepresentation alleging that the Company misleadingly labels its Blue Sky® beverages as manufactured and canned/bottled wholly in Santa Fe, New Mexico. Defendants removed this Superior Court action to the United States District Court for the Northern District of California (the “District Court”) under the Class Action Fairness Act and filed motions for dismissal or transfer.  On June 11, 2007, the District Court granted the Company’s motion to dismiss Chavez’s complaint with prejudice.  On June 23, 2009, the United States Court of Appeals for the Ninth Circuit (“Ninth Circuit”) filed a memorandum opinion reversing the decision of the District Court and remanded the case to the District Court for further proceedings.  The Company filed a motion to dismiss the CLRA claims; the plaintiff filed a motion for a decision on a preemption issue; and the plaintiff filed a motion for class certification.  On June 18, 2010, the District Court entered an order certifying the class, ruled that there was no preemption by federal law, and denied the Company’s motion to dismiss.  The class that the District Court certified initially consists of all persons who purchased any beverage bearing the Blue Sky mark or brand in the United States at any time between May 16, 2002 and June 30, 2006.  On September 9, 2010, the District Court approved the form of the class notice and its distribution plan; and set an opt-out date of December 10, 2010.  On January 27, 2012, the parties entered into a settlement agreement on terms acceptable to the Company. On February 23, 2012, the District Court granted preliminary approval of the class action settlement agreement. A final approval hearing is scheduled for May 11, 2012.  If approved, the Company does not believe that the settlement will have a material adverse effect on the Company’s financial position or results of operations.

 

In May 2009, Avraham Wellman, purporting to act on behalf of himself and a class of consumers in Canada, filed a putative class action in the Ontario Superior Court of Justice, in the City of Toronto, Ontario, Canada, against the Company and its former Canadian distributor, Pepsi-Cola Canada Ltd., as defendants.  The plaintiff alleges that the defendants misleadingly packaged and labeled Monster Energy® products in Canada by not including sufficiently specific statements with respect to contra-indications and/or adverse reactions associated with the consumption of the energy drink products.  The plaintiff’s claims against the defendants are for negligence, unjust enrichment, and making misleading/false representations in violation of the Competition Act (Canada), the Food and Drugs Act (Canada) and the Consumer Protection Act, 2002 (Ontario).  The plaintiff claims general damages on behalf of the putative class in the amount of CDN$20 million, together with punitive damages of CDN$5 million, plus legal costs and interest. The plaintiff’s certification motion materials have not yet been filed. The Company believes that any such damages, if awarded, would not have a material adverse effect on the Company’s financial position or results of operations. In accordance with class action practices in Ontario, the Company will not file an answer to the complaint until after the determination of the certification motion.  The Company believes that the plaintiff’s complaint is without merit and plans a vigorous defense.

 

Securities Litigation — On September 11, 2008, a federal securities class action complaint styled Cunha v. Hansen Natural Corp., et al. was filed in the United States District Court for the Central District of California (the “District Court”). On September 17, 2008, a second federal securities class action complaint styled Brown v. Hansen Natural Corp., et al. was also filed in the District Court.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

On July 14, 2009, the District Court entered an order consolidating the actions and appointing lead counsel and the Structural Ironworkers Local Union #1 Pension Fund as lead plaintiff. On August 28, 2009, lead plaintiff filed a Consolidated Complaint for Violations of Federal Securities Laws (the “Consolidated Class Action Complaint”).  The Consolidated Class Action Complaint purported to be brought on behalf of a class of purchasers of the Company’s stock during the period November 9, 2006 through November 8, 2007 (the “Class Period”).  It named as defendants the Company, Rodney C. Sacks, Hilton H. Schlosberg, and Thomas J. Kelly. Plaintiff principally alleged that, during the Class Period, the defendants made false and misleading statements relating to the Company’s distribution coordination agreements with Anheuser-Busch, Inc. (“AB”) and its sales of “Allied” energy drink lines, and engaged in sales of shares in the Company on the basis of material non-public information.  Plaintiff also alleged that the Company’s financial statements for the second quarter of 2007 did not include certain promotional expenses.  The Consolidated Class Action Complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, and sought an unspecified amount of damages.

 

On November 16, 2009, the defendants filed their motion to dismiss the Consolidated Class Action Complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b), as well as the Private Securities Litigation Reform Act.  On July 12, 2010, following a hearing, the District Court granted the defendants’ motion to dismiss the Consolidated Class Action Complaint, with leave to amend, on the grounds, among others, that it failed to specify which statements plaintiff claimed were false or misleading, failed adequately to allege that certain statements were actionable or false or misleading, and failed adequately to demonstrate that defendants acted with scienter.

 

On August 27, 2010, plaintiff filed a Consolidated Amended Class Action Complaint for Violations of Federal Securities Laws (the “Amended Class Action Complaint”).  While similar in many respects to the Consolidated Class Action Complaint, the Amended Class Action Complaint drops certain of the allegations set forth in the Consolidated Class Action Complaint and makes certain new allegations, including that the Company engaged in “channel stuffing” during the Class Period that rendered false or misleading the Company’s reported sales results and certain other statements made by the defendants.  In addition, it no longer names Thomas J. Kelly as a defendant.  The Amended Class Action Complaint continues to allege violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, and seeks an unspecified amount of damages.

 

Defendants filed a motion to dismiss the Amended Class Action Complaint on November 8, 2010.  At a hearing on defendants’ motion to dismiss the Amended Class Action Complaint held on May 12, 2011, the District Court issued a tentative ruling that would grant the motion to dismiss as to certain of plaintiff’s claims, but would deny the motion to dismiss with regard to the majority of plaintiff’s claims.  The District Court has not, however, issued a final ruling.  The District Court held an additional hearing on the motion to dismiss on May 25, 2011, and has received supplemental submissions from the parties.  Defendants’ motion to dismiss remains sub judice.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

The Amended Class Action Complaint seeks an unspecified amount of damages.  As a result, the amount or range of reasonably possible litigation losses to which the Company is exposed cannot be estimated. Although the ultimate outcome of this action cannot be determined with certainty, the Company believes that the allegations in the Amended Class Action Complaint are without merit.  The Company intends to vigorously defend against this lawsuit.

 

In addition to the above matters, the Company is subject to litigation from time to time in the normal course of business, including claims from terminated distributors.  Although it is not possible to predict the outcome of such litigation, based on the facts known to the Company and after consultation with counsel, management believes that such litigation in the aggregate will likely not have a material adverse effect on the Company’s financial position or results of operations.

 

10.                            ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The components of accumulated other comprehensive income (loss) are as follows:

 

 

 

March 31, 2012

 

December 31, 2011

 

Foreign currency translation adjustments

 

$                   908

 

$                   (1,547

)

Total accumulated other comprehensive income (loss)

 

$                   908

 

$                   (1,547

)

 

11.                            TREASURY STOCK PURCHASE

 

On October 12, 2011, the Company’s Board of Directors authorized a new share repurchase program for the repurchase of up to $250.0 million of the Company’s outstanding common stock (the “2011 Repurchase Plan”). No shares have been repurchased under the 2011 Repurchase Plan as of March 31, 2012.

 

On March 11, 2010, the Company’s Board of Directors authorized the repurchase of up to $200.0 million of the Company’s common stock (the “2010 Repurchase Plan”). During the year ended December 31, 2011, the Company purchased 5.0 million shares of common stock at an average purchase price of $35.63 per share for a total amount of $176.4 million, which the Company holds in treasury. This repurchase, coupled with the repurchases during the year ended December 31, 2010, exhausted the availability under the 2010 Repurchase Plan.

 

12.                            STOCK-BASED COMPENSATION

 

The Company has two stock-based compensation plans under which shares were available for grant at March 31, 2012: the Monster Beverage Corporation 2011 Omnibus Incentive Plan (the “2011 Omnibus Incentive Plan”) and the 2009 Monster Beverage Corporation Stock Incentive Plan for Non-Employee Directors (the “2009 Directors Plan”).

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

The Company recorded $6.6 million and $3.8 million of compensation expense relating to outstanding options, restricted stock awards, stock appreciation rights and restricted stock units during the three-months ended March 31, 2012 and 2011, respectively.

 

Stock Options

 

Under the Company’s stock-based compensation plans, all stock options granted as of March 31, 2012 were granted at prices based on the fair value of the Company’s common stock on the date of grant. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes-Merton option pricing formula with the assumptions included in the table below. The Company records compensation expense for non-employee stock options based on the estimated fair value of the options as of the earlier of (1) the date at which a commitment for performance by the non-employee to earn the stock option is reached or (2) the date at which the non-employee’s performance is complete, using the Black-Scholes-Merton option pricing formula with the assumptions included in the table below. The Company uses historical data to determine the exercise behavior, volatility and forfeiture rate of the options.

 

The following weighted-average assumptions were used to estimate the fair value of options granted during:

 

 

 

Three-Months Ended March 31,

 

 

 

2012

 

2011

 

Dividend yield

 

0.0 %

 

0.0 

%

Expected volatility

 

48.3 %

 

55.9 

%

Risk-free interest rate

 

0.9 %

 

2.0 

%

Expected term

 

5.5 Years

 

6.1 Years

 

 

Expected Volatility: The Company uses historical volatility as it provides a reasonable estimate of the expected volatility. Historical volatility is based on the most recent volatility of the stock price over a period of time equivalent to the expected term of the option.

 

Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. Treasury zero coupon yield curve in effect at the time of grant for the expected term of the option.

 

Expected Term: The Company’s expected term represents the weighted-average period that the Company’s stock options are expected to be outstanding. The expected term is based on the expected time to post-vesting exercise of options by employees. The Company uses historical exercise patterns of previously granted options to derive employee behavioral patterns used to forecast expected exercise patterns.

 

The following table summarizes the Company’s activities with respect to its stock option plans as follows:

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

Options

 

Number of
Shares (In
Thousands)

 

Weighted-
Average
Exercise
Price Per
Share

 

Weighted-
Average
Remaining
Contractual
Term (In
Years)

 

Aggregate
Intrinsic
Value

 

Balance at January 1, 2012

 

18,569

 

$

8.57

 

4.1 

 

$

696,371

 

Granted

 

120

 

$

57.45

 

 

 

 

 

Exercised

 

(1,920)

 

$

1.42

 

 

 

 

 

Cancelled or forfeited

 

(97)

 

$

19.24

 

 

 

 

 

Outstanding at March 31, 2012

 

16,672

 

$

9.68

 

4.3 

 

$

873,781

 

Vested and expected to vest in the future at March 31, 2012

 

16,060

 

$

9.14

 

4.1 

 

$

850,404

 

Exercisable at March 31, 2012

 

12,547

 

$

5.86

 

3.2 

 

$

705,494

 

 

The weighted-average grant-date fair value of options granted during the three-months ended March 31, 2012 and 2011 was $25.48 per share and $15.51 per share, respectively. The total intrinsic value of options exercised during the three-months ended March 31, 2012 and 2011 was $107.4 million and $2.5 million, respectively.

 

Cash received from option exercises under all plans for the three-months ended March 31, 2012 and 2011 was approximately $2.7 million and $4.2 million, respectively. The excess tax benefit realized for tax deductions from non-qualified stock option exercises and disqualifying dispositions of incentive stock options for the three-months ended March 31, 2012 and 2011 was $0.5 million and $0.2 million, respectively.

 

At March 31, 2012, there was $38.5 million of total unrecognized compensation expense related to non-vested options granted under the Company’s share-based payment plans. That cost is expected to be recognized over a weighted-average period of 2.4 years.

 

Restricted Stock Awards and Restricted Stock Units

 

Stock-based compensation cost for restricted stock awards and restricted stock units is measured based on the closing fair market value of the Company’s common stock at the date of grant. In the event that the Company has the option and intent to settle a restricted stock unit in cash, the award is classified as a liability and revalued at each balance sheet date. Total cash paid to settle restricted stock unit liabilities and the increase in the liabilities for future cash settlements during the three-months ended March 31, 2012 and the year ended December 31, 2011 were not material.

 

The following table summarizes the Company’s activities with respect to non-vested restricted stock awards and non-vested restricted stock units as follows:

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

 

 

Number of
Shares (in
thousands)

 

 

Weighted-
Average
Grant-Date
Fair Value

 

Non-vested at January 1, 2012

 

724

 

 

$

41.66

 

Granted

 

91

 

 

$

57.45

 

Vested

 

-

 

 

$

-    

 

Forfeited/cancelled

 

-

 

 

$

-    

 

Non-vested at March 31, 2012

 

815

 

 

$

43.44

 

 

The weighted-average grant-date fair value of restricted stock units and restricted stock awards granted during the three-months ended March 31, 2012  was $57.45. No restricted stock units or restricted stock awards were granted during the three-months ended March 31, 2011. As of March 31, 2012, 0.7 million restricted stock units and restricted stock awards are expected to vest.

 

At March 31, 2012, total unrecognized compensation expense relating to non-vested restricted stock awards and non-vested restricted stock units was $29.0 million, which is expected to be recognized over a weighted-average period of 2.1 years.

 

13.                            INCOME TAXES

 

The following is a roll-forward of the Company’s total gross unrecognized tax benefits, not including interest and penalties, for the three-months ended March 31, 2012:

 

 

 

Gross Unrealized Tax
Benefits

 

Balance at December 31, 2011

 

$

1,910

 

Additions for tax positions related to the current year

 

-

 

Additions for tax positions related to the prior year

 

-

 

Decreases related to settlement with taxing authority

 

-

 

Balance at March 31, 2012

 

$

1,910

 

 

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Company’s condensed consolidated financial statements. As of March 31, 2012, the Company had accrued approximately $0.5 million in interest and penalties related to unrecognized tax benefits. If the Company were to prevail on all uncertain tax positions, it would not have a significant impact on the Company’s effective tax rate.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

It is expected that the amount of unrecognized tax benefits will change within the next 12 months as a result of ongoing audits. However, the Company does not expect the change to have a significant impact on its financial position, results of operations or liquidity.

 

On February 10, 2011, the Internal Revenue Service (“IRS”) began its examination of the Company’s U.S. federal income tax return for the years ended December 31, 2009 and 2008. The examination was completed in April 2012 with no material adjustments. The Company is also currently under examination by certain state jurisdictions.

 

The Company is subject to U.S. federal income tax as well as to income tax in multiple state and foreign jurisdictions. Federal income tax returns are subject to IRS examination for the 2010 and 2011 tax years. State income tax returns are subject to examination for the 2007 through 2011 tax years.

 

14.                            EARNINGS PER SHARE

 

A reconciliation of the weighted-average shares used in the basic and diluted earnings per common share computations is presented below:

 

 

 

Three-Months Ended

 

 

 

March 31,

 

 

 

2012

 

2011

 

Weighted-average shares outstanding:

 

 

 

 

 

Basic

 

174,832

 

177,858

 

Dilutive securities

 

10,430

 

9,390

 

Diluted

 

185,262

 

187,248

 

 

For the three-months ended March 31, 2012 and 2011, options outstanding totaling 0.2 million and 0.7 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.

 

15.                            SEGMENT INFORMATION

 

The Company has two reportable segments, namely Direct Store Delivery (“DSD”), whose principal products comprise energy drinks, and Warehouse (“Warehouse”), whose principal products comprise juice based and soda beverages.  The DSD segment develops, markets and sells products primarily through an exclusive distributor network, whereas the Warehouse segment develops, markets and sells products primarily direct to retailers. Corporate and unallocated amounts that do not relate to DSD or Warehouse segments have been allocated to “Corporate & Unallocated.”

 

The net revenues derived from the DSD and Warehouse segments and other financial information related thereto are as follows:

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

 

 

Three-Months Ended March 31, 2012

 

 

 

DSD

 

Warehouse

 

Corporate and
Unallocated

 

Total

 

Net sales

 

$

431,182

 

 

$

23,423

 

 

$

-

 

 

$

454,605

 

 

Contribution margin

 

149,092

 

 

2,157

 

 

-

 

 

151,249

 

 

Corporate and unallocated expenses

 

-

 

 

-

 

 

(24,964

)

 

(24,964

)

 

Operating income

 

 

 

 

 

 

 

 

 

 

126,285

 

 

Other income

 

100

 

 

-

 

 

246

 

 

346

 

 

Income before provision for income taxes

 

 

 

 

 

 

 

 

 

 

126,631

 

 

Depreciation and amortization

 

3,783

 

 

29

 

 

1,144

 

 

4,956

 

 

Trademark amortization

 

-

 

 

11

 

 

1

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three-Months Ended March 31, 2011

 

 

 

DSD

 

Warehouse

 

Corporate and
Unallocated

 

Total

 

Net sales

 

$

334,722

 

 

$

21,697

 

 

$

-

 

 

$

356,419

 

 

Contribution margin

 

110,075

 

 

(340

)

 

-

 

 

109,735

 

 

Corporate and unallocated expenses

 

-

 

 

-

 

 

(21,280

)

 

(21,280

)

 

Operating income

 

 

 

 

 

 

 

 

 

 

88,455

 

 

Other income

 

13

 

 

-

 

 

288

 

 

301

 

 

Income before provision for income taxes

 

 

 

 

 

 

 

 

 

 

88,756

 

 

Depreciation and amortization

 

2,545

 

 

17

 

 

1,019

 

 

3,581

 

 

Trademark amortization

 

-

 

 

11

 

 

1

 

 

12

 

 

 

Revenue is derived from sales to external customers.  Operating expenses that pertain to each segment are allocated to the appropriate segment.

 

Corporate and unallocated expenses were $25.0 million for the three-months ended March 31, 2012 and included $17.7 million of payroll costs, of which $6.6 million was attributable to stock-based compensation expense (see Note 12, “Stock-Based Compensation”), $4.7 million attributable to professional service expenses, including accounting and legal costs, and $2.6 million of other operating expenses.  Corporate and unallocated expenses were $21.3 million for the three-months ended March 31, 2011 and included $12.7 million of payroll costs, of which $3.8 million was attributable to stock-based compensation expense (see Note 12, “Stock-Based Compensation”), $5.2 million attributable to professional service expenses, including accounting and legal costs, and $3.4 million of other operating expenses. Certain items, including operating assets and income taxes, are not allocated to individual segments and therefore are not presented above.

 

Coca-Cola Refreshments, a customer of the DSD segment, accounted for approximately 30% of the Company’s net sales for both the three-months ended March 31, 2012 and 2011, respectively.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

 

Net sales to customers outside the United States amounted to $79.2 million and $55.5 million for the three-months ended March 31, 2012 and 2011, respectively. Such sales were approximately 17.4% and 15.6% of net sales for the three-months ended March 31, 2012 and 2011, respectively.

 

The Company’s net sales by product line were as follows:

 

 

 

 

 

 

 

 

 

Three-Months Ended

 

 

March 31,

Product Line

 

2012

 

2011

Energy drinks

 

$

418,912

 

$

327,642

Non-carbonated (primarily juice based beverages and Peace Tea® iced teas)

 

24,252

 

18,944

Carbonated (primarily soda beverages)

 

7,661

 

7,269

Other

 

3,780

 

2,564

 

 

$

454,605

 

$

356,419

 

 

 

 

 

 

 

16.                            RELATED PARTY TRANSACTIONS

 

A director of the Company was a partner in a law firm (the director resigned from the law firm effective July 10, 2011) that serves as counsel to the Company. Expenses incurred in connection with services rendered by such firm to the Company during the three-months ended March 31, 2012 and 2011 were $0.6 million and $1.2 million, respectively.

 

Two directors and officers of the Company and their families are principal owners of a company that provides promotional materials to the Company. Expenses incurred with such company in connection with promotional materials purchased during the three-months ended March 31, 2012 and 2011 were $0.1 million and $0.2 million, respectively.

 

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Table of Contents

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Our Business

 

Overview

 

Monster Beverage Corporation was incorporated in Delaware on April 25, 1990. Our principal place of business is located at 550 Monica Circle, Suite 201, Corona, California 92880 and our telephone number is (951) 739-6200. When this report uses the words “the Company”, “Hansen Natural Company” “we”, “us”, and “our”, these words refer to Monster Beverage Corporation and its subsidiaries, unless the context otherwise requires. We are a holding company and conduct no operating business except through our consolidated subsidiaries.

 

We develop, market, sell and distribute “alternative” beverage category beverages primarily under the following brand names:

 

·              Monster Energy®

·      Hansen’s®

·              Monster Rehab®

·      Hansen’s Natural Soda®

·              Monster Energy Extra Strength Nitrous Technology®

·      Junior Juice®

·              Java Monster®

·      Blue Sky®

·              X-Presso Monster®

·      Hubert’s®

·              Worx Energy®

·      Vidration®

·              Peace Tea®

 

 

Our Monster Energy® drinks, which represented 91.6% and 91.5% of our net sales for the three-months ended March 31, 2012 and 2011, respectively, include the following:

 

·              Monster Energy®

·              Lo-Carb Monster Energy®

·              Monster Energy® Assault®

·              Monster Khaos®

·              Monster M-80® (named “RIPPER” in certain countries)

·              Monster MIXXD®

·              Monster Energy® Absolutely Zero

·              Monster Energy® Import

·              Monster Energy® Import Light

·              Monster Energy® Dub Edition

·              Monster Rehab® Tea + Lemonade + Energy

·              Monster Rehab® Rojo Tea + Energy

·              Monster Rehab® Green Tea + Energy

·              Monster Rehab® Protean + Energy

·              Monster Rehab® Tea + Orangeade + Energy

·              Monster Energy® M3™ Super Concentrate

·              Übermonster™ Energy Brew

 

·         Java Monster® Kona Blend

·         Java Monster® Loca Moca®

·         Java Monster® Mean Bean®

·         Java Monster® Vanilla Light

·         Java Monster® Irish Blend®

·         Java Monster® Toffee

·         Monster Energy Extra Strength Nitrous Technology® Super Dry™

·         Monster Energy Extra Strength Nitrous Technology® Anti-Gravity®

·         Monster Energy Extra Strength Nitrous Technology® Killer B®

·         Monster Energy Extra Strength Nitrous Technology® Black Ice™

·         X-Presso Monster® Hammer

·         X-Presso Monster® Midnite

 

We have two reportable segments, namely Direct Store Delivery (“DSD”), whose principal products comprise energy drinks, and Warehouse (“Warehouse”), whose principal products comprise juice-based and soda beverages. The DSD segment develops, markets and sells products primarily through an exclusive distributor network, whereas the Warehouse segment develops, markets and sells products primarily direct to retailers.

 

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Table of Contents

 

During the three-months ended March 31, 2012, we continued to expand our existing product lines and flavors and further developed our markets. In particular, we continued to focus on developing and marketing beverages that fall within the category generally described as the “alternative” beverage category. During the three-months ended March 31, 2012, we introduced the following products:

 

·

Monster Rehab® Tea + Orangeade + Energy, a non-carbonated rehydration energy drink (February 2012).

·

Übermonster™ Energy Brew, a non-alcoholic energy drink manufactured using a brewed fermentation process (February 2012).

·

Hansen’s® Coconut Water, in original and tropical flavors, packaged in re-sealable Tetra Prisma boxes (March 2012).

 

Our gross sales* of $517.3 million for the three-months ended March 31, 2012 represented record sales for our first fiscal quarter. The vast majority of our gross sales are derived from our Monster Energy® brand energy drinks. Gross sales of our Monster Energy® brand energy drinks were $481.4 million for the three-months ended March 31, 2012, an increase of $106.1 million, or 96.7% of our overall increase in gross sales for the three-months ended March 31, 2012. Any decrease in gross sales of our Monster Energy® brand energy drinks could have a significant adverse effect on our future revenues and net income. Competitive pressure in the energy drink category could also adversely affect our operating results.

 

*Gross sales — see definition below.

 

Our DSD segment represented 94.8% and 93.9% of our consolidated net sales for the three-months ended March 31, 2012 and 2011, respectively. Our Warehouse segment represented 5.2% and 6.1% of our consolidated net sales for the three-months ended March 31, 2012 and 2011, respectively.

 

Our sales and marketing strategy for all our beverages is to focus our efforts on developing brand awareness through image enhancing programs and product sampling. We use our branded vehicles and other promotional vehicles at events where we offer samples of our products to consumers. We utilize “push-pull” methods to enhance shelf and display space exposure in sales outlets (including advertising, in-store promotions and in-store placement of point-of-sale materials, racks, coolers and barrel coolers) to enhance demand from consumers for our products. We also support our brands with prize promotions, price promotions, competitions, endorsements from selected public and extreme sports figures, personality endorsements (including from television and other well known sports personalities), coupons, sampling and sponsorship of selected causes, events, athletes and teams. In-store posters, outdoor posters, print, radio and television advertising and coupons, may also be used to promote our brands.

 

We believe that one of the keys to success in the beverage industry is differentiation, making our brands and products visually distinctive from other beverages on the shelves of retailers. We review our products and packaging on an ongoing basis and, where practical, endeavor to make them different, better and unique. The labels and graphics for many of our products are redesigned from time to time to maximize their visibility and identification, wherever they may be placed in stores, which we will continue to reevaluate from time to time.

 

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All of our beverage products are manufactured by various third party bottlers and co-packers situated throughout the United States and abroad, under separate arrangements with each party.

 

Our growth strategy includes expanding our international business. Gross sales to customers outside the United States amounted to $100.6 million and $72.8 million for the three-months ended March 31, 2012 and 2011, respectively. Such sales were approximately 19% and 18% of gross sales for the three-months ended March 31, 2012 and 2011, respectively.

 

Our customers are primarily full service beverage distributors, retail grocery and specialty chains, wholesalers, club stores, drug chains, mass merchandisers, convenience chains, health food distributors, food service customers and the military. Gross sales to our various customer types for the three-months ended March 31, 2012 and 2011 are reflected below. Such information includes sales made by us directly to the customer types concerned, which include our full service beverage distributors in the United States. Such full service beverage distributors in turn sell certain of our products to the same customer types listed below. We do not have complete details of such full service distributors’ sales of our products to their respective customers and therefore limit our description of our customer types to include only our sales to such full service distributors without reference to such distributors’ sales to their own customers.

 

 

 

Three-Months Ended
March 31,

 

 

 

2012

 

2011

 

Full service distributors

 

65%

 

65%

 

Club stores, drug chains & mass merchandisers

 

10%

 

10%

 

Outside the U.S.

 

19%

 

18%

 

Retail grocery, specialty chains and wholesalers

 

4%

 

5%

 

Other

 

2%

 

2%

 

 

Our customers include Coca-Cola Refreshments (“CCR”), Coca-Cola Enterprises, Coca-Cola Refreshments Canada, Ltd. (formerly known as Coca-Cola Bottling Company), CCBCC Operations, LLC, United Bottling Contracts Company, LLC and other Coca-Cola Company independent bottlers, Wal-Mart, Inc. (including Sam’s Club), select Anheuser-Busch, Inc. distributors, certain bottlers of the Coca-Cola Hellenic group, Kalil Bottling Group, Trader Joe’s, John Lenore & Company, Swire Coca-Cola, Costco, The Kroger Co. and Safeway, Inc. A decision by any large customer to decrease amounts purchased from us or to cease carrying our products could have a material negative effect on our financial condition and consolidated results of operations.  CCR accounted for approximately 30% of our net sales for both the three-months ended March 31, 2012 and 2011, respectively.

 

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Table of Contents

 

Results of Operations

 

The following table sets forth key statistics for the three-months ended March 31, 2012 and 2011, respectively. (In thousands, except per share amounts)

 

 

 

Three-Months Ended
March 31,

 

 

Percentage
Change

 

 

 

2012

 

 

2011

 

 

12 vs. 11

 

Gross sales, net of discounts & returns *

 

$

517,313

 

 

$

407,593

 

 

26.9%

 

Less: Promotional and other allowances**

 

62,708

 

 

51,174

 

 

22.5%

 

Net sales