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, 2016

Commission File Number 001-18761

 

 

 

MONSTER BEVERAGE CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware

47-1809393

 

(State or other jurisdiction of

(I.R.S. Employer

 

incorporation or organization)

Identification No.)

 

 

1 Monster Way

Corona, California 92879

(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 ¨

 

 

 

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

 

Smaller reporting company ¨

 

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 203,042,661 shares of common stock, par value $0.005 per share, outstanding as of April 20, 2016.

 



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

MARCH 31, 2016

 

 

INDEX

 

 

Part I.

FINANCIAL INFORMATION

Page No.

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015

3

 

 

 

 

Condensed Consolidated Statements of Income for the Three-Months Ended March 31, 2016 and 2015

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three-Months Ended March 31, 2016 and 2015

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three-Months Ended March 31, 2016 and 2015

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

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

28

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

 

 

 

Item 4.

Controls and Procedures

43

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

43

 

 

 

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

44

 

 

 

 

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, 2016 AND DECEMBER 31, 2015

(In Thousands, Except Par Value) (Unaudited)

 

 

 

March 31,
2016

 

December 31,
2015

ASSETS

 

 

 

 

CURRENT ASSETS:

 

 

 

 

Cash and cash equivalents

 

  $

2,528,109

 

  $

2,175,417

Short-term investments

 

508,243

 

744,610

Accounts receivable, net

 

416,704

 

352,955

TCCC Transaction receivable

 

125,000

 

125,000

Inventories

 

165,929

 

156,121

Prepaid expenses and other current assets

 

36,458

 

26,967

Prepaid income taxes

 

12,429

 

1,532

Total current assets

 

3,792,872

 

3,582,602

 

 

 

 

 

INVESTMENTS

 

7,419

 

15,348

PROPERTY AND EQUIPMENT, net

 

99,257

 

97,354

DEFERRED INCOME TAXES

 

261,297

 

261,310

GOODWILL

 

1,279,715

 

1,279,715

OTHER INTANGIBLE ASSETS, net

 

428,578

 

427,986

OTHER ASSETS

 

14,346

 

10,874

Total Assets

 

  $

5,883,484

 

  $

5,675,189

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

Accounts payable

 

  $

183,216

 

  $

144,763

Accrued liabilities

 

96,734

 

81,786

Accrued promotional allowances

 

131,091

 

115,530

Accrued distributor terminations

 

8,660

 

11,018

Deferred revenue

 

36,226

 

32,271

Accrued compensation

 

12,978

 

22,159

Income taxes payable

 

71,750

 

106,662

Total current liabilities

 

540,655

 

514,189

 

 

 

 

 

DEFERRED REVENUE

 

350,983

 

351,590

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 11)

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

Common stock - $0.005 par value; 240,000 shares authorized;
207,175 shares issued and 203,041 outstanding as of March 31, 2016;
207,019 shares issued and 202,900 outstanding as of December 31, 2015

 

1,036

 

1,035

Additional paid-in capital

 

4,005,996

 

3,991,857

Retained earnings

 

1,558,740

 

1,394,863

Accumulated other comprehensive loss

 

(15,443)

 

(21,878)

Common stock in treasury, at cost; 4,134 shares and 4,119 shares as of March 31, 2016 and December 31, 2015, respectively

 

(558,483)

 

(556,467)

Total stockholders’ equity

 

4,991,846

 

4,809,410

Total Liabilities and Stockholders’ Equity

 

  $

5,883,484

 

  $

5,675,189

 

 

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, 2016 AND 2015

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

 

 

 

 

Three-Months Ended

 

 

 

March 31,

 

 

 

2016

 

2015

 

 

 

 

 

 

 

NET SALES

 

  $

680,186

 

  $

626,791

 

 

 

 

 

 

 

COST OF SALES

 

257,088

 

257,834

 

 

 

 

 

 

 

GROSS PROFIT

 

423,098

 

368,957

 

 

 

 

 

 

 

OPERATING EXPENSES

 

168,385

 

361,328

 

 

 

 

 

 

 

OPERATING INCOME

 

254,713

 

7,629

 

 

 

 

 

 

 

INTEREST and OTHER INCOME, net

 

608

 

1,233

 

 

 

 

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

255,321

 

8,862

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

91,444

 

4,448

 

 

 

 

 

 

 

NET INCOME

 

  $

163,877

 

  $

4,414

 

 

 

 

 

 

 

NET INCOME PER COMMON SHARE:

 

 

 

 

 

Basic

 

  $

0.81

 

  $

0.03

 

Diluted

 

  $

0.79

 

  $

0.03

 

 

 

 

 

 

 

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

 

 

 

 

 

Basic

 

202,946

 

169,871

 

Diluted

 

206,908

 

173,778

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE-MONTHS ENDED MARCH 31, 2016 AND 2015

(In Thousands) (Unaudited)

 

 

 

 

Three-Months Ended
March 31,

 

 

 

2016

 

2015

 

Net income, as reported

 

  $

163,877

 

  $

4,414

 

Other comprehensive income:

 

 

 

 

 

Change in foreign currency translation adjustment

 

6,435

 

(9,980)

 

Available-for-sale investments:

 

 

 

 

 

Change in net unrealized gains

 

-

 

-

 

Reclassification adjustment for net gains included in net income

 

-

 

-

 

Net change in available-for-sale investments

 

-

 

-

 

Other comprehensive income (loss)

 

6,435

 

(9,980)

 

Comprehensive income (loss)

 

  $

170,312

 

  $

(5,566)

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE-MONTHS ENDED MARCH 31, 2016 AND 2015

(In Thousands) (Unaudited)

 

 

 

 

Three-Months Ended

 

 

March 31, 2016

 

March 31, 2015

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

Net income

 

  $

163,877

 

  $

4,414

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

 

 

 

 

Depreciation and amortization

 

9,024

 

6,470

Loss (gain) on disposal of property and equipment

 

46

 

(46)

Stock-based compensation

 

10,062

 

6,354

Deferred income taxes

 

9

 

-

Effect on cash of changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

(58,550)

 

(68,138)

Distributor receivables

 

(1,656)

 

66

Inventories

 

(7,639)

 

(26,547)

Prepaid expenses and other current assets

 

(12,841)

 

(5,895)

Prepaid income taxes

 

(10,535)

 

(13,498)

Accounts payable

 

36,086

 

42,742

Accrued liabilities

 

12,239

 

5,387

Accrued promotional allowances

 

13,136

 

(2,160)

Accrued distributor terminations

 

(2,853)

 

205,980

Accrued compensation

 

(9,147)

 

(7,866)

Income taxes payable

 

(34,791)

 

(4,298)

Deferred revenue

 

3,092

 

(40,041)

Net cash provided by operating activities

 

109,559

 

102,924

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

Maturities of held-to-maturity investments

 

396,346

 

253,732

Sales of available-for-sale investments

 

-

 

101

Purchases of held-to-maturity investments

 

(152,050)

 

(118,283)

Purchases of property and equipment

 

(8,205)

 

(4,687)

Proceeds from sale of property and equipment

 

381

 

102

Increase in intangibles

 

(2,342)

 

(1,552)

Decrease in other assets

 

142

 

227

Net cash provided by investing activities

 

234,272

 

129,640

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

Principal payments on debt

 

(522)

 

(196)

Issuance of common stock

 

4,078

 

19,119

Purchases of common stock held in treasury

 

(2,016)

 

(251,382)

Net cash provided by (used in) financing activities

 

1,540

 

(232,459)

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

7,321

 

(7,641)

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

352,692

 

(7,536)

CASH AND CASH EQUIVALENTS, beginning of period

 

2,175,417

 

370,323

CASH AND CASH EQUIVALENTS, end of period

 

  $

2,528,109

 

  $

362,787

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

 

  $

16

 

  $

5

Income taxes

 

  $

137,186

 

  $

22,703

 

 

 

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, 2016 AND 2015

(In Thousands) (Unaudited) (Continued)

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS

 

The Company entered into capital leases for the acquisition of promotional vehicles of $1.2 million and $0.2 million for the three-months ended March 31, 2016 and 2015, respectively.

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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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”) Annual Report on Form 10-K for the year ended December 31, 2015 (“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, 2016 and 2015 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.

 

2.                                    ACQUISITIONS AND DIVESTITURES

 

On June 12, 2015, the Company completed the transactions contemplated by the definitive agreements entered into with The Coca-Cola Company (“TCCC”) on August 14, 2014, which provided for a long-term strategic relationship in the global energy drink category (the “TCCC Transaction”).

 

In consequence of the TCCC Transaction, (1) the Company issued to TCCC 34,040,534 newly issued Company common shares representing approximately 16.7% of the total number of outstanding Company common shares (after giving effect to such issuance) and TCCC appointed two individuals to the Company’s Board of Directors, (2) TCCC transferred all of its rights in and to TCCC’s worldwide energy drink business (“KO Energy”) to the Company, (3) the Company transferred all of its rights in and to its non-energy drink business to TCCC, (4) the Company and TCCC amended the distribution coordination agreements previously existing between them to govern the transition of third parties’ rights to distribute the Company’s energy products in most territories in the U.S. to members of TCCC’s distribution network, which consists of owned or controlled bottlers/distributors and independent bottling/distribution partners, and (5) TCCC and one of its subsidiaries made an aggregate net cash payment to the Company of $2.15 billion, $125.0 million of which is currently held in escrow subject to release upon the achievement of milestones relating to the transition of distribution rights to TCCC’s distribution network.

 

The following unaudited pro forma condensed combined financial information is presented as if the TCCC Transaction had closed on January 1, 2015:

 

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Table of Contents

 

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, 2015

 

 

 

 

 

 

 

Pro Forma Adjustments

 

 

 

 

 

Monster
Beverage
Corporation
as reported

 

KO Energy

 

Disposal of
Monster Non-
Energy

 

Other

 

Pro Forma
Combined

 

Net sales

 

  $

626,791

 

  $

80,705

 

  $

(31,308)

 

  $

4,923

 

  $

681,111

 

Net income

 

4,414

 

59,439

1

(1,229)

 

(23,159)

 

39,465

 

 

1The $59.4 million of net income for KO Energy for the three-months ended March 31, 2015 is presented before tax. The associated estimated provision for income taxes is included in the “Other” category.

 

Pro-Forma Adjustments – Other include the following:

 

 

 

Three-Months
Ended
March 31,
2015

 

Net sales:

 

 

 

Amortization of deferred revenue

 

  $

4,923

 

 

 

 

 

Net income:

 

 

 

Amortization of deferred revenue

 

  $

4,923

 

To record sales commissions

 

(9,043)

 

To record amortization of definite lived KO Energy intangibles

 

(1,726)

 

To eliminate TCCC Transaction expenses

 

3,597

 

Estimated provision for income taxes on pro forma adjustments

 

1,974

 

Estimated provision for income taxes on KO Energy income

 

(22,884)

 

Total

 

  $

(23,159)

 

 

For purposes of the unaudited pro forma financial information, a combined U.S. Federal and state statutory tax rate of 38.5% has been used. This rate does not reflect the Company’s expected effective tax rate, which includes other tax charges and benefits, and does not take into account any historical or possible future tax events that may impact the combined company.

 

The unaudited pro forma financial information is presented for information purposes only and is not intended to represent or be indicative of the combined results of operations that the Company would have reported had the TCCC Transaction been completed as of the date and for the periods presented, and should not be taken as representative of the Company’s consolidated results of operations following the completion of the TCCC Transaction. In addition, the unaudited pro forma financial information is not intended to project the future financial results of operations of the combined company. The unaudited pro forma combined financial information does not reflect any cost savings, operational synergies or revenue enhancements that the combined company may achieve as a result of the TCCC Transaction or the costs to combine the operations or costs necessary to achieve cost savings, operating synergies and revenue enhancements.

 

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Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

3.                                    RECENT ACCOUNTING PRONOUNCEMENTS

 

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting”, which changes how companies account for certain aspects of share-based payments to employees. The new guidance identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, and certain classifications on the statement of cash flows. The update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods with early application permitted. The Company early adopted the standards update effective January 1, 2016, electing (i) retrospective adjustment in the statement of cash flows and (ii) continued recognition stock compensation based on estimated forfeitures.  For the three-months ended March 31, 2015, net cash provided by operating activities and net cash used in financing activities increased by $184.7 million, respectively, as a result of such retrospective adjustment. The adoption of ASU 2016-09 did not have a material impact on the Company’s financial position, results of operations or liquidity.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. This update will increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This update is effective for annual and interim reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2016-02 on its financial position, results of operations and liquidity.

 

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes”. The amendments under the new guidance require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The Company adopted the standards update effective December 31, 2015, electing to apply it retrospectively to all periods presented.

 

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”.  ASU 2015-11 requires entities to measure inventory at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for annual periods, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. The adoption of ASU 2015-11 is not expected to have a material impact on the Company’s financial position, results of operations or liquidity.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which supersedes previous revenue recognition guidance. ASU 2014-09 requires that a company recognize revenue at an amount that reflects the consideration to which the company expects to be entitled in exchange for transferring goods or services to a customer. In applying the new guidance, a company will (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the contract’s performance obligations; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 was to be effective for reporting periods beginning after December 15, 2016.  However, on July 9, 2015, the FASB voted to approve a one-year deferral of the effective date. This new guidance is effective for the Company beginning January 1, 2018 and can be adopted using either a full retrospective or modified approach. The Company is currently

 

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Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

evaluating the impact of ASU 2014-09 on its financial position, results of operations and liquidity.

 

4.                                    INVESTMENTS

 

The following table summarizes the Company’s investments at:

 

March 31, 2016

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

  $

7,969

 

  $

-

 

  $

-

 

  $

7,969

 

  $

-

 

  $

-

Municipal securities

 

464,865

 

22

 

148

 

464,739

 

148

 

-

U.S. government agency securities

 

17,316

 

1

 

7

 

17,310

 

7

 

-

U.S. Treasuries

 

18,093

 

1

 

-

 

18,094

 

-

 

-

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

7,419

 

-

 

8

 

7,411

 

8

 

-

Total

 

  $

515,662

 

  $

24

 

  $

163

 

  $

515,523

 

  $

163

 

  $

-

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

  $

3,978

 

  $

-

 

  $

-

 

  $

3,978

 

  $

-

 

  $

-

Municipal securities

 

709,207

 

63

 

192

 

709,078

 

192

 

-

U.S. government agency securities

 

23,369

 

-

 

58

 

23,311

 

58

 

-

U.S. Treasuries

 

8,056

 

-

 

13

 

8,043

 

13

 

-

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

11,071

 

-

 

8

 

11,063

 

8

 

-

U.S. government agency securities

 

4,277

 

-

 

25

 

4,252

 

25

 

-

Total

 

  $

759,958

 

  $

63

 

  $

296

 

  $

759,725

 

  $

296

 

  $

-

 

 

 

During the three-months ended March 31, 2016 and 2015, realized gains or losses recognized on the sale of investments were not significant.

 

The Company’s investments at March 31, 2016 and December 31, 2015 in commercial paper, U.S. Treasuries, municipal securities and U.S. government agency securities carried investment grade credit ratings.

 

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

 

March 31, 2016

 

December 31, 2015

 

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

Less than 1 year:

 

 

 

 

 

 

 

 

Commercial paper

 

  $

7,969

 

  $

7,969

 

  $

3,978

 

  $

3,978

Municipal securities

 

464,865

 

464,739

 

709,207

 

709,078

U.S. government agency securities

 

17,316

 

17,310

 

23,369

 

23,311

U.S. Treasuries

 

18,093

 

18,094

 

8,056

 

8,043

Due 1 -10 years:

 

 

 

 

 

 

 

 

Municipal securities

 

5,334

 

5,328

 

11,071

 

11,063

U.S. government agency securities

 

-

 

-

 

4,277

 

4,252

Due 11 - 20 years:

 

 

 

 

 

 

 

 

Municipal securities

 

2,085

 

2,083

 

-

 

-

Total

 

  $

515,662

 

  $

515,523

 

  $

759,958

 

  $

759,725

 

 

 

5.                                    FAIR VALUE OF CERTAIN FINANCIAL ASSETS AND LIABILITIES

 

ASC 820 provides a framework for measuring fair value and requires disclosures regarding fair value measurements. ASC 820 defines fair value as the price that would be received on the sale of 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 cost and the fair value of the Company’s financial assets and liabilities 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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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

March 31, 2016

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

 

$

280,113

 

$

-

 

$

-

 

$

280,113

 

Money market funds

 

 

1,195,818

 

-

 

-

 

1,195,818

 

Certificates of deposit

 

 

-

 

102,315

 

-

 

102,315

 

Commercial paper

 

 

-

 

244,125

 

-

 

244,125

 

U.S. Treasuries

 

 

-

 

561,104

 

-

 

561,104

 

Municipal securities

 

 

-

 

478,005

 

-

 

478,005

 

U.S. government agency securities

 

 

-

 

182,291

 

-

 

182,291

 

Foreign currency derivatives

 

 

-

 

(417

)

-

 

(417

)

Total

 

 

$

1,475,931

 

$

1,567,423

 

$

-

 

$

3,043,354

 

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

1,475,931

 

$

1,052,178

 

$

-

 

$

2,528,109

 

Short-term investments

 

 

-

 

508,243

 

-

 

508,243

 

Accounts receivable, net

 

 

-

 

219

 

-

 

219

 

Investments

 

 

-

 

7,419

 

-

 

7,419

 

Accrued liabilities

 

 

-

 

(636

)

-

 

(636

)

Total

 

 

$

1,475,931

 

$

1,567,423

 

$

-

 

$

3,043,354

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

 

$

255,723

 

$

-

 

$

-

 

$

255,723

 

Money market funds

 

 

664,005

 

-

 

-

 

664,005

 

Certificates of deposit

 

 

-

 

85,007

 

-

 

85,007

 

Commercial paper

 

 

-

 

430,605

 

-

 

430,605

 

U.S. Treasuries

 

 

-

 

260,035

 

-

 

260,035

 

Municipal securities

 

 

-

 

731,744

 

-

 

731,744

 

U.S. government agency securities

 

 

-

 

508,256

 

-

 

508,256

 

Foreign currency derivatives

 

 

-

 

(217

)

-

 

(217

)

Total

 

 

$

919,728

 

$

2,015,430

 

$

-

 

$

2,935,158

 

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

919,728

 

$

1,255,689

 

$

-

 

$

2,175,417

 

Short-term investments

 

 

-

 

744,610

 

-

 

744,610

 

Accounts receivable, net

 

 

-

 

371

 

-

 

371

 

Investments

 

 

-

 

15,348

 

-

 

15,348

 

Accrued liabilities

 

 

-

 

(588

)

-

 

(588

)

Total

 

 

$

919,728

 

$

2,015,430

 

$

-

 

$

2,935,158

 

 

All 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, is based on quoted market prices in active markets for identical securities. The Company’s valuation of its Level 2 investments, which include commercial paper, U.S. Treasuries, certificates of deposit, municipal securities and U.S. government agency securities, is based on other observable inputs, specifically a market approach which utilizes valuation models, pricing systems, mathematical tools and other relevant information for the same or similar securities. The Company’s valuation of its Level 2 foreign exchange contracts is based on quoted market prices of the same or similar instruments, adjusted for counterparty risk. There were no transfers between Level 1 and Level 2 measurements during the three-months ended March 31, 2016 or the year ended December 31, 2015, and there were no changes in the Company’s valuation techniques.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

6.                                    DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The Company is exposed to foreign currency exchange rate risks related primarily to its foreign business operations. During the three-months ended March 31, 2016 and the year ended December 31, 2015, the Company entered into forward currency exchange contracts with financial institutions to create an economic hedge to specifically manage a portion of the foreign exchange risk exposure associated with certain consolidated subsidiaries’ non-functional currency denominated assets and liabilities. All foreign currency exchange contracts of the Company that were outstanding as of March 31, 2016 have terms of one month or less. The Company does not enter into forward currency exchange contracts for speculation or trading purposes.

 

The Company has not designated its foreign currency exchange contracts as hedge transactions under ASC 815. Therefore, gains and losses on the Company’s foreign currency exchange contracts are recognized in interest income and other (expense), net, in the condensed consolidated statements of income, and are largely offset by the changes in the fair value of the underlying economically hedged item.

 

The notional amount and fair value of all outstanding foreign currency derivative instruments in the condensed consolidated balance sheets consist of the following at:

 

March 31, 2016

Derivatives not designated as
hedging instruments under
FASB ASC 815-20

 

Notional
Amount

 

Fair
Value

 

Balance Sheet Location

Assets:

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

Receive EUR/pay USD

 

  $

21,945

 

  $

157

 

Accounts receivable, net

Receive SGD/pay USD

 

9,606

 

38

 

Accounts receivable, net

Receive RUB/pay USD

 

1,374

 

24

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

Receive USD/pay GBP

 

  $

17,380

 

  $

(12)

 

Accrued liabilities

Receive USD/pay AUD

 

17,588

 

(104)

 

Accrued liabilities

Receive USD/pay CAD

 

3,823

 

(28)

 

Accrued liabilities

Receive USD/pay MXN

 

6,798

 

(24)

 

Accrued liabilities

Receive USD/pay ZAR

 

11,655

 

(335)

 

Accrued liabilities

Receive USD/pay HUF

 

1,085

 

(6)

 

Accrued liabilities

Receive USD/pay SEK

 

1,612

 

(15)

 

Accrued liabilities

Receive USD/pay BRL

 

2,722

 

(38)

 

Accrued liabilities

Receive USD/pay CLP

 

2,650

 

(46)

 

Accrued liabilities

Receive USD/pay COP

 

1,379

 

(28)

 

Accrued liabilities

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

December 31, 2015

Derivatives not designated as
hedging instruments under
FASB ASC 815-20

 

Notional
Amount

 

Fair
Value

 

Balance Sheet Location

Assets:

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

Receive USD/pay GBP

 

  $

18,146

 

  $

168

 

Accounts receivable, net

Receive USD/pay ZAR

 

17,411

 

144

 

Accounts receivable, net

Receive USD/pay RUB

 

2,173

 

9

 

Accounts receivable, net

Receive USD/pay BRL

 

2,478

 

49

 

Accounts receivable, net

Receive USD/pay COP

 

1,351

 

1

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

Receive EUR/pay USD

 

  $

39,578

 

  $

(429)

 

Accrued liabilities

Receive USD/pay AUD

 

14,040

 

(82)

 

Accrued liabilities

Receive USD/pay CAD

 

2,804

 

(15)

 

Accrued liabilities

Receive USD/pay JPY

 

2,495

 

(2)

 

Accrued liabilities

Receive USD/pay MXN

 

8,122

 

(15)

 

Accrued liabilities

Receive SGD/pay USD

 

3,837

 

(30)

 

Accrued liabilities

Receive USD/pay NZD

 

1,978

 

(3)

 

Accrued liabilities

Receive USD/pay CLP

 

3,519

 

(12)

 

Accrued liabilities

 

 

The net gains (losses) on derivative instruments in the condensed consolidated statements of income were as follows:

 

 

 

 

 

Amount of gain (loss)
recognized in income on
derivatives

 

 

 

 

Three-months ended

Derivatives not designated as
hedging instruments under
FASB ASC 815-20

 

Location of gain
recognized in income on
derivatives

 

March 31,
2016

 

March 31,
2015

Foreign currency exchange contracts

 

Interest and other income, net

 

  $

317

 

  $

(1,856)

 

7.                                    INVENTORIES

 

Inventories consist of the following at:

 

 

 

March 31,
2016

 

December 31,
2015

 

Raw materials

 

  $

55,053

 

  $

52,043

 

Finished goods

 

110,876

 

104,078

 

 

 

  $

165,929

 

  $

156,121

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

8.                                    PROPERTY AND EQUIPMENT, Net

 

Property and equipment consist of the following at:

 

 

 

March 31,
2016

 

December 31,
2015

 

Land

 

  $

6,792

 

  $

6,792

 

Leasehold improvements

 

2,862

 

2,804

 

Furniture and fixtures

 

3,599

 

3,551

 

Office and computer equipment

 

10,639

 

11,080

 

Computer software

 

2,672

 

2,530

 

Equipment

 

97,124

 

93,465

 

Buildings

 

40,043

 

39,848

 

Vehicles

 

30,256

 

29,804

 

 

 

193,987

 

189,874

 

Less: accumulated depreciation and amortization

 

(94,730)

 

(92,520)

 

 

 

  $

99,257

 

  $

97,354

 

 

9.                                    GOODWILL AND OTHER INTANGIBLE ASSETS

 

The following is a roll-forward of goodwill for the three-months ended March 31, 2016 by reportable segment:

 

 

 

Finished
Products

 

Concentrate

 

Total

 

Balance at December 31, 2015

 

  $

641,716

 

  $

637,999

 

  $

1,279,715

 

Acquisitions

 

-

 

-

 

-

 

Balance at March 31, 2016

 

  $

641,716

 

  $

637,999

 

  $

1,279,715

 

 

Intangible assets consist of the following at:

 

 

 

March 31,
2016

 

December 31,
2015

 

Amortizing intangibles

 

  $

35,286

 

  $

35,263

 

Accumulated amortization

 

(5,651)

 

(3,899)

 

 

 

29,635

 

31,364

 

Non-amortizing intangibles

 

398,943

 

396,622

 

 

 

  $

428,578

 

  $

427,986

 

 

Amortizing intangibles primarily consist of customer relationships. All amortizing intangibles have been assigned an estimated finite useful life and such intangibles are amortized on a straight-line basis over the number of years that approximate their respective useful lives, generally 5 years. Total amortization expense recorded was $1.8 million and $0.001 million for the three-months ended March 31, 2016 and 2015, respectively.

 

10.                            DISTRIBUTION AGREEMENTS

 

In accordance with ASC No. 420 “Exit or Disposal Cost Obligations”, the Company expenses distributor termination costs in the period in which the written notification of termination occurs.  The

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Company incurred termination costs of $3.4 million and $206.0 million for the three-months ended March 31, 2016 and 2015, respectively. Such termination costs have been expensed in full and are included in operating expenses for the three-months ended March 31, 2016 and 2015.

 

In the normal course of business, 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, are accounted for as deferred revenue and are recognized as revenue ratably over the anticipated life of the respective distribution agreement, generally 20 years. Revenue recognized was $8.2 million and $43.3 million for the three-months ended March 31, 2016 and 2015, respectively. Included in the $43.3 million of revenue recognized for the three-months ended March 31, 2015 was $39.8 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors who were sent notices of termination during the first quarter of 2015.

 

11.                            COMMITMENTS AND CONTINGENCIES

 

The Company had purchase commitments aggregating approximately $33.6 million at March 31, 2016, which represented 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 had contractual obligations aggregating approximately $106.3 million at March 31, 2016, which related primarily to sponsorships and other marketing activities.

 

The Company had operating lease commitments aggregating approximately $11.1 million at March 31, 2016, which related primarily to warehouse and office space.

 

Legal Proceedings

 

Litigation – The Company has been named a defendant in numerous personal injury lawsuits, claiming that the death or other serious injury of the plaintiffs was caused by consumption of Monster Energy® brand energy drinks. The plaintiffs in these lawsuits allege strict product liability, negligence, fraudulent concealment, breach of implied warranties and wrongful death. The Company believes that each complaint is without merit and plans a vigorous defense. The Company also believes that any damages, if awarded, would not have a material adverse effect on the Company’s financial position or results of operations.

 

State Attorney General Inquiry – In July 2012, the Company received a subpoena from the Attorney General for the State of New York in connection with its investigation concerning the Company’s advertising, marketing, promotion, ingredients, usage and sale of its Monster Energy® brand energy drinks. Production of documents pursuant to that subpoena was completed in approximately May 2014.

 

On August 6, 2014, the Attorney General for the State of New York issued a second subpoena seeking additional documents and the deposition of a Company employee. On September 8, 2014, the Company moved to quash the second subpoena in the Supreme Court, New York County. The motion was fully briefed and was argued on March 17, 2015.  No decision has been rendered. It is unknown what, if any, action the state attorney general may take against the Company, the relief which may be sought in the event of any such proceeding or whether such proceeding could have a material adverse effect on the Company’s business, financial condition or results of operations.

 

San Francisco City Attorney Litigation – On October 31, 2012, the Company received a written

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

request for information from the City Attorney for the City and County of San Francisco concerning the Company’s advertising and marketing of its Monster Energy® brand energy drinks and specifically concerning the safety of its products for consumption by adolescents. In a letter dated March 29, 2013, the San Francisco City Attorney threatened to bring suit against the Company if it did not agree to take the following five steps immediately: (i) “Reformulate its products to lower the caffeine content to safe levels” - (ii) “Provide adequate warning labels”; (iii) “Cease promoting over-consumption in marketing”; (iv) “Cease use of alcohol and drug references in marketing”; and (v) “Cease targeting minors.”

 

(i) The Company Action – On April 29, 2013, the Company and its wholly owned subsidiary, Monster Energy Company, filed a complaint for declaratory and injunctive relief against the San Francisco City Attorney (the “Company Action”) in United States District Court for the Central District of California (the “Central District Court”), styled Monster Beverage Corp., et al. v. Dennis Herrera. The Company sought a declaration from the Central District Court that the San Francisco City Attorney’s investigation and demands are impermissible and preempted, subject to the doctrine of primary jurisdiction, are unconstitutional in that they violate the First and Fourteenth Amendments’ prohibitions against compelled speech, content-based speech and commercial speech, are impermissibly void-for-vagueness, and/or violate the Commerce Clause. On June 3, 2013, the City Attorney filed a motion to dismiss the Company Action, arguing in part that the complaint should be dismissed in light of the San Francisco Action (described below) filed on May 6, 2013. On August 22, 2013, the Central District Court granted in part and denied in part the City Attorney’s motion. On October 17, 2013, the City Attorney filed a renewed motion to dismiss the Company Action and on December 16, 2013, the Central District Court granted the City Attorney’s renewed motion, dismissing the Company Action. The Company filed a Notice of Appeal to the Ninth Circuit on December 18, 2013. The appeal was argued before the Ninth Circuit on April 7, 2016, and taken under submission.

 

(ii) The San Francisco Action – On May 6, 2013, the San Francisco City Attorney filed a complaint for declaratory and injunctive relief, civil penalties and restitution for alleged violation of California’s Unfair Competition Law, Business & Professions Code sections 17200, et seq., styled People Of The State Of California ex rel. Dennis Herrera, San Francisco City Attorney v. Monster Beverage Corporation, in San Francisco Superior Court (the “San Francisco Action”). The City Attorney alleges that the Company (1) mislabeled its products as a dietary supplement, in violation of California’s Sherman Food, Drug and Cosmetic Law, California Health & Safety Code sections 109875 et. seq.; (2) is selling an “adulterated” product because caffeine is not generally recognized as safe due to the alleged lack of scientific consensus concerning the safety of the levels of caffeine in the Company’s products; and (3) is engaged in unfair and misleading business practices because its marketing (a) does not disclose the health risks that energy drinks pose for children and teens; (b) fails to warn against and promotes unsafe consumption; (c) implicitly promotes mixing of energy drinks with alcohol or drugs; and (d) is deceptive because it includes unsubstantiated claims about the purported special benefits of its “killer” ingredients and “energy blend.” The City Attorney sought a declaration that the Company has engaged in unfair and unlawful business acts and practices in violation of the Unfair Competition Law; an injunction from performing or proposing to perform any acts in violation of the Unfair Competition Law; restitution; and civil penalties.

 

After a motion to strike filed by the Company was granted in part, on March 20, 2014, the City Attorney filed an amended complaint, adding allegations supporting the theory for relief as to which the Court had granted the motion to strike. On April 18, 2014, the Company filed a renewed motion to strike, as well as a motion asking the Court to bifurcate and/or stay claims relating to the safety of Monster Energy® brand energy drinks, pending resolution of the ongoing U.S. Food and Drug Administration (“FDA”) investigation of the safety and labeling of food products to which caffeine is added. On May 22, 2014, the Court denied the Company’s motion to strike and motion to bifurcate and/or stay claims relating to safety.

 

On September 5, 2014, the City Attorney filed a second amended complaint, adding Monster Energy

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Company as a defendant. The Company and Monster Energy Company filed answers to the second amended complaint on October 4, 2014 and November 10, 2014, respectively. Discovery is ongoing.

 

The Court has set the case for a bench trial which is scheduled to take place April 10-21, 2017.

 

The Company denies that it has violated the Unfair Competition Law or any other law and believes that the City Attorney’s claims and demands are preempted and unconstitutional, as alleged in the action the Company filed in the Central District Court. The Company intends to vigorously defend against this lawsuit. At this time, no evaluation of the likelihood of an unfavorable outcome or range of potential loss can be expressed.

 

The actions or investigations described above have not progressed to a point where a reasonably possible range of losses associated with their ultimate outcome can be estimated at this time. If the final resolution of any such litigation or proceedings is unfavorable, the Company’s financial condition, operating results and cash flows could be materially affected.

 

In addition to the above matters, the Company has been named as a defendant in various false advertising putative class actions and in a private attorney general action. In these actions, plaintiffs allege that defendants misleadingly labeled and advertised Monster Energy® brand products that allegedly were ineffective for the advertised benefits (including, but not limited to, an allegation that the products do not hydrate as advertised because they contain caffeine). The plaintiffs further allege that the Monster Energy® brand products at issue are unsafe because they contain one or more ingredients that allegedly could result in illness, injury or death. In connection with these product safety allegations, the plaintiffs claim that the product labels did not provide adequate warnings and/or that the Company did not include sufficiently specific statements with respect to contra-indications and/or adverse reactions associated with the consumption of its energy drink products (including, but not limited to, claims that certain ingredients, when consumed individually or in combination with other ingredients, could result in high blood pressure, palpitations, liver damage or other negative health effects and/or that the products themselves are unsafe). Based on these allegations, the plaintiffs assert claims for violation of state consumer protection statutes, including unfair competition and false advertising statutes, and for breach of warranty and unjust enrichment. In their prayers for relief, the plaintiffs seek, inter alia, compensatory and punitive damages, restitution, attorneys’ fees, and, in some cases, injunctive relief. The Company regards these cases and allegations as having no merit. Furthermore, the Company is subject to litigation from time to time in the normal course of business, including intellectual property litigation and claims from terminated distributors.

 

Although it is not possible to predict the ultimate outcome of such litigation, based on the facts known to the Company, 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.

 

The Company evaluates, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of the liability that is accrued, if any, or in the amount of any related insurance reimbursements recorded. As of March 31, 2016, the Company’s condensed consolidated balance sheet includes accrued loss contingencies of approximately $0.3 million.

 

12.                          ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Changes in accumulated other comprehensive loss by component, after tax, for the three-months ended March 31, 2016 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)

 

 

 

 

Currency
Translation
Losses

 

Balance at December 31, 2015

 

  $

21,878

 

Other comprehensive (gain)  before reclassifications

 

-

 

Amounts reclassified from accumulated   other comprehensive loss

 

-

 

Net current-period other comprehensive (gain)

 

(6,435)

 

Balance at March 31, 2016

 

  $

15,443

 

 

13.                            TREASURY STOCK

 

On February 24, 2016, the Company’s Board of Directors authorized a repurchase program of up to $1.75 billion of the Company’s outstanding common stock (the “February 2016 Repurchase Plan”). During the three-months ended March 31, 2016, no shares were purchased under the February 2016 Repurchase Plan.

 

On September 11, 2015, the Company’s Board of Directors authorized a share repurchase program for the repurchase of up to $500.0 million of the Company’s outstanding common stock (the “September 2015 Repurchase Plan”). As of March 31, 2016, $250.0 million remained available under the September 2015 Repurchase Plan.  During the three-months ended March 31, 2016, no shares were purchased under the September 2015 Repurchase Plan. During the year ended December 31, 2015, the Company purchased 1.9 million shares of common stock at an average purchase price of $134.26 per share, for a total amount of $250.0 million (excluding broker commissions), under the September 2015 Repurchase Plan.

 

During the three-months ended March 31, 2016, 15,277 shares were purchased from employees in lieu of cash payments for options exercised or withholding taxes due for a total amount of $2.0 million. While such purchases are considered common stock repurchases, they are not counted as purchases against the Company’s authorized share repurchase programs, including the September 2015 Repurchase Plan or the February 2016 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying condensed consolidated balance sheet at March 31, 2016.

 

On April 28, 2016, the Board of Directors authorized the Company to commence a “modified Dutch auction” tender offer to repurchase up to $2.0 billion of its outstanding shares of common stock. The repurchase of these shares is authorized under the Company’s existing share repurchase authority and will be funded with cash on hand. The Company anticipates commencing the tender offer in May 2016. Details of the tender offer, including the offer price, conditions, potential participation by management and other terms, will be set forth in the offering materials to be distributed to shareholders upon commencement of the tender offer.

 

14.                            STOCK-BASED COMPENSATION

 

The Company has two stock-based compensation plans under which shares were available for grant at March 31, 2016: 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 $10.1 million and $6.4 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, 2016 and 2015, respectively.

 

The excess tax benefit for tax deductions from non-qualified stock option exercises, disqualifying dispositions of incentive stock options, vesting of restricted stock units and restricted stock awards for the three-months ended March 31, 2016 and 2015 was $1.6 million and $184.7 million, respectively.

 

Stock Options

 

Under the Company’s stock-based compensation plans, all stock options granted as of March 31, 2016 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,

 

 

 

2016

 

2015

 

Dividend yield

 

0.0%

 

 

0.0%

 

 

Expected volatility

 

36.2%

 

 

37.1%

 

 

Risk-free interest rate

 

1.5%

 

 

1.6%

 

 

Expected term

 

5.7 years

 

 

5.8 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 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.

 

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

 

Options

 

Number of
Shares (In
thousands)

 

Weighted-
Average
Exercise
Price Per
Share

 

Weighted-
Average
Remaining
Contractual
Term (In
years)

 

Aggregate
Intrinsic Value

Outstanding at January 1, 2016

 

6,590

 

  $

50.85

 

5.6

 

  $

646,497

Granted 01/01/16 - 03/31/16

 

961

 

  $

132.06

 

 

 

 

Exercised

 

(110)

 

  $

37.18

 

 

 

 

Cancelled or forfeited

 

(8)

 

  $

93.05

 

 

 

 

Outstanding at March 31, 2016

 

7,433

 

  $

61.50

 

5.7

 

  $

536,196

Vested and expected to vest in the future at March 31, 2016

 

6,969

 

  $

57.97

 

5.5

 

  $

527,253

Exercisable at March 31, 2016

 

4,257

 

  $

30.38

 

4.0

 

  $

438,805

 

 

The weighted-average grant-date fair value of options granted during the three-months ended March 31, 2016 and 2015 was $47.65 per share and $50.16 per share, respectively. The total intrinsic value of options exercised during the three-months ended March 31, 2016 and 2015 was $10.5 million and $515.7 million, respectively.

 

Cash received from option exercises under all plans for the three-months ended March 31, 2016 and 2015 was approximately $4.0 million and $19.0 million, respectively.

 

At March 31, 2016, there was $107.1 million of total unrecognized compensation expense related to non-vested options granted to employees under the Company’s share-based payment plans. That cost is expected to be recognized over a weighted-average period of 3.2 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.

 

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, 2016

 

178

 

  $

99.58

 

Granted 01/01/16- 03/31/16

 

82

 

  $

131.96

 

Vested

 

(46)

 

  $

109.44

 

Forfeited/cancelled

 

-

 

  $

-

 

Non-vested at March 31, 2016

 

214

 

  $

109.84

 

 

 

The weighted-average grant-date fair value of restricted stock units and restricted stock awards granted during the three-months ended March 31, 2016 and 2015 was $131.96 per share and $135.48 per share, respectively.  As of March 31, 2016, 0.2 million of restricted stock units and restricted stock awards are expected to vest over their respective terms.

 

At March 31, 2016, total unrecognized compensation expense relating to non-vested restricted stock awards and non-vested restricted stock units was $20.0 million, which is expected to be recognized over a weighted-average period of 2.0 years.

 

15.                            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, 2016:

 

 

 

Gross Unrecognized Tax
Benefits

 

Balance at December 31, 2015

 

  $

471

 

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, 2016

 

  $

471

 

 

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, 2016, the Company had accrued approximately $0.2 million in interest and penalties related to unrecognized tax benefits. If the Company were to prevail on all uncertain tax positions, the resultant impact on the Company’s effective tax rate would not be significant. It is expected that the change in the amount of unrecognized tax benefits within the next 12 months will not be significant.

 

The Company is subject to U.S. federal income tax as well as to income tax in multiple state and foreign jurisdictions.

 

On August 7, 2015, the Internal Revenue Service (the “IRS”) began its examination of the Company’s U.S. federal income tax returns for the years ended December 31, 2012 and 2013.

 

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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 is in various stages of examination with certain states and certain foreign jurisdictions. The 2012 through 2015 U.S. federal income tax returns are subject to examination by the IRS. State income tax returns are subject to examination for the 2011 through 2015 tax years.

 

16.                            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,

 

 

 

2016

 

2015

 

Weighted-average shares outstanding:

 

 

 

 

 

Basic

 

202,946

 

169,871

 

Dilutive securities

 

3,962

 

3,907

 

Diluted

 

206,908

 

173,778

 

 

For the three-months ended March 31, 2016 and 2015, options and awards outstanding totaling 1.4 million shares and 0.4 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.

 

17.                            SEGMENT INFORMATION

 

The Company has three operating and reportable segments, (i) Finished Products, which is comprised primarily of the Company’s Monster Energy® drink products (previously comprising the majority of the former Direct Store Delivery segment) (“Finished Products”), (ii) Concentrate, the principal products of which include the various energy drink brands acquired from TCCC as a result of the TCCC Transaction  (“Concentrate”) and (iii) Other, the principal products of which include the brands disposed of as a result of the TCCC Transaction (previously comprising the majority of the former Warehouse segment and the Peace Tea® brand) (“Other”).

 

The Company’s Finished Products segment generates net operating revenues by selling ready-to-drink packaged energy drinks to 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.

 

The Company’s Concentrate segment generates net operating revenues by selling “concentrates” and/or “beverage bases” to authorized bottling and canning operations. Such bottlers generally combine the concentrates and/or beverage bases with sweeteners and water, which are then filled in authorized containers bearing the Company’s respective trademarks and sold to customers directly (or in some cases through wholesalers or other bottlers).

 

Generally, the Finished Products segment generates higher per case net operating revenues, but lower per case gross profit margins than the Concentrate segment.

 

Corporate and unallocated amounts that do not relate to a reportable segment have been allocated to “Corporate & Unallocated.” No asset information, other than goodwill and other intangible assets, has been provided for in the Company’s reportable segments as management does not measure or allocate such assets on

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

a segment basis.

 

The net revenues derived from the Company’s reportable segments and other financial information related thereto for the three-months ended March 31, 2016 and 2015 are as follows:

 

 

 

Three-Months Ended

 

 

 

March 31,

 

 

 

2016

 

2015

 

Net sales:

 

 

 

 

 

Finished Products(1)

 

  $

624,292

 

  $

595,482

 

Concentrate

 

55,894

 

-

 

Other

 

-

 

31,309

 

Corporate and unallocated

 

-

 

-

 

 

 

  $

680,186

 

  $

626,791

 

 

 

 

Three-Months Ended

 

 

 

March 31,

 

 

 

2016

 

2015

 

Operating Income:

 

 

 

 

 

Finished Products(1) (2)

 

  $

267,996

 

  $

55,621

 

Concentrate

 

38,122

 

-

 

Other

 

-

 

1,999

 

Corporate and unallocated

 

(51,405)

 

(49,991)

 

 

 

  $

254,713

 

  $

7,629

 

 

 

 

Three-Months Ended

 

 

 

March 31,

 

 

 

2016

 

2015

 

Income before tax:

 

 

 

 

 

Finished Products(1) (2)

 

  $

268,047

 

  $

55,695

 

Concentrate

 

38,107

 

-

 

Other

 

-

 

1,999

 

Corporate and unallocated

 

(50,833)

 

(48,832)

 

 

 

  $

255,321

 

  $

8,862

 

 

(1)    Includes $8.2 million and $43.3 million for the three-months ended March 31, 2016 and 2015, respectively, related to the recognition of deferred revenue.

 

(2)    Includes $3.4 million and $206.0 million for the three-months ended March 31, 2016 and 2015, respectively, related to distributor termination costs.

 

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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,

 

 

 

2016

 

2015

 

Depreciation and amortization

 

 

 

 

 

Finished Products

 

  $

5,779

 

  $

5,055

 

Concentrate

 

1,770

 

-

 

Other

 

-

 

140

 

Corporate and unallocated

 

1,475

 

1,275

 

 

 

  $

9,024

 

  $

6,470

 

 

 

 

 

March 31,
2016

 

December 31,
2015

 

Goodwill and other intangible assets:

 

 

 

 

 

Finished Products

 

  $

701,651

 

  $

699,346

 

Concentrate

 

1,006,642

 

1,008,355

 

Other

 

-

 

-

 

Corporate and unallocated

 

-

 

-

 

 

 

  $

1,708,293

 

  $

1,707,701

 

 

Corporate and unallocated expenses for the three-months ended March 31, 2016 include $28.4 million of payroll costs, of which $10.1 million was attributable to stock-based compensation expense (see Note 14, “Stock-Based Compensation”), as well as $16.0 million attributable to professional service expenses, including accounting and legal costs, and $7.0 million of other operating expenses.  Corporate and unallocated expenses for the three-months ended March 31, 2015 include $28.5 million of payroll costs, of which $6.4 million was attributable to stock-based compensation expense (see Note 14, “Stock-Based Compensation”), as well as $14.5 million attributable to professional service expenses, including accounting and legal costs, and $7.0 million attributable to other operating expenses.

 

Coca-Cola Refreshments USA Inc. (“CCR”) accounted for approximately 46% and 35% of the Company’s net sales for the three-months ended March 31, 2016 and 2015, respectively.

 

Net sales to customers outside the United States amounted to $149.1 million and $113.0 million for the three-months ended March 31, 2016 and 2015, respectively.

 

18.                            RELATED PARTY TRANSACTIONS

 

As a result of the TCCC Transaction, TCCC controls more than 10% of the voting interests of the Company.  TCCC, through certain wholly-owned subsidiaries (the “TCCC Subsidiaries”) and through certain affiliated companies (the “TCCC Affiliates”) purchases and distributes certain of the Company’s products both domestically and in certain international territories.  The Company also pays TCCC a sales commission based on certain sales within the TCCC bottling network. TCCC commissions, based on sales to the TCCC Affiliates for the three-months ended March 31, 2016, were $1.9 million. TCCC commissions, based on sales to the TCCC Subsidiaries, are accounted for as a reduction to revenue and are reported in net sales to the TCCC Subsidiaries. Net sales to the TCCC Subsidiaries for the three-months ended March 31, 2016 and 2015 were $310.1 million and $218.9 million, respectively.  The Company also purchases concentrates from TCCC which are then sold to both the TCCC Affiliates and the TCCC Subsidiaries. Concentrate purchases from TCCC were $6.7 million for the three-months ended March 31, 2016. A certain TCCC Subsidiary also contract manufactures certain of the Company’s Monster Energy® brand energy drinks. Contract manufacturing

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

expenses were $1.6 million and $1.8 million for the three-months ended March 31, 2016 and 2015, respectively. Accounts receivable, accounts payable and accrued promotional allowances related to the TCCC Subsidiaries are as follows at:

 

 

 

March 31,
2016

 

December 31,
2015

 

 

 

 

 

 

 

Accounts receivable, net

 

  $

217,708

 

  $

172,201

 

Accounts payable

 

  $

59,347

 

  $

58,579

 

Accrued promotional allowances

 

  $

41,752

 

  $

27,544

 

 

 

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, 2016 and 2015 were $0.1 million and $0.9 million, respectively.

 

19.                            SUBSEQUENT EVENTS

 

On April 1, 2016, the Company completed its acquisition of flavor supplier and long-time business partner American Fruits & Flavors (“AFF”), in a transaction that brings the Company’s primary flavor supplier in-house, secures the intellectual property of the Company’s most important flavors in perpetuity and further enhances its flavor development and global flavor footprint capabilities. Pursuant to the terms of the transaction, the Company purchased AFF for $690 million in cash, subject to adjustments. As of April 29, 2016, the fair value analysis has yet to progress to a stage where there is sufficient information for a preliminary or definitive measurement of the transactions respective fair values.

 

On April 28, 2016, the Board of Directors authorized the Company to commence a “modified Dutch auction” tender offer to repurchase up to $2.0 billion of its outstanding shares of common stock under its existing share repurchase authority.  The Company anticipates commencing the tender offer in May 2016. Details of the tender offer, including the offer price, conditions, potential participation by management and other terms, will be set forth in the offering materials to be distributed to shareholders upon commencement of the tender offer.

 

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

 

Our Business

 

Monster Beverage Corporation was incorporated in Delaware on April 25, 1990. Our principal place of business is located at 1 Monster Way, Corona, California 92879 and our telephone number is (951) 739-6200. When this report uses the words “the 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.

 

Acquisitions and Divestitures

 

On June 12, 2015, we completed the transactions contemplated by the definitive agreements entered into with The Coca-Cola Company (“TCCC”) on August 14, 2014, which provided for a long-term strategic relationship in the global energy drink category (the “TCCC Transaction”).

 

In accordance with ASC No. 420 “Exit or Disposal Cost Obligations”, we expense distributor termination costs in the period in which the written notification of termination occurs.  As a result, we incurred termination amounts of $3.4 million and $206.0 million for the three-months ended March 31, 2016 and 2015, respectively, related to the distribution rights transferred to TCCC’s distribution network. Such termination amounts have been expensed in full and are included in operating expenses for the three-months ended March 31, 2016 and 2015. In addition, the Company recognized as income $39.8 million in the first quarter of 2015, related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors who were sent notices of termination during the first quarter of 2015.

 

The Company incurred $3.6 million in TCCC Transaction related expenses for the three-months ended March 31, 2015.

 

The following table summarizes the selected items discussed above for the three-months ended March 31, 2016 and 2015:

 

Income Statement Items (in thousands):

 

Three-Months
Ended
March 31,
2016

 

Three-Months
Ended
March 31,
2015

 

 

 

 

 

 

 

Included in Net Sales:

 

 

 

 

 

Accelerated recognition of deferred revenue

 

  $

-

 

  $

39,761

 

 

 

 

 

 

 

Included in Operating Expenses:

 

 

 

 

 

Distributor termination costs

 

  $

3,440

 

  $

205,980

 

TCCC Transaction expenses

 

  $

-

 

  $

3,597

 

 

 

 

 

 

 

Net Impact on Operating Income

 

  $

(3,440)

 

  $

(169,816)

 

 

 

Overview

 

We develop, market, sell and distribute energy drink beverages and/or concentrates for energy drink beverages, primarily under the following brand names:

 

·                                         Monster Energy®

·                 Nalu®

·                                         Monster Rehab®

·                 NOS®

 

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·                                         Monster Energy Extra Strength Nitrous Technology®

·                 Full Throttle®

·                                         Java Monster®

·                 Burn®

·                                         Muscle Monster®

·                 Mother®

·                                         Mega Monster Energy®

·                 Ultra®

·                                         Punch Monster®

·                 Play® and Power Play®

·                                         Juice Monster®

·                 Gladiator®

·                                         M3®

·                 Relentless®

·                                         Übermonster®

·                 Samurai®

·                                         BU®

·                 BPM®

 

Our Monster Energy® brand energy drinks, which represented 90.2% and 88.1% of our net sales for the three-months ended March 31, 2016 and 2015, respectively, primarily include the following:

 

·                                         Monster Energy®

·                                         Lo-Carb Monster Energy®

·                                         Monster Assault®

·                                         Juice Monster® Khaos®

·                                         Juice Monster® Ripper®

·                                         Juice Monster® Pipeline Punch™

·                                         Monster Energy® Absolutely Zero

·                                         Monster Energy® Import

·                                         Punch Monster® Baller’s Blend® (formerly Dub Edition)

·                                         Punch Monster® Mad Dog (formerly Dub Edition)

·                                         Monster Rehab® Tea + Lemonade + Energy

·                                         Monster Rehab® Raspberry Tea + Energy (formerly Rojo)

·                                         Monster Rehab® Green Tea + Energy

·                                         Monster Rehab® Tea + Orangeade + Energy

·                                         Monster Rehab® Tea + Pink Lemonade + Energy

·                                         Monster Rehab® Peach Tea + Energy

·                                         Muscle Monster® Vanilla

·                                         Muscle Monster® Chocolate

·                                         Muscle Monster® Strawberry

·                                         Muscle Monster® Banana

·                                         Monster Ghost™ M-100™

·                                         Monster Phantom™ M-100™

·                                         Java Monster® Salted Caramel

·                               Java Monster® Kona Blend

·                               Java Monster® Loca Moca®

·                               Java Monster® Mean Bean®

·                               Java Monster® Vanilla Light

·                               Java Monster® Irish Blend®

·                               Java Monster® Cappuccino

·                               Mega Monster Energy®

·                               Monster Energy Extra Strength Nitrous Technology® Super Dry™

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

·                               M3® Monster Energy® Super Concentrate

·                               Monster Energy® Zero Ultra

·                               Monster Energy® Ultra Blue™

·                               Monster Energy® Ultra Red™

·                               Monster Energy® Ultra Black™

·                               Monster Energy® Ultra Sunrise®

·                               Monster Energy® Ultra Citron™

·                               Monster Energy® Unleaded®

·                               Übermonster® Energy Brew™

·                               Monster Energy® Valentino Rossi

·                               Monster Energy® Gronk

 

We have three operating and reportable segments, (i) Finished Products, which is comprised primarily of our Monster Energy® drink products (previously comprising the majority of the former Direct Store Delivery segment) (“Finished Products”), (ii) Concentrate, the principal products of which include the supply of concentrates for the brands of energy drinks acquired from TCCC (the “Strategic Brands”) (“Concentrate”) and (iii) Other, the principal products of which include the brands disposed of as a result of the TCCC Transaction (previously comprising the majority of the former Warehouse segment and the Peace Tea® brand).

 

During the three-months ended March 31, 2016, we continued to expand our existing energy drink portfolio and further develop our distribution markets. During the three-months ended March 31, 2016, we introduced the following products:

 

·                               Java Monster® Salted Caramel (January 2016).

·                               Monster Energy® Gronk, a carbonated energy drink (February 2016).

 

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In the normal course of business we discontinue certain products and/or product lines. Those products or product lines discontinued during the three-months ended March 31, 2016, either individually or in aggregate, did not have a material adverse impact on our financial position, results of operations or liquidity.

 

Our net sales of $680.2 million for the three-months ended March 31, 2016 represented record sales for our first fiscal quarter. The vast majority of our net sales are derived from our Monster Energy® brand energy drinks. Net sales of our Monster Energy® brand energy drinks were $613.8 million for the three-months ended March 31, 2016.  Net sales of our Strategic Brands acquired as part of the TCCC Transaction were $58.5 million for the three-months ended March 31, 2016.

 

Changes in foreign currency exchange rates had an unfavorable impact on net sales in the Finished Products segment of approximately $10.3 million for the three-months ended March 31, 2016, which was primarily due to a stronger U.S. dollar compared to certain local currencies in which we conduct certain of our international business. Changes in foreign currency exchange rates had an unfavorable impact on net sales in the Concentrate segment of approximately $2.0 million for the three-months ended March 31, 2016, which was primarily due to a stronger U.S. dollar compared to certain local currencies in which we conduct certain of our international business.

 

Our Finished Products segment represented 91.8% and 95.0% of our consolidated net sales for the three-months ended March 31, 2016 and 2015, respectively. Our Concentrate segment represented 8.2% of our consolidated net sales for the three-months ended March 31, 2016. There were no net sales for the Concentrate segment for the three-months ended March 31, 2015. Our Other segment represented 5.0% of our consolidated net sales for the three-months ended March 31, 2015. As a result of the TCCC Transaction, there were no net sales for the Other segment during the three-months ended March 31, 2016.

 

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 racks, coolers and barrel coolers), advertising, in-store promotions and in-store placement of point-of-sale materials to encourage demand from consumers for our products. We also support our brands with prize promotions, price promotions, competitions, endorsements from selected public and sports figures, personality endorsements (including from television and other well-known sports personalities), sampling and sponsorship of selected causes, events, athletes and teams. In-store posters, outdoor posters, print, radio and television advertising (directly and through our sponsorships and endorsements) and coupons may also be used to promote our brands. We are currently evaluating our future strategy for the positioning of our Strategic 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.

 

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 $184.4 million and $141.0 million for the three-months ended March 31, 2016 and 2015, respectively. Such sales were approximately 24% and 21% of gross sales for the three-months ended March 31, 2016 and 2015, respectively. Changes in foreign currency exchange rates had an unfavorable impact on gross sales to customers outside the United States of approximately 8% and 11% for the three-months ended March 31, 2016 and 2015, respectively, which was primarily due to a stronger U.S. dollar compared to certain

 

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local currencies in which we conduct certain of our international business.

 

Our customers are primarily full service beverage bottlers/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, 2016 and 2015 are reflected below. Such information includes sales made by us directly to the customer types concerned, which include our full service beverage bottlers/distributors in the United States. Such full service beverage bottlers/distributors in turn sell certain of our products to some of the same customer types listed below. We limit our description of our customer types to include only our sales to our full service bottlers/distributors without reference to such distributors’ sales to their own customers.

 

 

 

Three-Months Ended
March 31,

 

 

 

2016

 

2015

 

U.S. full service bottlers/distributors

 

66%

 

65%

 

Club stores, drug chains & mass merchandisers

 

9%

 

9%

 

International full service bottlers/distributors

 

24%

 

21%

 

Retail grocery, specialty chains and wholesalers

 

1%

 

3%

 

Other

 

0%

 

2%

 

 

 

Our customers include Coca-Cola Refreshments USA, Inc., Coca-Cola Bottling Company, CCBCC Operations, LLC, United Bottling Contracts Company, LLC, Swire Coca-Cola, USA and certain other TCCC independent bottlers, Coca-Cola Enterprises, Inc., Coca-Cola Hellenic, Asahi, Kalil Bottling Group, Wal-Mart, Inc. (including Sam’s Club), Costco and Anheuser Busch (“AB”) select independent AB distributors (“AB Distributors”). In February 2015, in accordance with our then existing agreements with the applicable AB Distributors, we sent notices of termination to the majority of the AB Distributors in the U.S. for the termination of their respective distribution agreements. The associated distribution rights relating to such terminated distribution agreements have been transitioned to TCCC’s network of owned or controlled bottlers/distributors and independent bottlers/distributors as of the effective date of termination of the affected AB Distributors’ rights in the applicable territories. As of April 29, 2016, distribution rights in the U.S. representing approximately 89% of the target case sales have been transitioned to TCCC’s distribution network. 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. TCCC, through certain wholly-owned subsidiaries (the “TCCC Subsidiaries”), accounted for approximately 46% and 35% of our net sales for the three-months ended March 31, 2016 and 2015, respectively.

 

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Results of Operations

 

The following table sets forth key statistics for the three-months ended March 31, 2016 and 2015, respectively.

 

(In thousands, except per share amounts)

 

Three-Months Ended
March 31,

 

Percentage Change

 

 

2016

 

2015

 

16 vs. 15

Net sales1

 

  $

680,186

 

  $

626,791

 

8.5%

Cost of sales

 

257,088

 

257,834

 

(0.3%)

Gross profit*1

 

423,098

 

368,957

 

14.7%

Gross profit as a
percentage of net sales
1

 

62.2%

 

58.9%

 

 

 

 

 

 

 

 

 

Operating expenses2,3

 

168,385

 

361,328

 

(53.4%)

Operating expenses as a percentage of net sales

 

24.8%

 

57.6%

 

 

 

 

 

 

 

 

 

Operating income12,3

 

254,713

 

7,629

 

3,238.7%

Operating income as a percentage of net sales

 

37.4%

 

1.2%

 

 

 

 

 

 

 

 

 

Interest and other income, net

 

608

 

1,233

 

(50.7%)

 

 

 

 

 

 

 

Income before provision for income taxes12,3

 

255,321

 

8,862

 

2,781.1%

 

 

 

 

 

 

 

Provision for income taxes

 

91,444

 

4,448

 

1,955.8%

 

 

 

 

 

 

 

Income taxes as a percentage of income before taxes

 

35.8%

 

50.2%

 

 

 

 

 

 

 

 

 

Net income12,3

 

  $

163,877

 

  $

4,414

 

3,612.7%

Net income as a percentage of net sales

 

24.1%

 

0.7%

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

Basic

 

  $

0.81

 

  $

0.03

 

3,007.6%

Diluted

 

  $

0.79

 

  $

0.03

 

3,018.2%

 

 

 

 

 

 

 

Case sales (in thousands)

 

 

 

 

 

 

(in 192-ounce case equivalents)

 

72,653

 

57,779

 

25.7%

 

 

 

1Includes $8.2 million and $43.3 million for the three-months ended March 31, 2016 and 2015, respectively, related to the recognition of deferred revenue. Included in the $43.3 million recognition of deferred revenue for the three-months ended March 31, 2015, is $39.8 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors who were sent notices of termination during the first quarter of 2015.

 

2Includes $3.4 million and $206.0 million for the three-months ended March 31, 2016 and 2015, respectively, related to distributor termination costs.

 

3Includes $3.6 million for the three-months ended March 31, 2015 related to TCCC Transaction related expenses.

 

*Gross profit may not be comparable to that of other entities since some entities include all costs associated with their distribution

 

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process in cost of sales, whereas others exclude certain costs and instead include such costs within another line item such as operating expenses. We include out-bound freight and warehouse costs in operating expenses rather than in cost of sales.

 

Results of Operations for the Three-Months Ended March 31, 2016 Compared to the Three-Months Ended March 31, 2015.

 

Net Sales. Net sales were $680.2 million for the three-months ended March 31, 2016, an increase of approximately $53.4 million, or 8.5% higher than net sales of $626.8 million for the three-months ended March 31, 2015. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $61.6 million of the overall increase in net sales. Net sales of our Monster Energy® brand energy drinks increased partially due to increased sales by volume as a result of increased domestic and international consumer demand. Our net sales of $680.2 million for the three-months ended March 31, 2016 were enhanced by a pre-announced price increase that became effective on August 31, 2015 on certain of our Monster Energy® brand energy drinks. We estimate that net sales for the three-months ended March 31, 2016 were increased by approximately $25.8 million as a result of such price increase. Net sales of our Strategic Brands were $58.5 million for the three-months ended March 31, 2016. There were no net sales for the Other segment, the principal products of which include the brands disposed of as a result of the TCCC Transaction on June 12, 2015 (previously comprising the majority of the former Warehouse segment and the Peace Tea® brand), which resulted in a decrease in net sales for the Other segment of $31.3 million for the three-months ended March 31, 2016 from the three-months ended March 31, 2015. No other individual product line contributed either a material increase or decrease to net sales for the three-months ended March 31, 2016.

 

Changes in foreign currency exchange rates had an unfavorable impact on net sales in the Finished Products segment of approximately $10.3 million for the three-months ended March 31, 2016, which was primarily due to a stronger U.S. dollar compared to certain local currencies in which we conduct certain of our international business. Changes in foreign currency exchange rates had an unfavorable impact on net sales in the Concentrate segment of approximately $2.0 million for the three-months ended March 31, 2016, which was primarily due to a stronger U.S. dollar compared to certain local currencies in which we conduct certain of our international business.

 

Case sales, in 192-ounce case equivalents, were 72.7 million cases for the three-months ended March 31, 2016, an increase of approximately 14.9 million cases or 25.7% higher than case sales of 57.8 million cases for the three-months ended March 31, 2015. The overall average net sales per case decreased to $9.36 for the three-months ended March 31, 2016, which was 13.7% lower than the average net sales per case of $10.85 for the three-months ended March 31, 2015. The lower net sales per case was primarily attributable to sales of concentrates and/or beverage bases in the Concentrate segment, which generally generate lower net operating revenues than those products within the Finished Products segment.

 

Net sales for the Finished Products segment were $624.3 million for the three-months ended March 31, 2016, an increase of approximately $28.8 million, or 4.8% higher than net sales of $595.5 million for the three-months ended March 31, 2015. Our net sales for the Finished Products segment of $624.3 million for the three-months ended March 31, 2016 were enhanced by a pre-announced price increase that became effective on August 31, 2015 on certain of our Monster Energy® brand energy drinks. We estimate that net sales of the Finished Products segment for the three-months ended March 31, 2016 were increased by approximately $25.8 million as a result of such price increase. No other individual product line contributed either a material increase or decrease to net sales for the three-months ended March 31, 2016.

 

Net sales for the Concentrate segment were $55.9 million for the three-months ended March 31, 2016. There were no net sales for the Concentrate segment for the three-months ended March 31, 2015.

 

Gross Profit.  Gross profit was $423.1 million for the three-months ended March 31, 2016, an increase of approximately $54.1 million, or 14.7% higher than the gross profit of $369.0 million for the three-months ended March 31, 2015. Gross profit as a percentage of net sales increased to 62.2% for the three-months ended March 31, 2016 from 58.9% for the three-months ended March 31, 2015.  The increase in gross profit dollars

 

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was primarily the result of the $61.6 million increase in net sales of our Monster Energy® brand energy drinks as well as the $58.5 million of net sales of our Strategic Brands. The increase in gross profit as a percentage of net sales was primarily attributable to the Concentrate segment, which generally has higher gross margins than the Finished Products segment, as well as to the disposal of the Other segment, which generally has lower gross margins than the Finished Products segment, lower costs of certain raw materials, the price increase described above and changes in product sales mix.

 

Operating Expenses.  Total operating expenses were $168.4 million for the three-months ended March 31, 2016, a decrease of approximately $192.9 million, or 53.4% lower than total operating expenses of $361.3 million for the three-months ended March 31, 2015. The decrease in operating expenses was primarily due to the $202.5 million decrease in costs associated with distributor terminations. To a lesser extent, the decrease in operating expenses was also due to decreased expenditures of $3.5 million of professional service costs and transaction expenses related to the TCCC Transaction. The decrease in operating expenses was partially offset by increased expenditures of $4.6 million for sponsorships and endorsements, increased expenditures of $5.0 million for professional service costs (exclusive of expenditures related to the TCCC Transaction), including legal and accounting fees and increased expenditures of $2.7 million for merchandise displays.

 

Contribution Margin.  Contribution margin for the Finished Products segment was $268.0 million for the three-months ended March 31, 2016, an increase of approximately $212.4 million, or 381.8% higher than contribution margin of $55.6 million for the three-months ended March 31, 2015. The increase in contribution margin for the Finished Products segment was primarily the result of the $202.5 million decrease in costs associated with distributor terminations as well as the $61.6 million increase in net sales of our Monster Energy® brand energy drinks.  The increase in contribution margin for the Finished Products segment was partially offset by the $39.8 million of accelerated amortization of deferred revenue during the three-months ended March 31, 2015 related to distributor terminations. Contribution margin for the Concentrate segment was $38.1 million for the three-months ended March 31, 2016. There was no contribution margin for the Concentrate segment for the three-months ended March 31, 2015. Contribution margin for the Other segment was $2.0 million for the three-months ended March 31, 2015. There was no contribution margin for the Other segment for the three-months ended March 31, 2016.

 

Operating Income.  Operating income was $254.7 million for the three-months ended March 31, 2016, an increase of approximately $247.1 million, or 3,238.7% higher than operating income of $7.6 million for the three-months ended March 31, 2015. Operating income as a percentage of net sales increased to 37.4% for the three-months ended March 31, 2016 from 1.2% for the three-months ended March 31, 2015. The increase in operating income in dollars was primarily due to the $202.5 million decrease in costs associated with distributor terminations as well as the $54.1 million increase in gross profit. Operating income was $24.6 million and $8.1 million for the three-months ended March 31, 2016 and 2015, respectively, in relation to our operations in Africa, Asia, Australia, Europe, the Middle East and South America.

 

Interest and Other Income, net.  Interest and other income, net was $0.6 million for the three-months ended March 31, 2016, as compared to interest and other income, net of $1.2 million for the three-months ended March 31, 2015. Foreign currency transaction gains (losses) were ($1.4) million and $0.8 million for the three-months ended March 31, 2016 and 2015, respectively. Interest income was $2.0 million and $0.3 million for the three-months ended March 31, 2016 and 2015, respectively.

 

Provision for Income Taxes.  Provision for income taxes was $91.4 million for the three-months ended March 31, 2016, an increase of $87.0 million or 1,955.8% higher than the provision for income taxes of $4.4 million for the three-months ended March 31, 2015.  The effective combined federal, state and foreign tax rate decreased to 35.8% from 50.2% for the three-months ended March 31, 2016 and 2015, respectively. The decrease in the effective tax rate was primarily due to the domestic production deduction.  In addition, the effective tax rate for the three months ended March 31, 2015 was high due to (i) the non-deductibility of certain TCCC Transaction costs, and (ii) the ratio between: (a) net losses earned in certain foreign subsidiaries that have no related income tax expense as a result of the prior establishment of valuation allowance on their deferred tax assets, and (b) the overall lower net income of the Company due primarily to distributor termination costs.

 

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Net Income.  Net income was $163.9 million for the three-months ended March 31, 2016, an increase of $159.5 million or 3,612.7% higher than net income of $4.4 million for the three-months ended March 31, 2015. The increase in net income was primarily attributable to the $202.5 million decrease in costs associated with distributor terminations as well as the increase in gross profit of $54.1 million. The increase in net income was partially offset by an increase in the provision of income taxes of $87.0 million.

 

Non-GAAP Financial Measures

 

Gross Sales**. Gross sales were $777.5 million for the three-months ended March 31, 2016, an increase of approximately $67.3 million, or 9.5% higher than gross sales of $710.2 million for the three-months ended March 31, 2015. The increase in gross sales of our Monster Energy® brand energy drinks represented approximately $73.7 million of the overall increase in gross sales. Gross sales of our Monster Energy® brand energy drinks increased partially due to increased sales by volume as a result of increased domestic and international consumer demand. Our gross sales of $777.5 million for the three-months ended March 31, 2016 were enhanced by a pre-announced price increase that became effective on August 31, 2015 on certain of our Monster Energy® brand energy drinks. We estimate that gross sales for the three-months ended March 31, 2016 were increased by approximately $25.8 million as a result of such price increase. Gross sales of our Strategic Brands were $64.0 million for the three-months ended March 31, 2016. There were no gross sales for the Other segment, the principal products of which include the brands disposed of as a result of the TCCC Transaction on June 12, 2015 (previously comprising the majority of the former Warehouse segment and the Peace Tea® brand), which resulted in a decrease in gross sales for the Other segment of $35.3 million for the three-months ended March 31, 2016 from the three-months ended March 31, 2015. Promotional and other allowances, as described in the footnote below, were $97.3 million for the three-months ended March 31, 2016, an increase of $13.9 million, or 16.7% higher than promotional and other allowances of $83.4 million for the three-months ended March 31, 2015. Promotional and other allowances as a percentage of gross sales increased to 12.5% from 11.7% for the three-months ended March 31, 2016 and 2015, respectively. No other individual product line contributed either a material increase or decrease to gross sales for the three-months ended March 31, 2016.

 

Changes in foreign currency exchange rates had an unfavorable impact on gross sales in the Finished Products segment of approximately $13.0 million for the three-months ended March 31, 2016, which was primarily due to a stronger U.S. dollar compared to certain local currencies in which we conduct certain of our international business. Changes in foreign currency exchange rates had an unfavorable impact on gross sales in the Concentrate segment of approximately $2.1 million for the three-months ended March 31, 2016, which was primarily due to a stronger U.S. dollar compared to certain local currencies in which we conduct certain of our international business.

 

**Gross sales is used internally by management as an indicator of and to monitor operating performance, including sales performance of particular products, salesperson performance, product growth or declines and overall Company performance. The use of gross sales allows evaluation of sales performance before the effect of any promotional items, which can mask certain performance issues. We therefore believe that the presentation of gross sales provides a useful measure of our operating performance. Gross sales is not a measure that is recognized under GAAP and should not be considered as an alternative to net sales, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of net sales. Additionally, gross sales may not be comparable to similarly titled measures used by other companies, as gross sales has been defined by our internal reporting practices. In addition, gross sales may not be realized in the form of cash receipts as promotional payments and allowances may be deducted from payments received from certain customers.

 

The following table reconciles the non-GAAP financial measure of gross sales with the most directly comparable GAAP financial measure of net sales:

 

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(In thousands, except per share
amounts)

 

Three-Months Ended
March 31,

 

Percentage
Change

 

 

 

2016

 

2015

 

16 vs. 15

 

Gross sales, net of discounts and returns

 

  $

777,508

 

  $

710,193

 

9.5%

 

Less: Promotional and other allowances***

 

97,322

 

83,402

 

16.7%

 

Net Sales

 

  $

680,186

 

  $

626,791

 

8.5%

 

 

***Although the expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the presentation thereof does not conform with GAAP presentation requirements. Additionally, our definition of promotional and other allowances may not be comparable to similar items presented by other companies. Promotional and other allowances primarily include consideration given to the Company’s bottlers/distributors or retail customers including, but not limited to the following: (i) discounts granted off list prices to support price promotions to end-consumers by retailers; (ii) reimbursements given to the Company’s bottlers/distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products; (iii) the Company’s agreed share of fees given to bottlers/distributors and/or directly to retailers for advertising, in-store marketing and promotional activities; (iv) the Company’s agreed share of slotting, shelf space allowances and other fees given directly to retailers; (v) incentives given to the Company’s bottlers/distributors and/or retailers for achieving or exceeding certain predetermined sales goals; (vi) discounted or free products; (vii) contractual fees given to the Company’s bottlers/distributors related to sales made by the Company direct to certain customers that fall within the bottler’s/distributors’ sales territories; and (viii) commissions paid to our customers. The presentation of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and the spending levels incurred or correlated with such sales. Promotional and other allowances constitute a material portion of our marketing activities. The Company’s promotional allowance programs with its numerous bottlers/distributors and/or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one week to one year. The primary drivers of our promotional and other allowance activities for the three-months ended March 31, 2016 and 2015 were (i) to increase sales volume and trial, (ii) to address market conditions, and (iii) to secure shelf and display space at retail.

 

Liquidity and Capital Resources

 

Cash flows provided by operating activities.  Cash provided by operating activities was $109.6 million for the three-months ended March 31, 2016, as compared with net cash provided by operating activities of $102.9 million for the three-months ended March 31, 2015.

 

For the three-months ended March 31, 2016, cash provided by operating activities was primarily attributable to net income earned of $163.9 million and adjustments for certain non-cash expenses, consisting of $10.1 million of stock-based compensation and $9.0 million of depreciation and other amortization. For the three-months ended March 31, 2016, cash provided by operating activities also increased due to a $36.1 million increase in accounts payable, a $12.2 million increase in accrued liabilities, a $13.1 million increase in accrued promotional allowances and a $3.1 million increase in deferred revenue. For the three-months ended March 31, 2016, cash used in operating activities was due to a $58.6 million increase in accounts receivable, a $34.8 million decrease in income taxes payable, a $10.5 million increase in prepaid income taxes, a $7.6 million increase in inventories, a $12.8 million increase in prepaid expenses and other current assets, a $9.1 million decrease in accrued compensation and a $2.9 million decrease in accrued distributor terminations.

 

For the three-months ended March 31, 2015, cash provided by operating activities was primarily attributable to a $206.0 million increase in accrued distributor terminations, a $42.7 million increase in accounts payable and a $5.4 million increase in accrued liabilities as well as net income earned of $4.4 million and adjustments for certain non-cash expenses consisting of $6.5 million of depreciation and amortization and $6.4 million of stock-based compensation. For the three-months ended March 31, 2015, cash used in operating activities was due to a $68.1 million increase in accounts receivable, a $40.0 million decrease in deferred revenue, a $26.5 million increase in inventories, a $13.5 million increase in prepaid income taxes, a $7.9 million decrease in accrued compensation, a $4.3 million decrease in income tax payable and a $2.2 million decrease in accrued promotional allowances.

 

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Cash flows provided by investing activities. We generated $234.3 million of cash from investing activities for the three-months ended March 31, 2016 as compared to $129.6 million for the three-months ended March 31, 2015.

 

Net cash provided by investing activities was $234.3 million for the three-months ended March 31, 2016, as compared to net cash provided by investing activities of $129.6 million for the three-months ended March 31, 2015.  For the three-months ended March 31, 2016 and 2015, cash used in investing activities was primarily attributable to purchases of held-to-maturity investments, purchases of property and equipment, and additions to intangibles. For both the three-months ended March 31, 2016 and 2015, cash provided by investing activities was primarily attributable to maturities of held-to-maturity i