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 June 30, 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 190,356,702 shares of common stock, par value $0.005 per share, outstanding as of July 22, 2016.

 



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

JUNE 30, 2016

 

 

INDEX

 

 

Part I.

FINANCIAL INFORMATION

Page No.

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015

3

 

 

 

 

Condensed Consolidated Statements of Income for the Three- and Six-Months Ended June 30, 2016 and 2015

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three- and Six-Months Ended June 30, 2016 and 2015

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six-Months Ended June 30, 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

33

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

53

 

 

 

Item 4.

Controls and Procedures

54

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

54

 

 

 

Item 1A.

Risk Factors

54

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

54

 

 

 

Item 3.

Defaults Upon Senior Securities

55

 

 

 

Item 4.

Mine Safety Disclosures

55

 

 

 

Item 5.

Other Information

55

 

 

 

Item 6.

Exhibits

55

 

 

 

 

Signatures

56

 

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 JUNE 30, 2016 AND DECEMBER 31, 2015

(In Thousands, Except Par Value) (Unaudited)

 

 

 

June 30,
2016

 

December 31,
2015

ASSETS

 

 

 

 

CURRENT ASSETS:

 

 

 

 

Cash and cash equivalents

 

  $

434,769

 

  $

2,175,417

Short-term investments

 

44,319

 

744,610

Accounts receivable, net

 

465,708

 

352,955

TCCC Transaction receivable

 

125,000

 

125,000

Inventories

 

174,401

 

156,121

Prepaid expenses and other current assets

 

28,081

 

26,967

Prepaid income taxes

 

20,547

 

1,532

Total current assets

 

1,292,825

 

3,582,602

 

 

 

 

 

INVESTMENTS

 

-

 

15,348

PROPERTY AND EQUIPMENT, net

 

102,562

 

97,354

DEFERRED INCOME TAXES

 

261,319

 

261,310

GOODWILL

 

1,283,643

 

1,279,715

OTHER INTANGIBLE ASSETS, net

 

1,082,151

 

427,986

OTHER ASSETS

 

15,556

 

10,874

Total Assets

 

  $

4,038,056

 

  $

5,675,189

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

Accounts payable

 

  $

183,084

 

  $

144,763

Accrued liabilities

 

90,400

 

81,786

Accrued promotional allowances

 

144,419

 

115,530

Accrued distributor terminations

 

24,484

 

11,018

Deferred revenue

 

33,053

 

32,271

Accrued compensation

 

16,265

 

22,159

Income taxes payable

 

5,651

 

106,662

Total current liabilities

 

497,356

 

514,189

 

 

 

 

 

DEFERRED REVENUE

 

348,289

 

351,590

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 11)

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

Common stock - $0.005 par value; 240,000 shares authorized;
207,298 shares issued and 190,341 outstanding as of June 30, 2016;
207,019 shares issued and 202,900 outstanding as of December 31, 2015

 

1,036

 

1,035

Additional paid-in capital

 

4,021,613

 

3,991,857

Retained earnings

 

1,742,960

 

1,394,863

Accumulated other comprehensive loss

 

(14,477)

 

(21,878)

Common stock in treasury, at cost; 16,957 shares and 4,119 shares as of June 30, 2016 and December 31, 2015, respectively

 

(2,558,721)

 

(556,467)

Total stockholders’ equity

 

3,192,411

 

4,809,410

Total Liabilities and Stockholders’ Equity

 

  $

4,038,056

 

  $

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- AND SIX-MONTHS ENDED JUNE 30, 2016 AND 2015

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

 

 

 

Three-Months Ended

 

Six-Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

NET SALES

 

  $

827,488

 

  $

693,722

 

  $

1,507,674

 

  $

1,320,512

 

 

 

 

 

 

 

 

 

 

 

COST OF SALES

 

309,674

 

299,214

 

566,762

 

557,048

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

517,814

 

394,508

 

940,912

 

763,464

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

229,291

 

189,839

 

397,675

 

551,167

 

 

 

 

 

 

 

 

 

 

 

GAIN ON SALE OF MONSTER NON-ENERGY

 

-

 

161,470

 

-

 

161,470

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

288,523

 

366,139

 

543,237

 

373,767

 

 

 

 

 

 

 

 

 

 

 

INTEREST and OTHER (EXPENSE) INCOME, net

 

(222)

 

(1,015)

 

386

 

218

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

288,301

 

365,124

 

543,623

 

373,985

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

104,082

 

136,120

 

195,526

 

140,568

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

  $

184,219

 

  $

229,004

 

  $

348,097

 

  $

233,417

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

Basic

 

  $

0.92

 

  $

1.29

 

  $

1.72

 

  $

1.35

 

Diluted

 

  $

0.90

 

  $

1.26

 

  $

1.69

 

  $

1.31

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

200,979

 

176,985

 

201,962

 

173,447

 

Diluted

 

204,968

 

181,417

 

205,948

 

177,998

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE- AND SIX-MONTHS ENDED JUNE 30, 2016 AND 2015

(In Thousands) (Unaudited)

 

 

 

 

Three-Months Ended
June 30,

 

Six-Months Ended
June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Net income, as reported

 

  $

184,219

 

  $

229,004

 

  $

348,097

 

  $

233,417

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

966

 

2,360

 

7,401

 

(7,620)

 

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)

 

966

 

2,360

 

7,401

 

(7,620)

 

Comprehensive income

 

  $

185,185

 

  $

231,364

 

  $

355,498

 

  $

225,797

 

 

 

 

 

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 SIX-MONTHS ENDED JUNE 30, 2016 AND 2015

(In Thousands) (Unaudited)

 

 

 

Six-Months Ended

 

 

 

June 30, 2016

 

June 30, 2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

  $

348,097

 

  $

233,417

 

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

 

 

 

 

 

Depreciation and amortization

 

19,329

 

13,249

 

Gain on disposal of property and equipment

 

(120)

 

(108)

 

Gain on sale of Monster Non-Energy

 

-

 

(161,470)

 

Stock-based compensation

 

21,590

 

14,837

 

Deferred income taxes

 

(13)

 

156,710

 

Effect on cash of changes in operating assets and liabilities, net of effects of acquisitions:

 

 

 

 

 

Accounts receivable

 

(103,303)

 

(95,235)

 

Distributor receivables

 

(1,716)

 

191

 

Inventories

 

11,613

 

(28,919)

 

Prepaid expenses and other current assets

 

(2,515)

 

(3,322)

 

Prepaid income taxes

 

(18,694)

 

(84,147)

 

Accounts payable

 

35,005

 

72,124

 

Accrued liabilities

 

6,780

 

12,482

 

Accrued promotional allowances

 

27,238

 

18,038

 

Accrued distributor terminations

 

13,822

 

64,767

 

Accrued compensation

 

(6,077)

 

(3,493)

 

Income taxes payable

 

(100,728)

 

(7,533)

 

Deferred revenue

 

(2,753)

 

(40,792)

 

Net cash provided by operating activities

 

247,555

 

160,796

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Maturities of held-to-maturity investments

 

868,304

 

480,281

 

Sales of available-for-sale investments

 

-

 

100

 

Sales of trading investments

 

-

 

725

 

Proceeds from the transfer of distribution rights to TCCC

 

-

 

179,658

 

Purchases of held-to-maturity investments

 

(152,664)

 

(944,193)

 

Purchases of property and equipment

 

(17,813)

 

(15,827)

 

Proceeds from the sale of Monster Non-Energy

 

-

 

198,008

 

Proceeds from sale of property and equipment

 

541

 

161

 

Purchases of AFF Assets, net

 

(688,485)

 

-

 

Increase in intangibles

 

(4,881)

 

(3,566)

 

Decrease in other assets

 

(2,377)

 

(1,214)

 

Net cash provided by (used in) investing activities

 

2,625

 

(105,867)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Principal payments on debt

 

(1,099)

 

(530)

 

Issuance of common stock

 

8,167

 

1,689,120

 

Purchases of common stock held in treasury

 

(2,002,254)

 

(412,217)

 

Net cash (used in) provided by financing activities

 

(1,995,186)

 

1,276,373

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

4,358

 

(5,330)

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

(1,740,648)

 

1,325,972

 

CASH AND CASH EQUIVALENTS, beginning of period

 

2,175,417

 

370,323

 

CASH AND CASH EQUIVALENTS, end of period

 

  $

434,769

 

  $

1,696,295

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

  $

34

 

  $

12

 

Income taxes

 

  $

315,177

 

  $

76,285

 

 

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 SIX-MONTHS ENDED JUNE 30, 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 $1.9 million and $0.9 million for the six-months ended June 30, 2016 and 2015, respectively.

 

During the six-months ended June 30, 2015, the Company issued 11.8 million shares of the Company’s common stock in exchange for KO Energy (see Note 2).

 

During the six-months ended June 30, 2015, the Company cancelled 41.5 million shares of treasury stock (see Note 2). Amounts previously recorded as treasury stock were netted against common stock and retained earnings.

 

 

See accompanying notes to condensed consolidated financial statements.

 

7



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

1.                                    BASIS OF PRESENTATION

 

Reference is made to the Notes to Consolidated Financial Statements, in Monster Beverage Corporation and Subsidiaries (the “Company”) 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- and six-months ended June 30, 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.

 

During the second quarter of 2016, the Company renamed and revised its reportable segments to reflect management’s current view of the business and to align its external financial reporting with its operating and internal financial model. Historical segment information has been revised to reflect the effect of this change. See Note 17 for additional information about the Company’s reporting segments.

 

2.                                    ACQUISITIONS AND DIVESTITURES

 

American Fruits & Flavors

 

On April 1, 2016, the Company completed its acquisition of flavor supplier and long-time business partner American Fruits & Flavors (“AFF”), in an asset acquisition that brought the Company’s primary flavor supplier in-house, secured the intellectual property of the Company’s most important flavors in perpetuity and further enhanced its flavor development and global flavor footprint capabilities (the “AFF Transaction”). Pursuant to the terms of the AFF Transaction, the Company purchased AFF for $688.5 million in cash.

 

The Company accounted for the AFF Transaction in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 “Business Combinations”.

 

8



Table of Contents

 

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 AFF Transaction consideration preliminary fair value allocations:

 

 

 

Identifiable
Assets Acquired
and Liabilities
Assumed

 

Consideration
Transferred

 

Intangibles - flavor formulas (non-amortizing)¹

 

  $

618,000

 

  $

-

 

Intangibles - flavor formulas (amortizing)

 

641

 

-

 

Intangibles - customer relationships (amortizing)

 

30,100

 

-

 

Intangibles - trademarks (amortizing)

 

500

 

-

 

Intangibles - other (amortizing)

 

200

 

-

 

Working capital (excluding inventory)

 

1,861

 

-

 

Inventory

 

27,600

 

-

 

Property and equipment, net

 

1,175

 

-

 

Favorable leases

 

4,480

 

-

 

Goodwill

 

3,928

 

-

 

Cash

 

-

 

688,485

 

Total

 

  $

688,485

 

  $

688,485

 

 

1Represents proprietary formulas for the Company’s principal products.

 

The fair value analysis has yet to progress to a stage where there is sufficient information for a definitive measurement of the respective fair values. Accordingly, the respective fair value allocations are preliminary and are based on valuations derived from estimated fair value assumptions used by management. The Company expects to complete its fair value analysis at a level of detail necessary to finalize the underlying fair value allocation as soon as practicable, but no later than twelve months from the closing of the AFF Transaction.

 

The Company determined the estimated fair values as follows:

 

·                 Flavor formulas (non-amortizing) – multi-period excess earnings method

 

·                 Flavor formulas (amortizing) – replacement cost method

 

·                 Customer relationships – multi-period excess earnings method

 

·                 Trademarks – relief-from-royalty method

 

·                 Inventory – comparative sales method and replacement cost method

 

·                 Property and equipment, net – replacement cost method

 

·                 Favorable leases – discounted cash flow method

 

The preliminary book value of the working capital (excluding inventory) approximates fair value.

 

The Company has determined goodwill in accordance with ASC 805-30-30-1, “Business Combinations,” which requires the recognition of goodwill for the excess of the aggregate consideration over the net amounts of identifiable assets acquired and liabilities assumed as of the acquisition date.

 

For tax purposes, the AFF Transaction was recorded as an asset purchase.  As such, the Company received a step-up in tax basis of the AFF assets, net, equal to the purchase price.

 

In accordance with Regulation S-X, pro forma unaudited condensed financial information for the AFF Transaction has not been provided as the impact of the transaction on the Company’s financial position, results of operations and liquidity was not material.

 

9



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The Coca-Cola Company

 

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 (the “TCCC Transaction”), which provided for a long-term strategic relationship in the global energy drink category.

 

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) at such time 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 (“Monster Non-Energy”) 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 United States (“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 was held in escrow through June 17, 2016, subject to release upon the achievement of milestones relating to the transition of distribution rights to TCCC’s distribution network.

 

Under the terms of the escrow agreement and the transition payment agreement entered into in connection therewith, if the distribution rights in the U.S. transitioned to TCCC’s distribution network represented case sales in excess of the following percentages of a target case sale amount agreed to by the parties, amounts in the escrow fund in excess of the applicable amounts below would be released to the Company:

 

Percentage Transitioned

 

Escrow Release

40%

 

Amounts in excess of $375 million

50%

 

Amounts in excess of $312.5 million

60%

 

Amounts in excess of $250 million

70%

 

Amounts in excess of $187.5 million

80%

 

Amounts in excess of $125 million

90%

 

Amounts in excess of $62.5 million

95%

 

All remaining amounts

 

As of June 30, 2016, distribution rights in the U.S. representing approximately 89% of the target case sales had been transitioned to TCCC’s distribution network.  As a result, on the one-year anniversary of the closing of the TCCC Transaction, the then-remaining escrow amount of $125 million was released to TCCC. Going forward TCCC will directly pay to the Company the amounts described above that become payable as a result of future target case sale transitions.  The Company expects to transition sufficient additional distribution rights to receive all such amounts.

 

10



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

 

 

Three-Months Ended June 30, 2015

 

 

 

 

 

 

 

Pro Forma Adjustments

 

 

 

 

 

Monster
Beverage
Corporation
as reported
¹

 

KO Energy²

 

Disposal of
Monster Non-
Energy
³

 

Other

 

Pro Forma
Combined

 

Net sales

 

  $

693,722

 

  $

57,422

 

  $

(29,516)

 

  $

3,089

 

  $

724,717

 

Net income

 

229,004

 

41,136

 

(100,652)

 

(11,659)

 

157,829

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six-Months Ended June 30, 2015

 

 

 

 

 

 

 

Pro Forma Adjustments

 

 

 

 

 

Monster
Beverage
Corporation
as reported
¹

 

KO Energy²

 

Disposal of
Monster Non-
Energy
³

 

Other

 

Pro Forma
Combined

 

Net sales

 

  $

1,320,512

 

  $

138,127

 

  $

(60,824)

 

  $

6,897

 

  $

1,404,712

 

Net income

 

233,417

 

100,575

 

(101,881)

 

(36,608)

 

195,503

 

 

1 Includes net sales of $13.0 million and net income of $5.8 million related to the acquired KO Energy assets from June 12, 2015 (the date of acquisition) through June 30, 2015.

 

2 Includes results through June 12, 2015, the date the TCCC Transaction was finalized. The $41.1 million and $100.6 million of net income for KO Energy for the three- and six-months ended June 30, 2015, respectively, is presented before tax. The associated estimated provision for income taxes is included in the “Other” category.

 

3 Includes results through June 12, 2015. Net income includes the gain recognized on the sale of Monster Non-Energy of $161.5 million.

 

Pro-Forma Adjustments – Other include the following:

 

 

 

Three-Months
Ended
June 30, 2015

 

Six-Months
Ended
June 30, 2015

 

Net sales:

 

 

 

 

 

Amortization of deferred revenue

 

  $

3,089

 

  $

6,897

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

Amortization of deferred revenue

 

  $

3,089

 

  $

6,897

 

To record sales commissions

 

(6,431)

 

(15,470)

 

To record amortization of definite lived KO Energy intangibles

 

(1,400)

 

(3,126)

 

To eliminate TCCC Transaction expenses

 

11,536

 

15,134

 

Estimated provision for income taxes on pro forma adjustments

 

(2,616)

 

(1,322)

 

Estimated provision for income taxes on KO Energy income

 

(15,837)

 

(38,721)

 

Total

 

  $

(11,659)

 

  $

(36,608)

 

 

11



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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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.

 

3.                                    RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The accounting standard changes the methodology for measuring credit losses on financial instruments and the timing when such losses are recorded. ASU No. 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently evaluating the impact of ASU No. 2016-13 on its financial position, results of operations and liquidity.

 

In March 2016, the FASB issued ASU No. 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 of stock compensation based on estimated forfeitures.  For the six-months ended June 30, 2015, each of net cash provided by operating activities and net cash used in financing activities increased by $300.3 million, respectively, as a result of such retrospective adjustment. For the three-and six-months ended June 30, 2016, the Company recorded $2.0 million and $3.6 million of excess tax benefits in net income that previously would have been recorded in additional paid-in-capital. The adoption of ASU No. 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 No. 2016-02, “Leases (Topic 842)”. This update is intended to 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 No. 2016-02 on its financial position, results of operations and liquidity.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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 the classified balance sheets. 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 No. 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 No. 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 No. 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 No. 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 No. 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 evaluating the impact of ASU No. 2014-09 on its financial position, results of operations and liquidity.

 

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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)

 

4.                                    INVESTMENTS

 

The following table summarizes the Company’s investments at:

 

June 30, 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

 

  $

-

 

  $

-

 

  $

-

 

  $

-

 

  $

-

 

  $

-

Municipal securities

 

44,319

 

5

 

7

 

44,317

 

7

 

-

U.S. government agency securities

 

-

 

-

 

-

 

-

 

-

 

-

U.S. Treasuries

 

-

 

-

 

-

 

-

 

-

 

-

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

-

 

-

 

-

 

-

 

-

 

-

Total

 

  $

44,319

 

  $

5

 

  $

7

 

  $

44,317

 

  $

7

 

  $

-

 

 

 

 

 

 

 

 

 

 

 

 

 

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- and six-months ended June 30, 2016 and 2015, realized gains or losses recognized on the sale of investments were not significant.

 

The Company’s investments at June 30, 2016 and December 31, 2015 in commercial paper, U.S. Treasuries, municipal securities and U.S. government agency securities carried investment grade credit ratings.

 

14



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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 underlying contractual maturities of the Company’s investments at:

 

 

 

June 30, 2016

 

December 31, 2015

 

 

 

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

 

Less than 1 year:

 

 

 

 

 

 

 

 

 

Commercial paper

 

  $

-

 

  $

-

 

  $

3,978

 

  $

3,978

 

Municipal securities

 

44,319

 

44,317

 

709,207

 

709,078

 

U.S. government agency securities

 

-

 

-

 

23,369

 

23,311

 

U.S. Treasuries

 

-

 

-

 

8,056

 

8,043

 

Due 1 -10 years:

 

 

 

 

 

 

 

 

 

Municipal securities

 

-

 

-

 

11,071

 

11,063

 

U.S. government agency securities

 

-

 

-

 

4,277

 

4,252

 

Due 11 - 20 years:

 

 

 

 

 

 

 

 

 

Municipal securities

 

-

 

-

 

-

 

-

 

Total

 

  $

44,319

 

  $

44,317

 

  $

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.

 

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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)

 

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:

 

June 30, 2016

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

 

$

271,234

 

$

-

 

$

-

 

$

271,234

 

Money market funds

 

 

163,023

 

-

 

-

 

163,023

 

Certificates of deposit

 

 

-

 

-

 

-

 

-

 

Commercial paper

 

 

-

 

-

 

-

 

-

 

U.S. Treasuries

 

 

-

 

-

 

-

 

-

 

Municipal securities

 

 

-

 

44,831

 

-

 

44,831

 

U.S. government agency securities

 

 

-

 

-

 

-

 

-

 

Foreign currency derivatives

 

 

-

 

(722

)

-

 

(722

)

Total

 

 

$

434,257

 

$

44,109

 

$

-

 

$

478,366

 

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

434,257

 

$

512

 

$

-

 

$

434,769

 

Short-term investments

 

 

-

 

44,319

 

-

 

44,319

 

Accounts receivable, net

 

 

-

 

184

 

-

 

184

 

Investments

 

 

-

 

-

 

-

 

-

 

Accrued liabilities

 

 

-

 

(906

)

-

 

(906

)

Total

 

 

$

434,257

 

$

44,109

 

$

-

 

$

478,366

 

 

 

 

 

 

 

 

 

 

 

 

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 municipal securities at June 30, 2016 and commercial paper, U.S. Treasuries, certificates of deposit, municipal securities and U.S. government agency securities at December 31, 2015, 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 six-months ended June 30, 2016 or the year ended December 31, 2015, and there were no changes in the Company’s valuation techniques.

 

16



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

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 six-months ended June 30, 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 June 30, 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 and other (expense) income, 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:

 

June 30, 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 USD/pay GBP

 

  $

16,141

 

  $

110

 

Accounts receivable, net

Receive EUR/pay USD

 

28,473

 

57

 

Accounts receivable, net

Receive SGD/pay USD

 

6,734

 

17

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

Receive USD/pay AUD

 

  $

17,578

 

  $

(204)

 

Accrued liabilities

Receive USD/pay MXN

 

6,739

 

(188)

 

Accrued liabilities

Receive USD/pay ZAR

 

13,385

 

(347)

 

Accrued liabilities

Receive USD/pay NZD

 

2,314

 

(36)

 

Accrued liabilities

Receive USD/pay BRL

 

3,121

 

(91)

 

Accrued liabilities

Receive USD/pay COP

 

1,672

 

(40)

 

Accrued liabilities

 

17



Table of Contents

 

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 (loss)
recognized in income on
derivatives

 

June 30, 2016

 

June 30, 2015

Foreign currency exchange contracts

 

Interest and other (expense) income, net

 

  $

141

 

  $

(63)

 

 

 

 

 

Amount of gain (loss)
recognized in income on
derivatives

 

 

 

 

Six-months ended

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

 

Location of gain (loss)
recognized in income on
derivatives

 

June 30, 2016

 

June 30, 2015

Foreign currency exchange contracts

 

Interest and other (expense) income, net

 

  $

458

 

  $

(1,919)

 

18



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

7.                                    INVENTORIES

 

Inventories consist of the following at:

 

 

 

June 30,
2016

 

December 31,
2015

 

Raw materials

 

  $

69,811

 

  $

52,043

 

Finished goods

 

104,590

 

104,078

 

 

 

  $

174,401

 

  $

156,121

 

 

 

8.                                    PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following at:

 

 

 

June 30,
2016

 

December 31,
2015

 

Land

 

  $

6,792

 

  $

6,792

 

Leasehold improvements

 

2,756

 

2,804

 

Furniture and fixtures

 

3,602

 

3,551

 

Office and computer equipment

 

10,764

 

11,080

 

Computer software

 

2,768

 

2,530

 

Equipment

 

102,225

 

93,465

 

Buildings

 

40,983

 

39,848

 

Vehicles

 

30,738

 

29,804

 

 

 

200,628

 

189,874

 

Less: accumulated depreciation and amortization

 

(98,066)

 

(92,520)

 

 

 

  $

102,562

 

  $

97,354

 

 

9.                                    GOODWILL AND OTHER INTANGIBLE ASSETS

 

The following is a roll-forward of goodwill for the six-months ended June 30, 2016 by reportable segment:

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

 

 

Monster
Energy®
Drinks

 

Strategic
Brands

 

Other

 

Total

 

Balance at December 31, 2015

 

  $

641,716

 

  $

637,999

 

  $

-

 

  $

1,279,715

 

Acquisitions

 

3,928

 

-

 

-

 

3,928

 

Balance at June 30, 2016

 

  $

645,644

 

  $

637,999

 

  $

-

 

  $

1,283,643

 

 

 

Intangible assets consist of the following at:

 

 

 

June 30,
2016

 

December 31,
2015

 

Amortizing intangibles

 

  $

71,213

 

  $

35,263

 

Accumulated amortization

 

(8,612)

 

(3,899)

 

 

 

62,601

 

31,364

 

Non-amortizing intangibles

 

1,019,550

 

396,622

 

 

 

  $

1,082,151

 

  $

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 five to seven years. Total amortization expense recorded was $2.9 million and $0.3 million for the three-months ended June 30, 2016 and 2015, respectively. Total amortization expense recorded was $4.6 million and $0.3 million for the six-months ended June 30, 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 Company incurred termination costs of $25.3 million and $12.2 million for the three-months ended June 30, 2016 and 2015, respectively. The Company incurred termination costs of $28.7 million and $218.2 million for the six-months ended June 30, 2016 and 2015, respectively. Such termination costs have been expensed in full and are included in operating expenses for the three- and six-months ended June 30, 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 $12.1 million and $3.2 million for the three-months ended June 30, 2016 and 2015, respectively. Revenue recognized was $20.2 million and $46.5 million for the six-months ended June 30, 2016 and 2015, respectively.  Included in the $12.1 million and $20.2 million of revenue recognized for the three- and six-months ended June 30, 2016 was $5.0 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 second quarter of 2016. There was no acceleration of deferred revenue in the three-months ended June 30, 2015. Included in the $46.5 million of revenue recognized for the six-months ended June 30, 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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

11.                            COMMITMENTS AND CONTINGENCIES

 

The Company had purchase commitments aggregating approximately $29.0 million at June 30, 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 $136.7 million at June 30, 2016, which related primarily to sponsorships and other marketing activities.

 

The Company had operating lease commitments aggregating approximately $20.3 million at June 30, 2016, which related primarily to warehouse and office space.

 

In July 2016, we entered into an agreement to acquire an approximately 75,425 square foot, free standing, three-story office building, including the real property thereunder and improvements thereon, located in Corona, CA adjacent to our current corporate headquarters, for a purchase price of approximately $12.6 million. The purchase is subject to various conditions precedent that must be satisfied prior to the closing. If we ultimately acquire the building, we intend to complete any necessary improvements and occupy the building as an extension of our existing corporate headquarters at some time in the future.

 

In February 2016, the Company entered into an agreement to acquire approximately 49 acres of land, located in Rialto, CA, for a purchase price of approximately $39.0 million. The purchase is subject to various conditions precedent that must be satisfied prior to the closing. If the Company ultimately acquires the land, it intends to build an approximately 1,000,000 square-foot building to replace its current leased warehouse and distribution space located in Corona, CA.

 

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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

San Francisco City Attorney Litigation – On October 31, 2012, the Company received a written 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 and on May 17, 2016, the Ninth Circuit affirmed the Central District Court’s order.

 

(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 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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The Court has set the case for a bench trial which is scheduled to take place April 10-17, 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 June 30, 2016, the Company’s condensed consolidated balance sheet includes accrued loss contingencies of approximately $0.3 million.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

12.                            ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Changes in accumulated other comprehensive loss by component, after tax, for the six-months ended June 30, 2016 are as follows:

 

 

 

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)

 

(7,401)

 

Balance at June 30, 2016

 

  $

14,477

 

 

13.                            TREASURY STOCK

 

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 was authorized under the Company’s existing share repurchase authority and was funded with cash on hand. The Company commenced the tender offer in May 2016. On June 15, 2016, the Company accepted for payment an aggregate of 12,820,512 shares of common stock at a purchase price of $156.00 per share, for a total amount of $2.0 billion (excluding commissions), which exhausted the availability under all share repurchase plans. Such shares of common stock are included in common stock in treasury in the accompanying condensed consolidated balance sheet at June 30, 2016.

 

During the three-months ended June 30, 2016, 1,585 shares of common stock were purchased from employees in lieu of cash payments for options exercised or withholding taxes due for a total amount of $0.2 million. While such purchases are considered common stock repurchases, they are not counted as purchases against the Company’s authorized share repurchase programs. Such shares are included in common stock in treasury in the accompanying condensed consolidated balance sheet at June 30, 2016.

 

14.                            STOCK-BASED COMPENSATION

 

The Company has two stock-based compensation plans under which shares were available for grant at June 30, 2016: the Monster Beverage Corporation 2011 Omnibus Incentive Plan and the 2009 Monster Beverage Corporation Stock Incentive Plan for Non-Employee Directors.

 

The Company recorded $11.5 million and $8.5 million of compensation expense relating to outstanding options, restricted stock awards, stock appreciation rights and restricted stock units during the three-months ended June 30, 2016 and 2015, respectively. The Company recorded $21.6 million and $14.8 million of compensation expense relating to outstanding options, restricted stock awards, stock appreciation rights and restricted stock units during the six-months ended June 30, 2016 and 2015, respectively.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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 June 30, 2016 and 2015 was $2.0 million and $115.6 million, 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 six-months ended June 30, 2016 and 2015 was $3.6 million and $300.3 million, respectively. As a result of the Company’s early adoption of ASU No. 2016-09 effective January 1, 2016, the Company recorded excess tax benefits of $2.0 million and $3.6 million in net income for the three- and six-months ended June 30, 2016.  The excess tax benefits for the three- and six-months ended June 30, 2015 of $115.6 million and $300.3 million, respectively, were recorded in additional paid-in-capital.

 

Stock Options

 

Under the Company’s stock-based compensation plans, all stock options granted as of June 30, 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 June 30,

 

 

Six-Months Ended June 30,

 

 

2016

 

2015

 

 

2016

 

2015

Dividend yield

 

0.0%

 

 

0.0%

 

 

 

0.0%

 

 

0.0%

 

Expected volatility

 

36.2%

 

 

37.0%

 

 

 

36.2%

 

 

37.1%

 

Risk-free interest rate

 

1.3%

 

 

1.5%

 

 

 

1.4%

 

 

1.6%

 

Expected term

 

6.4 years

 

 

5.8 years

 

 

 

6.3 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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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

 

 

 

 

Granted 04/01/16 - 06/30/16

 

219

 

  $

138.53

 

 

 

 

Exercised

 

(210)

 

  $

38.89

 

 

 

 

Cancelled or forfeited

 

(81)

 

  $

94.97

 

 

 

 

Outstanding at June 30, 2016

 

7,479

 

  $

63.72

 

5.8

 

  $

725,436

Vested and expected to vest in the future at June 30, 2016

 

7,031

 

  $

60.23

 

5.6

 

  $

706,495

Exercisable at June 30, 2016

 

4,350

 

  $

31.24

 

3.9

 

  $

563,212

 

The weighted-average grant-date fair value of options granted during the three-months ended June 30, 2016 and 2015 was $52.33 per share and $49.72 per share, respectively. The weighted-average grant-date fair value of options granted during the six-months ended June 30, 2016 and 2015 was $50.66 per share and $50.14 per share, respectively. The total intrinsic value of options exercised during the three-months ended June 30, 2016 and 2015 was $10.9 million and $314.0 million, respectively. The total intrinsic value of options exercised during the six-months ended June 30, 2016 and 2015 was $21.4 million and $829.7 million, respectively.

 

Cash received from option exercises under all plans for the three-months ended June 30, 2016 and 2015 was approximately $4.1 million and $22.7 million, respectively. Cash received from option exercises under all plans for the six-months ended June 30, 2016 and 2015 was approximately $8.1 million and $41.7 million, respectively.

 

At June 30, 2016, there was $106.9 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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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

 

Granted 04/01/16- 06/30/16

 

12

 

  $

148.94

 

Vested

 

(68)

 

  $

104.32

 

Forfeited/cancelled

 

(1)

 

  $

57.45

 

Non-vested at June 30, 2016

 

203

 

  $

114.26

 

 

The weighted-average grant-date fair value of restricted stock units and restricted stock awards granted during the three-months ended June 30, 2016 was $148.94 per share. No restricted stock units or restricted stock awards were granted during the three-months ended June 30, 2015.  The weighted-average grant-date fair value of restricted stock units and restricted stock awards granted during the six-months ended June 30, 2016 and 2015 was $134.14 per share and $135.48 per share, respectively. As of June 30, 2016, 0.2 million of restricted stock units and restricted stock awards are expected to vest over their respective terms.

 

At June 30, 2016, total unrecognized compensation expense relating to non-vested restricted stock awards and non-vested restricted stock units was $19.3 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 six-months ended June 30, 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 June 30, 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 June 30, 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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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.

 

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

 

Six-Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

200,979

 

176,985

 

201,962

 

173,447

 

Dilutive

 

3,989

 

4,432

 

3,986

 

4,551

 

Diluted

 

204,968

 

181,417

 

205,948

 

177,998

 

 

For the three-months ended June 30, 2016 and 2015, options and awards outstanding totaling 2.0 million shares and 1.1 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive. For the six-months ended June 30, 2016 and 2015, options and awards outstanding totaling 1.6 million shares and 0.8 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.

 

17.                            SEGMENT INFORMATION

 

During the second quarter of 2016, the Company renamed and revised its reportable segments to reflect management’s current view of the business and to align its external financial reporting with its operating and internal financial model. Historical segment information has been revised to reflect the effect of this change.

 

The Company has three operating and reportable segments, (i) Monster Energy® Drinks segment (“Monster Energy® Drinks”), which is comprised of the Company’s Monster Energy® drink products (previously the Finished Products segment), (ii) Strategic Brands (“Strategic Brands”), which include the various energy drink brands acquired from TCCC as a result of the TCCC Transaction (previously the Concentrate segment) and (iii) Other, (“Other”) the principal products of which include the brands disposed of as a result of the TCCC Transaction as well as certain products acquired as part of the AFF Transaction that are sold to independent third-parties.

 

The Company’s Monster Energy® Drinks 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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The Company’s Strategic Brands segment primarily 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). To a lesser extent, the Company’s Strategic Brands 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.

 

Generally, the Monster Energy® Drinks segment generates higher per case net operating revenues, but lower per case gross profit margins than the Strategic Brands 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 a segment basis.

 

The net revenues derived from the Company’s reportable segments and other financial information related thereto for the three- and six-months ended June 30, 2016 and 2015 are as follows:

 

 

 

Three-Months Ended

 

Six-Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Net sales:

 

 

 

 

 

 

 

 

 

Monster Energy® Drinks(1)

 

  $

743,453

 

  $

651,228

 

  $

1,365,381

 

  $

1,246,710

 

Strategic Brands

 

77,400

 

12,978

 

135,852

 

12,978

 

Other

 

6,635

 

29,516

 

6,441

 

60,824

 

Corporate and unallocated

 

-

 

-

 

-

 

-

 

 

 

  $

827,488

 

  $

693,722

 

  $

1,507,674

 

  $

1,320,512

 

 

 

 

Three-Months Ended

 

Six-Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Operating Income:

 

 

 

 

 

 

 

 

 

Monster Energy® Drinks(1) (2)

 

  $

298,942

 

  $

251,551

 

  $

566,329

 

  $

307,172

 

Strategic Brands

 

48,019

 

9,084

 

87,095

 

9,084

 

Other(3)

 

686

 

163,661

 

342

 

165,660

 

Corporate and unallocated

 

(59,124)

 

(58,157)

 

(110,529)

 

(108,149)

 

 

 

  $

288,523

 

  $

366,139

 

  $

543,237

 

  $

373,767

 

 

 

 

Three-Months Ended

 

Six-Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Income before tax:

 

 

 

 

 

 

 

 

 

Monster Energy® Drinks(1) (2)

 

  $

298,974

 

  $

251,740

 

  $

566,412

 

  $

307,435

 

Strategic Brands

 

48,008

 

9,084

 

87,068

 

9,084

 

Other(3)

 

686

 

163,661

 

342

 

165,660

 

Corporate and unallocated

 

(59,367)

 

(59,361)

 

(110,199)

 

(108,194)

 

 

 

  $

288,301

 

  $

365,124

 

  $

543,623

 

  $

373,985

 

 

(1)          Includes $12.1 million and $3.2 million for the three-months ended June 30, 2016 and 2015, respectively, related to the recognition of deferred revenue. Includes $20.2 million and $46.5 million for the six-months ended June 30, 2016 and 2015, respectively, related to the recognition of deferred revenue.

 

(2)          Includes $25.3 million and $12.2 million for the three-months ended June 30, 2016 and 2015, respectively, related to distributor termination costs. Includes $28.7 million and $218.2 million for the six-months ended June 30, 2016 and 2015, respectively, related to distributor termination costs.

 

(3)          Includes $161.5 million gain on the sale of Monster Non-Energy for the three- and six-months ended June 30, 2015.

 

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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

 

Six-Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

Monster Energy® Drinks

 

  $

 5,795

 

  $

5,093

 

  $

11,573

 

  $

10,148

 

Strategic Brands

 

1,778

 

345

 

3,548

 

345

 

Other

 

1,135

 

92

 

1,136

 

231

 

Corporate and unallocated

 

1,598

 

1,250

 

3,072

 

2,525

 

 

 

  $

 10,306

 

  $

6,780

 

  $

19,329

 

  $

13,249

 

 

 

 

 

 

 

 

 

 

June 30,
2016

 

December 31,
2015

 

 

Goodwill and other intangible assets:

 

 

 

 

 

 

Monster Energy® Drinks

 

  $

1,330,493

 

  $

699,346

 

 

Strategic Brands

 

1,004,995

 

1,008,355

 

 

Other

 

30,306

 

-

 

 

Corporate and unallocated

 

-

 

-

 

 

 

 

  $

2,365,794

 

  $

1,707,701