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, 2017

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 o

 

 

 

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

 

Smaller reporting company o

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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

 

Yes ___    No  X

 

The Registrant had 567,811,810 shares of common stock, par value $0.005 per share, outstanding as of April 24, 2017.

 



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

MARCH 31, 2017

 

 

INDEX

 

 

Part I.

FINANCIAL INFORMATION

Page No.

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016

3

 

 

 

 

Condensed Consolidated Statements of Income for the Three-Months Ended March 31, 2017 and 2016

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three-Months Ended March 31, 2017 and 2016

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three-Months Ended March 31, 2017 and 2016

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

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

25

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

39

 

 

 

Item 4.

Controls and Procedures

39

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

40

 

 

 

Item 1A.

Risk Factors

40

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

 

 

 

Item 3.

Defaults Upon Senior Securities

40

 

 

 

Item 4.

Mine Safety Disclosures

40

 

 

 

Item 5.

Other Information

40

 

 

 

Item 6.

Exhibits

40

 

 

 

 

Signatures

41

 

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, 2017 AND DECEMBER 31, 2016

(In Thousands, Except Par Value) (Unaudited)

 

 

 

March 31,
2017

 

December 31,
2016

ASSETS

 

 

 

 

CURRENT ASSETS:

 

 

 

 

Cash and cash equivalents

 

  $

576,337

 

  $

377,582

Short-term investments

 

209,366

 

220,554

Accounts receivable, net

 

509,477

 

448,051

TCCC Transaction receivable

 

62,500

 

125,000

Inventories

 

171,290

 

161,971

Prepaid expenses and other current assets

 

46,703

 

32,562

Prepaid income taxes

 

41,143

 

66,550

Total current assets

 

1,616,816

 

1,432,270

 

 

 

 

 

INVESTMENTS

 

477

 

2,394

PROPERTY AND EQUIPMENT, net

 

189,631

 

173,343

DEFERRED INCOME TAXES

 

158,739

 

159,556

GOODWILL

 

1,331,643

 

1,331,643

OTHER INTANGIBLE ASSETS, net

 

1,032,886

 

1,032,635

OTHER ASSETS

 

19,555

 

21,630

Total Assets

 

  $

4,349,747

 

  $

4,153,471

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

Accounts payable

 

  $

178,093

 

  $

193,270

Accrued liabilities

 

92,043

 

79,526

Accrued promotional allowances

 

125,533

 

110,237

Accrued distributor terminations

 

8,506

 

8,184

Deferred revenue

 

42,625

 

41,672

Accrued compensation

 

14,275

 

30,043

Income taxes payable

 

8,749

 

7,657

Total current liabilities

 

469,824

 

470,589

 

 

 

 

 

DEFERRED REVENUE

 

349,697

 

353,173

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 10)

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

Common stock - $0.005 par value; 1,250,000 shares authorized;
624,405 shares issued and 567,769 outstanding as of March 31, 2017;
623,201 shares issued and 566,566 outstanding as of December 31, 2016

 

3,122

 

3,116

Additional paid-in capital

 

4,072,508

 

4,051,245

Retained earnings

 

2,285,528

 

2,107,548

Accumulated other comprehensive loss

 

(21,917)

 

(23,249)

Common stock in treasury, at cost; 56,636 shares and 56,635 shares as of March 31, 2017 and December 31, 2016, respectively

 

(2,809,015)

 

(2,808,951)

Total stockholders’ equity

 

3,530,226

 

3,329,709

Total Liabilities and Stockholders’ Equity

 

  $

4,349,747

 

  $

4,153,471

 

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, 2017 AND 2016

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

 

 

 

Three-Months Ended

 

 

March 31,

 

 

2017

 

2016

 

 

 

 

 

NET SALES

 

  $

742,146

 

  $

680,186

 

 

 

 

 

COST OF SALES

 

261,272

 

257,088

 

 

 

 

 

GROSS PROFIT

 

480,874

 

423,098

 

 

 

 

 

OPERATING EXPENSES

 

216,612

 

168,385

 

 

 

 

 

OPERATING INCOME

 

264,262

 

254,713

 

 

 

 

 

INTEREST and OTHER INCOME, net

 

658

 

608

 

 

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

264,920

 

255,321

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

86,940

 

91,444

 

 

 

 

 

NET INCOME

 

  $

177,980

 

  $

163,877

 

 

 

 

 

NET INCOME PER COMMON SHARE:

 

 

 

 

Basic

 

  $

0.31

 

  $

0.27

Diluted

 

  $

0.31

 

  $

0.26

 

 

 

 

 

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

 

 

 

 

Basic

 

571,578

 

608,838

Diluted

 

582,032

 

620,724

 

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, 2017 AND 2016

(In Thousands) (Unaudited)

 

 

 

Three-Months Ended
March 31,

 

 

2017

 

2016

Net income, as reported

 

  $

177,980

 

  $

163,877

Other comprehensive income:

 

 

 

 

Change in foreign currency translation adjustment

 

1,201

 

6,435

Available-for-sale investments:

 

 

 

 

Change in net unrealized gains

 

131

 

-

Reclassification adjustment for net gains included in net income

 

-

 

-

Net change in available-for-sale investments

 

131

 

-

Other comprehensive income

 

1,332

 

6,435

Comprehensive income

 

  $

179,312

 

  $

170,312

 

See accompanying notes to condensed consolidated financial statements.

 

5



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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE-MONTHS ENDED MARCH 31, 2017 AND 2016

(In Thousands) (Unaudited)

 

 

 

Three-Months Ended

 

 

March 31, 2017

 

March 31, 2016

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

Net income

 

  $

177,980

 

  $

163,877

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

 

 

 

 

Depreciation and amortization

 

11,183

 

9,024

Loss (gain) on disposal of property and equipment

 

(268)

 

46

Stock-based compensation

 

13,142

 

10,062

Deferred income taxes

 

1,862

 

9

Effect on cash of changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

7,441

 

(58,550)

Distributor receivables

 

(951)

 

(1,656)

Inventories

 

(7,793)

 

(7,639)

Prepaid expenses and other current assets

 

(11,368)

 

(12,841)

Prepaid income taxes

 

25,601

 

(10,535)

Accounts payable

 

(19,317)

 

36,086

Accrued liabilities

 

6,788

 

12,239

Accrued promotional allowances

 

14,111

 

13,136

Accrued distributor terminations

 

315

 

(2,853)

Accrued compensation

 

(15,802)

 

(9,147)

Income taxes payable

 

(5,506)

 

(34,791)

Deferred revenue

 

(4,454)

 

3,092

Net cash provided by operating activities

 

192,964

 

109,559

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

Maturities of held-to-maturity investments

 

-

 

396,346

Sales of available-for-sale investments

 

71,553

 

-

Purchases of held-to-maturity investments

 

-

 

(152,050)

Purchases of available-for-sale investments

 

(58,314)

 

-

Purchases of property and equipment

 

(19,093)

 

(8,205)

Proceeds from sale of property and equipment

 

452

 

381

Increase in intangibles

 

(848)

 

(2,342)

Decrease (increase) in other assets

 

(52)

 

142

Net cash (used in) provided by investing activities

 

(6,302)

 

234,272

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

Principal payments on debt

 

(700)

 

(522)

Issuance of common stock

 

13,621

 

4,078

Purchases of common stock held in treasury

 

(64)

 

(2,016)

Net cash provided by financing activities

 

12,857

 

1,540

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(764)

 

7,321

 

 

 

 

 

NET INCREASE IN CASH AND

 

 

 

 

CASH EQUIVALENTS

 

198,755

 

352,692

CASH AND CASH EQUIVALENTS, beginning of period

 

377,582

 

2,175,417

CASH AND CASH EQUIVALENTS, end of period

 

  $

576,337

 

  $

2,528,109

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

 

  $

19

 

  $

16

Income taxes

 

  $

66,094

 

  $

137,186

 

See accompanying notes to condensed consolidated financial statements.

 

6



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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE-MONTHS ENDED MARCH 31, 2017 AND 2016

(In Thousands) (Unaudited) (Continued)

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS

 

The Company entered into capital leases for the acquisition of promotional vehicles of $1.0 million and $1.2 million for the three-months ended March 31, 2017 and 2016, respectively.

 

Included in accounts payable as of March 31, 2017 and 2016 were $4.3 million and $0.3 million, respectively, related to purchases of property and equipment.

 

Included in accrued liabilities as of March 31, 2017 and 2016 were $6.2 million and $3.6 million, respectively, related to additions to other intangible assets.

 

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, 2016 (“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, 2017 and 2016, respectively, 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.                                    RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This amendment is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of ASU No. 2017-01 on its financial position, results of operations and liquidity.

 

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill but rather requires an entity to record an impairment charge based on the excess of a reporting unit’s carrying value over its fair value. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of ASU No. 2017-04 on its financial position, results of operations and liquidity.

 

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory”, in an effort to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. FASB ASU No. 2016-16 establishes the requirement that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU No. 2016-16 is effective for financial statements issued for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Earlier application is permitted as of the beginning of an interim or annual reporting period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of ASU No. 2016-16 on its financial position, results of operations and liquidity.

 

8



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230)”. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company is currently evaluating the impact of ASU No. 2016-15 on its financial position, results of operations and liquidity.

 

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 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.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, 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 in the very early stages of evaluating the amended revenue recognition guidance in Topic 606. The evaluation has yet to progress to a stage where there is sufficient information for a preliminary position of the impact on the Company’s consolidated financial statements. Therefore, the Company is unable at this time to provide (i) qualitative financial statement disclosures of the potential impact that this standard will have on its financial statements when adopted, (ii) a description of the effects of the accounting policies it expects to apply, (iii) a comparison to its current revenue recognition policies and (iv) a method for adoption.

 

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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.                                    INVESTMENTS

 

The following table summarizes the Company’s investments at:

 

March 31, 2017

 

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

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

  $

50,623

 

  $

-

 

  $

-

 

  $

50,623

 

  $

-

 

  $

-

Certificates of deposit

 

3,164

 

-

 

-

 

3,164

 

-

 

-

Municipal securities

 

119,833

 

2

 

56

 

119,779

 

54

 

-

U.S. government agency securities

 

10,076

 

-

 

6

 

10,070

 

6

 

-

Variable rate demand notes

 

25,730

 

-

 

-

 

25,730

 

-

 

-

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

478

 

-

 

1

 

477

 

1

 

-

Total

 

  $

209,904

 

  $

2

 

  $

63

 

  $

209,843

 

  $

61

 

  $

-

 

 

 

 

 

 

 

 

 

 

 

 

 

December 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

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

  $

40,382

 

  $

-

 

  $

-

 

  $

40,382

 

  $

-

 

  $

-

Municipal securities

 

140,379

 

-

 

181

 

140,198

 

181

 

-

U.S. government agency securities

 

26,057

 

-

 

6

 

26,051

 

6

 

-

Variable rate demand notes

 

13,923

 

-

 

-

 

13,923

 

-

 

-

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

2,403

 

-

 

9

 

2,394

 

9

 

-

Total

 

  $

223,144

 

  $

-

 

  $

196

 

  $

222,948

 

  $

196

 

  $

-

 

During the three-months ended March 31, 2017 and 2016, realized gains or losses recognized on the sale of investments were not significant.

 

The Company’s investments at March 31, 2017 and December 31, 2016 in commercial paper, certificates of deposit, municipal securities, U.S. government agency securities and/or variable rate demand notes (“VRDNs”) carried investment grade credit ratings. VRDNs are floating rate municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest. All of the put options are secured by a pledged liquidity source. While they are classified as marketable investment securities, the put option allows the VRDNs to be liquidated at par on a same day, or more generally, on a seven day settlement basis.

 

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

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

Less than 1 year:

 

 

 

 

 

 

 

 

Commercial paper

 

  $

50,623

 

  $

50,623

 

  $

40,382

 

  $

40,382

Certificates of deposit

 

3,164

 

3,164

 

-

 

-

Municipal securities

 

119,833

 

119,779

 

140,379

 

140,198

U.S. government agency securities

 

10,076

 

10,070

 

26,057

 

26,051

Due 1 -10 years:

 

 

 

 

 

 

 

 

Municipal securities

 

478

 

477

 

2,403

 

2,394

Variable rate demand notes

 

3,917

 

3,917

 

3,917

 

3,917

Due 11 - 20 years:

 

 

 

 

 

 

 

 

Variable rate demand notes

 

13,808

 

13,808

 

6,003

 

6,003

Due 21 - 30 years:

 

 

 

 

 

 

 

 

Variable rate demand notes

 

4,002

 

4,002

 

4,003

 

4,003

Due 31 - 40 years:

 

 

 

 

 

 

 

 

Variable rate demand notes

 

4,003

 

4,003

 

-

 

-

Total

 

  $

209,904

 

  $

209,843

 

  $

223,144

 

  $

222,948

 

4.                                    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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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 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:

 

March 31, 2017

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

  $

288,457

 

$

-

 

$

-

 

$

288,457

 

Money market funds

 

211,237

 

-

 

-

 

211,237

 

Certificates of deposit

 

-

 

37,189

 

-

 

37,189

 

Commercial paper

 

-

 

54,443

 

-

 

54,443

 

Variable rate demand notes

 

-

 

25,730

 

-

 

25,730

 

Municipal securities

 

-

 

159,054

 

-

 

159,054

 

U.S. government agency securities

 

-

 

10,070

 

-

 

10,070

 

Foreign currency derivatives

 

-

 

850

 

-

 

850

 

Total

 

  $

499,694

 

$

287,336

 

$

-

 

$

787,030

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

  $

499,694

 

$

76,643

 

$

-

 

$

576,337

 

Short-term investments

 

-

 

209,366

 

-

 

209,366

 

Accounts receivable, net

 

-

 

924

 

-

 

924

 

Investments

 

-

 

477

 

-

 

477

 

Accrued liabilities

 

-

 

(74

)

-

 

(74

)

Total

 

  $

499,694

 

$

287,336

 

$

-

 

$

787,030

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

  $

278,972

 

$

-

 

$

-

 

$

278,972

 

Money market funds

 

76,112

 

-

 

-

 

76,112

 

Commercial paper

 

-

 

47,855

 

-

 

47,855

 

Variable rate demand notes

 

-

 

13,923

 

-

 

13,923

 

Municipal securities

 

-

 

157,617

 

-

 

157,617

 

U.S. government agency securities

 

-

 

26,051

 

-

 

26,051

 

Foreign currency derivatives

 

-

 

(528

)

-

 

(528

)

Total

 

  $

355,084

 

$

244,918

 

$

-

 

$

600,002

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

  $

355,084

 

$

22,498

 

$

-

 

$

377,582

 

Short-term investments

 

-

 

220,554

 

-

 

220,554

 

Accounts receivable, net

 

-

 

236

 

-

 

236

 

Investments

 

-

 

2,394

 

-

 

2,394

 

Accrued liabilities

 

-

 

(764

)

-

 

(764

)

Total

 

  $

355,084

 

$

244,918

 

$

-

 

$

600,002

 

 

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, commercial paper, certificates of deposit, VRDNs 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 currency 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, 2017 or the year ended December 31, 2016, and there were no changes in the Company’s valuation techniques.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

5.                                    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, 2017 and the year ended December 31, 2016, 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, 2017 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:

 

March 31, 2017

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 EUR

 

  $

35,972

 

  $

291

 

Accounts receivable, net

Receive USD/pay AUD

 

18,255

 

76

 

Accounts receivable, net

Receive CAD/pay USD

 

22,748

 

63

 

Accounts receivable, net

Receive USD/pay ZAR

 

21,483

 

479

 

Accounts receivable, net

Receive USD/pay MXN

 

21,556

 

4

 

Accounts receivable, net

Receive USD/pay NZD

 

1,477

 

5

 

Accounts receivable, net

Receive USD/pay BRL

 

3,692

 

6

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

Receive USD/pay GBP

 

  $

374

 

  $

(3)

 

Accrued liabilities

Receive SGD/pay USD

 

3,869

 

(7)

 

Accrued liabilities

Receive USD/pay TRY

 

6,383

 

(38)

 

Accrued liabilities

Receive USD/pay CLP

 

4,779

 

(22)

 

Accrued liabilities

Receive USD/pay COP

 

2,233

 

(4)

 

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, 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 CAD/pay USD

 

  $

22,314

 

  $

173

 

Accounts receivable, net

Receive SGD/pay USD

 

7,915

 

24

 

Accounts receivable, net

Receive NOK/pay USD

 

2,138

 

28

 

Accounts receivable, net

Receive USD/pay CLP

 

4,094

 

9

 

Accounts receivable, net

Receive USD/pay COP

 

2,330

 

2

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

Receive USD/pay GBP

 

  $

7,718

 

  $

(57)

 

Accrued liabilities

Receive USD/pay EUR

 

29,621

 

(325)

 

Accrued liabilities

Receive USD/pay AUD

 

15,135

 

(74)

 

Accrued liabilities

Receive USD/pay ZAR

 

20,405

 

(296)

 

Accrued liabilities

Receive USD/pay MXN

 

25,864

 

(4)

 

Accrued liabilities

Receive USD/pay BRL

 

3,138

 

(3)

 

Accrued liabilities

Receive USD/pay NZD

 

2,076

 

(5)

 

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

 

March 31,
2017

 

March 31,
2016

Foreign currency exchange contracts

 

Interest and other income, net

 

  $

(5,028)

 

  $

317

 

6.                                    INVENTORIES

 

Inventories consist of the following at:

 

 

 

March 31,
2017

 

December 31,
2016

 

Raw materials

 

  $

70,032

 

  $

58,658

 

Finished goods

 

101,258

 

103,313

 

 

 

  $

171,290

 

  $

161,971

 

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

7.                                    PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following at:

 

 

 

March 31,
2017

 

December 31,
2016

 

Land

 

  $

47,373

 

  $

46,596

 

Leasehold improvements

 

3,115

 

2,687

 

Furniture and fixtures

 

3,710

 

3,635

 

Office and computer equipment

 

11,917

 

11,701

 

Computer software

 

2,917

 

3,274

 

Equipment

 

120,459

 

114,230

 

Buildings

 

81,837

 

69,547

 

Vehicles

 

34,733

 

31,582

 

 

 

306,061

 

283,252

 

Less: accumulated depreciation and amortization

 

(116,430)

 

(109,909)

 

 

 

  $

189,631

 

  $

173,343

 

 

Total depreciation and amortization expense recorded was $8.2 million and $7.2 million for the three-months ended March 31, 2017 and 2016, respectively.

 

8.                                    GOODWILL AND OTHER INTANGIBLE ASSETS

 

The following is a roll-forward of goodwill for the three-months ended March 31, 2017 by reportable segment:

 

 

 

Monster
Energy®
Drinks

 

Strategic
Brands

 

Other

 

Total

 

Balance at December 31, 2016

 

  $

693,644

 

  $

637,999

 

  $

-

 

  $

1,331,643

 

Acquisitions

 

-

 

-

 

-

 

-

 

Balance at March 31, 2017

 

  $

693,644

 

  $

637,999

 

  $

-

 

  $

1,331,643

 

 

Intangible assets consist of the following at:

 

 

 

March 31,
2017

 

December 31,
2016

 

Amortizing intangibles

 

  $

71,330

 

  $

71,290

 

Accumulated amortization

 

(17,497)

 

(14,535)

 

 

 

53,833

 

56,755

 

Non-amortizing intangibles

 

979,053

 

975,880

 

 

 

  $

1,032,886

 

  $

1,032,635

 

 

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 $3.0 million and $1.8 million for the three-months ended March 31, 2017 and 2016, respectively.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

9.                                    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 $19.9 million and $3.4 million for the three-months ended March 31, 2017 and 2016, respectively.

 

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 $10.0 million and $8.2 million for the three-months ended March 31, 2017 and 2016, respectively.

 

10.                            COMMITMENTS AND CONTINGENCIES

 

The Company had purchase commitments aggregating approximately $39.8 million at March 31, 2017, 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 $153.4 million at March 31, 2017, which related primarily to sponsorships and other marketing activities.

 

The Company had operating lease commitments aggregating approximately $18.9 million at March 31, 2017, which related primarily to warehouse and office space.

 

In September 2016, the Company completed its acquisition of approximately 49 acres of land, located in Rialto, CA, for a purchase price of approximately $39.1 million. The Company has begun construction of an approximately 1,000,000 square-foot building, which it hopes to have LEED certified, to replace its current leased warehouse and distribution facilities located in Corona, CA. The Company has entered into an approximately $37.6 million guaranteed maximum price construction contract for the construction of the building of which $22.3 million remained outstanding as of March 31, 2017.

 

In December 2016, the Company entered into a credit facility with HSBC Bank (China) Company Limited, Shanghai Branch consisting of a working capital line of credit under which the Company may borrow up to $4.0 million of non-collateralized debt. In February 2017, the working capital line limit was increased from $4.0 million to $9.0 million. Interest on borrowings under the line of credit is based on the People’s Bank of China benchmark lending rates multiplied by 1.05. As of March 31, 2017, the Company had $5.7 million outstanding on this line of credit including interest, which is included in accounts payable in the condensed consolidated balance sheet.

 

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.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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.  On January 13, 2017, the Court issued an opinion in which it agreed with certain Company arguments regarding the scope of the subpoena and the Attorney General’s investigation, but denied the motion to quash and granted the Attorney General’s cross-motion to compel compliance.  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.

 

Furthermore, from time to time in the normal course of business, the Company is named in other litigation, including consumer class actions, intellectual property litigation and claims from prior 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, 2017, the Company’s consolidated balance sheet includes accrued loss contingencies of approximately $1.5 million.

 

11.                            ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Changes in accumulated other comprehensive loss by component, after tax, for the three-months ended March 31, 2017 are as follows:

 

 

 

 

Currency
Translation
Losses

 

Unrealized
(Gains) Losses
on Available-for-
Sale Securities

 

Total

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

  $

23,056

 

  $

193

 

  $

23,249

Other comprehensive (gain) before reclassifications

 

(1,201)

 

(131)

 

(1,332)

Amounts reclassified from accumulated other comprehensive loss

 

-

 

-

 

-

Net current-period other comprehensive (gain)

 

(1,201)

 

(131)

 

(1,332)

Balance at March 31, 2017

 

  $

21,855

 

  $

62

 

  $

21,917

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

12.                            TREASURY STOCK

 

On February 28, 2017, the Company’s Board of Directors authorized a new share repurchase program for the purchase of up to $500.0 million of our outstanding common stock (the “February 2017 Repurchase Plan”). As of May 5, 2017, no shares have been repurchased pursuant to the February 2017 Repurchase Plan.

 

During the three-months ended March 31, 2017, 1,397 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 $0.1 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 March 31, 2017.

 

13.                            STOCK-BASED COMPENSATION

 

The Company has two stock-based compensation plans under which shares were available for grant at March 31, 2017: 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 Company recorded $13.1 million and $10.1 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, 2017 and 2016, 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, 2017 and 2016 was $9.4 million and $1.6 million, respectively.

 

In 2016, the Company adopted the Monster Beverage Deferred Compensation Plan (the “Deferred Compensation Plan”) (a sub plan to the 2011 Omnibus Incentive Plan).  Deferrals under the Deferred Compensation Plan are unfunded and unsecured. As of March 31, 2017, deferrals under the Deferred Compensation Plan are solely comprised of cash compensation and equity compensation coming due after March, 2018 and are not material in the aggregate.

 

Stock Options

 

Under the Company’s stock-based compensation plans, all stock options granted as of March 31, 2017 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.

 

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

 

 

 

Three-Months Ended March 31,

 

 

2017

 

2016

Dividend yield

 

0.0%

 

0.0%

Expected volatility

 

36.6%

 

36.2%

Risk-free interest rate

 

2.1%

 

1.5%

Expected term

 

6.1 years

 

5.7 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.

 

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, 2017

 

22,643

 

$

23.55

 

5.8

 

$

474,739

Granted 01/01/17 - 03/31/17

 

1,319

 

$

45.94

 

 

 

 

Exercised

 

(993)

 

$

13.72

 

 

 

 

Cancelled or forfeited

 

(107)

 

$

40.16

 

 

 

 

Outstanding at March 31, 2017

 

22,862

 

$

25.19

 

5.9

 

$

480,827

Vested and expected to vest in the future at March 31, 2017

 

21,438

 

$

24.04

 

5.7

 

$

475,332

Exercisable at March 31, 2017

 

13,205

 

$

14.13

 

3.9

 

$

423,110

 

 

The weighted-average grant-date fair value of options granted during the three-months ended March 31, 2017 and 2016 was $18.00 per share and $15.88 per share, respectively. The total intrinsic value of options exercised during the three-months ended March 31, 2017 and 2016 was $32.4 million and $10.5 million, respectively.

 

Cash received from option exercises under all plans for the three-months ended March 31, 2017 and 2016 was approximately $13.6 million and $4.0 million, respectively.

 

At March 31, 2017, there was $111.4 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.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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:

 

 

 

Number of
Shares (in
thousands)

 

Weighted
Average
Grant-Date
Fair Value

Non-vested at January 1, 2017

 

556

 

$

39.95

Granted 01/01/17- 03/31/17

 

252

 

$

46.27

Vested

 

(212)

 

$

39.77

Forfeited/cancelled

 

(2)

 

$

20.69

Non-vested at March 31, 2017

 

594

 

$

42.76

 

 

The weighted-average grant-date fair value of restricted stock units and restricted stock awards granted during the three-months ended March 31, 2017 and 2016 was $46.27 per share and $43.99 per share, respectively. As of March 31, 2017, 0.5 million of restricted stock units and restricted stock awards are expected to vest over their respective terms.

 

At March 31, 2017, total unrecognized compensation expense relating to non-vested restricted stock awards and non-vested restricted stock units was $22.4 million, which is expected to be recognized over a weighted-average period of 2.0 years.

 

14.                            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, 2017:

 

 

 

Gross Unrecognized Tax
Benefits

Balance at December 31, 2016

 

$

9

Additions for tax positions related to the current year

 

-

Additions for tax positions related to the prior year

 

6,540

Decreases related to settlement with taxing authority

 

(9)

Balance at March 31, 2017

 

$

6,540

 

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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 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, 2017, the Company had approximately $1.1 million in accrued 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. On October 18, 2016, the IRS began its examination of the Company’s U.S. federal income tax return for the year ended December 31, 2014. On March 27, 2017, the IRS began its examination of the Company’s U.S. federal income tax return for the year ended December 31, 2015.

 

The Company is in various stages of examination with certain states and certain foreign jurisdictions. The 2012 through 2016 U.S. federal income tax returns are subject to examination by the IRS. State income tax returns are subject to examination for the 2012 through 2016 tax years.

 

15.                            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,

 

 

2017

 

2016

Weighted-average shares outstanding:

 

 

 

 

Basic

 

571,578

 

608,838

Dilutive

 

10,454

 

11,886

Diluted

 

582,032

 

620,724

 

For the three-months ended March 31, 2017 and 2016, options and awards outstanding totaling 8.0 million shares and 4.2 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.

 

16.                            SEGMENT INFORMATION

 

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® drinks as well as Mutant® Super Soda drinks, (ii) Strategic Brands segment (“Strategic Brands”), which is comprised of the various energy drink brands acquired from The Coca-Cola Company (“TCCC”) in 2015 and (iii) Other segment (“Other”), which is comprised of certain products sold by American Fruits & Flavors LLC, a wholly-owned subsidiary of the Company, to independent third-party customers.

 

The Company’s Monster Energy® Drinks segment generates net operating revenues by selling ready-to-drink packaged drinks primarily to bottlers and full service beverage distributors. In some cases, the Company sells directly to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, food service customers and the military.

 

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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’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, water and other ingredients to produce ready-to-drink packaged energy drinks. The ready-to-drink packaged energy drinks are then sold to other bottlers, full service distributors or retailers, including, retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, food service customers, drug stores and the military. To a lesser extent, the Company’s Strategic Brands segment generates net operating revenues by selling ready-to-drink packaged energy drinks to bottlers and full service beverage distributors.

 

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-months ended March 31, 2017 and 2016 are as follows:

 

 

 

Three-Months Ended

 

 

March 31,

 

 

2017

 

2016

Net sales:

 

 

 

 

Monster Energy® Drinks(1)

 

$

668,571

 

$

621,734

Strategic Brands

 

68,036

 

58,452

Other

 

5,539

 

-

Corporate and unallocated

 

-

 

-

 

 

$

742,146

 

$

680,186

 

 

 

Three-Months Ended

 

 

March 31,

 

 

2017

 

2016

Operating Income:

 

 

 

 

Monster Energy® Drinks(1) (2)

 

$

279,431

 

$

267,044

Strategic Brands

 

42,106

 

39,075

Other

 

1,416

 

-

Corporate and unallocated

 

(58,691)

 

(51,406)

 

 

$

264,262

 

$

254,713

 

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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,

 

 

2017

 

2016

Income before tax:

 

 

 

 

Monster Energy® Drinks(1) (2)

 

$

279,335

 

$

267,094

Strategic Brands

 

42,094

 

39,060

Other

 

1,416

 

-

Corporate and unallocated

 

(57,925)

 

(50,833)

 

 

$

264,920

 

$

255,321

 

(1)          Includes $10.0 million and $8.2 million for the three-months ended March 31, 2017 and 2016, respectively, related to the recognition of deferred revenue.

 

(2)          Includes $19.9 million and $3.4 million for the three-months ended March 31, 2017 and 2016, respectively, related to distributor termination costs.

 

 

 

Three-Months Ended

 

 

March 31,

 

 

2017

 

2016

Depreciation and amortization:

 

 

 

 

Monster Energy® Drinks

 

$

6,541

 

$

5,779

Strategic Brands

 

1,796

 

1,770

Other

 

1,153

 

-

Corporate and unallocated

 

1,693

 

1,475

 

 

$

11,183

 

$

9,024

 

 

 

March 31,
2017

 

December 31,
2016

Goodwill and other intangible assets:

 

 

 

 

Monster Energy® Drinks

 

$

1,337,398

 

$

1,334,494

Strategic Brands

 

1,000,175

 

1,001,749

Other

 

26,956

 

28,035

Corporate and unallocated

 

-

 

-

 

 

$

2,364,529

 

$

2,364,278

 

Corporate and unallocated expenses for the three-months ended March 31, 2017 include $37.6 million of payroll costs, of which $13.1 million was attributable to stock-based compensation expenses (see Note 13, “Stock-Based Compensation”), as well as $12.3 million attributable to professional service expenses, including accounting and legal costs, and $8.8 million of other operating expenses. 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 expenses (see Note 13, “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.

 

TCCC, through certain wholly-owned subsidiaries (the “TCCC Subsidiaries”), accounted for approximately 34% and 46% of the Company’s net sales for the three-months ended March 31, 2017 and 2016, respectively.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Net sales to customers outside the United States amounted to $190.9 million and $149.1 million for the three-months ended March 31, 2017 and 2016, respectively.

 

17.                            RELATED PARTY TRANSACTIONS

 

TCCC controls more than 10% of the voting interests of the Company.  TCCC, through the TCCC Subsidiaries and through certain of its 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 commission based on certain sales within the TCCC distribution network.

 

TCCC commissions, based on sales to the TCCC Affiliates for the three-months ended March 31, 2017 and 2016, were $7.9 million and $1.9 million, respectively.

 

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, 2017 and 2016 were $255.8 million and $310.1 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 $5.9 million and $6.7 million for the three-months ended March 31, 2017 and 2016, respectively.

 

Certain TCCC Subsidiaries also contract manufacture certain of the Company’s Monster Energy® brand energy drinks as well as Mutant® Super Soda drinks. Contract manufacturing expenses were $2.2 million and $1.6 million for the three-months ended March 31, 2017 and 2016, respectively.

 

Accounts receivable, accounts payable and accrued promotional allowances related to the TCCC Subsidiaries are as follows at:

 

 

 

March 31,
2017

 

December 31,
2016

 

 

 

 

 

 

 

Accounts receivable, net

 

  $

161,440

 

  $

151,756

 

TCCC transaction receivable

 

  $

62,500

 

  $

125,000

 

Accounts payable

 

  $

(35,869)

 

  $

(41,210)

 

Accrued promotional allowances

 

  $

(33,296)

 

  $

(27,056)

 

 

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, 2017 and 2016 were $0.2 million and $0.1 million, respectively.

 

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

 

Our Business

 

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. Based in Corona, California, Monster Beverage Corporation is a holding company and conducts no operating business except through its consolidated subsidiaries. The Company’s subsidiaries primarily develop and market energy drinks as well as Mutant® Super Sodas.

 

Acquisitions and Divestitures

 

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

 

We accounted for the AFF Transaction in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 “Business Combinations”.  Inventory purchased under the AFF Transaction was recorded at fair value. Raw material cost savings from the AFF Transaction were approximately $23.3 million in the three-months ended March 31, 2017.

 

Distributor Terminations

 

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 costs of $19.9 million and $3.4 million for the three-months ended March 31, 2017 and 2016, respectively, related to the distribution rights transferred to The Coca-Cola Company’s (“TCCC”) distribution network. Such termination costs have been expensed in full and are included in operating expenses for the three-months ended March 31, 2017 and 2016.

 

Overview

 

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

 

·                 Monster Energy®

·                 Nalu®

·                 Monster Rehab®

·                 NOS®

·                 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®

·                 Übermonster®

·                 Relentless®

·                 BU®

·                 Samurai®

·                 Mutant® Super Soda

·                 BPM®

 

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Our Monster Energy® brand energy drinks, which represented 89.7% and 91.4% of our net sales for the three-months ended March 31, 2017 and 2016, respectively, primarily include the following:

 

·                  Monster Energy®

·                  Java Monster® Kona Blend

·                  Lo-Carb Monster Energy®

·                  Java Monster® Loca Moca®

·                  Monster Assault®

·                  Java Monster® Mean Bean®

·                  Juice Monster® Khaos®

·                  Java Monster® Vanilla Light

·                  Juice Monster® Ripper®

·                  Java Monster® Irish Blend®

·                  Juice Monster® Pipeline Punch®

·                  Java Monster® Salted Caramel

·                  Monster Energy Absolutely Zero®

·                  Mega Monster Energy®

·                  Monster Energy® Import

·                  Monster Energy Extra Strength Nitrous Technology® Super Dry™

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

·                  Punch Monster® Mad Dog (formerly Dub Edition)

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

·                  Monster Rehab® Tea + Lemonade + Energy

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

·                  M3® Monster Energy® Super Concentrate

·                  Monster Rehab® Green Tea + Energy

·                  Monster Energy Zero Ultra®

·                  Monster Rehab® Tea + Orangeade + Energy

·                  Monster Energy Ultra Blue®

·                  Monster Rehab® Tea + Pink Lemonade + Energy

·                  Monster Energy Ultra Red®

·                  Monster Rehab® Peach Tea + Energy

·                  Monster Energy Ultra Black®

·                  Muscle Monster® Vanilla

·                  Monster Energy Ultra Sunrise®

·                  Muscle Monster® Chocolate

·                  Monster Energy Ultra Citron®

·                  Muscle Monster® Strawberry

·                  Monster Energy Ultra VioletTM

·                  Muscle Monster® Banana

·                  Monster Energy® Valentino Rossi

·                  Monster Energy® Gronk

·                  Übermonster® Energy Brew™

 

We have three operating and reportable segments, (i) Monster Energy® Drinks segment (“Monster Energy® Drinks”), which is comprised of the Company’s Monster Energy® drinks as well as Mutant® Super Soda drinks, (ii) Strategic Brands segment (“Strategic Brands”), which is comprised of the various energy drink brands acquired from TCCC in 2015 and (iii) Other segment (“Other”), which is comprised of certain products sold by AFF to independent third-party customers (the “AFF Third- Party Products”).

 

During the three-months ended March 31, 2017, we continued to expand our existing energy drink portfolio and further develop our distribution markets. During the three-months ended March 31, 2017, we introduced the following products:

 

·                 Full Throttle Orange (March 2017)

 

In the normal course of business we discontinue certain products and/or product lines. Those products or product lines discontinued in the three-months ended March 31, 2017, 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 $742.1 million for the three-months ended March 31, 2017 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 $665.8 million for the three-months ended March 31, 2017.  Net sales of our Strategic Brands were $68.0 million for the three-months ended March 31, 2017.

 

Our Monster Energy® Drinks segment represented 90.1% and 91.4% of our consolidated net sales for the three-months ended March 31, 2017 and 2016, respectively. Our Strategic Brands segment represented 9.2% and 8.6% of our consolidated net sales for the three-months ended March 31, 2017 and 2016, respectively. Our Other segment represented 0.7% of our consolidated net sales for the three-months ended March 31, 2017. There were no net sales for the Other segment during the three-months ended March 31, 2016.

 

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Net changes in foreign currency exchange rates had an unfavorable impact on net sales in the Monster Energy® Drinks segment of approximately $4.7 million for the three-months ended March 31, 2017. Net changes in foreign currency exchange rates had a favorable impact on net sales in the Strategic Brands segment of approximately $1.0 million for the three-months ended March 31, 2017.

 

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 television and other well-known sports personalities), sampling and sponsorship of selected athletes, teams, series, bands, esports, causes and events. 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 believe that one of the keys to success in the beverage industry is differentiation, making our brands and products visually appealing and 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 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.

 

Our growth strategy includes expanding our international business. Net sales to customers outside the United States amounted to $190.9 million and $149.1 million for the three-months ended March 31, 2017 and 2016, respectively. Such sales were approximately 26% and 22% of net sales for the three-months ended March 31, 2017 and 2016, respectively. Net changes in foreign currency exchange rates had an unfavorable impact on net sales to customers outside the United States of approximately 2% for the three-months ended March 31, 2017.

 

Our customers are primarily full service beverage bottlers/distributors, retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, food service customers and the military. Percentages of our gross sales to our various customer types for the three-months ended March 31, 2017 and 2016 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 bottlers/distributors’ sales to their own customers.

 

 

 

Three-Months Ended
March 31,

 

 

 

 

 

 

2017

 

2016

 

 

 

 

U.S. full service bottlers/distributors

 

64%

 

66%

 

 

 

 

Club stores and mass merchandisers

 

7%

 

9%

 

 

 

 

International full service bottlers/distributors

 

27%

 

24%

 

 

 

 

Retail grocery, specialty chains and wholesalers

 

1%

 

1%

 

 

 

 

Other

 

1%

 

0%

 

 

 

 

 

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Our customers include Coca-Cola Refreshments USA, Inc., Coca-Cola Bottling Company, CCBCC Operations, LLC, United Bottling Contracts Company, LLC, and certain other TCCC independent bottlers, Coca-Cola European Partners, Coca-Cola Hellenic, Coca-Cola FEMSA, Coca-Cola Amatil, Swire Coca-Cola group in China, COFCO Coca-Cola group in China, Asahi, Kalil Bottling Group, Wal-Mart, Inc. (including Sam’s Club), Costco and select Anheuser-Busch distributors (the “AB Distributors”). TCCC, through certain wholly-owned subsidiaries (the “TCCC Subsidiaries”), accounted for approximately 34% and 46% of our net sales for the three-months ended March 31, 2017 and 2016, respectively. 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.

 

Results of Operations

 

The following table sets forth key statistics for the three-months ended March 31, 2017 and 2016.

 

(In thousands, except per share amounts)

 

Three-Months Ended
March 31,

 

Percentage
Change

 

 

 

2017

 

2016

 

17 vs. 16

 

Net sales¹

 

  $

742,146

 

  $

680,186

 

9.1%

 

Cost of sales

 

261,272

 

257,088

 

1.6%

 

Gross profit*¹

 

480,874

 

423,098

 

13.7%

 

Gross profit as a percentage of net sales¹

 

64.8%

 

62.2%

 

 

 

 

 

 

 

 

 

 

 

Operating expenses²

 

216,612

 

168,385

 

28.6%

 

Operating expenses as a percentage of net sales

 

29.2%

 

24.8%

 

 

 

 

 

 

 

 

 

 

 

Operating income¹,²

 

264,262

 

254,713

 

3.7%

 

Operating income as a percentage of net sales

 

35.6%

 

37.4%

 

 

 

 

 

 

 

 

 

 

 

Interest and other income, net

 

658

 

608

 

8.2%

 

 

 

 

 

 

 

 

 

Income before provision for income taxes¹,²

 

264,920

 

255,321

 

3.8%

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

86,940

 

91,444

 

(4.9%)

 

 

 

 

 

 

 

 

 

Income taxes as a percentage of income before taxes

 

32.8%

 

35.8%

 

 

 

 

 

 

 

 

 

 

 

Net income¹,²

 

  $

177,980

 

  $

163,877

 

8.6%

 

Net income as a percentage of net sales

 

24.0%

 

24.1%

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

Basic

 

  $

0.31

 

  $

0.27

 

15.7%

 

Diluted

 

  $

0.31

 

  $

0.26

 

15.8%

 

 

 

 

 

 

 

 

 

Case sales (in thousands)

 

 

 

 

 

 

 

(in 192-ounce case equivalents)

 

79,992

 

72,653

 

10.1%

 

 

¹Includes $10.0 million and $8.2 million for the three-months ended March 31, 2017 and 2016, respectively, related to the recognition of deferred revenue.

 

²Includes $19.9 million and $3.4 million for the three-months ended March 31, 2017 and 2016, respectively, of distributor termination costs.

 

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

 

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Results of Operations for the Three-Months Ended March 31, 2017 Compared to the Three-Months Ended March 31, 2016.

 

Net Sales. Net sales were $742.1 million for the three-months ended March 31, 2017, an increase of approximately $62.0 million, or 9.1% higher than net sales of $680.2 million for the three-months ended March 31, 2016. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $43.8 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.  Net sales of our Strategic Brands were $68.0 million for the three-months ended March 31, 2017, or 16.4% higher than net sales of $58.5 million for the three-months ended March 31, 2016. Net sales of the AFF Third-Party Products were $5.5 million for the three-months ended March 31, 2017. There were no net sales of the AFF Third-Party Products for the three-months ended March 31, 2016. No other individual product line contributed either a material increase or decrease to net sales for the three-months ended March 31, 2017.

 

Net changes in foreign currency exchange rates had an unfavorable impact on net sales in the Monster Energy® Drinks segment of approximately $4.7 million for the three-months ended March 31, 2017. Net changes in foreign currency exchange rates had a favorable impact on net sales in the Strategic Brands segment of approximately $1.0 million for the three-months ended March 31, 2017.

 

Case sales, in 192-ounce case equivalents, were 80.0 million cases for the three-months ended March 31, 2017, an increase of approximately 7.3 million cases or 10.1% higher than case sales of 72.7 million cases for the three-months ended March 31, 2016. The overall average net sales per case (excluding AFF Third-Party Products net sales of $5.5 million as these sales do not have unit case equivalents) decreased to $9.21 for the three-months ended March 31, 2017, which was 1.6% lower than the average net sales per case of $9.36 for the three-months ended March 31, 2016. The lower average net sales price per case was primarily attributable to the changes in geographic sales mix.

 

Net sales for the Monster Energy® Drinks segment were $668.6 million for the three-months ended March 31, 2017, an increase of approximately $46.9 million, or 7.5% higher than net sales of $621.7 million for the three-months ended March 31, 2016. No other individual product line contributed either a material increase or decrease to net sales for the three-months ended March 31, 2017.

 

Net sales for the Strategic Brands segment were $68.0 million for the three-months ended March 31, 2017, an increase of approximately $9.6 million, or 16.4% higher than net sales of $58.5 million for the three-months ended March 31, 2016.

 

Net sales for the Other segment were $5.5 million for the three-months ended March 31, 2017. There were no net sales of the Other segment for the three-months ended March 31, 2016.

 

Gross Profit.  Gross profit was $480.9 million for the three-months ended March 31, 2017, an increase of approximately $57.8 million, or 13.7% higher than the gross profit of $423.1 million for the three-months ended March 31, 2016. Gross profit as a percentage of net sales increased to 64.8% for the three-months ended March 31, 2017 from 62.2% for the three-months ended March 31, 2016.  The increase in gross profit dollars was primarily the result of the $43.8 million increase in net sales of our Monster Energy® brand energy drinks as well as approximately $23.3 million of raw material cost savings from the AFF Transaction. The increase in gross profit as a percentage of net sales was primarily attributable to (i) the raw material cost savings from the AFF Transaction and (ii) changes in product sales mix.

 

Operating Expenses.  Total operating expenses were $216.6 million for the three-months ended March 31, 2017, an increase of approximately $48.2 million, or 28.6% higher than total operating expenses of $168.4 million for the three-months ended March 31, 2016. The increase in operating expenses was primarily due to increased expenditures of $16.4 million associated with distributor terminations, increased payroll expenses of $13.0 million (of which $3.1 million was related to an increase in stock-based compensation), increased expenditures of $6.8 million for sponsorships and endorsements and increased expenditures of $5.0 million for commissions.

 

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Contribution Margin.  Contribution margin for the Monster Energy® Drinks segment was $279.4 million for the three-months ended March 31, 2017, an increase of approximately $12.4 million, or 4.6% higher than contribution margin of $267.0 million for the three-months ended March 31, 2016. The increase in contribution margin for the Monster Energy® Drinks segment was primarily the result of the $43.8 million increase in net sales of our Monster Energy® brand energy drinks as well as approximately $23.3 million of raw material cost savings from the AFF Transaction.

 

Contribution margin for the Strategic Brands segment was $42.1 million for the three-months ended March 31, 2017, an increase of approximately $3.0 million, or 7.8% higher than contribution margin of $39.1 million for the three-months ended March 31, 2016. The increase in contribution margin for the Strategic Brands segment was primarily due to an increase in net sales.

 

Contribution margin for the Other segment was $1.4 million for the three-months ended March 31, 2017. There was no contribution margin for the Other segment for the three-months ended March 31, 2016.

 

Operating Income.  Operating income was $264.3 million for the three-months ended March 31, 2017, an increase of approximately $9.5 million, or 3.7% higher than operating income of $254.7 million for the three-months ended March 31, 2016. Operating income as a percentage of net sales decreased to 35.6% for the three-months ended March 31, 2017 from 37.4% for the three-months ended March 31, 2016. The decrease in operating income as a percentage of net sales was primarily due to the $48.2 million increase in operating expenses for the three-months ended March 31, 2017. Operating income was $33.0 million and $24.6 million for the three-months ended March 31, 2017 and 2016, 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 $0.7 million for the three-months ended March 31, 2017, as compared to interest and other income, net of $0.6 million for the three-months ended March 31, 2016. Foreign currency transaction gains (losses) were $0.1 million and ($1.4) million for the three-months ended March 31, 2017 and 2016, respectively. Interest income was $0.8 million and $2.2 million for the three-months ended March 31, 2017 and 2016, respectively.

 

Provision for Income Taxes.  Provision for income taxes was $86.9 million for the three-months ended March 31, 2017, a decrease of $4.5 million or 4.9% lower than the provision for income taxes of $91.4 million for the three-months ended March 31, 2016. The effective combined federal, state and foreign tax rate decreased to 32.8% from 35.8% for the three-months ended March 31, 2017 and 2016, respectively. The decrease in the effective tax rate was primarily due to the increase in profits earned by certain foreign subsidiaries in lower tax jurisdictions than the United States as well as an increase in equity compensation deductions.

 

Net Income.  Net income was $178.0 million for the three-months ended March 31, 2017, an increase of $14.1 million or 8.6% higher than net income of $163.9 million for the three-months ended March 31, 2016. The increase in net income was primarily due to the $57.8 million increase in gross profit and the $4.5 million decrease in the provision for income taxes. The increase in net income was partially offset by the increase in operating expenses of $48.2 million.

 

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Non-GAAP Financial Measures

 

Gross Sales**.  Gross sales were $845.5 million for the three-months ended March 31, 2017, an increase of approximately $68.0 million, or 8.8% higher than gross sales of $777.5 million for the three-months ended March 31, 2016. The increase in gross sales of our Monster Energy® brand energy drinks represented approximately $47.9 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. Gross sales of our Strategic Brands were $73.5 million for the three-months ended March 31, 2017, as compared with $64.0 million for the three-months ended March 31, 2016. Gross sales of our AFF Third-Party Products were $5.5 million for the three-months ended March 31, 2017. There were no gross sales of our AFF Third-Party Products for the three-months ended March 31, 2016. No other individual product line contributed either a material increase or decrease to gross sales for the three-months ended March 31, 2017. Promotional and other allowances, as described in the footnote below, were $103.4 million for the three-months ended March 31, 2017, an increase of $6.1 million, or 6.2% higher than promotional and other allowances of $97.3 million for the three-months ended March 31, 2016. Promotional and other allowances as a percentage of gross sales decreased to 12.2% from 12.5% for the three-months ended March 31, 2017 and 2016, respectively.

 

Net changes in foreign currency exchange rates had an unfavorable impact on gross sales in the Monster Energy® Drinks segment of approximately $7.2 million for the three-months ended March 31, 2017. Net changes in foreign currency exchange rates had a favorable impact on gross sales in the Strategic Brands segment of approximately $1.0 million for the three-months ended March 31, 2017.

 

**Gross sales are 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. The use of 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:

 

(In thousands)

 

Three-Months Ended
March 31,

 

Percentage
Change

 

 

 

2017

 

2016

 

17 vs. 16

 

Gross sales, net of discounts and returns

 

  $

 845,548

 

  $

 777,508

 

8.8%

 

Less: Promotional and other allowances***

 

103,402

 

97,322

 

6.2%

 

Net Sales

 

  $

 742,146

 

  $

 680,186

 

9.1%

 

 

***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, 2017 and 2016 were (i) to increase sales volume and trial, (ii) to address market conditions, and (iii) to secure shelf and display space at retail.

 

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Liquidity and Capital Resources

 

Cash flows provided by operating activities.  Cash provided by operating activities was $193.0 million for the three-months ended March 31, 2017, as compared with cash provided by operating activities of $109.6 million for the three-months ended March 31, 2016.

 

For the three-months ended March 31, 2017, cash provided by operating activities was primarily attributable to net income earned of $178.0 million and adjustments for certain non-cash expenses, consisting of $13.1 million of stock-based compensation and $11.2 million of depreciation and other amortization. For the three-months ended March 31, 2017, cash provided by operating activities also increased due to a $25.6 million decrease in prepaid income taxes, a $14.1 million increase in accrued promotional allowances, a $7.4 million decrease in accounts receivable and a $6.8 million increase in accrued liabilities. For the three-months ended March 31, 2017, cash used in operating activities was primarily attributable to a $19.3 million decrease in accounts payable, a $15.8 million decrease in accrued compensation, an $11.4 million increase in prepaid expenses and other current assets, a $7.8 million increase in inventories, a $5.5 million decrease in income taxes payable and a $4.5 million decrease in deferred revenue.

 

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 primarily attributable 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.

 

Cash flows (used in) provided by investing activities. Cash used in investing activities was $6.3 million for the three-months ended March 31, 2017 as compared to cash provided by investing activities of $234.3 million for the three-months ended March 31, 2016.

 

For the three-months ended March 31, 2017, cash used in investing activities was primarily attributable to purchases of available-for-sale. For the three-months ended March 31, 2016, cash used in investing activities was primarily attributable to purchases of held-to-maturity investments. For the three-months ended March 31, 2017, cash provided by investing activities was primarily attributable to sales of available-for-sale investments. For the three-months ended March 31, 2016, cash provided by investing activities was primarily attributable to maturities of held-to-maturity investments. For both the three-months ended March 31, 2017 and 2016, cash used in investing activities also included the acquisitions of fixed assets consisting of vans and promotional vehicles, coolers and other equipment to support our marketing and promotional activities, production equipment, furniture and fixtures, office and computer equipment, computer software, equipment used for sales and administrative activities and certain leasehold improvements. We expect to continue to use a portion of our cash in excess of our requirements for operations for purchasing short-term and long-term investments, leasehold improvements, the acquisition of capital equipment (specifically, vans, trucks and promotional vehicles, coolers, other promotional equipment, merchandise displays, warehousing racks as well as items of production equipment required to produce certain of our existing and/or new products and to develop our brand in international markets) and for other corporate purposes. From time to time, we may also use cash to purchase additional real property related to our beverage business and/or acquire compatible businesses.

 

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Cash flows provided by financing activities.  Cash provided by financing activities was $12.9 million for the three-months ended March 31, 2017 as compared to cash provided by financing activities of $1.5 million for the three-months ended March 31, 2016. The cash flows provided by financing activities for both the three-months ended March 31, 2017, and 2016 was primarily attributable to the issuance of our common stock.

 

Purchases of inventories, increases in accounts receivable and other assets, acquisition of property and equipment (including real property and coolers), leasehold improvements, advances for or the purchase of equipment for our bottlers, acquisition and maintenance of trademarks, payments of accounts payable, income taxes payable and purchases of our common stock are expected to remain our principal recurring use of cash.

 

Cash and cash equivalents, short-term and long-term investments.  At March 31, 2017, we had $576.3 million in cash and cash equivalents and $209.8 million in short and long-term investments. We have historically invested these amounts in U.S. Treasury bills, U.S. government agency securities and municipal securities, commercial paper, certificates of deposit, variable rate demand notes and money market funds meeting certain criteria. We maintain our investments for cash management purposes and not for purposes of speculation. Our risk management policies emphasize credit quality (primarily based on short-term ratings by nationally recognized statistical organizations) in selecting and maintaining our investments. We regularly assess market risk of our investments and believe our current policies and investment practices adequately limit those risks. However, certain of these investments are subject to general credit, liquidity, market and interest rate risks. These market risks associated with our investment portfolio may have an adverse effect on our future results of operations, liquidity and financial condition.

 

Of our $576.3 million of cash and cash equivalents held at March 31, 2017, $182.7 million was held by our foreign subsidiaries. No short-term or long-term investments were held by our foreign subsidiaries at March 31, 2017. We do not intend, nor do we foresee a need, to repatriate undistributed earnings of our foreign subsidiaries other than to repay certain intercompany debt owed to our U.S. operations. Under current tax laws, if funds in excess of intercompany amounts owed were repatriated to our U.S. operations we would be required to accrue and pay additional income taxes on such excess funds at the tax rates then in effect.

 

We believe that cash available from operations, including our cash resources and access to credit, will be sufficient for our working capital needs, including purchase commitments for raw materials and inventory, increases in accounts receivable, payments of tax liabilities, expansion and development needs, purchases of capital assets, purchases of equipment and properties and purchases of shares of our common stock, through at least the next 12 months. Based on our current plans, at this time we estimate that capital expenditures, including the purchases of real property, are likely to be less than $150.0 million through March 31, 2018. However, future business opportunities may cause a change in this estimate.

 

The following represents a summary of the Company’s contractual commitments and related scheduled maturities as of March 31, 2017:

 

 

 

Payments due by period (in thousands)

 

Obligations

 

Total

 

Less than
1 year

 

1-3
years

 

3-5
years

 

More than
5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual Obligations¹

 

  $

153,425

 

  $

81,918

 

  $

57,966

 

  $

13,541

 

  $

-

 

Capital Leases

 

1,412

 

1,412

 

-

 

-

 

-

 

Operating Leases

 

18,865

 

5,141

 

2,912

 

2,722

 

8,090

 

Purchase Commitments²

 

39,834

 

39,834

 

-

 

-

 

-

 

Construction Contract³

 

22,315

 

22,315

 

-

 

-

 

-

 

 

 

  $

235,851

 

  $

150,620

 

  $

60,878

 

  $

16,263

 

  $

8,090

 

 

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¹Contractual obligations include our obligations related to sponsorships and other commitments.

 

²Purchase commitments include obligations made by us and our subsidiaries to various suppliers for raw materials used in the production of our products. These obligations vary in terms, but are generally satisfied within one year.

 

3In September 2016, the Company completed its acquisition of approximately 49 acres of land, located in Rialto, CA, for a purchase price of approximately $39.1 million. The Company has begun construction of an approximately 1,000,000 square-foot building to replace its current leased warehouse and distribution facilities located in Corona, CA. The Company has entered into an approximately $37.6 million guaranteed maximum price construction contract for the construction of the building, of which $22.3 million remained outstanding as of March 31, 2017.

 

In addition, approximately $6.5 million of unrecognized tax benefits have been recorded as liabilities as of March 31, 2017. It is expected that the amount of unrecognized tax benefits will not significantly change within the next 12 months. As of March 31, 2017, we had $1.1 million of accrued interest and penalties related to unrecognized tax benefits.

 

Sales

 

The table below discloses selected quarterly data regarding sales for the three-months ended March 31, 2017 and 2016, respectively.  Data from any one or more quarters or periods is not necessarily indicative of annual results or continuing trends.

 

Sales of beverages are expressed in unit case volume.  A “unit case” means a unit of measurement equal to 192 U.S. fluid ounces of finished beverage (24 eight-ounce servings).  Unit case volume means the number of unit cases (or unit case equivalents) of finished products or concentrates as if converted into finished products sold by us.

 

Our quarterly results of operations reflect seasonal trends that are primarily the result of increased demand in the warmer months of the year. It has been our experience that beverage sales tend to be lower during the first and fourth quarters of each calendar year. However, our experience with our energy drink products suggests they may be less seasonal than the seasonality expected from traditional beverages. In addition, our continued growth internationally may further reduce the impact of seasonality. Quarterly fluctuations may also be affected by other factors including the introduction of new products, the opening of new markets where temperature fluctuations are more pronounced, the addition of new bottlers, customers and distributors, changes in the sales mix of our products and changes in advertising and promotional expenses.

 

(In thousands, except average

 

Three-Months Ended

 

         net sales per case)

 

March 31,

 

 

 

2017

 

2016

 

Net sales¹

 

  $

742,146

 

  $

680,186

 

Less: AFF third-party sales

 

(5,539)

 

-

 

Adjusted net sales²

 

  $

736,607

 

  $

680,186

 

Case sales by segment:

 

 

 

 

 

Monster Energy® Drinks

 

63,781

 

57,569

 

Strategic Brands

 

16,211

 

15,084

 

Other²

 

-

 

-

 

Total case sales

 

79,992

 

72,653

 

Average net sales per case

 

  $

9.21

 

  $

9.36

 

 

1Includes $10.0 million and $8.2 million for the three-months ended March 31, 2017 and 2016, respectively, related to the recognition of deferred revenue.

 

2Excludes Other segment net sales of $5.5 million for the three-months ended March 31, 2017 comprised of sales of AFF Third-Party Products to independent third-party customers as these sales do not have unit case equivalents.

 

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See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Our Business” for additional information related to the increase in sales.

 

Critical Accounting Policies

 

There have been no material changes to our critical accounting policies from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (“Form 10-K”).

 

Recent Accounting Pronouncements

 

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This amendment is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of ASU No. 2017-01 on its financial position, results of operations and liquidity.

 

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which eliminates the requirement to calculate the implied fair value of goodwill but rather requires an entity to record an impairment charge based on the excess of a reporting unit’s carrying value over its fair value. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of ASU No. 2017-04 on its financial position, results of operations and liquidity.

 

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory”, in an effort to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. FASB ASU No. 2016-16 establishes the requirement that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU No. 2016-16 is effective for financial statements issued for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Earlier application is permitted as of the beginning of an interim or annual reporting period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of ASU No. 2016-16 on its financial position, results of operations and liquidity.

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230)”. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company is currently evaluating the impact of ASU No. 2016-15 on its financial position, results of operations and liquidity.

 

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.

 

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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.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, 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 in the very early stages of evaluating the amended revenue recognition guidance in Topic 606. The evaluation has yet to progress to a stage where there is sufficient information for a preliminary position of the impact on the Company’s consolidated financial statements. Therefore, the Company is unable at this time to provide (i) qualitative financial statement disclosures of the potential impact that this standard will have on its financial statements when adopted, (ii) a description of the effects of the accounting policies it expects to apply, (iii) a comparison to its current revenue recognition policies and (iv) a method for adoption.

 

Inflation

 

We believe inflation did not have a significant impact on our results of operations for the periods presented.

 

Forward-Looking Statements

 

Certain statements made in this report may constitute forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) (the “Exchange Act”) regarding the expectations of management with respect to revenues, profitability, adequacy of funds from operations and our existing credit facility, among other things.  All statements containing a projection of revenues, income (loss), earnings (loss) per share, capital expenditures, dividends, capital structure or other financial items, a statement of management’s plans