Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

 

 

For the quarterly period ended June 30, 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 568,169,102 shares of common stock, par value $0.005 per share, outstanding as of August 1, 2017.

 



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

JUNE 30, 2017

 

 

INDEX

 

 

Part I.

FINANCIAL INFORMATION

Page No.

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016

3

 

 

 

 

Condensed Consolidated Statements of Income for the Three- and Six-Months Ended June 30, 2017 and 2016

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three- and Six-Months Ended June 30, 2017 and 2016

5

 

 

 

 

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

27

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45

 

 

 

Item 4.

Controls and Procedures

45

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

45

 

 

 

Item 1A.

Risk Factors

46

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

 

 

 

Item 3.

Defaults Upon Senior Securities

46

 

 

 

Item 4.

Mine Safety Disclosures

46

 

 

 

Item 5.

Other Information

46

 

 

 

Item 6.

Exhibits

46

 

 

 

 

Signatures

47

 

2



Table of Contents

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2017 AND DECEMBER 31, 2016

(In Thousands, Except Par Value) (Unaudited)

 

 

 

June 30,
2017

 

December 31, 2016

ASSETS

 

 

 

 

CURRENT ASSETS:

 

 

 

 

Cash and cash equivalents

 

  $

777,655

 

  $

377,582

Short-term investments

 

323,851

 

220,554

Accounts receivable, net

 

537,082

 

448,051

TCCC Transaction receivable

 

-

 

125,000

Inventories

 

190,600

 

161,971

Prepaid expenses and other current assets

 

44,399

 

32,562

Prepaid income taxes

 

6,492

 

66,550

Total current assets

 

1,880,079

 

1,432,270

 

 

 

 

 

INVESTMENTS

 

48,639

 

2,394

PROPERTY AND EQUIPMENT, net

 

211,555

 

173,343

DEFERRED INCOME TAXES

 

158,739

 

159,556

GOODWILL

 

1,331,643

 

1,331,643

OTHER INTANGIBLE ASSETS, net

 

1,032,874

 

1,032,635

OTHER ASSETS

 

20,602

 

21,630

Total Assets

 

  $

4,684,131

 

  $

4,153,471

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

Accounts payable

 

  $

242,667

 

  $

193,270

Accrued liabilities

 

100,801

 

79,526

Accrued promotional allowances

 

141,483

 

110,237

Accrued distributor terminations

 

301

 

8,184

Deferred revenue

 

43,946

 

41,672

Accrued compensation

 

23,022

 

30,043

Income taxes payable

 

8,951

 

7,657

Total current liabilities

 

561,171

 

470,589

 

 

 

 

 

DEFERRED REVENUE

 

346,943

 

353,173

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 10)

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

Common stock - $0.005 par value; 1,250,000 shares authorized;
624,762 shares issued and 568,121 outstanding as of June 30, 2017;
623,201 shares issued and 566,566 outstanding as of December 31, 2016

 

3,124

 

3,116

Additional paid-in capital

 

4,090,818

 

4,051,245

Retained earnings

 

2,508,161

 

2,107,548

Accumulated other comprehensive loss

 

(16,833)

 

(23,249)

Common stock in treasury, at cost; 56,641 shares and 56,635 shares as of June 30, 2017 and December 31, 2016, respectively

 

(2,809,253)

 

(2,808,951)

Total stockholders’ equity

 

3,776,017

 

3,329,709

Total Liabilities and Stockholders’ Equity

 

  $

4,684,131

 

  $

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- AND SIX-MONTHS ENDED JUNE 30, 2017 AND 2016

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

 

 

 

Three-Months Ended

 

Six-Months Ended

 

 

June 30,

 

June 30,

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

NET SALES

 

  $

907,068

 

  $

827,488

 

  $

1,649,214

 

$

1,507,674

 

 

 

 

 

 

 

 

 

COST OF SALES

 

323,571

 

309,674

 

584,843

 

566,762

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

583,497

 

517,814

 

1,064,371

 

940,912

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

233,456

 

229,291

 

450,068

 

397,675

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

350,041

 

288,523

 

614,303

 

543,237

 

 

 

 

 

 

 

 

 

INTEREST and OTHER (EXPENSE) INCOME, net

 

(2,551)

 

(222)

 

(1,893)

 

386

 

 

 

 

 

 

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

347,490

 

288,301

 

612,410

 

543,623

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

124,857

 

104,082

 

211,797

 

195,526

 

 

 

 

 

 

 

 

 

NET INCOME

 

  $

222,633

 

  $

184,219

 

  $

400,613

 

$

348,097

 

 

 

 

 

 

 

 

 

NET INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

 

Basic

 

  $

0.39

 

  $

0.31

 

  $

0.71

 

$

0.57

Diluted

 

  $

0.39

 

  $

0.30

 

  $

0.69

 

$

0.56

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Basic

 

567,910

 

602,937

 

567,384

 

605,886

Diluted

 

578,020

 

614,904

 

577,719

 

617,844

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE- AND SIX-MONTHS ENDED JUNE 30, 2017 AND 2016

(In Thousands) (Unaudited)

 

 

 

Three-Months Ended
June 30,

 

Six-Months Ended
June 30,

 

 

2017

 

2016

 

2017

 

2016

Net income, as reported

 

  $

222,633

 

  $

184,219

 

  $

400,613

 

  $

348,097

Other comprehensive income:

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

5,111

 

966

 

6,311

 

7,401

Available-for-sale investments:

 

 

 

 

 

 

 

 

Change in net unrealized (losses) gains

 

(26)

 

-

 

105

 

-

Reclassification adjustment for net gains included in net income

 

-

 

-

 

-

 

-

Net change in available-for-sale investments

 

(26)

 

-

 

105

 

-

Other comprehensive income

 

5,085

 

966

 

6,416

 

7,401

Comprehensive income

 

  $

227,718

 

  $

185,185

 

  $

407,029

 

  $

355,498

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX-MONTHS ENDED JUNE 30, 2017 AND 2016

(In Thousands) (Unaudited)

 

 

 

Six-Months Ended

 

 

June 30, 2017

 

June 30, 2016

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

Net income

 

  $

400,613

 

  $

348,097

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

 

 

 

 

Depreciation and amortization

 

22,775

 

19,329

Gain on disposal of property and equipment

 

(436)

 

(120)

Stock-based compensation

 

25,983

 

21,590

Deferred income taxes

 

1,862

 

(13)

Effect on cash of changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

(75,178)

 

(103,303)

TCCC Transaction receivable

 

125,000

 

-

Distributor receivables

 

(1,452)

 

(1,716)

Inventories

 

(24,859)

 

11,613

Prepaid expenses and other current assets

 

(8,131)

 

(2,515)

Prepaid income taxes

 

60,696

 

(18,694)

Accounts payable

 

8,784

 

35,005

Accrued liabilities

 

(667)

 

6,780

Accrued promotional allowances

 

25,805

 

27,238

Accrued distributor terminations

 

(7,917)

 

13,822

Accrued compensation

 

(7,225)

 

(6,077)

Income taxes payable

 

(5,362)

 

(100,728)

Deferred revenue

 

(7,069)

 

(2,753)

Net cash provided by operating activities

 

533,222

 

247,555

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

Maturities of held-to-maturity investments

 

-

 

868,304

Sales of available-for-sale investments

 

172,528

 

-

Purchases of held-to-maturity investments

 

-

 

(152,664)

Purchases of available-for-sale investments

 

(286,858)

 

-

Purchases of property and equipment

 

(40,477)

 

(17,813)

Proceeds from sale of property and equipment

 

733

 

541

Purchases of AFF Assets, net

 

-

 

(688,485)

Decrease (increase) in intangibles

 

26

 

(4,881)

Increase in other assets

 

(632)

 

(2,377)

Net cash (used in) provided by investing activities

 

(154,680)

 

2,625

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

Principal payments on debt

 

(1,334)

 

(1,099)

Issuance of common stock

 

19,093

 

8,167

Purchases of common stock held in treasury

 

(302)

 

(2,002,254)

Net cash provided by (used in) financing activities

 

17,457

 

(1,995,186)

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

4,074

 

4,358

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

400,073

 

(1,740,648)

CASH AND CASH EQUIVALENTS, beginning of period

 

377,582

 

2,175,417

CASH AND CASH EQUIVALENTS, end of period

 

  $

777,655

 

  $

434,769

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

 

  $

38

 

  $

34

Income taxes

 

  $

156,039

 

  $

315,177

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX-MONTHS ENDED JUNE 30, 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 $1.5 million and $1.9 million for the six-months ended June 30, 2017 and 2016, respectively.

 

Included in accounts payable as of June 30, 2017 and 2016 were $12.4 million and $0.1 million, respectively, related to purchases of property and equipment.

 

Included in accrued liabilities as of June 30, 2017 and 2016 were $6.2 million and $3.0 million, respectively, related to additions to other intangible assets.

 

Included in accounts payable as of June 30, 2017 were available-for-sale short- and long-term investment purchases of $35.1 million.

 

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- and six-months ended June 30, 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 amounts 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 May 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09, “Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting,” clarifying when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for the Company on a prospective basis beginning on January 1, 2018, with early adoption permitted. The Company is currently evaluating the impact of ASU No. 2017-09 on its financial position, results of operations and liquidity.

 

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.

 

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 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.

 

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 progressing in its evaluation of the amended revenue recognition guidance in Topic 606. However, such 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.

 

9



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:

 

June 30, 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

 

  $

73,037

 

  $

3

 

  $

-

 

  $

73,040

 

  $

-

 

  $

-

Certificates of deposit

 

37,210

 

-

 

-

 

37,210

 

-

 

-

Municipal securities

 

152,287

 

8

 

42

 

152,253

 

42

 

-

U.S. government agency securities

 

28,465

 

-

 

22

 

28,443

 

22

 

-

Variable rate demand notes

 

32,905

 

-

 

-

 

32,905

 

-

 

-

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

32,704

 

-

 

17

 

32,687

 

17

 

-

U.S. government agency securities

 

15,974

 

-

 

22

 

15,952

 

22

 

-

Total

 

  $

372,582

 

  $

11

 

  $

103

 

  $

372,490

 

  $

103

 

  $

-

 

 

 

 

 

 

 

 

 

 

 

 

 

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- and six-months ended June 30, 2017 and 2016, realized gains or losses recognized on the sale of investments were not significant.

 

The Company’s investments at June 30, 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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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

Less than 1 year:

 

 

 

 

 

 

 

 

Commercial paper

 

  $

73,037

 

  $

73,040

 

  $

40,382

 

  $

40,382

Certificates of deposit

 

37,210

 

37,210

 

-

 

-

Municipal securities

 

152,287

 

152,253

 

140,379

 

140,198

U.S. government agency securities

 

28,465

 

28,443

 

26,057

 

26,051

Due 1 -10 years:

 

 

 

 

 

 

 

 

Municipal securities

 

32,704

 

32,687

 

2,403

 

2,394

U.S. government agency securities

 

15,974

 

15,952

 

-

 

-

Variable rate demand notes

 

3,918

 

3,918

 

3,917

 

3,917

Due 11 - 20 years:

 

 

 

 

 

 

 

 

Variable rate demand notes

 

10,006

 

10,006

 

6,003

 

6,003

Due 21 - 30 years:

 

 

 

 

 

 

 

 

Variable rate demand notes

 

14,979

 

14,979

 

4,003

 

4,003

Due 31 - 40 years:

 

 

 

 

 

 

 

 

Variable rate demand notes

 

4,002

 

4,002

 

-

 

-

Total

 

  $

372,582

 

  $

372,490

 

  $

223,144

 

  $

222,948

 

4.                                    FAIR VALUE OF CERTAIN FINANCIAL ASSETS AND LIABILITIES

 

Accounting Standards Codification (“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:

 

June 30, 2017

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

  $

311,631

 

$

-

 

$

-

 

$

311,631

 

Money market funds

 

363,656

 

-

 

-

 

363,656

 

Certificates of deposit

 

-

 

57,756

 

-

 

57,756

 

Commercial paper

 

-

 

90,257

 

-

 

90,257

 

Variable rate demand notes

 

-

 

32,905

 

-

 

32,905

 

Municipal securities

 

-

 

234,558

 

-

 

234,558

 

U.S. government agency securities

 

-

 

59,382

 

-

 

59,382

 

Foreign currency derivatives

 

-

 

482

 

-

 

482

 

Total

 

  $

675,287

 

$

475,340

 

$

-

 

$

1,150,627

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

  $

675,287

 

$

102,368

 

$

-

 

$

777,655

 

Short-term investments

 

-

 

323,851

 

-

 

323,851

 

Accounts receivable, net

 

-

 

853

 

-

 

853

 

Investments

 

-

 

48,639

 

-

 

48,639

 

Accrued liabilities

 

-

 

(371

)

-

 

(371

)

Total

 

  $

675,287

 

$

475,340

 

$

-

 

$

1,150,627

 

 

 

 

 

 

 

 

 

 

 

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 six-months ended June 30, 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 six-months ended June 30, 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 June 30, 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:

 

June 30, 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 CAD/pay USD

 

  $

20,193

 

  $

104

 

Accounts receivable, net

 

Receive USD/pay ZAR

 

20,664

 

365

 

Accounts receivable, net

 

Receive USD/pay MXN

 

19,948

 

336

 

Accounts receivable, net

 

Receive SGD/pay USD

 

10,091

 

7

 

Accounts receivable, net

 

Receive USD/pay BRL

 

4,589

 

25

 

Accounts receivable, net

 

Receive USD/pay CLP

 

4,747

 

2

 

Accounts receivable, net

 

Receive USD/pay COP

 

1,906

 

14

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

 

Receive USD/pay GBP

 

  $

17,728

 

  $

(118)

 

Accrued liabilities

 

Receive USD/pay EUR

 

19,834

 

(62)

 

Accrued liabilities

 

Receive USD/pay AUD

 

24,791

 

(186)

 

Accrued liabilities

 

Receive USD/pay NZD

 

1,971

 

(5)

 

Accrued liabilities

 

 

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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)

 

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

 

 

 

 

 

Amount of (loss) gain
recognized in income on
derivatives

 

 

 

 

Three-months ended

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

 

Location of (loss) gain
recognized in income on
derivatives

 

June 30, 2017

 

June 30, 2016

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

Interest and other (expense) income, net

 

  $

(4,439)

 

  $

141

 

 

 

 

 

 

Amount of (loss) gain
recognized in income on
derivatives

 

 

 

 

Six-months ended

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

 

Location of (loss) gain
recognized in income on
derivatives

 

June 30, 2017

 

June 30, 2016

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

Interest and other (expense) income, net

 

  $

 (9,467)

 

  $

 458

 

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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)

 

6.                                    INVENTORIES

 

Inventories consist of the following at:

 

 

 

June 30,
2017

 

December 31,
2016

 

Raw materials

 

  $

79,924

 

  $

58,658

 

Finished goods

 

110,676

 

103,313

 

 

 

  $

190,600

 

  $

161,971

 

 

7.                                    PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following at:

 

 

 

June 30,
2017

 

December 31,
2016

 

Land

 

  $

47,373

 

  $

46,596

 

Leasehold improvements

 

3,906

 

2,687

 

Furniture and fixtures

 

4,467

 

3,635

 

Office and computer equipment

 

12,598

 

11,701

 

Computer software

 

3,411

 

3,274

 

Equipment

 

129,907

 

114,230

 

Buildings

 

98,043

 

69,547

 

Vehicles

 

35,547

 

31,582

 

 

 

335,252

 

283,252

 

Less: accumulated depreciation and amortization

 

(123,697)

 

(109,909)

 

 

 

  $

211,555

 

  $

173,343

 

 

Total depreciation and amortization expense recorded was $8.6 million and $7.5 million for the three-months ended June 30, 2017 and 2016, respectively. Total depreciation and amortization expense recorded was $16.8 million and $14.7 million for the six-months ended June 30, 2017 and 2016, respectively.

 

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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)

 

8.                                    GOODWILL AND OTHER INTANGIBLE ASSETS

 

The following is a roll-forward of goodwill for the six-months ended June 30, 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 June 30, 2017

 

$

693,644

 

$

637,999

 

$

-

 

$

1,331,643

 

 

Intangible assets consist of the following at:

 

 

 

June 30,
2017

 

December 31,
2016

 

Amortizing intangibles

 

  $

71,377

 

  $

71,290

 

Accumulated amortization

 

(20,459)

 

(14,535)

 

 

 

50,918

 

56,755

 

Non-amortizing intangibles

 

981,956

 

975,880

 

 

 

  $

1,032,874

 

  $

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 $2.9 million for the three-months ended June 30, 2017 and 2016, respectively. Total amortization expense recorded was $6.0 million and $4.6 million for the six-months ended June 30, 2017 and 2016, respectively.

 

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 $0.2 million and $25.3 million for the three-months ended June 30, 2017 and 2016, respectively. The Company incurred termination costs of $20.1 million and $28.7 million for the six-months ended June 30, 2017 and 2016, respectively. Such termination costs have been expensed in full and are included in operating expenses for the three- and six-months ended June 30, 2017 and 2016.

 

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 $10.2 million and $12.1 million for the three-months ended June 30, 2017 and 2016, respectively. Revenue recognized was $20.1 million and $20.2 million for the six-months ended June 30, 2017 and 2016, respectively.

 

10.                            COMMITMENTS AND CONTINGENCIES

 

The Company had purchase commitments aggregating approximately $32.6 million at June 30, 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.

 

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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 Company had contractual obligations aggregating approximately $146.0 million at June 30, 2017, which related primarily to sponsorships and other marketing activities.

 

The Company had operating lease commitments aggregating approximately $18.3 million at June 30, 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 is constructing 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 $17.1 million remained outstanding as of June 30, 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 June 30, 2017, the Company had $6.0 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.

 

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.

 

17



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The Company evaluates, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of the liability that is accrued, if any, or in the amount of any related insurance reimbursements recorded. As of June 30, 2017, the Company’s condensed 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 six-months ended June 30, 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 loss (gain) before reclassifications

 

-

 

-

 

-

Amounts reclassified from accumulated other comprehensive loss (gain)

 

-

 

-

 

-

Net current-period other comprehensive loss (gain)

 

(6,311)

 

(105)

 

(6,416)

Balance at June 30, 2017

 

  $

16,745

 

  $

88

 

  $

16,833

 

 

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 August 8, 2017, no shares have been repurchased pursuant to the February 2017 Repurchase Plan.

 

During the three-months ended June 30, 2017, 4,846 shares of common stock were purchased from employees in lieu of cash payments for options exercised or withholding taxes due, for a total amount of $0.2 million. While such purchases are considered common stock repurchases, they are not counted as purchases against the Company’s authorized share repurchase programs. Such shares are included in common stock in treasury in the accompanying condensed consolidated balance sheet at June 30, 2017.

 

13.                            STOCK-BASED COMPENSATION

 

The Company has two stock-based compensation plans under which shares were available for grant at June 30, 2017: the Monster Beverage Corporation 2011 Omnibus Incentive Plan (the “2011 Omnibus Incentive Plan”) and the Monster Beverage Corporation Stock 2017 Compensation Plan for Non-Employee Directors (the “2017 Directors Plan”).

 

The Company recorded $12.8 million and $11.5 million of compensation expense relating to outstanding options, restricted stock awards, stock appreciation rights and restricted stock units during the three-months ended June 30, 2017 and 2016, respectively. The Company recorded $26.0 million and $21.6 million of compensation expense relating to outstanding options, restricted stock awards, stock appreciation rights and restricted stock units during the six-months ended June 30, 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)

 

The excess tax benefit for tax deductions from non-qualified stock option exercises, disqualifying dispositions of incentive stock options, vesting of restricted stock units and restricted stock awards for the three-months ended June 30, 2017 and 2016 was $1.9 million and $2.0 million, respectively. The excess tax benefit for tax deductions from non-qualified stock option exercises, disqualifying dispositions of incentive stock options, vesting of restricted stock units and restricted stock awards for the six-months ended June 30, 2017 and 2016 was $11.3 million and $3.6 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 June 30, 2017, deferrals under the Deferred Compensation Plan are solely comprised of cash compensation and equity compensation coming due after June 30, 2018 and are not material in the aggregate.

 

During the quarter ending June 30, 2017, the Company adopted the Monster Beverage Corporation Deferred Compensation Plan for Non-Employee Directors (the “Non-Employee Director Deferral Plan”) (a sub-plan to the 2017 Directors Plan), pursuant to which non-employee directors may elect to defer cash and/or equity based compensation and to receive the deferred compensation, either at a pre-determined time in the future or upon departure from the Company’s Board of Directors, as provided under the Non-Employee Director Deferral Plan. Deferrals under the Non-Employee Director Deferral Plan are unfunded and unsecured. As of June 30, 2017, there were no deferrals under the Non-Employee Director Deferral Plan.

 

Stock Options

 

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

 

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

 

 

 

Three-Months Ended June 30,

 

Six-Months Ended June 30,

 

 

2017

 

2016

 

2017

 

2016

Dividend yield

 

0.0%

 

0.0%

 

0.0%

 

0.0%

Expected volatility

 

36.5%

 

36.2%

 

36.6%

 

36.2%

Risk-free interest rate

 

1.8%

 

1.3%

 

2.1%

 

1.4%

Expected term

 

6.1 years

 

6.4 years

 

6.1 years

 

6.3 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.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

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

 

 

 

 

 

Granted 04/01/17 - 06/30/17

 

26

 

  $

49.71

 

 

 

 

 

Exercised

 

(1,278)

 

  $

14.94

 

 

 

 

 

Cancelled or forfeited

 

(299)

 

  $

40.47

 

 

 

 

 

Outstanding at June 30, 2017

 

22,411

 

  $

25.16

 

5.6

 

  $

549,689

Vested and expected to vest in the future at June 30, 2017

 

21,157

 

  $

24.12

 

5.4

 

  $

540,993

Exercisable at June 30, 2017

 

13,135

 

  $

14.33

 

3.7

 

  $

464,352

 

 

The weighted-average grant-date fair value of options granted during the three-months ended June 30, 2017 and 2016 was $18.97 per share and $17.44 per share, respectively. The weighted-average grant-date fair value of options granted during the six-months ended June 30, 2017 and 2016 was $18.01 per share and $16.89 per share, respectively. The total intrinsic value of options exercised during the three-months ended June 30, 2017 and 2016 was $8.5 million and $10.9 million, respectively. The total intrinsic value of options exercised during the six-months ended June 30, 2017 and 2016 was $40.9 million and $21.4 million, respectively.

 

Cash received from option exercises under all plans for the three-months ended June 30, 2017 and 2016 was approximately $5.5 million and $4.1 million, respectively. Cash received from option exercises under all plans for the six-months ended June 30, 2017 and 2016 was approximately $19.1 million and $8.1 million, respectively.

 

At June 30, 2017, there was $101.2 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 3.0 years.

 

Restricted Stock Awards and Restricted Stock Units

 

The cost of stock-based compensation 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.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

The following table summarizes the Company’s activities with respect to 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

Granted 04/01/17- 06/30/17

 

23

 

$

50.86

Vested

 

(283)

 

$

37.95

Forfeited/cancelled

 

(2)

 

$

20.69

Non-vested at June 30, 2017

 

546

 

$

44.43

 

The weighted-average grant-date fair value of restricted stock units and restricted stock awards granted during the three-months ended June 30, 2017 and 2016 was $50.86 per share and $49.65 per share, respectively. The weighted-average grant-date fair value of restricted stock units and restricted stock awards granted during the six-months ended June 30, 2017 and 2016 was $46.65 per share and $44.71 per share, respectively. As of June 30, 2017, 0.5 million of restricted stock units and restricted stock awards are expected to vest over their respective terms.

 

At June 30, 2017, total unrecognized compensation expense relating to non-vested restricted stock awards and non-vested restricted stock units was $20.4 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 six-months ended June 30, 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 June 30, 2017

 

  $

6,540

 

 

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Company’s condensed consolidated financial statements. As of June 30, 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 any change in the amount of unrecognized tax benefits within the next 12 months will not be significant.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

The Company is 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 Company’s 2012 through 2016 U.S. federal income tax returns are subject to examination by the IRS. The Company’s 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 (in thousands):

 

 

 

Three-Months Ended

 

Six-Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

567,910

 

602,937

 

567,384

 

605,886

 

Dilutive

 

10,110

 

11,967

 

10,335

 

11,958

 

Diluted

 

578,020

 

614,904

 

577,719

 

617,844

 

 

For the three-months ended June 30, 2017 and 2016, options and awards outstanding totaling 8.8 million shares and 2.0 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive. For the six-months ended June 30, 2017 and 2016, options and awards outstanding totaling 8.4 million shares and 1.6 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, Monster HydroTM energy drinks and 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- and six-months ended June 30, 2017 and 2016 are as follows:

 

 

 

Three-Months Ended

 

Six-Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Net sales:

 

 

 

 

 

 

 

 

 

Monster Energy® Drinks(1)

 

  $

815,261

 

  $

743,453

 

  $

1,483,831

 

  $

1,365,381

 

Strategic Brands

 

85,633

 

77,400

 

153,669

 

135,852

 

Other

 

6,174

 

6,635

 

11,714

 

6,441

 

Corporate and unallocated

 

-

 

-

 

-

 

-

 

 

 

  $

907,068

 

  $

827,488

 

  $

1,649,214

 

  $

1,507,674

 

 

 

 

Three-Months Ended

 

Six-Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Operating Income:

 

 

 

 

 

 

 

 

 

Monster Energy® Drinks(1) (2)

 

  $

356,223

 

  $

298,942

 

  $

635,654

 

  $

566,329

 

Strategic Brands

 

53,175

 

48,019

 

95,281

 

87,095

 

Other

 

1,718

 

686

 

3,134

 

342

 

Corporate and unallocated

 

(61,075)

 

(59,124)

 

(119,766)

 

(110,529)

 

 

 

  $

350,041

 

  $

288,523

 

  $

614,303

 

  $

543,237

 

 

 

 

Three-Months Ended

 

Six-Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Income before tax:

 

 

 

 

 

 

 

 

 

Monster Energy® Drinks(1) (2)

 

  $

356,316

 

  $

298,974

 

  $

635,651

 

  $

566,412

 

Strategic Brands

 

53,174

 

48,008

 

95,268

 

87,068

 

Other

 

1,718

 

686

 

3,134

 

342

 

Corporate and unallocated

 

(63,718)

 

(59,367)

 

(121,643)

 

(110,199)

 

 

 

  $

347,490

 

  $

288,301

 

  $

612,410

 

  $

543,623

 

 

(1)          Includes $10.2 million and $12.1 million for the three-months ended June 30, 2017 and 2016, respectively, related to the recognition of deferred revenue. Includes $20.1 million and $20.2 million for the six-months ended June 30, 2017 and 2016, respectively, related to the recognition of deferred revenue.

 

(2)          Includes $0.2 million and $25.3 million for the three-months ended June 30, 2017 and 2016, respectively, related to distributor termination costs. Includes $20.1 million and $28.7 million for the six-months ended June 30, 2017 and 2016, respectively, related to distributor termination costs.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

 

Three-Months Ended

 

Six-Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

Monster Energy® Drinks

 

  $

6,873

 

  $

5,795

 

  $

13,413

 

  $

11,573

 

Strategic Brands

 

1,842

 

1,778

 

3,638

 

3,548

 

Other

 

1,153

 

1,135

 

2,306

 

1,136

 

Corporate and unallocated

 

1,725

 

1,598

 

3,418

 

3,072

 

 

 

  $

11,593

 

  $

10,306

 

  $

22,775

 

  $

19,329

 

 

 

 

June 30,
2017

 

December 31,
2016

 

Goodwill and other intangible assets:

 

 

 

 

 

Monster Energy® Drinks

 

  $

1,340,125

 

  $

1,334,494

 

Strategic Brands

 

998,625

 

1,001,749

 

Other

 

25,767

 

28,035

 

Corporate and unallocated

 

-

 

-

 

 

 

  $

2,364,517

 

  $

2,364,278

 

 

Corporate and unallocated expenses for the three-months ended June 30, 2017 include $38.4 million of payroll costs, of which $12.8 million was attributable to stock-based compensation expenses (see Note 13, “Stock-Based Compensation”), as well as $14.0 million attributable to professional service expenses, including accounting and legal costs, and $8.6 million of other operating expenses. Corporate and unallocated expenses for the three-months ended June 30, 2016 include $31.1 million of payroll costs, of which $11.5 million was attributable to stock-based compensation expenses (see Note 13, “Stock-Based Compensation”), as well as $19.6 million attributable to professional service expenses, including accounting and legal costs, and $8.7 million of other operating expenses.

 

Corporate and unallocated expenses for the six-months ended June 30, 2017 include $76.1 million of payroll costs, of which $26.0 million was attributable to stock-based compensation expenses (see Note 13, “Stock-Based Compensation”), as well as $26.4 million attributable to professional service expenses, including accounting and legal costs, and $17.3 million of other operating expenses. Corporate and unallocated expenses for the six-months ended June 30, 2016 include $59.5 million of payroll costs, of which $21.5 million was attributable to stock-based compensation expenses (see Note 13, “Stock-Based Compensation”), as well as $35.5 million attributable to professional service expenses, including accounting and legal costs, and $15.2 million of other operating expenses.

 

TCCC, through certain wholly-owned subsidiaries (the “TCCC Subsidiaries”), accounted for approximately 17% and 42% of the Company’s net sales for the three-months ended June 30, 2017 and 2016, respectively. The TCCC Subsidiaries accounted for approximately 25% and 44% of the Company’s net sales for the six-months ended June 30, 2017 and 2016, respectively. As part of TCCC’s North America Refranchising initiative (the “North America Refranchising”), the territories of certain TCCC Subsidiaries have been transitioned to certain independent/non wholly-owned TCCC bottlers/distributors. Accordingly, the Company’s percentage of net sales classified as sales to the TCCC Subsidiaries decreased for three- and six-months ended June 30, 2017.

 

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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 $247.9 million and $200.2 million for the three-months ended June 30, 2017 and 2016, respectively. Net sales to customers outside the United States amounted to $438.8 million and $349.3 million for the six-months ended June 30, 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 TCCC 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 June 30, 2017 and 2016, were $12.8 million and $8.3 million, respectively. TCCC commissions, based on sales to the TCCC Affiliates for the six-months ended June 30, 2017 and 2016, were $20.7 million and $10.9 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 June 30, 2017 and 2016 were $154.5 million and $344.0 million, respectively.  Net sales to the TCCC Subsidiaries for the six-months ended June 30, 2017 and 2016 were $409.7 million and $659.2 million, respectively. As part of the North America Refranchising, the territories of certain TCCC Subsidiaries have been transitioned to certain independent/non wholly-owned TCCC bottlers/distributors. Accordingly, the Company’s net sales classified as sales to the TCCC Subsidiaries decreased for three- and six-months ended June 30, 2017.

 

The Company also purchases concentrates from TCCC which are then sold to both the TCCC Affiliates and the TCCC Subsidiaries. Concentrate purchases from TCCC were $6.6 million and $8.0 million for the three-months ended June 30, 2017 and 2016, respectively. Concentrate purchases from TCCC were $12.5 million and $14.7 million for the six-months ended June 30, 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 $2.9 million and $2.2 million for the three-months ended June 30, 2017 and 2016, respectively. Contract manufacturing expenses were $5.1 million and $3.8 million for the six-months ended June 30, 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)

 

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

 

 

 

June 30,
2017

 

December 31,
2016

 

 

 

 

 

 

 

Accounts receivable, net

 

  $

99,337

 

  $

151,756

 

TCCC transaction receivable

 

  $

-

 

  $

125,000

 

Accounts payable

 

  $

(22,332)

 

  $

(41,210)

 

Accrued promotional allowances

 

  $

(20,257)

 

  $

(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 June 30, 2017 and 2016 were $1.2 million and $0.2 million, respectively. Expenses incurred with such company in connection with promotional materials purchased during the six-months ended June 30, 2017 and 2016 were $1.4 million and $0.3 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 $28.6 million and $1.1 million in the three-months ended June 30, 2017 and 2016, respectively. Raw material cost savings from the AFF Transaction were approximately $51.9 million and $1.1 million in the six-months ended June 30, 2017 and 2016, respectively.  Raw material costs savings from the AFF Transaction were minimally realized in the three- and six-months ended June 30, 2016 as the Company’s inventory on hand prior to the AFF Transaction, as well as the inventory acquired in the AFF Transaction which was recorded at fair value, were not recognized through cost of goods sold until the end of the second quarter of 2016.

 

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.  We incurred termination costs of $0.2 million and $25.3 million for the three-months ended June 30, 2017 and 2016, respectively, related to the distribution rights transferred to The Coca-Cola Company’s (“TCCC”) distribution network. We incurred termination costs of $20.1 million and $28.7 million for the six-months ended June 30, 2017 and 2016, respectively, related to the distribution rights transferred to TCCC’s distribution network. Such termination costs have been expensed in full and are included in operating expenses for the three- and six-months ended June 30, 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®

·      Naplu®

·      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®

·      Monster HydroTM

·      Monster Energy UltraTM

 

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Our Monster Energy® brand energy drinks, which represented 89.4% and 89.8% of our net sales for the three-months ended June 30, 2017 and 2016, respectively, primarily include the following:

 

·      Monster Energy®

·      Lo-Carb Monster Energy®

·      Monster Assault®

·      Juice Monster® Khaos®

·      Juice Monster® Ripper®

·      Juice Monster® Pipeline Punch®

·      Juice Monster® Mango Loco

·      Monster Energy® Import

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

·      Punch Monster® Mad Dog (formerly Dub Edition)

·      Monster Rehab® Tea + Lemonade + Energy

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

·      Monster Rehab® Green Tea + Energy

·      Monster Rehab® Tea + Orangeade + Energy

·      Monster Rehab® Tea + Pink Lemonade + Energy

·      Monster Rehab® Peach Tea + Energy

·      Muscle Monster® Vanilla

·      Muscle Monster® Chocolate

·      Muscle Monster® Strawberry

·      Muscle Monster® Banana

·      Monster Energy Absolutely Zero®

·      Monster HydroTM Mean Green®

·      Monster HydroTM Manic MelonTM

·      Monster HydroTM Tropical ThunderTM

·      Java Monster® Kona Blend

·      Java Monster® Loca Moca®

·      Java Monster® Mean Bean®

·      Java Monster® Vanilla Light

·      Java Monster® Irish Blend®

·      Java Monster® Salted Caramel

·      Mega Monster Energy®

·      Monster Energy Extra Strength Nitrous Technology® Super Dry™

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

·      M3® Monster Energy® Super Concentrate

·      Monster Energy Zero Ultra®

·      Monster Energy Ultra Blue®

·      Monster Energy Ultra Red®

·      Monster Energy Ultra Black®

·      Monster Energy Ultra Sunrise®

·      Monster Energy Ultra Citron®

·      Monster Energy Ultra VioletTM

·      Monster Energy® Valentino Rossi

·      Übermonster® Energy BrewTM

·      Monster Energy® Lewis Hamilton 44

·      Monster Energy® Gronk

 

 

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, Monster HydroTM energy drinks and 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 June 30, 2017, we continued to expand our existing energy drink portfolio and further develop our distribution markets. During the three-months ended June 30, 2017, we introduced the following products:

 

·      Monster Energy® Lewis Hamilton 44 (April 2017)

·      Mutant® Super Soda White Lightning (April 2017)

·      Monster HydroTM Mean Green® (May 2017)

·      Monster HydroTM Manic MelonTM (May 2017)

·      Monster HydroTM Tropical ThunderTM (May 2017)

·      Juice Monster® Mango Loco (May 2017)

 

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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 June 30, 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 $907.1 million for the three-months ended June 30, 2017 represented record sales for our second 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 $810.5 million for the three-months ended June 30, 2017.  Net sales of our Strategic Brands were $85.6 million for the three-months ended June 30, 2017.

 

Our Monster Energy® Drinks segment represented 89.9% and 89.8% of our consolidated net sales for the three-months ended June 30, 2017 and 2016, respectively. Our Strategic Brands segment represented 9.4% of our consolidated net sales for both the three-months ended June 30, 2017 and 2016. Our Other segment represented 0.7% and 0.8% of our consolidated net sales for the three-months ended June 30, 2017 and 2016, respectively.

 

Net changes in foreign currency exchange rates had an unfavorable impact on net sales in the Monster Energy® Drinks segment of approximately $8.3 million for the three-months ended June 30, 2017. Net changes in foreign currency exchange rates had a favorable impact on net sales in the Strategic Brands segment of approximately $0.1 million for the three-months ended June 30, 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, sports personality endorsements, 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 $247.9 million and $200.2 million for the three-months ended June 30, 2017 and 2016, respectively. Such sales were approximately 27% and 24% of net sales for the three-months ended June 30, 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 3% for the three-months ended June 30, 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- and six-months ended June 30, 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.

 

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Three-Months Ended
June 30,

 

Six-Months Ended
June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

U.S. full service bottlers/distributors

 

62%

 

64%

 

63%

 

65%

 

Club stores and mass merchandisers

 

8%

 

8%

 

7%

 

8%

 

International full service bottlers/distributors

 

29%

 

26%

 

28%

 

25%

 

Retail grocery, specialty chains and wholesalers

 

1%

 

1%

 

1%

 

1%

 

Other

 

0%

 

1%

 

1%

 

1%

 

 

 

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 Soft Drinks, Co., Ltd., Kalil Bottling Group, Wal-Mart, Inc. (including Sam’s Club), Costco Wholesale Corporation and select Anheuser-Busch distributors (the “AB Distributors”). TCCC, through certain wholly-owned subsidiaries (the “TCCC Subsidiaries”), accounted for approximately 17% and 42% of our net sales for the three-months ended June 30, 2017 and 2016, respectively. The TCCC Subsidiaries, accounted for approximately 25% and 44% of our net sales for the six-months ended June 30, 2017 and 2016, respectively. As part of TCCC’s North America Refranchising initiative (the “North America Refranchising”), the territories of certain TCCC Subsidiaries have been transitioned to certain independent/non wholly-owned TCCC bottler/distributors. Accordingly, our percentage of net sales classified as sales to the TCCC Subsidiaries decreased for the three- and six-months ended June 30, 2017. 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.

 

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Results of Operations

 

The following table sets forth key statistics for the three- and six-months ended June 30, 2017 and 2016.

 

 

(In thousands, except per share amounts)

 

Three-Months Ended
June 30,

 

Percentage
Change

 

Six-Months Ended
June 30,

 

Percentage
Change

 

 

2017

 

2016

 

17 vs. 16

 

2017

 

2016

 

17 vs. 16

Net sales1

 

$

907,068

 

$

827,488

 

9.6%

 

$

1,649,214

 

$

1,507,674

 

9.4%

Cost of sales

 

323,571

 

309,674

 

4.5%

 

584,843

 

566,762

 

3.2%

Gross profit*1

 

583,497

 

517,814

 

12.7%

 

1,064,371

 

940,912

 

13.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit as a percentage of net sales1

 

64.3%

 

62.6%

 

 

 

64.5%

 

62.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses2

 

233,456

 

229,291

 

1.8%

 

450,068