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, 2018

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 562,681,834 shares of common stock, par value $0.005 per share, outstanding as of April 26, 2018.

 



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

MARCH 31, 2018

 

 

INDEX

 

 

Part I.

FINANCIAL INFORMATION

Page No.

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017

3

 

 

 

 

Condensed Consolidated Statements of Income for the Three-Months Ended March 31, 2018 and 2017

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three-Months Ended March 31, 2018 and 2017

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three-Months Ended March 31, 2018 and 2017

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

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

31

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

46

 

 

 

Item 4.

Controls and Procedures

46

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

47

 

 

 

Item 1A.

Risk Factors

47

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

 

 

 

Item 3.

Defaults Upon Senior Securities

48

 

 

 

Item 4.

Mine Safety Disclosures

48

 

 

 

Item 5.

Other Information

48

 

 

 

Item 6.

Exhibits

48

 

 

 

 

Signatures

49

 

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, 2018 AND DECEMBER 31, 2017

(In Thousands, Except Par Value) (Unaudited)

 

 

 

March 31,
2018

 

December 31,
2017

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

  $

511,360

 

  $

528,622

 

Short-term investments

 

585,222

 

672,933

 

Accounts receivable, net

 

525,463

 

449,476

 

Inventories

 

268,607

 

255,745

 

Prepaid expenses and other current assets

 

61,639

 

40,877

 

Prepaid income taxes

 

86,257

 

138,724

 

Total current assets

 

2,038,548

 

2,086,377

 

 

 

 

 

 

 

INVESTMENTS

 

3,497

 

2,366

 

PROPERTY AND EQUIPMENT, net

 

231,199

 

230,276

 

DEFERRED INCOME TAXES

 

85,748

 

92,333

 

GOODWILL

 

1,331,643

 

1,331,643

 

OTHER INTANGIBLE ASSETS, net

 

1,036,661

 

1,034,085

 

OTHER ASSETS

 

12,836

 

13,932

 

Total Assets

 

  $

4,740,132

 

  $

4,791,012

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

  $

226,063

 

  $

245,910

 

Accrued liabilities

 

80,893

 

87,475

 

Accrued promotional allowances

 

155,992

 

137,998

 

Accrued distributor terminations

 

162

 

91

 

Deferred revenue

 

44,325

 

43,236

 

Accrued compensation

 

16,829

 

34,996

 

Income taxes payable

 

9,758

 

10,645

 

Total current liabilities

 

534,022

 

560,351

 

 

 

 

 

 

 

DEFERRED REVENUE

 

328,300

 

334,354

 

 

 

 

 

 

 

OTHER LIABILITIES

 

2,203

 

1,095

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 11)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Common stock - $0.005 par value; 1,250,000 shares authorized;
629,924 shares issued and 562,605 outstanding as of March 31, 2018;
629,255 shares issued and 566,298 outstanding as of December 31, 2017

 

3,150

 

3,146

 

Additional paid-in capital

 

4,170,565

 

4,150,628

 

Retained earnings

 

3,137,691

 

2,928,226

 

Accumulated other comprehensive loss

 

(13,721)

 

(16,659)

 

Common stock in treasury, at cost; 67,319 shares and 62,957 shares as of March 31, 2018 and December 31, 2017, respectively

 

(3,422,078)

 

(3,170,129)

 

Total stockholders’ equity

 

3,875,607

 

3,895,212

 

Total Liabilities and Stockholders’ Equity

 

  $

4,740,132

 

  $

4,791,012

 

 

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, 2018 AND 2017

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

 

 

 

 

Three-Months Ended

 

 

 

March 31,

 

 

 

2018

 

2017

 

 

 

 

 

 

 

NET SALES

 

  $

850,921

 

  $

742,146

 

 

 

 

 

 

 

COST OF SALES

 

335,664

 

261,272

 

 

 

 

 

 

 

GROSS PROFIT

 

515,257

 

480,874

 

 

 

 

 

 

 

OPERATING EXPENSES

 

235,342

 

216,612

 

 

 

 

 

 

 

OPERATING INCOME

 

279,915

 

264,262

 

 

 

 

 

 

 

INTEREST and OTHER INCOME, net

 

1,805

 

658

 

 

 

 

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

281,720

 

264,920

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

65,670

 

86,940

 

 

 

 

 

 

 

NET INCOME

 

  $

216,050

 

  $

177,980

 

 

 

 

 

 

 

NET INCOME PER COMMON SHARE:

 

 

 

 

 

Basic

 

  $

0.38

 

  $

0.31

 

Diluted

 

  $

0.38

 

  $

0.31

 

 

 

 

 

 

 

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

 

 

 

 

 

Basic

 

566,000

 

571,578

 

Diluted

 

574,129

 

582,032

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE-MONTHS ENDED MARCH 31, 2018 AND 2017

(In Thousands) (Unaudited)

 

 

 

 

Three-Months Ended
March 31,

 

 

 

2018

 

2017

 

Net income, as reported

 

  $

216,050

 

  $

177,980

 

Other comprehensive income:

 

 

 

 

 

Change in foreign currency translation adjustment

 

2,723

 

1,201

 

Available-for-sale investments:

 

 

 

 

 

Change in net unrealized gains

 

215

 

131

 

Reclassification adjustment for net gains included in net income

 

-

 

-

 

Net change in available-for-sale investments

 

215

 

131

 

Other comprehensive income

 

2,938

 

1,332

 

Comprehensive income

 

  $

218,988

 

  $

179,312

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE-MONTHS ENDED MARCH 31, 2018 AND 2017

(In Thousands) (Unaudited)

 

 

 

Three-Months Ended

 

 

 

March 31, 2018

 

March 31, 2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

216,050

 

$

177,980

 

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

 

 

 

 

 

Depreciation and amortization

 

13,991

 

11,183

 

Gain on disposal of property and equipment

 

(187)

 

(268)

 

Stock-based compensation

 

13,439

 

13,142

 

Deferred income taxes

 

-

 

1,862

 

Effect on cash of changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(72,699)

 

7,441

 

Distributor receivables

 

3,279

 

(951)

 

Inventories

 

(11,274)

 

(7,793)

 

Prepaid expenses and other current assets

 

(19,646)

 

(11,368)

 

Prepaid income taxes

 

52,410

 

25,601

 

Accounts payable

 

(22,616)

 

(19,317)

 

Accrued liabilities

 

(14,985)

 

6,788

 

Accrued promotional allowances

 

15,971

 

14,111

 

Accrued distributor terminations

 

71

 

315

 

Accrued compensation

 

(18,350)

 

(15,802)

 

Income taxes payable

 

(1,059)

 

(5,506)

 

Other liabilities

 

1,108

 

-

 

Deferred revenue

 

(6,592)

 

(4,454)

 

Net cash provided by operating activities

 

148,911

 

192,964

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Sales of available-for-sale investments

 

334,216

 

71,553

 

Purchases of available-for-sale investments

 

(247,421)

 

(58,314)

 

Purchases of property and equipment

 

(13,049)

 

(19,093)

 

Proceeds from sale of property and equipment

 

3,397

 

452

 

Decrease (Increase) in intangibles

 

280

 

(848)

 

Increase in other assets

 

(1,549)

 

(52)

 

Net cash provided by (used in) investing activities

 

75,874

 

(6,302)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Principal payments on debt

 

(543)

 

(700)

 

Issuance of common stock

 

6,501

 

13,621

 

Purchases of common stock held in treasury

 

(251,950)

 

(64)

 

Net cash (used in) provided by financing activities

 

(245,992)

 

12,857

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

3,945

 

(764)

 

 

 

 

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

(17,262)

 

198,755

 

CASH AND CASH EQUIVALENTS, beginning of period

 

528,622

 

377,582

 

CASH AND CASH EQUIVALENTS, end of period

 

$

511,360

 

$

576,337

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

16

 

$

19

 

Income taxes

 

$

15,223

 

$

66,094

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE-MONTHS ENDED MARCH 31, 2018 AND 2017

(In Thousands) (Unaudited) (Continued)

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS

 

The Company entered into capital leases for the acquisition of promotional vehicles of $0.1 million and $1.0 million for the three-months ended March 31, 2018 and 2017, respectively.

 

Included in accrued liabilities as of March 31, 2018 and 2017 were $8.3 million and $6.2 million, respectively, related to additions to other intangible assets.

 

Included in accounts receivable as of March 31, 2018 were available-for-sale short-term investment sales of $11.5 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, 2017 (“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, 2018 and 2017, 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

 

Recently issued accounting pronouncements not yet adopted

 

In February 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2018-02 (ASU No. 2018-02), “Income Statement—Reporting Comprehensive Income (Topic 220)”, which amends the previous guidance to allow for certain tax effects “stranded” in accumulated other comprehensive income, which are impacted by the Tax Cuts and Jobs Act (the “Tax Reform Act”), to be reclassified from accumulated other comprehensive income into retained earnings. This amendment pertains only to those items impacted by the new tax law and will not apply to any future tax effects stranded in accumulated other comprehensive income. This standard is effective for fiscal years beginning after December 15, 2018, and allows for early adoption. The Company is currently evaluating the impact of ASU No. 2018-02 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 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.

 

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 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.

 

Recently adopted 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 was effective for the Company on a prospective basis beginning on January 1, 2018, with early adoption permitted. The adoption of ASU No. 2017-09 did not have a material impact on the Company’s 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 was effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of ASU No. 2017-01 did not have a material impact on the Company’s 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 recognizes the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU No. 2016-16 was effective for financial statements issued for annual periods beginning after December 15, 2017 and interim periods within those annual periods. The Company adopted ASU No. 2016-16 effective January 1, 2018 on a modified retrospective basis, resulting in a $6.6 million reclassification of the unrecognized income tax effects related to assets transfers that occurred prior to the adoption from deferred income taxes to opening retained earnings.

 

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. The guidance requires application using a retrospective transition method. The adoption of ASU No. 2016-15 did not have a material impact on the Company’s financial position, results of operations and liquidity.

 

9



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which superseded previous revenue recognition guidance. ASU No. 2014-09 and its amendments were included in Accounting Standards Codification (“ASC”) 606 “Revenue from Contracts with Customers”. ASC 606 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. The Company adopted ASC 606 effective January 1, 2018, using the modified retrospective approach, with no impact to the opening retained earnings. Results for periods beginning on or after January 1, 2018 are presented under ASC 606, while prior periods are not adjusted and continue to be reported in accordance with the prior accounting guidance under ASC 605 “Revenue Recognition”. See Note 3.

 

3.                                    REVENUE RECOGNITION

 

The Company currently 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 Hydro® 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 energy 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, drug stores, food service customers and the military.

 

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 and full service distributors and to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, food service customers, drug stores and the military. To a lesser extent, our Strategic Brands segment generates net operating revenues by selling certain ready-to-drink packaged energy drinks to bottlers and full service beverage distributors.

 

The majority of the Company’s revenue is recognized when it satisfies a single performance obligation by transferring control of its products to a customer. Control is generally transferred when the Company’s products are either shipped or delivered based on the terms contained within the underlying contracts or agreements.   Certain of the Company’s bottlers/distributors may also perform a separate function as a co-packer on the Company’s behalf. In such cases, control of the Company’s products passes to such bottlers/distributors when they notify the Company that they have taken possession or transferred the relevant portion of the Company’s finished goods. The Company’s general payment terms are short-term in duration. The Company does not have significant financing components or payment terms. The Company did not have any material unsatisfied performance obligations as of March 31, 2018 or December 31, 2017.

 

The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers.

 

Distribution expenses to transport the Company’s products, where applicable, and warehousing expense after manufacture are accounted for within operating expenses.

 

10



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

There were no changes to the Company’s accounting for variable consideration under ASC 606. Promotional and other allowances (variable consideration) recorded as a reduction to net sales, primarily include consideration given to the Company’s bottlers/distributors or retail customers including, but not limited to the following:

 

·

 

discounts granted off list prices to support price promotions to end-consumers by retailers;

·

 

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;

·

 

the Company’s agreed share of fees given to bottlers/distributors and/or directly to retailers for advertising, in-store marketing and promotional activities;

·

 

the Company’s agreed share of slotting, shelf space allowances and other fees given directly to retailers;

·

 

incentives given to the Company’s bottlers/distributors and/or retailers for achieving or exceeding certain predetermined sales goals;

·

 

discounted or free products;

·

 

contractual fees given to the Company’s bottlers/distributors related to sales made by the Company direct to certain customers that fall within the bottlers’/distributors’ sales territories; and

·

 

certain commissions paid based on sales to the Company’s bottlers/distributors.

 

The Company’s promotional allowance programs with its 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 Company’s promotional and other allowances are calculated based on various programs with bottlers/distributors and retail customers, and accruals are established during the year for its anticipated liabilities. These accruals are based on agreed upon terms as well as the Company’s historical experience with similar programs and require management’s judgment with respect to estimating consumer participation and/or distributor and retail customer performance levels. Differences between such estimated expense and actual expenses for promotional and other allowance costs have historically been insignificant and are recognized in earnings in the period such differences are determined.

 

Upon adoption of ASC 606, commissions paid to TCCC based on sales to certain of the Company’s bottlers/distributors who are (i) consolidated subsidiaries of TCCC (the “TCCC Subsidiaries”), (ii) accounted for under the equity method by TCCC (the “TCCC Related Parties”) and (iii) those not included in (i) or (ii) (the “TCCC Independent Bottlers”) are accounted for as follows:

 

 

 

Three-Months Ended March 31, 2018

Commissions Related To:

 

As Reported

 

Without Adoption of
ASC 606

TCCC Subsidiaries

 

Reduction to net sales

 

Reduction to net sales

TCCC Related Parties

 

Reduction to net sales

 

Operating expenes

TCCC Independent Bottlers

 

Operating expenses

 

Operating expenes

 

11



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The impact of the adoption of ASC 606 on the Company’s condensed consolidated statement of income for the three-months ended March 31, 2018 was as follows:

 

 

 

Three-Months Ended March 31, 2018

 

 

 

As Reported

 

Without Adoption
of ASC 606

 

(Decrease)
Increase due to
Adoption of ASC
606

 

Net Sales

 

$

850,921

 

$

860,861

 

$

(9,940)

1

Operating Expenses

 

$

235,342

 

$

245,282

 

$

(9,940)

1

 

1 TCCC Commissions based on sales to the TCCC Related Parties. There were no other identified changes to our revenue recognition policies as a result of the adoption of ASC 606.

 

Disaggregation of Revenue

 

The following table disaggregates the Company’s revenue by geographical markets and reportable segments:

 

 

 

Three-Months Ended March 31, 2018

 

Net Sales

 

U.S. and
Canada

 

EMEA1

 

Asia Pacific

 

Latin
America
and
Caribbean

 

Total

 

Monster Energy® Drinks

 

$

588,817

 

$

110,929

 

$

47,431

 

$

33,328

 

$

780,505

 

Strategic Brands

 

39,724

 

19,313

 

5,548

 

1,174

 

65,759

 

Other

 

4,657

 

-

 

-

 

-

 

4,657

 

Total Net Sales

 

$

633,198

 

$

130,242

 

$

52,979

 

$

34,502

 

$

850,921

 

 

1Europe, Middle East and Africa (“EMEA”)

 

Contract Liabilities

 

Amounts received from certain bottlers/distributors at inception of their distribution contracts or at the inception of certain sales/marketing programs are accounted for as deferred revenue. As of December 31, 2017, the Company had $377.6 million of deferred revenue, which is included in current and long-term deferred revenue in the Company’s condensed consolidated balance sheet. As of March 31, 2018, the Company had $372.6 million of deferred revenue, which is included in current and long-term deferred revenue in the Company’s condensed consolidated balance sheets. During the three-months ended March 31, 2018, $11.2 million of deferred revenue was recognized in net sales. See Note 10.

 

12



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

4.                                    INVESTMENTS

 

The following table summarizes the Company’s investments at:

 

March 31, 2018

 

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

 

   $

42,288

 

   $

-

 

   $

-

 

   $

42,288

 

   $

-

 

   $

-

 

Municipal securities

 

441,360

 

-

 

508

 

440,852

 

508

 

-

 

U.S. government agency securities

 

74,773

 

-

 

107

 

74,666

 

107

 

-

 

Variable rate demand notes

 

27,416

 

-

 

-

 

27,416

 

-

 

-

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

527

 

-

 

-

 

527

 

-

 

-

 

U.S. government agency securities

 

2,973

 

-

 

3

 

2,970

 

3

 

-

 

Total

 

   $

589,337

 

   $

-

 

   $

618

 

   $

588,719

 

   $

618

 

   $

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 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

 

   $

81,026

 

   $

-

 

   $

-

 

   $

81,026

 

   $

-

 

   $

-

 

Certificates of deposit

 

11,869

 

-

 

-

 

11,869

 

-

 

-

 

Municipal securities

 

469,604

 

1

 

740

 

468,865

 

740

 

-

 

U.S. government agency securities

 

61,307

 

-

 

88

 

61,219

 

88

 

-

 

Variable rate demand notes

 

49,954

 

-

 

-

 

49,954

 

-

 

-

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

2,369

 

-

 

3

 

2,366

 

3

 

-

 

Total

 

   $

676,129

 

   $

1

 

   $

831

 

   $

675,299

 

   $

831

 

   $

-

 

 

During the three-months ended March 31, 2018 and 2017, realized gains or losses recognized on the sale of investments were not significant.

 

The Company’s investments at March 31, 2018 and December 31, 2017 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.

 

13



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, 2018

 

December 31, 2017

 

 

 

 

 

 

 

 

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

 

Less than 1 year:

 

 

 

 

 

 

 

 

 

Commercial paper

 

  $

42,288

 

  $

42,288

 

  $

81,026

 

  $

81,026

 

Municipal securities

 

441,360

 

440,852

 

469,604

 

468,865

 

U.S. government agency securities

 

74,773

 

74,666

 

61,307

 

61,219

 

Certificates of deposit

 

-

 

-

 

11,869

 

11,869

 

Due 1 -10 years:

 

 

 

 

 

 

 

 

 

Municipal securities

 

527

 

527

 

-

 

-

 

U.S. government agency securities

 

2,973

 

2,970

 

2,369

 

2,366

 

Variable rate demand notes

 

6,622

 

6,622

 

6,366

 

6,366

 

Due 11 - 20 years:

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

18,542

 

18,542

 

28,377

 

28,377

 

Due 21 - 30 years:

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

2,252

 

2,252

 

15,211

 

15,211

 

Total

 

  $

589,337

 

  $

588,719

 

  $

676,129

 

  $

675,299

 

 

5.                                    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.

 

14



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The following tables present the 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, 2018

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

  $

394,221

 

$

-

 

$

-

 

$

394,221

 

Money market funds

 

39,228

 

-

 

-

 

39,228

 

Certificates of deposit

 

-

 

16,985

 

-

 

16,985

 

Commercial paper

 

-

 

60,825

 

-

 

60,825

 

Variable rate demand notes

 

-

 

27,416

 

-

 

27,416

 

Municipal securities

 

-

 

481,250

 

-

 

481,250

 

U.S. government agency securities

 

-

 

80,154

 

-

 

80,154

 

U.S. Treasuries

 

-

 

-

 

-

 

-

 

Foreign currency derivatives

 

-

 

(95

)

-

 

(95

)

Total

 

  $

433,449

 

$

666,535

 

$

-

 

$

1,099,984

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

  $

433,449

 

$

77,911

 

$

-

 

$

511,360

 

Short-term investments

 

-

 

585,222

 

-

 

585,222

 

Accounts receivable, net

 

-

 

208

 

-

 

208

 

Investments

 

-

 

3,497

 

-

 

3,497

 

Accrued liabilities

 

-

 

(303

)

-

 

(303

)

Total

 

  $

433,449

 

$

666,535

 

$

-

 

$

1,099,984

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

  $

310,885

 

$

-

 

$

-

 

$

310,885

 

Money market funds

 

112,848

 

-

 

-

 

112,848

 

Certificates of deposit

 

-

 

15,720

 

-

 

15,720

 

Commercial paper

 

-

 

99,903

 

-

 

99,903

 

Variable rate demand notes

 

-

 

49,954

 

-

 

49,954

 

Municipal securities

 

-

 

529,984

 

-

 

529,984

 

U.S. government agency securities

 

-

 

81,230

 

-

 

81,230

 

U.S. Treasuries

 

-

 

3,397

 

-

 

3,397

 

Foreign currency derivatives

 

-

 

(1,484

)

-

 

(1,484

)

Total

 

  $

423,733

 

$

778,704

 

$

-

 

$

1,202,437

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

  $

423,733

 

$

104,889

 

$

-

 

$

528,622

 

Short-term investments

 

-

 

672,933

 

-

 

672,933

 

Accounts receivable, net

 

-

 

95

 

-

 

95

 

Investments

 

-

 

2,366

 

-

 

2,366

 

Accrued liabilities

 

-

 

(1,579

)

-

 

(1,579

)

Total

 

  $

423,733

 

$

778,704

 

$

-

 

$

1,202,437

 

 

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, U.S. Treasuries 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, 2018 or the year ended December 31, 2017, and there were no changes in the Company’s valuation techniques.

 

15



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

6.                                    DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The Company is exposed to foreign currency exchange rate risks related primarily to its foreign business operations. During the three-months ended March 31, 2018 and the year ended December 31, 2017, 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, 2018 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 income (expense), net, in the condensed consolidated statements of income, and are largely offset by the changes in the fair value of the underlying economically hedged item.

 

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

 

March 31, 2018

 

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

 

Notional
Amount

 

Fair
Value

 

Balance Sheet Location

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

 

Receive USD/pay GBP

 

  $

33,290

 

  $

139

 

Accounts receivable, net

 

Receive USD/pay ZAR

 

20,255

 

65

 

Accounts receivable, net

 

Receive NOK/pay USD

 

1,746

 

4

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

 

Receive USD/pay EUR

 

  $

76,452

 

  $

(85)

 

Accrued liabilities

 

Receive USD/pay AUD

 

16,909

 

(73)

 

Accrued liabilities

 

Receive USD/pay MXN

 

3,337

 

(29)

 

Accrued liabilities

 

Receive SGD/pay USD

 

3,296

 

(15)

 

Accrued liabilities

 

Receive USD/pay NZD

 

2,237

 

(4)

 

Accrued liabilities

 

Receive USD/pay TRY

 

5,435

 

(83)

 

Accrued liabilities

 

Receive USD/pay BRL

 

717

 

(8)

 

Accrued liabilities

 

Receive USD/pay CLP

 

2,545

 

(3)

 

Accrued liabilities

 

Receive USD/pay COP

 

3,286

 

(3)

 

Accrued liabilities

 

 

16



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, 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

 

  $

4,892

 

  $

61

 

Accounts receivable, net

 

Receive SGD/pay USD

 

223

 

2

 

Accounts receivable, net

 

Receive NOK/pay USD

 

1,534

 

18

 

Accounts receivable, net

 

Receive USD/pay BRL

 

1,806

 

1

 

Accounts receivable, net

 

Receive USD/pay COP

 

2,803

 

13

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

 

Receive USD/pay GBP

 

  $

31,342

 

  $

(334)

 

Accrued liabilities

 

Receive USD/pay EUR

 

65,131

 

(642)

 

Accrued liabilities

 

Receive USD/pay AUD

 

17,238

 

(177)

 

Accrued liabilities

 

Receive USD/pay ZAR

 

21,311

 

(222)

 

Accrued liabilities

 

Receive USD/pay MXN

 

7,720

 

(126)

 

Accrued liabilities

 

Receive USD/pay NZD

 

1,826

 

(18)

 

Accrued liabilities

 

Receive USD/pay TRY

 

5,483

 

(52)

 

Accrued liabilities

 

Receive USD/pay CLP

 

1,112

 

(8)

 

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

 

March 31,
2018

 

March 31,
2017

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

Interest and other income, net

 

  $

(4,659)

 

  $

(5,028)

 

17



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

7.                                    INVENTORIES

 

Inventories consist of the following at:

 

 

 

March 31,
2018

 

December 31,
2017

 

Raw materials

 

  $

84,594

 

  $

78,834

 

Finished goods

 

184,013

 

176,911

 

 

 

  $

268,607

 

  $

255,745

 

 

8.                                    PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following at:

 

 

 

March 31,
2018

 

December 31,
2017

 

Land

 

  $

44,260

 

  $

47,373

 

Leasehold improvements

 

3,281

 

3,109

 

Furniture and fixtures

 

6,397

 

6,461

 

Office and computer equipment

 

15,191

 

14,506

 

Computer software

 

3,593

 

3,650

 

Equipment

 

156,626

 

148,434

 

Buildings

 

110,978

 

107,374

 

Vehicles

 

39,522

 

38,179

 

 

 

379,848

 

369,086

 

Less: accumulated depreciation and amortization

 

(148,649)

 

(138,810)

 

 

 

  $

231,199

 

  $

230,276

 

 

Total depreciation and amortization expense recorded was $10.9 million and $8.2 million for the three-months ended March 31, 2018 and 2017, respectively.

 

9.                                    GOODWILL AND OTHER INTANGIBLE ASSETS

 

The following is a roll-forward of goodwill for the three-months ended March 31, 2018 and 2017 by reportable segment:

 

 

 

Monster
Energy®
Drinks

 

Strategic
Brands

 

Other

 

Total

 

Balance at December 31, 2017

 

$

693,644

 

$

637,999

 

$

-

 

$

1,331,643

 

Acquisitions

 

-

 

-

 

-

 

-

 

Balance at March 31, 2018

 

$

693,644

 

$

637,999

 

$

-

 

$

1,331,643

 

 

18



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

 

Monster
Energy®
Drinks

 

Strategic
Brands

 

Other

 

Total

 

Balance at December 31, 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,
2018

 

December 31,
2017

 

Amortizing intangibles

 

$

71,350

 

$

71,400

 

Accumulated amortization

 

(29,425)

 

(26,383)

 

 

 

41,925

 

45,017

 

Non-amortizing intangibles

 

994,736

 

989,068

 

 

 

$

1,036,661

 

$

1,034,085

 

 

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 $3.1 million and $3.0 million for the three-months ended March 31, 2018 and 2017, respectively.

 

10.                            DISTRIBUTION AGREEMENTS

 

In accordance with ASC No. 420 “Exit or Disposal Cost Obligations”, the Company expenses distributor termination costs in the period in which the written notification of termination occurs. The Company incurred termination costs of $7.0 million and $19.9 million for the three-months ended March 31, 2018 and 2017, respectively. Such termination costs have been expensed in full and are included in operating expenses for the three-months ended March 31, 2018 and 2017.

 

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 $11.2 million and $10.0 million for the three-months ended March 31, 2018 and 2017, respectively.

 

11.                            COMMITMENTS AND CONTINGENCIES

 

The Company had purchase commitments aggregating approximately $56.5 million at March 31, 2018, 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 $170.2 million at March 31, 2018, which related primarily to sponsorships and other marketing activities.

 

19



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 operating lease commitments aggregating approximately $16.4 million at March 31, 2018, which related primarily to warehouse and office space.

 

In February 2018, the working capital line limit for the Company’s credit facility with HSBC Bank (China) Company Limited, Shanghai Branch was increased from $9.0 million to $15.0 million. Interest on borrowings under the line of credit is based on the People’s Bank of China benchmark lending rates multiplied by 1.10. As of March 31, 2018, the Company had $10.6 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. As there has been no activity on this matter for the past eight months, the Company intends to remove it from future reports.

 

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, 2018, the Company’s condensed consolidated balance sheet includes accrued loss contingencies of approximately $1.6 million.

 

20



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

12.                            ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Changes in accumulated other comprehensive loss by component, after tax, for the three-months ended March 31, 2018 are as follows:

 

 

 

Currency
Translation
Losses

 

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

 

Total

 

Balance at December 31, 2017

 

$

15,818

 

$

841

 

$

16,659

 

Other comprehensive loss (gain) before reclassifications

 

(2,723)

 

(215)

 

(2,938)

 

Amounts reclassified from accumulated other comprehensive loss (gain)

 

-

 

-

 

-

 

Net current-period other comprehensive loss (gain)

 

(2,723)

 

(215)

 

(2,938)

 

Balance at March 31, 2018

 

$

13,095

 

$

626

 

$

13,721

 

 

 

 

 

 

 

 

 

 

13.                            TREASURY STOCK

 

On February 28, 2017, the Company’s Board of Directors authorized a share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock (the “February 2017 Repurchase Plan”). During the three-months ended March 31, 2018, the Company purchased 4.3 million shares of common stock at an average purchase price of $57.74 per share, for a total amount of $249.9 million (excluding broker commissions), under the February 2017 Repurchase Plan, which exhausted the availability under the February 2017 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying condensed consolidated balance sheet at March 31, 2018.

 

On February 27, 2018, the Company’s Board of Directors authorized a new share repurchase program for the purchase of up to $250.0 million of the Company’s outstanding common stock (the “February 2018 Repurchase Plan”). As of May 10, 2018, no shares have been repurchased pursuant to the February 2018 Repurchase Plan.

 

During the three-months ended March 31, 2018, 34,303 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 $2.0 million. While such purchases are considered common stock repurchases, they are not counted as purchases against the Company’s authorized share repurchase programs. Such shares are included in common stock in treasury in the accompanying condensed consolidated balance sheet at March 31, 2018.

 

14.                            STOCK-BASED COMPENSATION

 

The Company has two stock-based compensation plans under which shares were available for grant at March 31, 2018: the Monster Beverage Corporation 2011 Omnibus Incentive Plan (the “2011 Omnibus Incentive Plan”), including the Monster Beverage Deferred Compensation Plan (the “Deferred Compensation Plan”) as a sub plan thereunder, and the Monster Beverage Corporation 2017 Compensation Plan for Non-Employee Directors (the “2017 Directors Plan”), including the Monster Beverage Deferred Compensation Plan for Non-Employee Directors (the “Non-Employee Director Deferral Plan”) as a sub plan thereunder.

 

The Company recorded $13.4 million and $13.1 million of compensation expense relating to outstanding options and restricted stock units during the three-months ended March 31, 2018 and 2017, respectively.

 

21



Table of Contents

 

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 and vesting of restricted stock units for the three-months ended March 31, 2018 and 2017 was $2.8 million and $9.4 million, respectively.

 

Stock Options

 

Under the Company’s stock-based compensation plans, all stock options granted as of March 31, 2018 were granted at prices based on the fair value of the Company’s common stock on the date of grant. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes-Merton option pricing formula with the assumptions included in the table below. The Company records compensation expense for non-employee stock options based on the estimated fair value of the options as of the earlier of (1) the date at which a commitment for performance by the non-employee to earn the stock option is reached or (2) the date at which the non-employee’s performance is complete, using the Black-Scholes-Merton option pricing formula with the assumptions included in the table below. The Company uses historical data to determine the exercise behavior, volatility and forfeiture rate of the options.

 

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

 

 

 

Three-Months Ended March 31,

 

 

 

2018

 

2017

 

Dividend yield

 

0.0%

 

0.0%

 

Expected volatility

 

34.9%

 

36.6%

 

Risk-free interest rate

 

2.8%

 

2.1%

 

Expected term

 

6.0 years

 

6.1 years

 

 

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

 

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

 

Expected Term: The Company’s expected term represents the weighted-average period that the Company’s stock options are expected to be outstanding. The expected term is based on 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.

 

22



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 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, 2018

 

17,819

 

$

29.62

 

6.1

 

$

600,032

 

Granted 01/01/18 - 03/31/18

 

2,615

 

$

58.76

 

 

 

 

 

Exercised

 

(415)

 

$

15.68

 

 

 

 

 

Cancelled or forfeited

 

(192)

 

$

43.02

 

 

 

 

 

Outstanding at March 31, 2018

 

19,827

 

$

33.62

 

6.4

 

$

472,160

 

Vested and expected to vest in the

 

 

 

 

 

 

 

 

 

future at March 31, 2018

 

18,689

 

$

32.62

 

6.3

 

$

463,173

 

Exercisable at March 31, 2018

 

10,834

 

$

21.99

 

4.7

 

$

381,567

 

 

The weighted-average grant-date fair value of options granted during the three-months ended March 31, 2018 and 2017 was $22.82 per share and $18.00 per share, respectively. The total intrinsic value of options exercised during the three-months ended March 31, 2018 and 2017 was $18.2 million and $32.4 million, respectively.

 

Cash received from option exercises under all plans for the three-months ended March 31, 2018 and 2017 was approximately $6.5 million and $13.6 million, respectively.

 

At March 31, 2018, there was $125.3 million of total unrecognized compensation expense related to non-vested options granted to employees under the Company’s share-based payment plans. That cost is expected to be recognized over a weighted-average period of 3.2 years.

 

Restricted Stock Units

 

The cost of stock-based compensation for 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.

 

23



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 Company’s activities with respect to non-vested restricted stock units as follows:

 

 

 

Number of
Shares (in
thousands)

 

Weighted
Average
Grant-Date
Fair Value

 

Non-vested at January 1, 2018

 

530

 

$

45.09

 

Granted 01/01/18- 03/31/18

 

221

 

$

58.75

 

Vested

 

(255)

 

$

45.62

 

Forfeited/cancelled

 

(6)

 

$

32.17

 

Non-vested at March 31, 2018

 

490

 

$

51.15

 

 

The weighted-average grant-date fair value of restricted stock units granted during the three-months ended March 31, 2018 and 2017 was $58.75 per share and $46.27 per share, respectively. As of March 31, 2018, 0.5 million of restricted stock units are expected to vest over their respective terms.

 

At March 31, 2018, total unrecognized compensation expense relating to non-vested restricted stock units was $23.1 million, which is expected to be recognized over a weighted-average period of 2.1 years.

 

15.                            INCOME TAXES

 

On December 22, 2017, the President of the United States signed into law the Tax Reform Act.  The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. A company may select between one of three scenarios to determine a reasonable estimate for certain income tax effects arising from the Tax Reform Act. Those scenarios are (i) a final estimate which effectively closes the measurement window; (ii) a reasonable estimate leaving the measurement window open for future revisions; and (iii) no estimate as the law is still being analyzed. The Company was able to provide a reasonable estimate for the revaluation of deferred taxes and the effects of the toll charge on undistributed foreign subsidiary earnings and profits (“E&P”). As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its net deferred tax assets at December 31, 2017, resulting in a provisional $39.8 million charge included in the provision for income taxes for the year ended December 31, 2017. The Tax Reform Act also provided for a one-time deemed mandatory repatriation of Post-1986 E&P through the year ended December 31, 2017.  As a result, the Company recognized a provisional $2.1 million charge in the provision for income taxes for the year ended December 31, 2017 related to such deemed mandatory repatriation.

 

The Company has not made additional measurement window adjustments to these items during the three-months ended March 31, 2018. The Company continues to evaluate the various provisions of Tax Reform Act, including, the global intangible low-taxed income (“GILTI”) and the foreign derived intangible income (“FDII”) provisions. The ultimate impact of the Tax Reform Act may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, as well as any related actions the Company may take. The measurement window begins in the reporting period that includes the enactment date and ends when an entity has obtained, prepared, and analyzed the information needed in order to complete the accounting requirements under ASC Topic 740.

 

24



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 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, 2018:

 

 

 

Gross Unrecognized Tax
Benefits

 

Balance at December 31, 2017

 

  $

6,540

 

Additions for tax positions related to the current year

 

-

 

Additions for tax positions related to the prior year

 

-

 

Decreases related to settlement with taxing authority

 

-

 

Balance at March 31, 2018

 

  $

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 March 31, 2018, the Company had approximately $1.4 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.

 

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

 

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 2014 through 2017 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 2013 through 2017 tax years.

 

16.                            EARNINGS PER SHARE

 

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

 

 

 

Three-Months Ended

 

 

 

March 31,

 

 

 

2018

 

2017

 

Weighted-average shares outstanding:

 

 

 

 

 

Basic

 

566,000

 

571,578

 

Dilutive

 

8,129

 

10,454

 

Diluted

 

574,129

 

582,032

 

 

25



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

For the three-months ended March 31, 2018 and 2017, options and awards outstanding totaling 0.7 million shares and 8.0 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.

 

17.                            SEGMENT INFORMATION

 

The Company currently has three operating and reportable segments, (i) Monster Energy® Drinks segment, which is comprised of the Company’s Monster Energy® drinks, Monster Hydro® energy drinks and Mutant® Super Soda drinks, (ii) Strategic Brands segment, which is comprised of the various energy drink brands acquired from TCCC in 2015, and (iii) Other segment, 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 primarily 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.

 

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 certain 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.

 

26



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The net revenues derived from the Company’s reportable segments and other financial information related thereto for the three-months ended March 31, 2018 and 2017 are as follows:

 

 

 

Three-Months Ended

 

 

March 31,

 

 

2018

 

2017

Net sales:

 

 

 

 

Monster Energy® Drinks(¹)

 

   $

780,505

 

   $

668,571

Strategic Brands

 

65,759

 

68,036

Other

 

4,657

 

5,539

Corporate and unallocated

 

-

 

-

 

 

   $

850,921

 

   $

742,146

 

 

 

Three-Months Ended

 

 

March 31,

 

 

2018

 

2017

Operating Income:

 

 

 

 

Monster Energy® Drinks(¹) (²)

 

   $

301,702

 

   $

279,431

Strategic Brands

 

42,602

 

42,106

Other

 

971

 

1,416

Corporate and unallocated

 

(65,360)

 

(58,691)

 

 

   $

279,915

 

   $

264,262

 

 

 

 

Three-Months Ended

 

 

March 31,

 

 

2018

 

2017

Income before tax:

 

 

 

 

Monster Energy® Drinks(¹) (²)

 

   $

301,964

 

   $

279,335

Strategic Brands

 

42,583

 

42,094

Other

 

971

 

1,416

Corporate and unallocated

 

(63,798)

 

(57,925)

 

 

   $

281,720

 

   $

264,920

 

(1)          Includes $11.2 million and $10.0 million for the three-months ended March 31, 2018 and 2017, respectively, related to the recognition of deferred revenue.

 

(2)          Includes $7.0 million and $19.9 million for the three-months ended March 31, 2018 and 2017, respectively, related to distributor termination costs.

 

27



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

 

Three-Months Ended

 

 

March 31,

 

 

2018

 

2017

Depreciation and amortization:

 

 

 

 

Monster Energy® Drinks

 

   $

8,809

 

   $

6,541

Strategic Brands

 

1,926

 

1,796

Other

 

1,159

 

1,153

Corporate and unallocated

 

2,097

 

1,693

 

 

   $

13,991

 

   $

11,183

 

Corporate and unallocated expenses for the three-months ended March 31, 2018 include $43.1 million of payroll costs, of which $13.4 million was attributable to stock-based compensation expenses (see Note 14, “Stock-Based Compensation”), as well as $12.4 million attributable to professional service expenses, including accounting and legal costs, and $9.9 million of other operating expenses. 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 14, “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.

 

TCCC, through the TCCC Subsidiaries, accounted for approximately 4% and 34% of the Company’s net sales for the three-months ended March 31, 2018 and 2017, 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 TCCC bottlers/distributors and/or TCCC Related Parties. Accordingly, the Company’s percentage of net sales classified as sales to the TCCC Subsidiaries significantly decreased for three-months ended March 31, 2018.  CCBCC Operations, LLC accounted for approximately 14% and 11% of the Company’s net sales for the three-months ended March 31, 2018 and 2017, respectively.  Coca-Cola European Partners accounted for approximately 10% and 8% of the Company’s net sales for the three-months ended March 31, 2018 and 2017, respectively. Reyes Coca-Cola Bottling  accounted for approximately 13% and 4% of the Company’s net sales for the three-months ended March 31, 2018 and 2017, respectively.

 

Net sales to customers outside the United States amounted to $242.1 million and $190.9 million for the three-months ended March 31, 2018 and 2017, respectively.

 

28



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Goodwill and other intangible assets for the Company’s reportable segments as of March 31, 2018 and December 31, 2017 are as follows:

 

 

 

March 31,

 

December 31,

 

 

2018

 

2017

Goodwill and other intangible assets:

 

 

 

 

Monster Energy® Drinks

 

   $

1,351,780

 

   $

1,346,648

Strategic Brands

 

994,161

 

995,582

Other

 

22,363

 

23,498

Corporate and unallocated

 

-

 

-

 

 

   $

2,368,304

 

   $

2,365,728

 

18.                            RELATED PARTY TRANSACTIONS

 

TCCC controls approximately 18% of the voting interests of the Company.  The TCCC Subsidiaries, the TCCC Related Parties and the TCCC Independent Bottlers, purchase and distribute certain of the Company’s products in certain domestic and international markets. The Company also pays TCCC a commission based on certain sales within the TCCC distribution network.

 

TCCC commissions, based on sales to the TCCC Subsidiaries and the TCCC Related Parties, for the three-months ended March 31, 2018 were $11.3 million, and are included as a reduction to net sales. TCCC commissions, based on sales to the TCCC Independent Bottlers for the three-months ended March 31, 2018 were $3.1 million, and are included in operating expenses. TCCC commissions, based on sales to the TCCC Subsidiaries, for the three-months ended March 31, 2017 were $3.6 million, and are included as a reduction to net sales. TCCC commissions, based on sales to the TCCC Related Parties and the TCCC Independent Bottlers, for the three-months ended March 31, 2017 were $7.9 million and are included in operating expenses. Upon adoption of ASC 606, commissions paid to TCCC, based on sales to the TCCC Related Parties, are included as a reduction to net sales. Prior to January 1, 2018, such commissions, based on sales to the TCCC Related Parties, were included in operating expenses.

 

Net sales to the TCCC Subsidiaries for the three-months ended March 31, 2018 and 2017 were $35.0 million and $255.8 million, respectively.  As part of the North America Refranchising, the territories of certain TCCC Subsidiaries have been transitioned to certain independent TCCC bottlers/distributors and/or TCCC Related Parties. Accordingly, the Company’s net sales classified as sales to the TCCC Subsidiaries significantly decreased for the three-months ended March 31, 2018.

 

The Company also purchases concentrates from TCCC which are then sold to certain of the Company’s bottlers/distributors. Concentrate purchases from TCCC were $2.9 million and $5.9 million for the three-months ended March 31, 2018 and 2017, respectively.

 

Certain TCCC Subsidiaries also contract manufacture certain of the Company’s Monster Energy® brand energy drinks. Contract manufacturing expenses were $5.4 million and $2.2 million for the three-months ended March 31, 2018 and 2017, respectively.

 

29



Table of Contents

 

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:

 

 

 

March 31,
2018

 

December 31, 2017

 

 

 

 

 

 

 

Accounts receivable, net

 

   $

29,044

 

   $

32,607

 

Accounts payable

 

   $

(25,221)

 

   $

(45,465)

 

Accrued promotional allowances

 

   $

(7,479)

 

   $

(5,884)

 

 

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, 2018 and 2017 were $0.8 million and $0.2 million, respectively.

 

30



Table of Contents

 

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.

 

Overview

 

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

 

·    Monster Energy®

·    NOS®

·    Monster Energy Ultra®

·    Full Throttle®

·    Monster Rehab®

·    Burn®

·    Monster MAXXTM

·    Mother®

·    Java Monster®

·    Nalu®

·    Muscle Monster®

·    Ultra Energy®

·    Espresso MonsterTM

·    Play® and Power Play(stylized)®

·    Punch Monster®

·    Relentless®

·    Juice Monster®

·    BPM®

·    Übermonster®

·    BU®

·    Monster Hydro®

·    Gladiator®

·    Caffé Monster®

·    Samurai®

·    Mutant® Super Soda

 

 

Our Monster Energy® brand energy drinks represented 91.6% and 90.1% of our net sales for the three-months ended March 31, 2018 and 2017, respectively.

 

We currently 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 Hydro® 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 and Flavors LLC (a wholly-owned subsidiary of the Company) to independent third-party customers (the “AFF Third-Party Products”).

 

31



Table of Contents

 

During the three-months ended March 31, 2018, we continued to expand our existing energy drink portfolio and further develop our distribution markets. During the three-months ended March 31, 2018, we introduced the following product:

 

·                 Monster Cuba Libre (March 2018) (Japan)

·                 Monster Rehab® White Dragon Tea (February 2018)

·                 Monster Hydro® Blue Ice (February 2018)

·                 Monster Hydro® Purple Passion (February 2018)

·                 Monster Hydro® Zero Sugar (February 2018)

·                 Caffé Monster® Mocha (January 2018)

·                 Caffé Monster® Vanilla (January 2018)

·                 Caffé Monster® Salted Caramel (January 2018)

 

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, 2018, 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 $850.9 million for the three-months ended March 31, 2018 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 $779.2 million for the three-months ended March 31, 2018.  Net sales of our Strategic Brands were $65.8 million for the three-months ended March 31, 2018. Net sales for the three-months ended March 31, 2018 were negatively impacted by approximately $9.9 million as a result of the adoption of Accounting Standards Codification (“ASC”) 606. Under ASC 606, commissions paid to TCCC, based on sales to certain of the Company’s TCCC bottlers/distributors, which TCCC accounts for under the equity method (the “TCCC Related Parties”), or consolidates, are included as a reduction to net sales. Prior to January 1, 2018, commissions based on sales to the TCCC Related Parties, were included in operating expenses.

 

Our Monster Energy® Drinks segment represented 91.7% and 90.1% of our consolidated net sales for the three-months ended March 31, 2018 and 2017, respectively. Our Strategic Brands segment represented 7.7% and 9.2% of our consolidated net sales for the three-months ended March 31, 2018 and 2017, respectively. Our Other segment represented 0.5% and 0.7% of our consolidated net sales for the three-months ended March 31, 2018 and 2017, respectively.

 

Net changes in foreign currency exchange rates had a favorable impact on net sales in the Monster Energy® Drinks segment of approximately $15.4 million for the three-months ended March 31, 2018. Net changes in foreign currency exchange rates had a favorable impact on net sales in the Strategic Brands segment of approximately $2.3 million for the three-months ended March 31, 2018.

 

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 continue to reevaluate from time to time.

 

32



Table of Contents

 

Our growth strategy includes expanding our international business. Net sales to customers outside the United States amounted to $242.1 million and $190.9 million for the three-months ended March 31, 2018 and 2017, respectively. Such sales were approximately 28% and 26% of net sales for the three-months ended March 31, 2018 and 2017, respectively. Net changes in foreign currency exchange rates had a favorable impact on net sales to customers outside the United States of approximately $17.7 million for the three-months ended March 31, 2018.

 

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, 2018 and 2017 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,

 

 

2018

 

2017

U.S. full service bottlers/distributors

 

62%

 

64%

International full service bottlers/distributors

 

30%

 

27%

Club stores and mass merchandisers

 

6%

 

7%

Retail grocery, specialty chains and wholesalers

 

1%

 

1%

Other

 

1%

 

1%

 

Our customers include Coca-Cola Refreshments USA, Inc., Coca-Cola Refreshments Canada Company, Coca-Cola Bottling Company, CCBCC Operations, LLC, United Bottling Contracts Company, LLC, Reyes Coca-Cola Bottling, Great Lakes Coca-Cola Bottling, Coca-Cola Southwest Beverages LLC, Coca-Cola of Northern New England, Swire Coca-Cola, USA, Liberty Coca-Cola Beverages, 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, Coca-Cola Beverages Africa, Coca-Cola İçecek and certain other TCCC network bottlers; Asahi Soft Drinks, Co., Ltd., Kalil Bottling Group, Wal-Mart, Inc. (including Sam’s Club), Costco Wholesale Corporation, Big Geyser, Inc. and select Anheuser-Busch distributors.  TCCC, through certain consolidated subsidiaries (the “TCCC Subsidiaries”), accounted for approximately 4% and 34% of our net sales for the three-months ended March 31, 2018 and 2017, 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 TCCC bottlers/distributors and/or TCCC Related Parties. Accordingly, our percentage of net sales classified as sales to the TCCC Subsidiaries significantly decreased for the three-months ended March 31, 2018. CCBCC Operations, LLC accounted for approximately 14% and 11% of our net sales for the three-months ended March 31, 2018 and 2017, respectively.  Coca-Cola European Partners accounted for approximately 10% and 8% of the Company’s net sales for the three-months ended March 31, 2018 and 2017, respectively. Reyes Coca-Cola Bottling, accounted for approximately 13% and 4% of the Company’s net sales for the three-months ended March 31, 2018 and 2017, 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.

 

33



Table of Contents

 

Results of Operations

 

The following table sets forth key statistics for the three-months ended March 31, 2018 and 2017.

 

(In thousands, except per share amounts)

 

Three-Months Ended
March 31,

 

Percentage
Change

 

 

 

2018

 

2017

 

18 vs. 17

 

Net sales1

 

  $

850,921

 

  $

742,146

 

14.7%

 

Cost of sales

 

335,664

 

261,272

 

28.5%

 

Gross profit*1

 

515,257

 

480,874

 

7.2%

 

 

 

 

 

 

 

 

 

Gross profit as a percentage of net sales1

 

60.6%

 

64.8%

 

 

 

 

 

 

 

 

 

 

 

Operating expenses2

 

235,342

 

216,612

 

8.6%

 

 

 

 

 

 

 

 

 

Operating expenses as a percentage of net sales

 

27.7%

 

29.2%

 

 

 

 

 

 

 

 

 

 

 

Operating income1,2

 

279,915

 

264,262

 

5.9%

 

Operating income as a percentage of net sales

 

32.9%

 

35.6%

 

 

 

 

 

 

 

 

 

 

 

Interest and other income, net

 

1,805

 

658

 

174.3%

 

 

 

 

 

 

 

 

 

Income before provision for income taxes1,2

 

281,720

 

264,920

 

6.3%

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

65,670

 

86,940

 

(24.5%)

 

 

 

 

 

 

 

 

 

Income taxes as a percentage of income before taxes

 

23.3%

 

32.8%

 

 

 

 

 

 

 

 

 

 

 

Net income1,2

 

  $

216,050

 

  $

177,980

 

21.4%

 

Net income as a percentage of net sales

 

25.4%

 

24.0%