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, 2019

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes    No __

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Emerging growth company ¨

 

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. ¨

 

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

 

Yes ___    No  X

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock

 

MNST

 

Nasdaq Global Select Market

 

The registrant had 543,576,196 shares of common stock, par value $0.005 per share, outstanding as of April 17, 2019.

 


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

MARCH 31, 2019

 

 

INDEX

 

 

Part I.

FINANCIAL INFORMATION

Page No.

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

3

 

 

 

 

Condensed Consolidated Statements of Income for the Three-Months Ended March 31, 2019 and 2018

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three-Months Ended March 31, 2019 and 2018

5

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three-Months Ended March 31, 2019 and 2018

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three-Months Ended March 31, 2019 and 2018

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

Item 2.

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

34

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

48

 

 

 

Item 4.

Controls and Procedures

48

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

48

 

 

 

Item 1A.

Risk Factors

48

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

 

 

 

Item 3.

Defaults Upon Senior Securities

49

 

 

 

Item 4.

Mine Safety Disclosures

49

 

 

 

Item 5.

Other Information

49

 

 

 

Item 6.

Exhibits

49

 

 

 

 

Signatures

50

 

2


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PART I – FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2019 AND DECEMBER 31, 2018

(In Thousands, Except Par Value) (Unaudited)

 

 

 

March 31,
2019

 

December 31,
2018

ASSETS

 

 

 

 

CURRENT ASSETS:

 

 

 

 

Cash and cash equivalents

 

  $

618,344

 

  $

637,513

Short-term investments

 

263,697

 

320,650

Accounts receivable, net

 

596,661

 

484,562

Inventories

 

300,780

 

277,705

Prepaid expenses and other current assets

 

63,685

 

44,909

Prepaid income taxes

 

64,133

 

38,831

Total current assets

 

1,907,300

 

1,804,170

 

 

 

 

 

PROPERTY AND EQUIPMENT, net

 

241,232

 

243,051

DEFERRED INCOME TAXES

 

85,215

 

85,687

GOODWILL

 

1,331,643

 

1,331,643

OTHER INTANGIBLE ASSETS, net

 

1,042,839

 

1,045,878

OTHER ASSETS

 

47,622

 

16,462

Total Assets

 

  $

4,655,851

 

  $

4,526,891

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

Accounts payable

 

  $

267,735

 

  $

248,760

Accrued liabilities

 

117,350

 

112,507

Accrued promotional allowances

 

167,700

 

145,741

Accrued distributor terminations

 

10,272

 

-

Deferred revenue

 

43,591

 

44,045

Accrued compensation

 

18,211

 

39,903

Income taxes payable

 

6,113

 

10,189

Total current liabilities

 

630,972

 

601,145

 

 

 

 

 

DEFERRED REVENUE

 

303,241

 

312,224

 

 

 

 

 

OTHER LIABILITIES

 

22,818

 

2,621

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 12)

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

Common stock - $0.005 par value; 1,250,000 shares authorized; 634,841 shares issued and 543,547 shares outstanding as of March 31, 2019; 630,970 shares issued and 543,676 shares outstanding as of December 31, 2018

 

3,174

 

3,155

Additional paid-in capital

 

4,288,638

 

4,238,170

Retained earnings

 

4,176,130

 

3,914,645

Accumulated other comprehensive loss

 

(34,125)

 

(32,864)

Common stock in treasury, at cost; 91,294 shares and 87,294 shares as of March 31, 2019 and December 31, 2018, respectively

 

(4,734,997)

 

(4,512,205)

Total stockholders’ equity

 

3,698,820

 

3,610,901

Total Liabilities and Stockholders’ Equity

 

  $

4,655,851

 

  $

4,526,891

 

See accompanying notes to condensed consolidated financial statements.

 

3


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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE-MONTHS ENDED MARCH 31, 2019 AND 2018

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

 

 

 

 

Three-Months Ended

 

 

March 31,

 

 

2019

 

2018

 

 

 

 

 

NET SALES

 

  $

945,991

 

  $

850,921

 

 

 

 

 

COST OF SALES

 

372,459

 

335,664

 

 

 

 

 

GROSS PROFIT

 

573,532

 

515,257

 

 

 

 

 

OPERATING EXPENSES

 

262,071

 

235,342

 

 

 

 

 

OPERATING INCOME

 

311,461

 

279,915

 

 

 

 

 

INTEREST and OTHER INCOME, net

 

2,742

 

1,805

 

 

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

314,203

 

281,720

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

52,718

 

65,670

 

 

 

 

 

NET INCOME

 

  $

261,485

 

  $

216,050

 

 

 

 

 

NET INCOME PER COMMON SHARE:

 

 

 

 

Basic

 

  $

0.48

 

  $

0.38

Diluted

 

  $

0.48

 

  $

0.38

 

 

 

 

 

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

 

 

 

 

Basic

 

542,768

 

566,000

Diluted

 

548,273

 

574,129

 

See accompanying notes to condensed consolidated financial statements.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE-MONTHS ENDED MARCH 31, 2019 AND 2018

(In Thousands) (Unaudited)

 

 

 

 

Three-Months Ended
March 31,

 

 

 

2019

 

2018

 

Net income, as reported

 

  $

261,485

 

  $

216,050

 

Other comprehensive income:

 

 

 

 

 

Change in foreign currency translation adjustment

 

(1,381)

 

2,723

 

Available-for-sale investments:

 

 

 

 

 

Change in net unrealized gains

 

120

 

215

 

Reclassification adjustment for net gains included in net income

 

-

 

-

 

Net change in available-for-sale investments

 

120

 

215

 

Other comprehensive (loss) income

 

(1,261)

 

2,938

 

Comprehensive income

 

  $

260,224

 

  $

218,988

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE-MONTHS ENDED MARCH 31, 2019 AND 2018 (In Thousands) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Total

 

 

 

Common stock

 

Additional

 

Retained

 

Comprehensive

 

Treasury stock

 

Stockholders’

 

 

 

Shares

 

Amount

 

Paid-in Capital

 

Earnings

 

Loss

 

Shares

 

Amount

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018

 

630,970

 

  $

3,155

 

  $

4,238,170

 

  $

3,914,645

 

  $

(32,864)

 

(87,294)

 

  $

(4,512,205)

 

  $

3,610,901

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

-

 

-

 

15,324

 

-

 

-

 

-

 

-

 

15,324

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

3,871

 

19

 

35,144

 

-

 

-

 

-

 

-

 

35,163

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on available-for-sale securities

 

-

 

-

 

-

 

-

 

120

 

-

 

-

 

120

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock

 

-

 

-

 

-

 

-

 

-

 

(4,000)

 

(222,792)

 

(222,792)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

-

 

-

 

-

 

-

 

(1,381)

 

-

 

-

 

(1,381)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

-

 

-

 

-

 

261,485

 

-

 

-

 

-

 

261,485

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2019

 

634,841

 

  $

3,174

 

  $

4,288,638

 

  $

4,176,130

 

  $

(34,125)

 

(91,294)

 

  $

(4,734,997)

 

  $

3,698,820

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Total

 

 

 

Common stock

 

Additional

 

Retained

 

Comprehensive

 

Treasury stock

 

Stockholders’

 

 

 

Shares

 

Amount

 

Paid-in Capital

 

Earnings

 

Loss

 

Shares

 

Amount

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

629,255

 

  $

3,146

 

  $

4,150,628

 

  $

2,928,226

 

  $

(16,659)

 

(62,957)

 

  $

(3,170,129)

 

  $

3,895,212

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

-

 

-

 

13,439

 

-

 

-

 

-

 

-

 

13,439

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

669

 

4

 

6,498

 

-

 

-

 

-

 

-

 

6,502

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on available-for-sale securities

 

-

 

-

 

-

 

-

 

215

 

-

 

-

 

215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASU No. 2016-16 adoption

 

-

 

-

 

-

 

(6,585)

 

-

 

-

 

-

 

(6,585)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock

 

-

 

-

 

-

 

-

 

-

 

(4,362)

 

(251,949)

 

(251,949)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

-

 

-

 

-

 

-

 

2,723

 

-

 

-

 

2,723

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

-

 

-

 

-

 

216,050

 

-

 

-

 

-

 

216,050

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2018

 

629,924

 

  $

3,150

 

  $

4,170,565

 

  $

3,137,691

 

  $

(13,721)

 

(67,319)

 

  $

(3,422,078)

 

  $

3,875,607

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE-MONTHS ENDED MARCH 31, 2019 AND 2018

(In Thousands) (Unaudited)

 

 

 

Three-Months Ended
March 31,

 

 

2019

 

2018

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

Net income

 

  $

261,485

 

  $

216,050

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

 

 

 

 

Depreciation and amortization

 

14,870

 

13,991

Gain on disposal of property and equipment

 

(115)

 

(187)

Stock-based compensation

 

15,324

 

13,439

Deferred income taxes

 

472

 

-

Effect on cash of changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

(116,426)

 

(72,699)

Distributor receivables

 

2,923

 

3,279

Inventories

 

(24,004)

 

(11,274)

Prepaid expenses and other current assets

 

(21,492)

 

(19,646)

Prepaid income taxes

 

(25,224)

 

52,410

Accounts payable

 

18,565

 

(22,616)

Accrued liabilities

 

(2,262)

 

(14,985)

Accrued promotional allowances

 

23,103

 

15,971

Accrued distributor terminations

 

10,272

 

71

Accrued compensation

 

(21,832)

 

(18,350)

Income taxes payable

 

(4,125)

 

(1,059)

Other liabilities

 

1,338

 

1,108

Deferred revenue

 

(9,476)

 

(6,592)

Net cash provided by operating activities

 

123,396

 

148,911

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

Sales of available-for-sale investments

 

232,387

 

334,216

Purchases of available-for-sale investments

 

(175,314)

 

(247,421)

Purchases of property and equipment

 

(8,485)

 

(13,049)

Proceeds from sale of property and equipment

 

184

 

3,397

Decrease in intangibles

 

298

 

280

Increase in other assets

 

(2,291)

 

(1,549)

Net cash provided by investing activities

 

46,779

 

75,874

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

Principal payments on debt

 

(393)

 

(543)

Issuance of common stock

 

35,163

 

6,501

Purchases of common stock held in treasury

 

(222,792)

 

(251,950)

Net cash used in financing activities

 

(188,022)

 

(245,992)

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(1,322)

 

3,945

 

 

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(19,169)

 

(17,262)

CASH AND CASH EQUIVALENTS, beginning of period

 

637,513

 

528,622

CASH AND CASH EQUIVALENTS, end of period

 

  $

618,344

 

  $

511,360

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

 

  $

15

 

  $

16

Income taxes

 

  $

82,002

 

  $

15,223

 

See accompanying notes to condensed consolidated financial statements.

 

7


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE-MONTHS ENDED MARCH 31, 2019 AND 2018

(In Thousands) (Unaudited) (Continued)

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS

 

Included in accrued liabilities as of March 31, 2019 and 2018 were $12.3 million and $8.3 million, respectively, related to additions to other intangible assets.

 

See accompanying notes to condensed consolidated financial statements.

 

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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, 2018 (“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, 2019 and 2018, 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 August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15, “Intangibles–Goodwill and Other–Internal–Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.” ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU No. 2018-15 is effective for the Company on a prospective or retrospective basis beginning on January 1, 2020, with early adoption permitted. The Company is currently evaluating the impact of ASU No. 2018-15 on its financial position, results of operations and liquidity.

 

In August 2018, the FASB issued ASU No. 2018-14, “Compensation–Retirement Benefits–Defined Benefit Plans–General (Topic 715): Disclosure Framework–Changes to the Disclosure Requirements for Defined Benefit Plans.” ASU No. 2018-14 removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and requires certain additional disclosures. ASU No. 2018-14 is effective for the Company on a retrospective basis beginning in the year ending December 31, 2020, with early adoption permitted. The Company is currently evaluating the impact of ASU No. 2018-14 on its financial position, results of operations and liquidity.

 

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” ASU No. 2018-13 removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

measurement uncertainty and adds new disclosure requirements. ASU No. 2018-13 disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU No. 2018-13 is effective for the Company beginning on January 1, 2020, with early adoption permitted. Certain disclosures in the new guidance will need to be applied on a retrospective basis and others on a prospective basis. The Company is currently evaluating the impact of ASU No. 2018-13 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 and results of operations.

 

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. The Company is currently evaluating the impact of ASU No. 2016-13 on its financial position, results of operations and liquidity.

 

Recently adopted accounting pronouncements

 

In February 2018, the FASB issued ASU No. 2018-02 (ASU No. 2018-02), “Income Statement - Reporting Comprehensive Income (Topic 220)”, which amended the previous guidance to allow for certain tax effects “stranded” in accumulated other comprehensive income, which are impacted by the Tax Reform Act signed into law on December 22, 2017, 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 does not apply to any future tax effects stranded in accumulated other comprehensive income. This standard was effective for fiscal years beginning after December 15, 2018, and allowed for early adoption. The adoption of ASU No. 2018-02 did not have an impact on the Company’s financial position, results of operations and liquidity.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. This update requires the recognition of lease assets and lease liabilities on the balance sheet for leases classified as operating leases under previous guidance. The accounting for finance leases (capital leases) was substantially unchanged. The original guidance required application on a modified retrospective basis with adjustments to the earliest comparative period presented. In August 2018, the FASB issued ASU No. 2018-11, “Targeted Improvements to ASC 842,” which included an option to not restate comparative periods in transition and elect to use the effective date of ASU No. 2016-02 as the date of initial application, which the Company elected. As a result, the consolidated balance sheet prior to January 1, 2019 was not restated, and continues to be reported under previous guidance that did not require the recognition of operating lease liabilities and corresponding lease assets on the consolidated balance sheet. As a result of the adoption of ASU No. 2016-02 on January 1, 2019, the Company recorded operating lease right-of-use assets of $26.3 million and operating lease liabilities of $22.6 million. The adoption of ASU No. 2016-02 had an immaterial impact on the Company’s condensed consolidated statement of income and condensed consolidated statement of cash flows for the three-month period ended March 31, 2019. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to carry forward the historical lease classification, not reassess prior conclusions related to expired or existing contracts that are or that contain leases, and not reassess the accounting for initial direct costs. Additional information and disclosures required by ASU No. 2016-02 are contained in Note 4.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

3.                                    REVENUE RECOGNITION

 

The Company has three operating and reportable segments, (i) Monster Energy® Drinks segment (“Monster Energy® Drinks”), which is primarily comprised of the Company’s Monster Energy® drinks and Reign Total Body FuelTM high performance energy drinks, (ii) Strategic Brands segment (“Strategic Brands”), which is comprised primarily of the various energy drink brands acquired from The Coca-Cola Company (“TCCC”) in 2015 as well as the Company’s affordable energy brands, 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”).

 

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, foodservice 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, foodservice 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, 2019 or December 31, 2018.

 

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.

 

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;

 

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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 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 directly by the Company to certain customers that fall within the bottlers’/distributors’ sales territories; and

·     commissions paid to TCCC based on the Company’s sales to certain wholly-owned subsidiaries of TCCC (the “TCCC Subsidiaries”) and/or to certain companies accounted for by TCCC under the equity method (“the TCCC Related Parties”).

 

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 expenses 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.

 

Amounts received pursuant to new and/or amended distribution agreements entered into with certain distributors relating to the costs associated with terminating the Company’s prior distributors, are accounted for as revenue ratably over the anticipated life of the respective distribution agreements, generally over 20 years.

 

The Company also enters into license agreements that generate revenues associated with third-party sales of non-beverage products bearing the Company’s trademarks including, but not limited to, clothing, hats, t-shirts, jackets, helmets and automotive wheels.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Disaggregation of Revenue

 

The following tables disaggregate the Company’s revenue by geographical markets and reportable segments:

 

 

 

Three-Months Ended March 31, 2019

 

Net Sales

 

U.S. and
Canada

 

EMEA1

 

Asia Pacific

 

Latin
America
and
Caribbean

 

Total

 

Monster Energy® Drinks

 

$

642,826

 

$

124,637

 

$

62,456

 

$

40,465

 

$

870,384

 

Strategic Brands

 

41,750

 

21,908

 

6,225

 

403

 

70,286

 

Other

 

5,321

 

-

 

-

 

-

 

5,321

 

Total Net Sales

 

$

689,897

 

$

146,545

 

$

68,681

 

$

40,868

 

$

945,991

 

 

 

 

 

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 March 31, 2019, the Company had $346.8 million of deferred revenue, which is included in current and long-term deferred revenue in the Company’s condensed consolidated balance sheet. As of December 31, 2018, the Company had $356.3 million of deferred revenue, which is included in current and long-term deferred revenue in the Company’s condensed consolidated balance sheet. During the three-months ended March 31, 2019 and 2018, $14.2 million and $11.2 million, respectively, of deferred revenue was recognized in net sales. See Note 11.

 

4.                                    LEASES

 

The Company leases identified assets comprising real estate and equipment.  Real estate leases consist primarily of office and warehouse space and equipment leases consist of vehicles and warehouse equipment. At the inception of a contract, the Company assesses whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether the Company obtains the right to substantially all the economic benefit from the use of the asset throughout the term, and (3) whether the Company has the right to direct the use of the asset. At inception of a lease, the Company allocates the consideration in the contract to each lease and non-lease component based on the component’s relative stand-alone price to determine the lease payments. Lease and non-lease components are accounted for separately.

 

Leases are classified as either finance leases or operating leases based on criteria in Accounting Standards Codification (“ASC”) 842. The Company’s operating leases are generally comprised of real estate and warehouse equipment, and the Company’s finance leases are generally comprised of vehicles. Operating leases are included in Other Assets, Accrued Liabilities and Other Liabilities in the condensed consolidated balance sheet. Finance leases are included in Property and Equipment and Accrued Liabilities in the condensed consolidated balance sheet.

 

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Right-of-use (“ROU”) assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As the Company’s leases generally do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date if the implicit rate cannot be determined. ROU assets also include any lease payments made and exclude lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

 

Certain of the Company’s real estate leases contain variable lease payments, including payments based on an index or rate. Variable lease payments based on an index or rate are initially measured using the index or rate in effect at the lease commencement date. Additional payments based on the change in an index or rate, or payments based on a change in the Company’s portion of the operating expenses, including real estate taxes and insurance, are recorded as a period expense when incurred.

 

Lease expense for operating leases, consisting of lease payments, is recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability. Lease expense for finance leases consists of the amortization of the ROU asset on a straight-line basis over the asset’s estimated useful life and interest expense calculated using the amortized cost basis.

 

The Company’s leases have remaining lease terms of less than one year to 15 years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within one year.  The Company has elected not to recognize ROU assets and lease liabilities for short-term operating leases that have a term of 12 months or less. The effect of short-term leases on the Company’s ROU assets and lease liabilities was not material.

 

The components of lease cost for the three-months ended March 31, 2019 was as follows:

 

Operating leases:

 

 

Lease cost

 

  $

1,115

Variable Lease cost

 

165

Operating Lease cost

 

1,280

 

 

 

Short term Lease cost

 

1,082

 

 

 

Finance Leases:

 

 

Amortization of ROU assets

 

80

Interest on finance Lease liabilities

 

15

Finance Lease cost

 

95

 

 

 

Total Lease cost

 

  $

2,457

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Supplemental cash flow information for leases for the three-months ended March 31, 2019 was as follows:

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

Operating cash flows from operating leases

 

  $

889

Operating cash flows from finance leases

 

15

Financing cash flows from finance leases

 

393

 

 

 

Right-of-use assets obtained in exchange for lease obligations:

 

 

Finance leases

 

415

Operating leases

 

26,429

 

ROU assets for operating and finance leases at March 31, 2019 were comprised of the following:

 

 

 

Real Estate

 

Equipment

 

Total

Operating leases

 

  $

25,072

 

  $

509

 

  $

25,581

Finance leases

 

-

 

1,646

 

1,646

 

 

The weighted-average remaining lease term and weighted-average discount rate for operating and finance leases at March 31, 2019 was as follows:

 

 

 

Operating Leases

 

Finance Leases

Weighted-average remaining least term (years)

 

10.7

 

0.7

Weighted-average discount rate

 

3.6%

 

6.2%

 

The following table reconciles the undiscounted future lease payments for operating and finance leases to the operating and finance leases recorded in the condensed consolidated balance sheet at March 31, 2019:

 

 

 

Undiscounted Future Lease Payments

 

 

Operating Leases

 

Finance Leases

2019 (excluding the three months ended March 31, 2019)

 

  $

2,847

 

  $

814

2020

 

3,187

 

64

2021

 

2,586

 

-

2022

 

2,187

 

-

2023

 

1,733

 

-

2024 and thereafter

 

14,572

 

-

Total lease payments

 

27,112

 

878

Less interest

 

(5,001)

 

(18)

Total

 

  $

22,111

 

  $

860

 

 

 

 

 

Accrued liabilities

 

  $

3,028

 

  $

860

Other liabilities

 

19,083

 

-

 

As of March 31, 2019, the Company did not have any significant additional operating or finance leases that have not yet commenced.

 

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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 future minimum operating lease commitments, as of December 31, 2018, under ASC 840, the predecessor to ASC 842, were as follows:

 

Year Ending December 31:

 

 

 

 

 

 

 

2019

 

  $

3,954

2020

 

2,949

2021

 

2,410

2022

 

2,114

2023

 

1,681

2024 and thereafter

 

14,860

 

 

  $

27,968

 

Rent expense under operating leases was $6.1 million for the year ended December 31, 2018.

 

The Company’s capital lease commitments of $0.8 million as of December 31, 2018, collateralized by vehicles, is payable over 12 months in monthly installments at various effective interest rates, with final payments ending on or before December 31, 2019.

 

Interest expense for capital lease obligations amounted to $0.06 million for the year ended December 31, 2018.

 

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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.                                    INVESTMENTS

 

The following table summarizes the Company’s investments at:

 

March 31, 2019

 

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

 

  $

38,964

 

  $

-

 

  $

-

 

  $

38,964

 

  $

-

 

  $

-

 

Certificates of deposit

 

5,024

 

-

 

-

 

5,024

 

-

 

-

 

Municipal securities

 

103,664

 

30

 

4

 

103,690

 

4

 

-

 

U.S. government agency securities

 

19,940

 

7

 

2

 

19,945

 

2

 

-

 

U.S. treasuries

 

89,267

 

13

 

12

 

89,268

 

12

 

-

 

Variable rate demand notes

 

6,806

 

-

 

-

 

6,806

 

-

 

-

 

Total

 

  $

263,665

 

  $

50

 

  $

18

 

  $

263,697

 

  $

18

 

  $

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 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

 

  $

52,838

 

  $

-

 

  $

-

 

  $

52,838

 

  $

-

 

  $

-

 

Certificates of deposit

 

14,075

 

-

 

-

 

14,075

 

-

 

-

 

Municipal securities

 

151,690

 

16

 

62

 

151,644

 

62

 

-

 

U.S. government agency securities

 

19,943

 

-

 

12

 

19,931

 

12

 

-

 

U.S. treasuries

 

78,189

 

-

 

32

 

78,157

 

32

 

-

 

Variable rate demand notes

 

4,005

 

-

 

-

 

4,005

 

-

 

-

 

Total

 

  $

320,740

 

  $

16

 

  $

106

 

  $

320,650

 

  $

106

 

  $

-

 

 

During the three-months ended March 31, 2019 and 2018, realized gains or losses recognized on the sale of investments were not significant.

 

The Company’s investments at March 31, 2019 and December 31, 2018 in commercial paper, certificates of deposit, municipal securities, U.S. government agency securities, U.S. treasuries 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:

 

 

 

March 31, 2019

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

 

Less than 1 year:

 

 

 

 

 

 

 

 

 

Commercial paper

 

  $

38,964

 

  $

38,964

 

  $

52,838

 

  $

52,838

 

Municipal securities

 

103,664

 

103,690

 

151,690

 

151,644

 

U.S. government agency securities

 

19,940

 

19,945

 

19,943

 

19,931

 

Certificates of deposit

 

5,024

 

5,024

 

14,075

 

14,075

 

U.S. treasuries

 

89,267

 

89,268

 

78,189

 

78,157

 

Due 21 - 30 years:

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

5,805

 

5,805

 

4,005

 

4,005

 

Due 31 - 40 years:

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

1,001

 

1,001

 

-

 

-

 

Total

 

  $

263,665

 

  $

263,697

 

  $

320,740

 

  $

320,650

 

 

6.                                    FAIR VALUE OF CERTAIN FINANCIAL ASSETS AND LIABILITIES

 

ASC 820 provides a framework for measuring fair value and requires disclosures regarding fair value measurements. ASC 820 defines fair value as the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available. The three levels of inputs required by the standard that the Company uses to measure fair value are summarized below.

 

·                 Level 1: Quoted prices in active markets for identical assets or liabilities.

 

·                 Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

 

·                 Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

ASC 820 requires the use of observable market inputs (quoted market prices) when measuring fair value and requires a Level 1 quoted price to be used to measure fair value whenever possible.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The following tables present the fair value of the Company’s financial assets and liabilities that are recorded at fair value on a recurring basis, segregated among the appropriate levels within the fair value hierarchy at:

 

March 31, 2019

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

  $

444,489

 

$

-

 

$

-

 

$

444,489

 

Money market funds

 

79,611

 

-

 

-

 

79,611

 

Certificates of deposit

 

-

 

21,929

 

-

 

21,929

 

Commercial paper

 

-

 

63,920

 

-

 

63,920

 

Variable rate demand notes

 

-

 

6,806

 

-

 

6,806

 

Municipal securities

 

-

 

117,521

 

-

 

117,521

 

U.S. government agency securities

 

-

 

50,505

 

-

 

50,505

 

U.S. treasuries

 

-

 

97,260

 

-

 

97,260

 

Foreign currency derivatives

 

-

 

(133

)

-

 

(133

)

Total

 

  $

524,100

 

$

357,808

 

$

-

 

$

881,908

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

 Cash and cash equivalents

 

  $

524,100

 

$

94,244

 

$

-

 

$

618,344

 

 Short-term investments

 

-

 

263,697

 

-

 

263,697

 

 Accounts receivable, net

 

-

 

181

 

-

 

181

 

 Accrued liabilities

 

-

 

(314

)

-

 

(314

)

Total

 

  $

524,100

 

$

357,808

 

$

-

 

$

881,908

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

  $

393,936

 

$

-

 

$

-

 

$

393,936

 

Money market funds

 

191,358

 

-

 

-

 

191,358

 

Certificates of deposit

 

-

 

14,075

 

-

 

14,075

 

Commercial paper

 

-

 

60,422

 

-

 

60,422

 

Variable rate demand notes

 

-

 

4,005

 

-

 

4,005

 

Municipal securities

 

-

 

177,118

 

-

 

177,118

 

U.S. government agency securities

 

-

 

39,092

 

-

 

39,092

 

U.S. treasuries

 

-

 

78,157

 

-

 

78,157

 

Foreign currency derivatives

 

-

 

(492

)

-

 

(492

)

Total

 

  $

585,294

 

$

372,377

 

$

-

 

$

957,671

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

 Cash and cash equivalents

 

  $

585,294

 

$

52,219

 

$

-

 

$

637,513

 

 Short-term investments

 

-

 

320,650

 

-

 

320,650

 

 Accounts receivable, net

 

-

 

43

 

-

 

43

 

 Accrued liabilities

 

-

 

(535

)

-

 

(535

)

Total

 

  $

585,294

 

$

372,377

 

$

-

 

$

957,671

 

 

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, 2019 or the year-ended December 31, 2018, and there were no changes in the Company’s valuation techniques.

 

19


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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

7.                                    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, 2019 and the year-ended December 31, 2018, 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, 2019 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, 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, 2019

 

Derivatives not designated as
hedging instruments under
ASC 815-20

 

Notional
Amount

 

Fair
Value

 

Balance Sheet Location

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

 

Receive USD/pay GBP

 

  $

43,540

 

  $

176

 

Accounts receivable, net

 

Receive USD/pay COP

 

3,445

 

5

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

 

Receive USD/pay ZAR

 

  $

12,030

 

  $

(138)

 

Accrued liabilities

 

Receive USD/pay AUD

 

16,025

 

(99)

 

Accrued liabilities

 

Receive EUR/pay USD

 

25,470

 

(61)

 

Accrued liabilities

 

Receive SGD/pay USD

 

9,389

 

(12)

 

Accrued liabilities

 

Receive USD/pay NZD

 

2,106

 

(4)

 

Accrued liabilities

 

 

20


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, 2018

 

Derivatives not designated as
hedging instruments under
ASC 815-20

 

Notional
Amount

 

Fair
Value

 

Balance Sheet Location

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

 

Receive SGD/pay USD

 

  $

8,341

 

  $

30

 

Accounts receivable, net

 

Receive NOK/pay USD

 

902

 

13

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

 

Receive USD/pay GBP

 

  $

40,648

 

  $

(323)

 

Accrued liabilities

 

Receive USD/pay AUD

 

15,124

 

(105)

 

Accrued liabilities

 

Receive USD/pay ZAR

 

8,618

 

(68)

 

Accrued liabilities

 

Receive USD/pay COP

 

2,931

 

(33)

 

Accrued liabilities

 

Receive USD/pay NZD

 

2,952

 

(4)

 

Accrued liabilities

 

Receive USD/pay EUR

 

6,894

 

(2)

 

Accrued liabilities

 

 

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

 

 

 

 

 

Amount of loss
recognized in income on
derivatives

 

 

 

 

Three-months ended

Derivatives not designated as
hedging instruments under
ASC 815-20

 

Location of loss
recognized in income on
derivatives

 

March 31,
2019

 

March 31,
2018

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

Interest and other income, net

 

  $

1,087

 

  $

4,659

 

8.                                    INVENTORIES

 

Inventories consist of the following at:

 

 

 

March 31,
2019

 

December 31,
2018

 

Raw materials

 

  $

109,938

 

  $

94,421

 

Finished goods

 

190,842

 

183,284

 

 

 

  $

300,780

 

  $

277,705

 

 

21


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

9.                                    PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following at:

 

 

 

March 31,
2019

 

December 31,
2018

 

Land

 

  $

44,261

 

  $

44,261

 

Leasehold improvements

 

6,648

 

5,909

 

Furniture and fixtures

 

7,314

 

6,932

 

Office and computer equipment

 

19,568

 

18,717

 

Computer software

 

3,171

 

3,278

 

Equipment

 

188,426

 

183,727

 

Buildings

 

116,496

 

115,242

 

Vehicles

 

39,683

 

39,026

 

 

 

425,567

 

417,092

 

Less: accumulated depreciation and amortization

 

(184,335)

 

(174,041)

 

 

 

  $

241,232

 

  $

243,051

 

 

Total depreciation and amortization expense recorded was $12.0 million and $10.9 million for the three-months ended March 31, 2019 and 2018, respectively.

 

10.                            GOODWILL AND OTHER INTANGIBLE ASSETS

 

The following is a roll-forward of goodwill for the three-months ended March 31, 2019 and 2018 by reportable segment:

 

 

 

 

Monster
Energy®
Drinks

 

Strategic
Brands

 

Other

 

Total

 

Balance at December 31, 2018

 

$

693,644

 

$

637,999

 

$

-

 

$

1,331,643

 

Acquisitions

 

-

 

-

 

-

 

-

 

Balance at March 31, 2019

 

$

693,644

 

$

637,999

 

$

-

 

$

1,331,643

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

22


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Intangible assets consist of the following at:

 

 

 

March 31,
2019

 

December 31, 2018

 

Amortizing intangibles

 

  $

66,870

 

  $

71,350

 

Accumulated amortization

 

(40,377)

 

(38,311)

 

 

 

26,493

 

33,039

 

Non-amortizing intangibles

 

1,016,346

 

1,012,839

 

 

 

  $

1,042,839

 

  $

1,045,878

 

 

Amortizing intangibles primarily consist of customer relationships. All amortizing intangibles have been assigned an estimated finite useful life and such intangibles are amortized on a straight-line basis over the number of years that approximate their respective useful lives, generally five to seven years. Total amortization expense recorded was $2.9 million and $3.1 million for the three-months ended March 31, 2019 and 2018, respectively.

 

11.                            DISTRIBUTION AGREEMENTS

 

In accordance with ASC 420, the Company expenses distributor termination costs in the period in which the written notification of termination occurs. The Company incurred termination costs of $10.7 million and $7.0 million for the three-months ended March 31, 2019 and 2018, respectively.

 

In the normal course of business, amounts received pursuant to new and/or amended distribution agreements entered into with certain distributors, relating to the costs associated with terminating agreements with the Company’s prior distributors, are accounted for as deferred revenue and are recognized as revenue ratably over the anticipated life of the respective distribution agreement, generally 20 years. Revenue recognized was $14.2 million and $11.2 million for the three-months ended March 31, 2019 and 2018, respectively.

 

During the three-months ended March 31, 2019, the Company agreed to the assignment of Kalil Bottling Group’s distribution territories to TCCC network bottlers. The Company incurred no distributor termination costs and received no deferred revenue in connection with this assignment. As of April 6, 2019, with the transition of Big Geyser Inc.’s distribution territory to TCCC network bottlers, all distribution territories in the U.S. have been transitioned to TCCC network bottlers.

 

12.                            COMMITMENTS AND CONTINGENCIES

 

The Company had purchase commitments aggregating approximately $37.0 million at March 31, 2019, 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 $178.4 million at March 31, 2019, which related primarily to sponsorships and other marketing activities.

 

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. At March 31, 2019, the interest rate on borrowings under the line of credit was 5.5%. As of March 31, 2019, the Company had $9.8 million outstanding on this line of credit, including interest, which is included in accounts payable in the condensed consolidated balance sheet.

 

23


 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Legal Proceedings

 

Litigation — The Company, certain affiliates of the Company and TCCC are parties to various agreements setting forth, among other things, provisions relating to TCCC’s 18.8% equity holding in the Company and the terms on which the Company’s energy drink products are distributed globally by members of TCCC’s distribution network.  Among other provisions, the agreements restrict TCCC from competing in the energy drink category, with certain exceptions including an exception relating to the Coca-Cola brand.

 

TCCC has developed three energy drink products that it believes it may market under the exception relating to the Coca-Cola brand. The Company believes that the exception does not apply. By mutual agreement, the issue was submitted to AAA arbitration on October 31, 2018 for a determination of whether TCCC is permitted to manufacture, market, sell or distribute these products. The matter has since proceeded to a hearing before the arbitrators. Due to the nature of the relief sought, no reasonably possible range of losses, if any, can be estimated.

 

The Company is currently a defendant in a number of 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.

 

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 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, 2019, the Company’s condensed consolidated balance sheet includes accrued loss contingencies of approximately $0.02 million.

 

24


 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

13.                            ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Changes in accumulated other comprehensive loss by component, after tax, for the three-months ended March 31, 2019 and 2018 are as follows:

 

 

 

Currency
Translation
Losses

 

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

 

Total

 

Balance at December 31, 2018

 

$

32,775

 

$

89

 

$

32,864

 

Other comprehensive loss (income) before reclassifications

 

1,381

 

(120)

 

1,261

 

Amounts reclassified from accumulated other comprehensive loss (income)

 

-

 

-

 

-

 

Net current-period other comprehensive loss (income)

 

1,381

 

(120)

 

1,261

 

Balance at March 31, 2019

 

$

34,156

 

$

(31)

 

$

34,125

 

 

 

 

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 (income) before reclassifications

 

(2,723)

 

(215)

 

(2,938)

 

Amounts reclassified from accumulated other comprehensive loss (income)

 

-

 

-

 

-

 

Net current-period other comprehensive loss (income)

 

(2,723)

 

(215)

 

(2,938)

 

Balance at March 31, 2018

 

$

13,095

 

$

626

 

$

13,721

 

 

14.                            TREASURY STOCK

 

On August 7, 2018, 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 “August 2018 Repurchase Plan”). During the three-months ended March 31, 2019, the Company purchased 2.6 million shares of common stock at an average purchase price of $54.18 per share, for a total amount of $139.0 million (excluding broker commissions), under the August 2018 Repurchase Plan. Such shares are included in the common stock in treasury in the accompanying condensed consolidated balance sheet at March 31, 2019. As of May 3, 2019, $20.6 million remained available for repurchase under the August 2018 Repurchase Plan.

 

On February 26, 2019, the Company’s Board of Directors authorized a new share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock (the “February 2019 Repurchase Plan”). During the three-months ended March 31, 2019, no shares were repurchased under the February 2019 Repurchase Plan.

 

As of May 3, 2019, the aggregate amount available under such authorizations to repurchase the Company’s common stock was $520.6 million.

 

During the three-months ended March 31, 2019, 1.4 million 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 $83.8 million. While such purchases are considered common stock repurchases, they are not counted as purchases against our authorized share repurchase programs. Such shares are included in common stock in treasury in the accompanying condensed consolidated balance sheet at March 31, 2019.

 

25


 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

15.                            STOCK-BASED COMPENSATION

 

The Company has two stock-based compensation plans under which shares were available for grant at March 31, 2019: the Monster Beverage Corporation 2011 Omnibus Incentive Plan, including the Monster Beverage Deferred Compensation Plan as a sub plan thereunder, and the Monster Beverage Corporation 2017 Compensation Plan for Non-Employee Directors, including the Monster Beverage Deferred Compensation Plan for Non-Employee Directors as a sub plan thereunder.

 

The Company recorded $15.3 million and $13.4 million of compensation expense relating to outstanding options and restricted stock units during the three-months ended March 31, 2019 and 2018, respectively.

 

The 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, 2019 and 2018 was $22.4 million and $2.8 million, respectively.

 

Stock Options

 

Under the Company’s stock-based compensation plans, all stock options granted as of March 31, 2019 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 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 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,

 

 

 

 

 

 

 

2019

 

2018

 

 

 

 

 

Dividend yield

 

0.0%

 

0.0%

 

 

 

 

 

Expected volatility

 

30.2%

 

34.9%

 

 

 

 

 

Risk-free interest rate

 

2.4%

 

2.8%

 

 

 

 

 

Expected term

 

6.0 years

 

6.0 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 the 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.

 

26


 

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, 2019

 

18,890

 

$

34.61

 

5.8

 

$

303,627

 

Granted 01/01/19 - 03/31/19

 

1,570

 

$

59.52

 

 

 

 

 

Exercised

 

(3,627)

 

$

9.69

 

 

 

 

 

Cancelled or forfeited

 

(158)

 

$

50.86

 

 

 

 

 

Outstanding at March 31, 2019

 

16,675

 

$

42.23

 

6.9

 

$

224,846

 

Vested and expected to vest in the

 

 

 

 

 

 

 

 

 

future at March 31, 2019

 

15,564

 

$

41.40

 

6.8

 

$

221,040

 

Exercisable at March 31, 2019

 

8,680

 

$

33.49

 

5.6

 

$

184,608

 

 

The weighted-average grant-date fair value of options granted during the three-months ended March 31, 2019 and 2018 was $20.30 per share and $22.82 per share, respectively. The total intrinsic value of options exercised during the three-months ended March 31, 2019 and 2018 was $178.5 million and $18.2 million, respectively.

 

Cash received from option exercises under all plans for the three-months ended March 31, 2019 and 2018 was $35.2 million and $6.5 million, respectively.

 

At March 31, 2019, there was $112.8 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 2.9 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.

 

27


 

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)