Monster Beverage Corp - Quarter Report: 2016 September (Form 10-Q)
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 September 30, 2016 |
Commission File Number 001-18761 |
MONSTER BEVERAGE CORPORATION
(Exact name of Registrant as specified in its charter)
|
Delaware |
47-1809393 |
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(State or other jurisdiction of |
(I.R.S. Employer |
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incorporation or organization) |
Identification No.) |
1 Monster Way
Corona, California 92879
(Address of principal executive offices) (Zip code)
(951) 739 6200
(Registrants 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 X 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 |
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Accelerated filer ¨ |
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Non-accelerated filer ¨ (Do not check if smaller reporting company) |
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Smaller reporting company ¨ |
Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes ___ No X
The Registrant had 190,324,886 shares of common stock, par value $0.005 per share, outstanding as of October 20, 2016.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 2016
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Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2016 AND DECEMBER 31, 2015
(In Thousands, Except Par Value) (Unaudited)
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September 30, |
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December 31, | ||
ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
341,526 |
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$ |
2,175,417 |
Short-term investments |
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257,653 |
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744,610 | ||
Accounts receivable, net |
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467,348 |
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352,955 | ||
TCCC Transaction receivable |
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125,000 |
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125,000 | ||
Inventories |
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167,840 |
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156,121 | ||
Prepaid expenses and other current assets |
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35,016 |
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26,967 | ||
Prepaid income taxes |
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155,641 |
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18,462 | ||
Total current assets |
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1,550,024 |
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3,599,532 | ||
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INVESTMENTS |
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9,519 |
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15,348 | ||
PROPERTY AND EQUIPMENT, net |
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144,625 |
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97,354 | ||
DEFERRED INCOME TAXES |
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142,116 |
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140,468 | ||
GOODWILL |
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1,283,643 |
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1,279,715 | ||
OTHER INTANGIBLE ASSETS, net |
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1,080,813 |
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427,986 | ||
OTHER ASSETS |
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25,691 |
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10,874 | ||
Total Assets |
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$ |
4,236,431 |
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$ |
5,571,277 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
172,159 |
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$ |
144,763 |
Accrued liabilities |
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91,819 |
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81,786 | ||
Accrued promotional allowances |
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140,952 |
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115,530 | ||
Accrued distributor terminations |
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5,650 |
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11,018 | ||
Deferred revenue |
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34,407 |
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32,271 | ||
Accrued compensation |
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21,820 |
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22,159 | ||
Income taxes payable |
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5,835 |
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2,750 | ||
Total current liabilities |
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472,642 |
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410,277 | ||
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DEFERRED REVENUE |
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365,389 |
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351,590 | ||
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COMMITMENTS AND CONTINGENCIES (Note 11) |
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STOCKHOLDERS EQUITY: |
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Common stock - $0.005 par value; 240,000 shares authorized; |
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1,037 |
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1,035 | ||
Additional paid-in capital |
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4,036,204 |
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3,991,857 | ||
Retained earnings |
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1,934,601 |
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1,394,863 | ||
Accumulated other comprehensive loss |
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(14,534) |
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(21,878) | ||
Common stock in treasury, at cost; 16,958 shares and 4,119 shares as of September 30, 2016 and December 31, 2015, respectively |
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(2,558,908) |
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(556,467) | ||
Total stockholders equity |
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3,398,400 |
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4,809,410 | ||
Total Liabilities and Stockholders Equity |
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$ |
4,236,431 |
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$ |
5,571,277 |
See accompanying notes to condensed consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE- AND NINE-MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
(In Thousands, Except Per Share Amounts) (Unaudited)
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Three-Months Ended |
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Nine-Months Ended |
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September 30, |
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September 30, |
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2016 |
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2015 |
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2016 |
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2015 |
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NET SALES |
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$ |
787,954 |
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$ |
756,619 |
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$ |
2,295,628 |
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$ |
2,077,131 |
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COST OF SALES |
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284,979 |
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291,143 |
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851,741 |
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848,191 |
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GROSS PROFIT |
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502,975 |
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465,476 |
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1,443,887 |
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1,228,940 |
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OPERATING EXPENSES |
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212,600 |
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174,038 |
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610,277 |
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725,205 |
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GAIN ON SALE OF MONSTER NON-ENERGY |
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- |
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- |
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- |
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161,470 |
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OPERATING INCOME |
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290,375 |
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291,438 |
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833,610 |
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665,205 |
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INTEREST and OTHER EXPENSE, net |
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(1,037) |
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(3,362) |
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(651) |
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(3,144) |
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INCOME BEFORE PROVISION FOR INCOME TAXES |
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289,338 |
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288,076 |
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832,959 |
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662,061 |
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PROVISION FOR INCOME TAXES |
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97,695 |
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113,502 |
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293,221 |
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254,070 |
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NET INCOME |
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$ |
191,643 |
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$ |
174,574 |
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$ |
539,738 |
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$ |
407,991 |
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NET INCOME PER COMMON SHARE:* |
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Basic |
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$ |
1.01 |
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$ |
0.85 |
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$ |
2.72 |
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$ |
2.22 |
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Diluted |
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$ |
0.99 |
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$ |
0.84 |
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$ |
2.67 |
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$ |
2.17 |
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WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS:* |
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Basic |
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190,379 |
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205,051 |
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198,073 |
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184,098 |
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Diluted |
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194,431 |
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208,094 |
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202,093 |
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188,131 |
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See accompanying notes to condensed consolidated financial statements.
*On October 14, 2016, Monster Beverage Corporation announced that its Board of Directors approved a 3-for-1 stock split of its common stock to be effected in the form of a 200% stock dividend. The additional shares will be distributed on November 9, 2016 to stockholders of record at the close of business (Eastern Time) on October 26, 2016. The Company anticipates its common stock to begin trading at the split-adjusted price on November 10, 2016. See Note 19 Subsequent Events for pro-forma earnings per share information adjusted retroactively to reflect the stock split.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE- AND NINE-MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
(In Thousands) (Unaudited)
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Three-Months Ended |
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Nine-Months Ended |
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2016 |
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2015 |
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2016 |
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2015 |
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Net income, as reported |
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$ |
191,643 |
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$ |
174,574 |
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$ |
539,738 |
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$ |
407,991 |
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Other comprehensive income (loss): |
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Change in foreign currency translation adjustment |
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(57) |
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(1,778) |
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7,344 |
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(9,398) |
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Available-for-sale investments: |
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Change in net unrealized gains |
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- |
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- |
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- |
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- |
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Reclassification adjustment for net gains included in net income |
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- |
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- |
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- |
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- |
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Net change in available-for-sale investments |
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- |
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- |
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- |
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- |
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Other comprehensive income (loss) |
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(57) |
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(1,778) |
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7,344 |
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(9,398) |
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Comprehensive income |
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$ |
191,586 |
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$ |
172,796 |
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$ |
547,082 |
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$ |
398,593 |
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See accompanying notes to condensed consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
(In Thousands) (Unaudited)
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Nine-Months Ended |
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September 30, 2016 |
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September 30, 2015 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
539,738 |
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$ |
407,991 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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29,874 |
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21,757 |
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Gain on disposal of property and equipment |
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(171) |
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(212) |
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Gain on sale of Monster Non-Energy |
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- |
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(161,470) |
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Stock-based compensation |
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33,735 |
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23,689 |
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Deferred income taxes |
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(1,652) |
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(115,098) |
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Effect on cash of changes in operating assets and liabilities, net of effects of acquisitions: |
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Accounts receivable |
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(100,233) |
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(132,614) |
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Distributor receivables |
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(21,034) |
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393 |
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Inventories |
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18,355 |
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(9,076) |
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Prepaid expenses and other current assets |
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(8,805) |
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(6,863) |
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Prepaid income taxes |
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(136,899) |
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(83,276) |
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Accounts payable |
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21,795 |
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75,142 |
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Accrued liabilities |
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8,303 |
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29,296 |
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Accrued promotional allowances |
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23,411 |
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15,196 |
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Accrued distributor terminations |
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(5,466) |
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7,706 |
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Accrued compensation |
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(346) |
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2,414 |
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Income taxes payable |
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3,340 |
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312,750 |
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Deferred revenue |
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16,757 |
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(35,991) |
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Net cash provided by operating activities |
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420,702 |
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351,734 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Maturities of held-to-maturity investments |
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892,453 |
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998,762 |
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Sales of available-for-sale investments |
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2,993 |
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4,001 |
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Sales of trading investments |
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- |
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2,625 |
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Proceeds from the transfer of distribution rights to TCCC |
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- |
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179,658 |
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Purchases of held-to-maturity investments |
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(378,254) |
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(1,760,178) |
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Purchases of available-for-sale investments |
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(24,405) |
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- |
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Purchases of property and equipment |
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(67,527) |
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(25,627) |
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Proceeds from the sale of Monster Non-Energy |
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- |
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198,008 |
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Proceeds from sale of property and equipment |
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705 |
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484 |
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Purchases of AFF Assets, net |
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(688,485) |
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- |
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Increase in intangibles |
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(4,255) |
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(5,352) |
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Decrease (increase) in other assets |
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56 |
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(1,039) |
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Net cash used in investing activities |
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(266,719) |
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(408,658) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Principal payments on debt |
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(1,731) |
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(807) |
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Issuance of common stock |
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10,615 |
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1,691,051 |
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Purchases of common stock held in treasury |
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(2,002,441) |
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(758,974) |
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Net cash (used in) provided by financing activities |
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(1,993,557) |
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931,270 |
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Effect of exchange rate changes on cash and cash equivalents |
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5,683 |
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(3,952) |
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
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(1,833,891) |
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870,394 |
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CASH AND CASH EQUIVALENTS, beginning of period |
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2,175,417 |
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370,323 |
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CASH AND CASH EQUIVALENTS, end of period |
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$ |
341,526 |
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$ |
1,240,717 |
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SUPPLEMENTAL INFORMATION: |
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Cash paid during the period for: |
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Interest |
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$ |
54 |
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$ |
21 |
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Income taxes |
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$ |
429,371 |
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$ |
141,184 |
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See accompanying notes to condensed consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
(In Thousands) (Unaudited) (Continued)
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS
The Company entered into capital leases for the acquisition of promotional vehicles of $2.2 million and $1.1 million for the nine-months ended September 30, 2016 and 2015, respectively.
Included in accrued liabilities as of September 30, 2016 and 2015 were $2.3 million and $3.1 million, respectively, related to additions to other intangible assets.
Included in accounts payable as of September 30, 2015 are treasury stock purchases of $40.7 million.
During the nine-months ended September 30, 2015, the Company issued 11.8 million shares of the Companys common stock in exchange for KO Energy (see Note 2).
During the nine-months ended September 30, 2015, the Company cancelled 41.5 million shares of treasury stock. Amounts previously recorded as treasury stock were netted against common stock and retained earnings.
See accompanying notes to condensed consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
1. BASIS OF PRESENTATION
Reference is made to the Notes to Consolidated Financial Statements, in Monster Beverage Corporation and Subsidiaries (the Company) Annual Report on Form 10-K for the year ended December 31, 2015 (Form 10-K) for a summary of significant accounting policies utilized by the Company and its consolidated subsidiaries and other disclosures, which should be read in conjunction with this Quarterly Report on Form 10-Q (Form 10-Q).
The Companys condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and Securities and Exchange Commission (SEC) rules and regulations applicable to interim financial reporting. They do not include all the information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP. The information set forth in these interim condensed consolidated financial statements for the three- and nine-months ended September 30, 2016 and 2015, respectively, is unaudited and reflects all adjustments, which include only normal recurring adjustments and which in the opinion of management are necessary to make the interim condensed consolidated financial statements not misleading. Results of operations for periods covered by this report may not necessarily be indicative of results of operations for the full year.
The preparation of financial statements in conformity with GAAP necessarily requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.
Adjustment Subsequent to the issuance of the Companys condensed consolidated financial statements on Form 10-Q for the quarterly period ended June 30, 2016, management concluded that its presentation of prepaid income taxes, deferred income taxes and income taxes payable should be adjusted to conform to its filed 2015 United States (U.S.) Federal income tax return. As a result of such adjustments, prepaid income taxes increased by $16.9 million, deferred income taxes decreased by $120.8 million and income taxes payable decreased by $103.9 million in the comparable condensed consolidated balance sheet as of December 31, 2015.
During the second quarter of 2016, the Company renamed and revised its reportable segments to reflect managements current view of the business and to align its external financial reporting with its operating and internal financial model. Historical segment information has been revised to reflect the effect of this change. See Note 17 for additional information about the Companys reporting segments.
2. ACQUISITIONS AND DIVESTITURES
American Fruits & Flavors
On April 1, 2016, the Company completed its acquisition of flavor supplier and long-time business partner American Fruits & Flavors (AFF), in an asset acquisition that brought the Companys primary flavor supplier in-house, secured the intellectual property of the Companys most important flavors in perpetuity and further enhanced its flavor development and global flavor footprint capabilities (the AFF Transaction). Pursuant to the terms of the AFF Transaction, the Company purchased AFF for $688.5 million in cash after adjustments.
The Company accounted for the AFF Transaction in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805 Business Combinations.
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 preliminary fair value allocations of the AFF Transaction consideration:
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Identifiable |
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Consideration |
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Intangibles - flavor formulas (non-amortizing)¹ |
|
$ |
618,000 |
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$ |
- |
|
Intangibles - flavor formulas (amortizing) |
|
641 |
|
- |
| ||
Intangibles - customer relationships (amortizing) |
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30,100 |
|
- |
| ||
Intangibles - trademarks (amortizing) |
|
500 |
|
- |
| ||
Intangibles - other (amortizing) |
|
200 |
|
- |
| ||
Working capital (excluding inventory) |
|
1,861 |
|
- |
| ||
Inventory |
|
27,600 |
|
- |
| ||
Property and equipment, net |
|
1,175 |
|
- |
| ||
Favorable leases |
|
4,480 |
|
- |
| ||
Goodwill |
|
3,928 |
|
- |
| ||
Cash |
|
- |
|
688,485 |
| ||
Total |
|
$ |
688,485 |
|
$ |
688,485 |
|
1Represents proprietary formulas for the Companys principal products.
The fair value analysis has yet to progress to a stage where there is sufficient information for a definitive measurement of the respective fair values. Accordingly, the respective fair value allocations are preliminary and are based on valuations derived from estimated fair value assumptions used by management. The Company expects to complete its fair value analysis at a level of detail necessary to finalize the underlying fair value allocation as soon as practicable, but no later than twelve months from the closing of the AFF Transaction. The final respective fair value allocations and the preliminary estimates of management may differ substantially. However, the impact of any such differences on the Companys financial position, results of operations and liquidity would not be material.
The Company determined the estimated fair values as follows:
· Flavor formulas (non-amortizing) multi-period excess earnings method
· Flavor formulas (amortizing) replacement cost method
· Customer relationships multi-period excess earnings method
· Trademarks relief-from-royalty method
· Inventory comparative sales method and replacement cost method
· Property and equipment, net replacement cost method
· Favorable leases discounted cash flow method
The preliminary book value of the working capital (excluding inventory) approximates fair value.
The Company has determined goodwill in accordance with ASC 805-30-30-1, Business Combinations, which requires the recognition of goodwill for the excess of the aggregate consideration over the net amounts of identifiable assets acquired and liabilities assumed as of the acquisition date.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
For tax purposes, the AFF Transaction was recorded as an asset purchase. As such, the Company received a step-up in tax basis of the AFF assets, net, equal to the purchase price.
In accordance with Regulation S-X, pro forma unaudited condensed financial information for the AFF Transaction has not been provided as the impact of the transaction on the Companys financial position, results of operations and liquidity was not material.
The Coca-Cola Company
On June 12, 2015, the Company completed the transactions contemplated by the definitive agreements entered into with The Coca-Cola Company (TCCC) on August 14, 2014 (the TCCC Transaction), which provided for a long-term strategic relationship in the global energy drink category.
In consequence of the TCCC Transaction, (1) the Company issued to TCCC 34,040,534 newly issued Company common shares representing approximately 16.7% of the total number of outstanding Company common shares (after giving effect to such issuance) at such time and TCCC appointed two individuals to the Companys Board of Directors, (2) TCCC transferred all of its rights in and to TCCCs worldwide energy drink business (KO Energy) to the Company, (3) the Company transferred all of its rights in and to its non-energy drink business (Monster Non-Energy) to TCCC, (4) the Company and TCCC amended the distribution coordination agreements previously existing between them to govern the transition of third parties rights to distribute the Companys energy products in most territories in the U.S. to members of TCCCs distribution network, which consists of owned or controlled bottlers/distributors and independent bottling/distribution partners, and (5) TCCC and one of its subsidiaries made an aggregate net cash payment to the Company of $2.15 billion, $125.0 million of which was held in escrow through June 17, 2016, subject to release upon the achievement of milestones relating to the transition of distribution rights to TCCCs distribution network.
Under the terms of the escrow agreement and the transition payment agreement entered into in connection therewith, if the distribution rights in the U.S. transitioned to TCCCs distribution network represented case sales in excess of the following percentages of a target case sale amount agreed to by the parties, amounts in the escrow fund in excess of the applicable amounts below would be released to the Company:
Percentage Transitioned |
|
Escrow Release |
40% |
|
Amounts in excess of $375 million |
50% |
|
Amounts in excess of $312.5 million |
60% |
|
Amounts in excess of $250 million |
70% |
|
Amounts in excess of $187.5 million |
80% |
|
Amounts in excess of $125 million |
90% |
|
Amounts in excess of $62.5 million |
95% |
|
All remaining amounts |
As of September 30, 2016, distribution rights in the U.S. representing approximately 89% of the target case sales had been transitioned to TCCCs distribution network. As a result, on the one-year anniversary of the closing of the TCCC Transaction, the then-remaining escrow amount of $125 million was released to TCCC. Going forward TCCC will directly pay to the Company the amounts described above that become payable as a result of future target case sale transitions. The Company expects to transition sufficient additional distribution rights to receive all such amounts.
The following unaudited pro forma condensed combined financial information is presented as if the
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
TCCC Transaction had closed on January 1, 2015:
|
|
Three-Months Ended September 30, 2015 |
| |||||||||||||
|
|
|
|
|
|
Pro Forma Adjustments |
|
|
| |||||||
|
|
Monster |
|
KO Energy |
|
Disposal of |
|
Other |
|
Pro Forma |
| |||||
Net sales |
|
$ |
756,619 |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
756,619 |
|
Net income |
|
174,574 |
|
- |
|
- |
|
180 |
|
174,754 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
Nine-Months Ended September 30, 2015 |
| |||||||||||||
|
|
|
|
|
|
Pro Forma Adjustments |
|
|
| |||||||
|
|
Monster |
|
KO Energy³ |
|
Disposal of |
|
Other |
|
Pro Forma |
| |||||
Net sales |
|
$ |
2,077,131 |
|
$ |
138,127 |
|
$ |
(60,824) |
|
$ |
6,803 |
|
$ |
2,161,237 |
|
Net income |
|
407,991 |
|
100,575 |
|
(101,881) |
|
(36,487) |
|
370,198 |
|
1 Includes net sales of $69.9 million and net income of $27.4 million (tax affected) related to the acquired KO Energy assets for the three-months ended September 30, 2015.
2 Includes net sales of $82.9 million and net income of $32.9 million (tax affected) related to the acquired KO Energy assets from June 12, 2015 (the date of acquisition) through September 30, 2015.
3 Includes results through June 12, 2015, the date the TCCC Transaction was finalized. The $100.6 million of net income for KO Energy for the nine-months ended September 30, 2015, is presented before tax. The associated estimated provision for income taxes is included in the Other category. Net income for KO Energy includes only net revenues and direct operating expenses, rather than full carve-out financial statements, because such financial statements would not be meaningful given that it is not possible to provide a meaningful allocation of business unit and corporate costs, interest or tax in respect of KO Energy.
4 Includes results through June 12, 2015. Net income includes the gain recognized on the sale of Monster Non-Energy of $161.5 million.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
Pro-Forma Adjustments Other include the following:
|
|
Three-Months Ended |
|
Nine-Months Ended |
| ||
Net sales: |
|
|
|
|
| ||
Amortization of deferred revenue |
|
$ |
- |
|
$ |
6,803 |
|
|
|
|
|
|
| ||
Net income: |
|
|
|
|
| ||
Amortization of deferred revenue |
|
$ |
- |
|
$ |
6,803 |
|
To record sales commissions |
|
- |
|
(15,470) |
| ||
To record amortization of definite lived KO Energy intangibles |
|
- |
|
(3,126) |
| ||
To eliminate TCCC Transaction expenses |
|
292 |
|
15,425 |
| ||
Estimated provision for income taxes on pro forma adjustments |
|
(112) |
|
(1,398) |
| ||
Estimated provision for income taxes on KO Energy income |
|
- |
|
(38,721) |
| ||
Total |
|
$ |
180 |
|
$ |
(36,487) |
|
For purposes of the unaudited pro forma financial information, a combined U.S. Federal and state statutory tax rate of 38.5% has been used. This rate does not reflect the Companys expected effective tax rate, which includes other tax charges and benefits, and does not take into account any historical or possible future tax events that may impact the combined company.
The unaudited pro forma financial information is presented for information purposes only and is not intended to represent or be indicative of the combined results of operations that the Company would have reported had the TCCC Transaction been completed as of the date and for the periods presented, and should not be taken as representative of the Companys consolidated results of operations following the completion of the TCCC Transaction. In addition, the unaudited pro forma financial information is not intended to project the future financial results of operations of the combined company. The unaudited pro forma combined financial information does not reflect any cost savings, operational synergies or revenue enhancements that the combined company may achieve as a result of the TCCC Transaction, or the costs to combine the operations or costs necessary to achieve cost savings, operating synergies and revenue enhancements.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230). The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company is currently evaluating the impact of ASU No. 2016-15 on its financial position, results of operations and liquidity.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The accounting standard changes the methodology for measuring credit losses on financial instruments and the timing when such losses are recorded. ASU No. 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently evaluating the impact of ASU No. 2016-13 on its financial position, results of operations and liquidity.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which changes how companies account for certain aspects of share-based payments to employees. The new guidance identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, and certain classifications on the statement of cash flows. The update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods with early application permitted. The Company early adopted the standards update effective January 1, 2016, electing (i) retrospective adjustment in the statement of cash flows and (ii) continued recognition of stock compensation based on estimated forfeitures. For the nine-months ended September 30, 2015, net cash provided by operating activities increased and net cash provided by financing activities decreased by $303.9 million, respectively, as a result of such retrospective adjustment. For the three-and nine-months ended September 30, 2016, the Company recorded $3.5 million and $7.1 million of excess tax benefits in net income that previously would have been recorded in additional paid-in-capital. The adoption of ASU No. 2016-09 did not have a material impact on the Companys financial position, results of operations or liquidity.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This update is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This update is effective for annual and interim reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of ASU No. 2016-02 on its financial position, results of operations and liquidity.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes. The amendments under the new guidance require that deferred tax liabilities and assets be classified as noncurrent in the classified balance sheets. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The Company adopted the standards update effective December 31, 2015, electing to apply it retrospectively to all periods presented.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU No. 2015-11 requires entities to measure inventory at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU No. 2015-11 is effective for annual periods, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. The adoption of ASU No. 2015-11 is not expected to have a material impact on the Companys financial position, results of operations or liquidity.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which supersedes previous revenue recognition guidance. ASU No. 2014-09 requires that a company recognize revenue at an amount that reflects the consideration to which the company expects to be entitled in exchange for transferring goods or services to a customer. In applying the new guidance, a company will (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the contracts performance obligations; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU No. 2014-09 was to be effective for reporting periods beginning after December 15, 2016. However, on July 9, 2015, the FASB voted to approve a one-year deferral of the effective date. This new guidance is effective for the Company beginning January 1,
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
2018 and can be adopted using either a full retrospective or modified approach. The Company is currently evaluating the impact of ASU No. 2014-09 on its financial position, results of operations and liquidity.
4. INVESTMENTS
The following table summarizes the Companys investments at:
September 30, 2016 |
|
Amortized Cost |
|
Gross |
|
Gross |
|
Fair |
|
Continuous |
|
Continuous | ||||||
Held-to-Maturity |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Short-term: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial paper |
|
$ |
28,318 |
|
$ |
- |
|
$ |
- |
|
$ |
28,318 |
|
$ |
- |
|
$ |
- |
Municipal securities |
|
181,843 |
|
- |
|
222 |
|
181,621 |
|
222 |
|
- | ||||||
U.S. government agency securities |
|
26,080 |
|
1 |
|
3 |
|
26,078 |
|
3 |
|
- | ||||||
Long-term: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Municipal securities |
|
9,519 |
|
- |
|
19 |
|
9,500 |
|
19 |
|
- | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Available-for-Sale: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Short-term: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Variable rate demand notes |
|
21,412 |
|
- |
|
- |
|
21,412 |
|
- |
|
- | ||||||
Total |
|
$ |
267,172 |
|
$ |
1 |
|
$ |
244 |
|
$ |
266,929 |
|
$ |
244 |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
December 31, 2015 |
|
Amortized Cost |
|
Gross |
|
Gross |
|
Fair |
|
Continuous |
|
Continuous | ||||||
Held-to-Maturity |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Short-term: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial paper |
|
$ |
3,978 |
|
$ |
- |
|
$ |
- |
|
$ |
3,978 |
|
$ |
- |
|
$ |
- |
Municipal securities |
|
709,207 |
|
63 |
|
192 |
|
709,078 |
|
192 |
|
- | ||||||
U.S. government agency securities |
|
23,369 |
|
- |
|
58 |
|
23,311 |
|
58 |
|
- | ||||||
U.S. Treasuries |
|
8,056 |
|
- |
|
13 |
|
8,043 |
|
13 |
|
- | ||||||
Long-term: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Municipal securities |
|
11,071 |
|
- |
|
8 |
|
11,063 |
|
8 |
|
- | ||||||
U.S. government agency securities |
|
4,277 |
|
- |
|
25 |
|
4,252 |
|
25 |
|
- | ||||||
Total |
|
$ |
759,958 |
|
$ |
63 |
|
$ |
296 |
|
$ |
759,725 |
|
$ |
296 |
|
$ |
- |
During the three- and nine-months ended September 30, 2016 and 2015, realized gains or losses recognized on the sale of investments were not significant.
The Companys investments at September 30, 2016 and December 31, 2015 in commercial paper, municipal securities, U.S. government agency securities, variable rate demand notes (VRDNs) and/or U.S. Treasuries 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.
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 Companys investments at:
|
|
September 30, 2016 |
|
December 31, 2015 |
| ||||||||
|
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
| ||||
Less than 1 year: |
|
|
|
|
|
|
|
|
| ||||
Commercial paper |
|
$ |
28,318 |
|
$ |
28,318 |
|
$ |
3,978 |
|
$ |
3,978 |
|
Municipal securities |
|
181,843 |
|
181,621 |
|
709,207 |
|
709,078 |
| ||||
U.S. government agency securities |
|
26,080 |
|
26,078 |
|
23,369 |
|
23,311 |
| ||||
U.S. Treasuries |
|
- |
|
- |
|
8,056 |
|
8,043 |
| ||||
Due 1 -10 years: |
|
|
|
|
|
|
|
|
| ||||
Municipal securities |
|
9,519 |
|
9,500 |
|
11,071 |
|
11,063 |
| ||||
U.S. government agency securities |
|
- |
|
- |
|
4,277 |
|
4,252 |
| ||||
Variable rate demand notes |
|
6,003 |
|
6,003 |
|
- |
|
- |
| ||||
Due 11 - 20 years: |
|
|
|
|
|
|
|
|
| ||||
Variable rate demand notes |
|
8,005 |
|
8,005 |
|
- |
|
- |
| ||||
Due 21 - 30 years: |
|
|
|
|
|
|
|
|
| ||||
Variable rate demand notes |
|
4,002 |
|
4,002 |
|
- |
|
- |
| ||||
Due 31 - 40 years: |
|
|
|
|
|
|
|
|
| ||||
Variable rate demand notes |
|
3,402 |
|
3,402 |
|
- |
|
- |
| ||||
Total |
|
$ |
267,172 |
|
$ |
266,929 |
|
$ |
759,958 |
|
$ |
759,725 |
|
5. FAIR VALUE OF CERTAIN FINANCIAL ASSETS AND LIABILITIES
ASC 820 provides a framework for measuring fair value and requires disclosures regarding fair value measurements. ASC 820 defines fair value as the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The three levels of inputs required by the standard that the Company uses to measure fair value are summarized below.
· Level 1: Quoted prices in active markets for identical assets or liabilities.
· Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.
· Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
ASC 820 requires the use of observable market inputs (quoted market prices) when measuring fair value and requires a Level 1 quoted price to be used to measure fair value whenever possible.
The following tables present the Companys held-to-maturity investments at amortized cost and the fair value of the Companys 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:
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
September 30, 2016 |
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| ||||
Cash |
|
|
$ |
267,056 |
|
$ |
- |
|
$ |
- |
|
$ |
267,056 |
|
Money market funds |
|
|
27,784 |
|
- |
|
- |
|
27,784 |
| ||||
Certificates of deposit |
|
|
- |
|
4,908 |
|
- |
|
4,908 |
| ||||
Commercial paper |
|
|
- |
|
43,503 |
|
- |
|
43,503 |
| ||||
Variable rate demand notes |
|
|
- |
|
21,412 |
|
- |
|
21,412 |
| ||||
Municipal securities |
|
|
- |
|
217,955 |
|
- |
|
217,955 |
| ||||
U.S. government agency securities |
|
|
- |
|
26,080 |
|
- |
|
26,080 |
| ||||
Foreign currency derivatives |
|
|
- |
|
105 |
|
- |
|
105 |
| ||||
Total |
|
|
$ |
294,840 |
|
$ |
313,963 |
|
$ |
- |
|
$ |
608,803 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Amounts included in: |
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
|
|
$ |
294,840 |
|
$ |
46,686 |
|
$ |
- |
|
$ |
341,526 |
|
Short-term investments |
|
|
- |
|
257,653 |
|
- |
|
257,653 |
| ||||
Accounts receivable, net |
|
|
- |
|
231 |
|
- |
|
231 |
| ||||
Investments |
|
|
- |
|
9,519 |
|
- |
|
9,519 |
| ||||
Accrued liabilities |
|
|
- |
|
(126 |
) |
- |
|
(126 |
) | ||||
Total |
|
|
$ |
294,840 |
|
$ |
313,963 |
|
$ |
- |
|
$ |
608,803 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
December 31, 2015 |
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| ||||
Cash |
|
|
$ |
255,723 |
|
$ |
- |
|
$ |
- |
|
$ |
255,723 |
|
Money market funds |
|
|
664,005 |
|
- |
|
- |
|
664,005 |
| ||||
Certificates of deposit |
|
|
- |
|
85,007 |
|
- |
|
85,007 |
| ||||
Commercial paper |
|
|
- |
|
430,605 |
|
- |
|
430,605 |
| ||||
U.S. Treasuries |
|
|
- |
|
260,035 |
|
- |
|
260,035 |
| ||||
Municipal securities |
|
|
- |
|
731,744 |
|
- |
|
731,744 |
| ||||
U.S. government agency securities |
|
|
- |
|
508,256 |
|
- |
|
508,256 |
| ||||
Foreign currency derivatives |
|
|
- |
|
(217 |
) |
- |
|
(217 |
) | ||||
Total |
|
|
$ |
919,728 |
|
$ |
2,015,430 |
|
$ |
- |
|
$ |
2,935,158 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Amounts included in: |
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
|
|
$ |
919,728 |
|
$ |
1,255,689 |
|
$ |
- |
|
$ |
2,175,417 |
|
Short-term investments |
|
|
- |
|
744,610 |
|
- |
|
744,610 |
| ||||
Accounts receivable, net |
|
|
- |
|
371 |
|
- |
|
371 |
| ||||
Investments |
|
|
- |
|
15,348 |
|
- |
|
15,348 |
| ||||
Accrued liabilities |
|
|
- |
|
(588 |
) |
- |
|
(588 |
) | ||||
Total |
|
|
$ |
919,728 |
|
$ |
2,015,430 |
|
$ |
- |
|
$ |
2,935,158 |
|
All of the Companys short-term investments are classified within Level 1 or Level 2 of the fair value hierarchy. The Companys valuation of its Level 1 investments, which include money market funds, is based on quoted market prices in active markets for identical securities. The Companys valuation of its Level 2 investments, which include municipal securities, commercial paper, U.S. Treasuries, certificates of deposit, variable rate demand notes 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 Companys valuation of its Level 2 foreign currency 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 nine-months ended September 30, 2016 or the year ended December 31, 2015, and there were no changes in the Companys valuation techniques.
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 nine-months ended September 30, 2016 and the year ended December 31, 2015, the Company entered into forward currency exchange contracts with financial institutions to create an economic hedge to specifically manage a portion of the foreign exchange risk exposure associated with certain consolidated subsidiaries non-functional currency denominated assets and liabilities. All foreign currency exchange contracts of the Company that were outstanding as of September 30, 2016 have terms of one month or less. The Company does not enter into forward currency exchange contracts for speculation or trading purposes.
The Company has not designated its foreign currency exchange contracts as hedge transactions under ASC 815. Therefore, gains and losses on the Companys foreign currency exchange contracts are recognized in interest and other (expense) income, net, in the condensed consolidated statements of income, and are largely offset by the changes in the fair value of the underlying economically hedged item.
The notional amount and fair value of all outstanding foreign currency derivative instruments in the condensed consolidated balance sheets consist of the following at:
September 30, 2016 | ||||||||
Derivatives not designated as |
|
Notional |
|
Fair |
|
Balance Sheet Location | ||
Assets: |
|
|
|
|
|
| ||
Foreign currency exchange contracts: |
|
|
|
|
|
| ||
Receive USD/pay GBP |
|
$ |
16,283 |
|
$ |
46 |
|
Accounts receivable, net |
Receive EUR/pay USD |
|
30,682 |
|
31 |
|
Accounts receivable, net | ||
Receive USD/pay AUD |
|
17,978 |
|
63 |
|
Accounts receivable, net | ||
Receive USD/pay ZAR |
|
19,861 |
|
65 |
|
Accounts receivable, net | ||
Receive USD/pay BRL |
|
3,046 |
|
26 |
|
Accounts receivable, net | ||
|
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
Liabilities: |
|
|
|
|
|
| ||
Foreign currency exchange contracts: |
|
|
|
|
|
| ||
Receive CAD/pay USD |
|
$ |
20,609 |
|
$ |
(14) |
|
Accrued liabilities |
Receive USD/pay MXN |
|
27,360 |
|
(65) |
|
Accrued liabilities | ||
Receive USD/pay NZD |
|
3,119 |
|
(11) |
|
Accrued liabilities | ||
Receive USD/pay SEK |
|
1,856 |
|
(1) |
|
Accrued liabilities | ||
Receive USD/pay CLP |
|
3,435 |
|
(10) |
|
Accrued liabilities | ||
Receive USD/pay COP |
|
2,041 |
|
(21) |
|
Accrued liabilities | ||
Receive SGD/pay USD |
|
2,571 |
|
(4) |
|
Accrued liabilities |
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
December 31, 2015 | ||||||||
Derivatives not designated as |
|
Notional |
|
Fair |
|
Balance Sheet Location | ||
Assets: |
|
|
|
|
|
| ||
Foreign currency exchange contracts: |
|
|
|
|
|
| ||
Receive USD/pay GBP |
|
$ |
18,146 |
|
$ |
168 |
|
Accounts receivable, net |
Receive USD/pay ZAR |
|
17,411 |
|
144 |
|
Accounts receivable, net | ||
Receive USD/pay RUB |
|
2,173 |
|
9 |
|
Accounts receivable, net | ||
Receive USD/pay BRL |
|
2,478 |
|
49 |
|
Accounts receivable, net | ||
Receive USD/pay COP |
|
1,351 |
|
1 |
|
Accounts receivable, net | ||
|
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
Liabilities: |
|
|
|
|
|
| ||
Foreign currency exchange contracts: |
|
|
|
|
|
| ||
Receive EUR/pay USD |
|
$ |
39,578 |
|
$ |
(429) |
|
Accrued liabilities |
Receive USD/pay AUD |
|
14,040 |
|
(82) |
|
Accrued liabilities | ||
Receive USD/pay CAD |
|
2,804 |
|
(15) |
|
Accrued liabilities | ||
Receive USD/pay JPY |
|
2,495 |
|
(2) |
|
Accrued liabilities | ||
Receive USD/pay MXN |
|
8,122 |
|
(15) |
|
Accrued liabilities | ||
Receive SGD/pay USD |
|
3,837 |
|
(30) |
|
Accrued liabilities | ||
Receive USD/pay NZD |
|
1,978 |
|
(3) |
|
Accrued liabilities | ||
Receive USD/pay CLP |
|
3,519 |
|
(12) |
|
Accrued liabilities |
The net gains (losses) on derivative instruments in the condensed consolidated statements of income were as follows:
|
|
|
|
Amount of gain (loss) | ||||
|
|
|
|
Three-months ended | ||||
Derivatives not designated as |
|
Location of gain (loss) |
|
September 30, |
|
September 30, | ||
Foreign currency exchange contracts |
|
Interest and other expense, net |
|
$ |
(882) |
|
$ |
3,552 |
|
|
|
|
Amount of gain (loss) | ||||
|
|
|
|
Nine-months ended | ||||
Derivatives not designated as |
|
Location of gain (loss) |
|
September 30, |
|
September 30, | ||
Foreign currency exchange contracts |
|
Interest and other expense, net |
|
$ |
(424) |
|
$ |
1,634 |
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:
|
|
September 30, |
|
December 31, |
| ||
Raw materials |
|
$ |
68,860 |
|
$ |
52,043 |
|
Finished goods |
|
98,980 |
|
104,078 |
| ||
|
|
$ |
167,840 |
|
$ |
156,121 |
|
8. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following at:
|
|
September 30, |
|
December 31, |
| ||
Land |
|
$ |
46,597 |
|
$ |
6,792 |
|
Leasehold improvements |
|
2,726 |
|
2,804 |
| ||
Furniture and fixtures |
|
3,607 |
|
3,551 |
| ||
Office and computer equipment |
|
11,538 |
|
11,080 |
| ||
Computer software |
|
3,203 |
|
2,530 |
| ||
Equipment |
|
107,704 |
|
93,465 |
| ||
Buildings |
|
41,943 |
|
39,848 |
| ||
Vehicles |
|
31,737 |
|
29,804 |
| ||
|
|
249,055 |
|
189,874 |
| ||
Less: accumulated depreciation and amortization |
|
(104,430) |
|
(92,520) |
| ||
|
|
$ |
144,625 |
|
$ |
97,354 |
|
In September 2016, the Company completed its acquisition of approximately 49 acres of land, located in Rialto, CA, for a purchase price of approximately $39.1 million. The Company intends to build an approximately 1,000,000 square-foot building to replace its current leased warehouse and distribution space located in Corona, CA.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
The following is a roll-forward of goodwill for the nine-months ended September 30, 2016 by reportable segment:
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
|
|
Monster |
|
Strategic |
|
Other |
|
Total |
| ||||
Balance at December 31, 2015 |
|
$ |
641,716 |
|
$ |
637,999 |
|
$ |
- |
|
$ |
1,279,715 |
|
Acquisitions |
|
3,928 |
|
- |
|
- |
|
3,928 |
| ||||
Balance at September 30, 2016 |
|
$ |
645,644 |
|
$ |
637,999 |
|
$ |
- |
|
$ |
1,283,643 |
|
Intangible assets consist of the following at:
|
|
September 30, |
|
December 31, |
| ||
Amortizing intangibles |
|
$ |
71,227 |
|
$ |
35,263 |
|
Accumulated amortization |
|
(11,574) |
|
(3,899) |
| ||
|
|
59,653 |
|
31,364 |
| ||
Non-amortizing intangibles |
|
1,021,160 |
|
396,622 |
| ||
|
|
$ |
1,080,813 |
|
$ |
427,986 |
|
Amortizing intangibles primarily consist of customer relationships. All amortizing intangibles have been assigned an estimated finite useful life and such intangibles are amortized on a straight-line basis over the number of years that approximate their respective useful lives, generally five to seven years. Total amortization expense recorded was $3.0 million and $1.8 million for the three-months ended September 30, 2016 and 2015, respectively. Total amortization expense recorded was $7.7 million and $2.1 million for the nine-months ended September 30, 2016 and 2015, respectively.
10. DISTRIBUTION AGREEMENTS
In accordance with ASC No. 420 Exit or Disposal Cost Obligations, the Company expenses distributor termination costs in the period in which the written notification of termination occurs. The Company incurred termination costs of $4.7 million and $2.5 million for the three-months ended September 30, 2016 and 2015, respectively. The Company incurred termination costs of $33.4 million and $220.7 million for the nine-months ended September 30, 2016 and 2015, respectively. Such termination costs have been expensed in full and are included in operating expenses for the three- and nine-months ended September 30, 2016 and 2015.
In the normal course of business, amounts received pursuant to new and/or amended distribution agreements entered into with certain distributors, relating to the costs associated with terminating agreements with the Companys 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 $8.4 million and $8.2 million for the three-months ended September 30, 2016 and 2015, respectively. There was no acceleration of deferred revenue in the three-months ended September 30, 2016 and 2015, respectively. Revenue recognized was $28.6 million and $54.7 million for the nine-months ended September 30, 2016 and 2015, respectively. Included in the $28.6 million of revenue recognized for the nine-months ended September 30, 2016, was $5.0 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Companys prior distributors who were sent notices of termination during the nine-months ended September 30, 2016. Included in the $54.7 million of revenue recognized for the nine-months ended September 30, 2015 was $39.8 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Companys prior distributors who were sent notices of termination during the nine-months ended September 30, 2015.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
11. COMMITMENTS AND CONTINGENCIES
The Company had purchase commitments aggregating approximately $55.0 million at September 30, 2016, which represented commitments made by the Company and its subsidiaries to various suppliers of raw materials for the production of its products. These obligations vary in terms, but are generally satisfied within one year.
The Company had contractual obligations aggregating approximately $140.9 million at September 30, 2016, which related primarily to sponsorships and other marketing activities.
The Company had operating lease commitments aggregating approximately $18.6 million at September 30, 2016, which related primarily to warehouse and office space.
In July 2016, the Company entered into an agreement to acquire an approximately 75,425 square foot, free standing, three-story office building, including the real property thereunder and improvements thereon, located in Corona, CA adjacent to its current corporate headquarters, for a purchase price of approximately $12.6 million. The purchase is subject to various conditions precedent that must be satisfied prior to the closing. If the Company ultimately acquires the building, it intends to complete any necessary improvements and occupy the building as an extension of its existing corporate headquarters at some time in the future.
In September 2016, the Company completed its acquisition of approximately 49 acres of land, located in Rialto, CA, for a purchase price of approximately $39.1 million. The Company intends to build an approximately 1,000,000 square-foot building to replace its current leased warehouse and distribution facilities located in Corona, CA. The Company has entered into an approximately $36.8 million guaranteed maximum price construction contract for the construction of the building.
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 Companys 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 Companys advertising, marketing, promotion, ingredients, usage and sale of its Monster Energy® brand energy drinks. Production of documents pursuant to that subpoena was completed in approximately May 2014.
On August 6, 2014, the Attorney General for the State of New York issued a second subpoena seeking additional documents and the deposition of a Company employee. On September 8, 2014, the Company moved to quash the second subpoena in the Supreme Court, New York County. The motion was fully briefed and was argued on March 17, 2015. No decision has been rendered. It is unknown what, if any, action the state attorney general may take against the Company, the relief which may be sought in the event of any such proceeding or whether such proceeding could have a material adverse effect on the Companys business, financial condition or results of operations.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
San Francisco City Attorney Litigation On October 31, 2012, the Company received a written request for information from the City Attorney for the City and County of San Francisco concerning the Companys advertising and marketing of its Monster Energy® brand energy drinks and specifically concerning the safety of its products for consumption by adolescents. In a letter dated March 29, 2013, the San Francisco City Attorney threatened to bring suit against the Company if it did not agree to take the following five steps immediately: (i) Reformulate its products to lower the caffeine content to safe levels (ii) Provide adequate warning labels (iii) Cease promoting over-consumption in marketing (iv) Cease use of alcohol and drug references in marketing and (v) Cease targeting minors.
(i) The Company Action On April 29, 2013, the Company and its wholly-owned subsidiary, Monster Energy Company, filed a complaint for declaratory and injunctive relief against the San Francisco City Attorney (the Company Action) in United States District Court for the Central District of California (the Central District Court), styled Monster Beverage Corp., et al. v. Dennis Herrera. The Company sought a declaration from the Central District Court that the San Francisco City Attorneys investigation and demands are impermissible and preempted, subject to the doctrine of primary jurisdiction, are unconstitutional in that they violate the First and Fourteenth Amendments prohibitions against compelled speech, content-based speech and commercial speech, are impermissibly void-for-vagueness and/or violate the Commerce Clause. On June 3, 2013, the City Attorney filed a motion to dismiss the Company Action, arguing in part that the complaint should be dismissed in light of the San Francisco Action (described below) filed on May 6, 2013. On August 22, 2013, the Central District Court granted in part and denied in part the City Attorneys motion. On October 17, 2013, the City Attorney filed a renewed motion to dismiss the Company Action and on December 16, 2013, the Central District Court granted the City Attorneys renewed motion, dismissing the Company Action. The Company filed a Notice of Appeal to the Ninth Circuit on December 18, 2013 and on May 17, 2016, the Ninth Circuit affirmed the Central District Courts order.
(ii) The San Francisco Action On May 6, 2013, the San Francisco City Attorney filed a complaint for declaratory and injunctive relief, civil penalties and restitution for alleged violation of Californias Unfair Competition Law, Business & Professions Code sections 17200, et seq., styled People Of The State Of California ex rel. Dennis Herrera, San Francisco City Attorney v. Monster Beverage Corporation, in San Francisco Superior Court (the San Francisco Action). The City Attorney alleges that the Company (1) mislabeled its products as a dietary supplement, in violation of Californias Sherman Food, Drug and Cosmetic Law, California Health & Safety Code sections 109875, et. seq.; (2) is selling an adulterated product because caffeine is not generally recognized as safe due to the alleged lack of scientific consensus concerning the safety of the levels of caffeine in the Companys products and (3) is engaged in unfair and misleading business practices because its marketing (a) does not disclose the health risks that energy drinks pose for children and teens, (b) fails to warn against and promotes unsafe consumption, (c) implicitly promotes mixing of energy drinks with alcohol or drugs and (d) is deceptive because it includes unsubstantiated claims about the purported special benefits of its killer ingredients and energy blend. The City Attorney sought a declaration that the Company has engaged in unfair and unlawful business acts and practices in violation of the Unfair Competition Law, an injunction from performing or proposing to perform any acts in violation of the Unfair Competition Law, restitution and civil penalties.
After a motion to strike filed by the Company was granted in part, on March 20, 2014, the City Attorney filed an amended complaint, adding allegations supporting the theory for relief as to which the Court had granted the motion to strike. On April 18, 2014, the Company filed a renewed motion to strike, as well as a motion asking the Court to bifurcate and/or stay claims relating to the safety of Monster Energy® brand energy drinks, pending resolution of the ongoing U.S. Food and Drug Administration (FDA) investigation of the safety and labeling of food products to which caffeine is added. On May 22, 2014, the Court denied the Companys motion to strike and motion to bifurcate and/or stay claims relating to safety.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
On September 5, 2014, the City Attorney filed a second amended complaint, adding Monster Energy Company as a defendant. The Company and Monster Energy Company filed answers to the second amended complaint on October 4, 2014 and November 10, 2014, respectively. Discovery is ongoing.
The Court has set the case for a bench trial which is scheduled to take place April 10-21, 2017.
The Company denies that it has violated the Unfair Competition Law or any other law and believes that the City Attorneys claims and demands are preempted and unconstitutional, as alleged in the action the Company filed in the Central District Court. The Company intends to vigorously defend against this lawsuit. At this time, no evaluation of the likelihood of an unfavorable outcome or range of potential loss can be expressed.
The actions or investigations described above have not progressed to a point where a reasonably possible range of losses associated with their ultimate outcome can be estimated at this time. If the final resolution of any such litigation or proceedings is unfavorable, the Companys financial condition, operating results and cash flows could be materially affected.
In addition to the above matters, the Company has been named as a defendant in various false advertising putative class actions and in a private attorney general action. In these actions, plaintiffs allege that defendants misleadingly labeled and advertised Monster Energy® brand products that allegedly were ineffective for the advertised benefits (including, but not limited to, an allegation that the products do not hydrate as advertised because they contain caffeine). The plaintiffs further allege that the Monster Energy® brand products at issue are unsafe because they contain one or more ingredients that allegedly could result in illness, injury or death. In connection with these product safety allegations, the plaintiffs claim that the product labels did not provide adequate warnings and/or that the Company did not include sufficiently specific statements with respect to contra-indications and/or adverse reactions associated with the consumption of its energy drink products (including, but not limited to, claims that certain ingredients, when consumed individually or in combination with other ingredients, could result in high blood pressure, palpitations, liver damage or other negative health effects and/or that the products themselves are unsafe). Based on these allegations, the plaintiffs assert claims for violation of state consumer protection statutes, including unfair competition and false advertising statutes, and for breach of warranty and unjust enrichment. In their prayers for relief, the plaintiffs seek, inter alia, compensatory and punitive damages, restitution, attorneys fees and, in some cases, injunctive relief. The Company regards these cases and allegations as having no merit. Furthermore, the Company is subject to litigation from time to time in the normal course of business, including intellectual property litigation and claims from terminated distributors.
Although it is not possible to predict the ultimate outcome of such litigation, based on the facts known to the Company, management believes that such litigation in the aggregate will likely not have a material adverse effect on the Companys 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 September 30, 2016, the Companys condensed consolidated balance sheet includes accrued loss contingencies of approximately $2.1 million.
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 nine-months ended September 30, 2016 are as follows:
|
|
Currency |
| |
|
|
|
|
|
Balance at December 31, 2015 |
|
$ |
21,878 |
|
Other comprehensive (gain) before reclassifications |
|
- |
| |
Amounts reclassified from accumulated other comprehensive loss |
|
- |
| |
Net current-period other comprehensive (gain) |
|
(7,344) |
| |
Balance at September 30, 2016 |
|
$ |
14,534 |
|
13. TREASURY STOCK
On August 2, 2016, the Companys Board of Directors authorized a new share repurchase program for the repurchase of up to $250.0 million of the Companys outstanding common stock (the August 2016 Repurchase Plan). From August 2, 2016 to September 30, 2016, no shares had been repurchased under the August 2016 Repurchase Plan. Subsequent to September 30, 2016, the Company purchased 0.1 million shares at an average purchase price of $142.82 per share, pursuant to the August 2016 Repurchase Plan.
On April 28, 2016, the Board of Directors authorized the Company to commence a modified Dutch auction tender offer to repurchase up to $2.0 billion of its outstanding shares of common stock. The repurchase was authorized under the Companys existing share repurchase authority and was funded with cash on hand. The Company commenced the tender offer in May 2016. On June 15, 2016, the Company accepted for payment an aggregate of 12,820,512 shares of common stock at a purchase price of $156.00 per share, for a total amount of $2.0 billion (excluding commissions), which exhausted the availability under all previously authorized share repurchase plans. Such shares of common stock are included in common stock in treasury in the accompanying condensed consolidated balance sheet at September 30, 2016.
During the three-months ended September 30, 2016, 1,200 shares of common stock were purchased from employees in lieu of cash payments for options exercised or withholding taxes due for a total amount of $0.2 million. While such purchases are considered common stock repurchases, they are not counted as purchases against the Companys authorized share repurchase programs. Such shares are included in common stock in treasury in the accompanying condensed consolidated balance sheet at September 30, 2016.
14. STOCK-BASED COMPENSATION
The Company has two stock-based compensation plans under which shares were available for grant at September 30, 2016: the Monster Beverage Corporation 2011 Omnibus Incentive Plan and the 2009 Monster Beverage Corporation Stock Incentive Plan for Non-Employee Directors.
The Company recorded $12.1 million and $8.9 million of compensation expense relating to outstanding options, restricted stock awards, stock appreciation rights and restricted stock units during the three-months ended September 30, 2016 and 2015, respectively. The Company recorded $33.7 million and $23.7 million of compensation expense relating to outstanding options, restricted stock awards, stock appreciation rights and restricted stock units during the nine-months ended September 30, 2016 and 2015, respectively.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
The excess tax benefit for tax deductions from non-qualified stock option exercises, disqualifying dispositions of incentive stock options, vesting of restricted stock units and restricted stock awards for the three-months ended September 30, 2016 and 2015 was $3.5 million and $3.6 million, respectively. The excess tax benefit for tax deductions from non-qualified stock option exercises, disqualifying dispositions of incentive stock options, vesting of restricted stock units and restricted stock awards for the nine-months ended September 30, 2016 and 2015 was $7.1 million and $303.9 million, respectively. As a result of the Companys early adoption of ASU No. 2016-09 effective January 1, 2016, the Company recorded excess tax benefits of $3.5 million and $7.1 million in net income for the three- and nine-months ended September 30, 2016. The excess tax benefits for the three- and nine-months ended September 30, 2015 of $3.6 million and $303.9 million, respectively, were recorded in additional paid-in-capital.
Stock Options
Under the Companys stock-based compensation plans, all stock options granted as of September 30, 2016 were granted at prices based on the fair value of the Companys 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-employees 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 September 30, |
|
|
Nine-Months Ended September 30, | ||||||||
|
|
2016 |
|
2015 |
|
|
2016 |
|
2015 | ||||
Dividend yield |
|
0.0% |
|
|
0.0% |
|
|
|
0.0% |
|
|
0.0% |
|
Expected volatility |
|
36.3% |
|
|
36.7% |
|
|
|
36.1% |
|
|
37.1% |
|
Risk-free interest rate |
|
1.1% |
|
|
1.5% |
|
|
|
1.4% |
|
|
1.6% |
|
Expected term |
|
6.4 years |
|
|
6.1 years |
|
|
|
6.3 years |
|
|
5.8 years |
|
Expected Volatility: The Company uses historical volatility as it provides a reasonable estimate of the expected volatility. Historical volatility is based on the most recent volatility of the stock price over a period of time equivalent to the expected term of the option.
Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. Treasury zero coupon yield curve in effect at the time of grant for the expected term of the option.
Expected Term: The Companys expected term represents the weighted-average period that the Companys 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.
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 Companys activities with respect to its stock option plans as follows:
Options |
|
Number of |
|
Weighted- |
|
Weighted- |
|
Aggregate | ||
Outstanding at January 1, 2016 |
|
6,590 |
|
$ |
50.85 |
|
5.6 |
|
$ |
646,497 |
Granted 01/01/16 - 03/31/16 |
|
961 |
|
$ |
132.06 |
|
|
|
| |
Granted 04/01/16 - 06/30/16 |
|
219 |
|
$ |
138.53 |
|
|
|
| |
Granted 07/01/16 - 09/30/16 |
|
14 |
|
$ |
157.80 |
|
|
|
| |
Exercised |
|
(284) |
|
$ |
37.34 |
|
|
|
| |
Cancelled or forfeited |
|
(88) |
|
$ |
98.28 |
|
|
|
| |
Outstanding at September 30, 2016 |
|
7,412 |
|
$ |
64.14 |
|
5.6 |
|
$ |
613,113 |
Vested and expected to vest in the future at September 30, 2016 |
|
7,011 |
|
$ |
60.94 |
|
5.4 |
|
$ |
602,318 |
Exercisable at September 30, 2016 |
|
4,359 |
|
$ |
31.77 |
|
3.7 |
|
$ |
501,457 |
The weighted-average grant-date fair value of options granted during the three-months ended September 30, 2016 and 2015 was $59.21 per share and $51.14 per share, respectively. The weighted-average grant-date fair value of options granted during the nine-months ended September 30, 2016 and 2015 was $50.82 per share and $50.20 per share, respectively. The total intrinsic value of options exercised during the three-months ended September 30, 2016 and 2015 was $9.1 million and $11.9 million, respectively. The total intrinsic value of options exercised during the nine-months ended September 30, 2016 and 2015 was $30.6 million and $841.5 million, respectively.
Cash received from option exercises under all plans for the three-months ended September 30, 2016 and 2015 was approximately $2.4 million and $1.9 million, respectively. Cash received from option exercises under all plans for the nine-months ended September 30, 2016 and 2015 was approximately $10.6 million and $43.6 million, respectively.
At September 30, 2016, there was $100.3 million of total unrecognized compensation expense related to non-vested options granted to employees under the Companys share-based payment plans. That cost is expected to be recognized over a weighted-average period of 3.0 years.
Restricted Stock Awards and Restricted Stock Units
Stock-based compensation cost for restricted stock awards and restricted stock units is measured based on the closing fair market value of the Companys 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.
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 Companys activities with respect to non-vested restricted stock awards and non-vested restricted stock units as follows:
|
|
Number of |
|
Weighted |
| |
Non-vested at January 1, 2016 |
|
178 |
|
$ |
99.58 |
|
Granted 01/01/16- 03/31/16 |
|
82 |
|
$ |
131.96 |
|
Granted 04/01/16- 06/30/16 |
|
12 |
|
$ |
148.94 |
|
Granted 07/01/16- 09/30/16 |
|
- |
|
$ |
- |
|
Vested |
|
(81) |
|
$ |
95.62 |
|
Forfeited/cancelled |
|
(1) |
|
$ |
57.45 |
|
Non-vested at September 30, 2016 |
|
190 |
|
$ |
118.68 |
|
No restricted stock units or restricted stock awards were granted during the three-months ended September 30, 2016. The weighted-average grant-date fair value of restricted stock units and restricted stock awards granted during the three-months ended September 30, 2015 was $147.36 per share. The weighted-average grant-date fair value of restricted stock units and restricted stock awards granted during the nine-months ended September 30, 2016 and 2015 was $134.14 per share and $136.50 per share, respectively. As of September 30, 2016, 0.2 million of restricted stock units and restricted stock awards are expected to vest over their respective terms.
At September 30, 2016, total unrecognized compensation expense relating to non-vested restricted stock awards and non-vested restricted stock units was $16.7 million, which is expected to be recognized over a weighted-average period of 1.8 years.
15. INCOME TAXES
The following is a roll-forward of the Companys total gross unrecognized tax benefits, not including interest and penalties, for the nine-months ended September 30, 2016:
|
|
Gross Unrecognized Tax |
| |
Balance at December 31, 2015 |
|
$ |
471 |
|
Additions for tax positions related to the current year |
|
- |
| |
Additions for tax positions related to the prior year |
|
- |
| |
Decreases related to settlement with taxing authority |
|
(462) |
| |
Balance at September 30, 2016 |
|
$ |
9 |
|
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Companys condensed consolidated financial statements. As of September 30, 2016, the Company had no 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 Companys effective tax rate would not be significant. It is expected that the change in the amount of unrecognized tax benefits within the next 12 months will not be significant.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
The Company is subject to U.S. federal income tax as well as to income tax in multiple state and foreign jurisdictions.
On August 7, 2015, the Internal Revenue Service (the IRS) began its examination of the Companys U.S. federal income tax returns for the years ended December 31, 2012 and 2013. On October 18, 2016, the IRS began its examination of the Companys U.S. federal income tax return for the year ended December 31, 2014.
The Company is in various stages of examination with certain states and certain foreign jurisdictions. The 2012 through 2015 U.S. federal income tax returns are subject to examination by the IRS. State income tax returns are subject to examination for the 2011 through 2015 tax years.
16. EARNINGS PER SHARE
A reconciliation of the weighted-average shares used in the basic and diluted earnings per common share computations is presented below:
|
|
Three-Months Ended |
|
Nine-Months Ended |
| ||||
|
|
September 30, |
|
September 30, |
| ||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
|
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
|
Basic |
|
190,379 |
|
205,051 |
|
198,073 |
|
184,098 |
|
Dilutive |
|
4,052 |
|
3,043 |
|
4,020 |
|
4,033 |
|
Diluted |
|
194,431 |
|
208,094 |
|
202,093 |
|
188,131 |
|
For the three-months ended September 30, 2016 and 2015, options and awards outstanding totaling 1.9 million shares and 1.1 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive. For the nine-months ended September 30, 2016 and 2015, options and awards outstanding totaling 1.7 million shares and 0.9 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.
17. SEGMENT INFORMATION
During the second quarter of 2016, the Company renamed and revised its reportable segments to reflect managements current view of the business and to align its external financial reporting with its operating and internal financial model. Historical segment information has been revised to reflect the effect of this change.
The Company has three operating and reportable segments, (i) Monster Energy® Drinks segment (Monster Energy® Drinks), which is comprised of the Companys Monster Energy® drink products (previously the Finished Products segment) as well as MutantTM Super Soda drink products, (ii) Strategic Brands (Strategic Brands), which include the various energy drink brands acquired from TCCC as a result of the TCCC Transaction (previously the Concentrate segment) and (iii) Other, (Other) the principal products of which include the non-energy brands disposed of as a result of the TCCC Transaction as well as certain products acquired as part of the AFF Transaction that are sold to independent third-parties.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
The Companys Monster Energy® Drinks segment generates net operating revenues by selling ready-to-drink packaged energy drinks to full service beverage distributors, retail grocery and specialty chains, wholesalers, club stores, drug chains, mass merchandisers, convenience chains, health food distributors, food service customers and the military.
The Companys Strategic Brands segment primarily generates net operating revenues by selling concentrates and/or beverage bases to authorized bottling and canning operations. Such bottlers generally combine the concentrates and/or beverage bases with sweeteners and water, which are then filled in authorized containers bearing the Companys respective trademarks and sold to customers directly (or in some cases through wholesalers or other bottlers). To a lesser extent, the Companys Strategic Brands segment generates net operating revenues by selling ready-to-drink packaged energy drinks to full service beverage distributors, retail grocery and specialty chains, wholesalers, club stores, drug chains, mass merchandisers, convenience chains, health food distributors, food service customers and the military.
Generally, the Monster Energy® Drinks segment generates higher per case net operating revenues, but lower per case gross profit margins than the Strategic Brands segment.
Corporate and unallocated amounts that do not relate to a reportable segment have been allocated to Corporate & Unallocated. No asset information, other than goodwill and other intangible assets, has been provided for in the Companys reportable segments as management does not measure or allocate such assets on a segment basis.
The net revenues derived from the Companys reportable segments and other financial information related thereto for the three- and nine-months ended September 30, 2016 and 2015 are as follows:
|
|
Three-Months Ended |
|
Nine-Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
Net sales: |
|
|
|
|
|
|
|
|
| ||||
Monster Energy® Drinks(1) |
|
$ |
710,130 |
|
$ |
686,684 |
|
$ |
2,075,511 |
|
$ |
1,933,467 |
|
Strategic Brands |
|
72,138 |
|
69,935 |
|
207,990 |
|
82,913 |
| ||||
Other |
|
5,686 |
|
- |
|
12,127 |
|
60,751 |
| ||||
Corporate and unallocated |
|
- |
|
- |
|
- |
|
- |
| ||||
|
|
$ |
787,954 |
|
$ |
756,619 |
|
$ |
2,295,628 |
|
$ |
2,077,131 |
|
|
|
|
|
|
| ||||||||
|
|
Three-Months Ended |
|
Nine-Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
Operating Income: |
|
|
|
|
|
|
|
|
| ||||
Monster Energy® Drinks(1) (2) |
|
$ |
308,493 |
|
$ |
289,544 |
|
$ |
874,822 |
|
$ |
596,716 |
|
Strategic Brands |
|
40,075 |
|
45,291 |
|
127,169 |
|
54,375 |
| ||||
Other(3) |
|
1,186 |
|
(283) |
|
1,528 |
|
165,377 |
| ||||
Corporate and unallocated |
|
(59,379) |
|
(43,114) |
|
(169,909) |
|
(151,263) |
| ||||
|
|
$ |
290,375 |
|
$ |
291,438 |
|
$ |
833,610 |
|
$ |
665,205 |
|
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
|
|
Three-Months Ended |
|
Nine-Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
Income before tax: |
|
|
|
|
|
|
|
|
| ||||
Monster Energy® Drinks(1) (2) |
|
$ |
308,612 |
|
$ |
289,649 |
|
$ |
875,024 |
|
$ |
597,084 |
|
Strategic Brands |
|
40,073 |
|
45,275 |
|
127,141 |
|
54,359 |
| ||||
Other(3) |
|
1,186 |
|
(284) |
|
1,528 |
|
165,376 |
| ||||
Corporate and unallocated |
|
(60,533) |
|
(46,564) |
|
(170,734) |
|
(154,758) |
| ||||
|
|
$ |
289,338 |
|
$ |
288,076 |
|
$ |
832,959 |
|
$ |
662,061 |
|
(1) Includes $8.4 million and $8.2 million for the three-months ended September 30, 2016 and 2015, respectively, related to the recognition of deferred revenue. Includes $28.6 million and $54.7 million for the nine-months ended September 30, 2016 and 2015, respectively, related to the recognition of deferred revenue.
(2) Includes $4.7 million and $2.5 million for the three-months ended September 30, 2016 and 2015, respectively, related to distributor termination costs. Includes $33.4 million and $220.7 million for the nine-months ended September 30, 2016 and 2015, respectively, related to distributor termination costs.
(3) Includes $161.5 million gain on the sale of Monster Non-Energy for the nine-months ended September 30, 2015.
|
|
Three-Months Ended |
|
Nine-Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
Depreciation and amortization: |
|
|
|
|
|
|
|
|
| ||||
Monster Energy® Drinks |
|
$ |
5,974 |
|
$ |
5,408 |
|
$ |
17,651 |
|
$ |
15,556 |
|
Strategic Brands |
|
1,777 |
|
1,757 |
|
5,325 |
|
2,102 |
| ||||
Other |
|
1,151 |
|
- |
|
2,305 |
|
232 |
| ||||
Corporate and unallocated |
|
1,522 |
|
1,341 |
|
4,593 |
|
3,867 |
| ||||
|
|
$ |
10,424 |
|
$ |
8,506 |
|
$ |
29,874 |
|
$ |
21,757 |
|
|
|
September 30, |
|
December 31, |
| ||
Goodwill and other intangible assets: |
|
|
|
|
| ||
Monster Energy® Drinks |
|
$ |
1,331,931 |
|
$ |
699,346 |
|
Strategic Brands |
|
1,003,355 |
|
1,008,355 |
| ||
Other |
|
29,170 |
|
- |
| ||
Corporate and unallocated |
|
- |
|
- |
| ||
|
|
$ |
2,364,456 |
|
$ |
1,707,701 |
|
Corporate and unallocated expenses for the three-months ended September 30, 2016 include $33.2 million of payroll costs, of which $12.1 million was attributable to stock-based compensation expense (see Note 14, Stock-Based Compensation), as well as $16.9 million attributable to professional service expenses, including accounting and legal costs, and $9.3 million of other operating expenses. Corporate and unallocated expenses for the three-months ended September 30, 2015 include $27.1 million of payroll costs, of which $8.9 million was attributable to stock-based compensation expense (see Note 14, Stock-Based Compensation), as well as $10.3 million attributable to professional service expenses, including accounting and legal costs, of which $0.3 million was attributable to TCCC Transaction expenses, and $5.7 million of other operating expenses.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
Corporate and unallocated expenses for the nine-months ended September 30, 2016 include $92.7 million of payroll costs, of which $33.7 million was attributable to stock-based compensation expense (see Note 14, Stock-Based Compensation), as well as $52.4 million attributable to professional service expenses, including accounting and legal costs, of which $4.5 million was attributable to AFF Transaction expenses, and $24.8 million of other operating expenses. Corporate and unallocated expenses for the nine-months ended September 30, 2015 include $83.9 million of payroll costs, of which $23.7 million was attributable to stock-based compensation expense (see Note 14, Stock-Based Compensation), as well as $46.6 million attributable to professional service expenses, including accounting and legal costs, of which $15.4 million was attributable to TCCC Transaction expenses, and $20.8 million of other operating expenses.
TCCC, through certain wholly-owned subsidiaries (the TCCC Subsidiaries), accounted for approximately 41% and 42% of the Companys net sales for the three-months ended September 30, 2016 and 2015, respectively. The TCCC Subsidiaries accounted for approximately 43% and 41% of the Companys net sales for the nine-months ended September 30, 2016 and 2015, respectively.
Net sales to customers outside the United States amounted to $190.8 million and $170.6 million for the three-months ended September 30, 2016 and 2015, respectively. Net sales to customers outside the United States amounted to $540.2 million and $435.1 million for the nine-months ended September 30, 2016 and 2015, respectively.
18. RELATED PARTY TRANSACTIONS
As a result of the TCCC Transaction, TCCC controls more than 10% of the voting interests of the Company. TCCC, through the TCCC Subsidiaries and through certain of its affiliated companies (the TCCC Affiliates) purchases and distributes certain of the Companys products both domestically and in certain international territories. The Company also pays TCCC a commission based on certain sales within the TCCC distribution network.
TCCC commissions, based on sales to the TCCC Affiliates for the three-months ended September 30, 2016 and 2015, were $8.1 million and $7.7 million, respectively. TCCC commissions, based on sales to the TCCC Affiliates for the nine-months ended September 30, 2016 and 2015, were $19.0 million and $9.4 million, respectively.
TCCC commissions, based on sales to the TCCC Subsidiaries, are accounted for as a reduction to revenue and are reported in net sales to the TCCC Subsidiaries. Net sales to the TCCC Subsidiaries for the three-months ended September 30, 2016 and 2015 were $321.9 million and $315.9 million, respectively. Net sales to the TCCC Subsidiaries for the nine-months ended September 30, 2016 and 2015 were $981.0 million and $845.8 million, respectively.
The Company also purchases concentrates from TCCC which are then sold to both the TCCC Affiliates and the TCCC Subsidiaries. Concentrate purchases from TCCC were $6.2 million and $8.0 million for the three-months ended September 30, 2016 and 2015, respectively. Concentrate purchases from TCCC were $20.9 million and $9.1 million for the nine-months ended September 30, 2016 and 2015, respectively.
Certain TCCC Subsidiaries also contract manufacture certain of the Companys Monster Energy® brand energy drinks as well as MutantTM Super Sodas. Contract manufacturing expenses were $2.2 million and $1.8 million for the three-months ended September 30, 2016 and 2015, respectively. Contract manufacturing expenses were $6.0 million and $5.3 million for the nine-months ended September 30, 2016 and 2015, respectively.
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:
|
|
September 30, |
|
December 31, |
| ||
|
|
|
|
|
| ||
Accounts receivable, net |
|
$ |
198,245 |
|
$ |
172,201 |
|
Accounts payable |
|
$ |
(67,838) |
|
$ |
(58,579) |
|
Accrued promotional allowances |
|
$ |
(33,586) |
|
$ |
(27,544) |
|
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 September 30, 2016 and 2015 were $0.6 million and $0.3 million, respectively. Expenses incurred with such company in connection with promotional materials purchased during the nine-months ended September 30, 2016 and 2015 were $0.9 million and $1.5 million, respectively.
19. SUBSEQUENT EVENTS
On October 11, 2016, the Company filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation to increase the number of authorized shares of the Companys common stock, par value $0.005 per share (Common Stock), from 240,000,000 shares to 1,250,000,000 shares.
On October 14, 2016, the Company announced that its Board of Directors approved a 3-for-1 stock split of its Common Stock to be effected in the form of a 200% stock dividend. The additional shares will be distributed on November 9, 2016 to stockholders of record at the close of business (Eastern Time) on October 26, 2016. The Company anticipates its common stock to begin trading at the split-adjusted price on November 10, 2016.
The following pro-forma earnings per share information has been adjusted retroactively to reflect the stock split:
|
|
Three-Months Ended |
|
Nine-Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
NET INCOME |
|
$ |
191,643 |
|
$ |
174,574 |
|
$ |
539,738 |
|
$ |
407,991 |
|
|
|
|
|
|
|
|
|
|
| ||||
NET INCOME PER COMMON SHARE: |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
$ |
0.34 |
|
$ |
0.28 |
|
$ |
0.91 |
|
$ |
0.74 |
|
Diluted |
|
$ |
0.33 |
|
$ |
0.28 |
|
$ |
0.89 |
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
| ||||
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS: |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
571,138 |
|
615,153 |
|
594,219 |
|
552,294 |
| ||||
Diluted |
|
583,293 |
|
624,282 |
|
606,280 |
|
564,393 |
|
ITEM 2. MANAGEMENTS 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 Companys subsidiaries primarily develop and market energy drinks as well as MutantTM Super Sodas.
Stock Repurchase
On April 28, 2016, the Board of Directors authorized us to commence a modified Dutch auction tender offer to repurchase up to $2.0 billion of our outstanding shares of common stock (the Stock Repurchase). The Stock Repurchase was authorized under our existing share repurchase authority and was funded with cash on hand. We commenced the tender offer in May 2016. On June 15, 2016, we accepted for payment an aggregate of 12,820,512 shares of common stock at a purchase price of $156.00 per share, for a total amount of $2.0 billion (excluding commissions), which exhausted the availability under all share repurchase plans. Such shares of common stock are included in common stock in treasury in the accompanying condensed consolidated balance sheet at September 30, 2016.
Acquisitions and Divestitures
On April 1, 2016, we completed our acquisition of flavor supplier and long-time business partner American Fruits & Flavors (AFF), in an asset acquisition that brought our primary flavor supplier in-house, secured the intellectual property of our most important flavors in perpetuity and further enhanced our flavor development and global flavor footprint capabilities (the AFF Transaction). Pursuant to the terms of the AFF Transaction, we purchased AFF for $688.5 million in cash.
We accounted for the AFF Transaction in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805 Business Combinations. Inventory purchased under the AFF Transaction was recorded at fair value. Raw material cost savings from the AFF Transaction were approximately $23.3 million in the three-months ended September 30, 2016.
There were no AFF Transaction related expenses for the three-months ended September 30, 2016. We incurred $4.5 million in AFF Transaction related expenses for the nine-months ended September 30, 2016.
On June 12, 2015, we completed the transactions contemplated by the definitive agreements entered into with The Coca-Cola Company (TCCC) on August 14, 2014, which provided for a long-term strategic relationship in the global energy drink category (the TCCC Transaction).
In accordance with ASC No. 420 Exit or Disposal Cost Obligations, we expense distributor termination costs in the period in which the written notification of termination occurs. We incurred termination costs of $4.7 million and $2.5 million for the three-months ended September 30, 2016 and 2015, respectively. We incurred termination costs of $33.4 million and $220.7 million for the nine-months ended September 30, 2016 and 2015, respectively. Such termination costs have been expensed in full and are included in operating expenses for the three- and nine-months ended September 30, 2016 and 2015. There was no accelerated amortization of deferred revenue balances associated with certain of our prior distributors who were sent notices of termination during the three-months ended September 30, 2016 and 2015, respectively. We recognized as income $5.0 million and $39.8 million for the nine-months ended September 30, 2016 and 2015, respectively, related to the accelerated amortization of the deferred revenue balances associated with certain of our prior distributors who were sent notices of termination during the nine-months ended September 30, 2016 and 2015.
We incurred $0.3 million and $15.4 million in TCCC Transaction related expenses for the three- and nine-months ended September 30, 2015, respectively.
The following table summarizes the financial impact of the transactions discussed above for the three- and nine-months ended September 30, 2016 and 2015:
Income Statement Items (in thousands): |
|
Three-Months |
|
Three-Months |
|
Nine-Months |
|
Nine-Months |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Included in Net Sales: |
|
|
|
|
|
|
|
|
| ||||
Accelerated recognition of deferred revenue |
|
$ |
- |
|
$ |
- |
|
$ |
4,963 |
|
$ |
39,761 |
|
|
|
|
|
|
|
|
|
|
| ||||
Included in Operating Expenses: |
|
|
|
|
|
|
|
|
| ||||
Stock Repurchase expenses |
|
$ |
- |
|
$ |
- |
|
$ |
(1,556) |
|
$ |
- |
|
AFF Transaction expenses |
|
- |
|
- |
|
(4,483) |
|
- |
| ||||
Distributor termination costs |
|
(4,712) |
|
(2,471) |
|
(33,413) |
|
(220,658) |
| ||||
TCCC Transaction expenses |
|
- |
|
(292) |
|
- |
|
(15,426) |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gain on sale of Monster Non-Energy |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
161,470 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net Impact on Operating Income |
|
$ |
(4,712) |
|
$ |
(2,763) |
|
$ |
(34,489) |
|
$ |
(34,853) |
|
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® |
· Nalu® |
· Monster Rehab® |
· NOS® |
· Monster Energy Extra Strength Nitrous Technology® |
· Full Throttle® |
· Java Monster® |
· Burn® |
· Muscle Monster® |
· Mother® |
· Mega Monster Energy® |
· Ultra® |
· Punch Monster® |
· Play® and Power Play® |
· Juice Monster® |
· Gladiator® |
· M3® |
· Relentless® |
· Übermonster® |
· Samurai® |
· BU® |
· BPM® |
· MutantTM Super Soda |
|
Our Monster Energy® brand energy drinks, which represented 89.8% and 90.8% of our net sales for the three-months ended September 30, 2016 and 2015, respectively, primarily include the following:
· Monster Energy® |
· Java Monster® Kona Blend |
· Lo-Carb Monster Energy® |
· Java Monster® Loca Moca® |
· Monster Assault® |
· Java Monster® Mean Bean® |
· Juice Monster® Khaos® |
· Java Monster® Vanilla Light |
· Juice Monster® Ripper® |
· Java Monster® Irish Blend® |
· Juice Monster® Pipeline Punch® |
· Java Monster® Salted Caramel |
· Monster Energy Absolutely Zero® |
· Mega Monster Energy® |
· Monster Energy® Import |
· Monster Energy Extra Strength Nitrous |
· Punch Monster® Ballers Blend® (formerly Dub Edition) |
Technology® Super Dry |
· Punch Monster® Mad Dog (formerly Dub Edition) |
· Monster Energy Extra Strength Nitrous |
· Monster Rehab® Tea + Lemonade + Energy |
Technology® Anti-Gravity® |
· Monster Rehab® Raspberry Tea + Energy (formerly Rojo) |
· M3® Monster Energy® Super Concentrate |
· Monster Rehab® Green Tea + Energy |
· Monster Energy Zero Ultra® |
· Monster Rehab® Tea + Orangeade + Energy |
· Monster Energy Ultra Blue® |
· Monster Rehab® Tea + Pink Lemonade + Energy |
· Monster Energy Ultra Red® |
· Monster Rehab® Peach Tea + Energy |
· Monster Energy Ultra Black® |
· Muscle Monster® Vanilla |
· Monster Energy Ultra Sunrise® |
· Muscle Monster® Chocolate |
· Monster Energy Ultra Citron® |
· Muscle Monster® Strawberry |
· Monster Energy® Unleaded® |
· Muscle Monster® Banana |
· Übermonster® Energy Brew |
· Monster Energy® Gronk |
· Monster Energy® Valentino Rossi |
We have three operating and reportable segments, (i) Monster Energy® Drinks segment (Monster Energy® Drinks), which is comprised of our Monster Energy® drink products (previously the Finished Products segment) as well as MutantTM Super Soda drink products, (ii) Strategic Brands (Strategic Brands), which include the various energy drink brands acquired from TCCC as a result of the TCCC Transaction (previously the Concentrate segment) and (iii) Other, (Other) the principal products of which include the non-energy brands disposed of as a result of the TCCC Transaction as well as certain products acquired as part of the AFF Transaction that are sold to independent third-parties (the AFF Products).
During the nine-months ended September 30, 2016, we continued to expand our existing energy drink portfolio and further develop our distribution markets. During the nine-months ended September 30, 2016, we introduced the following products:
· Java Monster® Salted Caramel (January 2016)
· Monster Energy® Gronk (February 2016)
· MutantTM Super Soda (September 2016)
In the normal course of business we discontinue certain products and/or product lines. Those products and/or product lines discontinued during the nine-months ended September 30, 2016, 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 $788.0 million for the three-months ended September 30, 2016 represented record sales for our third 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 $707.4 million for the three-months ended September 30, 2016. Net sales of our Strategic Brands acquired as part of the TCCC Transaction were $72.1 million for the three-months ended September 30, 2016.
Net changes in foreign currency exchange rates had an unfavorable impact on net sales in the Monster Energy® Drinks segment of approximately $1.6 million for the three-months ended September 30, 2016, primarily due to our operations in Europe and Mexico, partially offset by our operations in Japan. Net changes in foreign currency exchange rates had an unfavorable impact on net sales in the Strategic Brands segment of approximately $1.0 million for the three-months ended September 30, 2016, primarily due to our operations in Europe.
Our Monster Energy® Drinks segment represented 90.1% and 90.8% of our consolidated net sales for the three-months ended September 30, 2016 and 2015, respectively. Our Strategic Brands segment represented 9.2% of our consolidated net sales for both the three-months ended September 30, 2016 and 2015, respectively. Our Other segment represented 0.7% of our consolidated net sales for the three-months ended September 30, 2016. There were no net sales for the Other segment during the three-months ended September 30, 2015.
Our sales and marketing strategy for all our beverages is to focus our efforts on developing brand awareness through image enhancing programs and product sampling. We use our branded vehicles and other promotional vehicles at events where we offer samples of our products to consumers. We utilize push-pull methods to enhance shelf and display space exposure in sales outlets (including racks, coolers and barrel coolers), advertising, in-store promotions and in-store placement of point-of-sale materials to encourage demand from consumers for our products. We also support our brands with prize promotions, price promotions, competitions, endorsements from selected public and sports figures, personality endorsements (including from television and other well-known sports personalities), sampling and sponsorship of selected causes, events, athletes and teams. 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 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, better and unique. The labels and graphics for many of our products are redesigned from time to time to maximize their visibility and identification, wherever they may be placed in stores, which we will continue to reevaluate from time to time.
All of our beverage products are manufactured by various third-party bottlers and co-packers situated throughout the United States and abroad, under separate arrangements with each party.
Our growth strategy includes expanding our international business. Gross sales to customers outside the United States amounted to $232.8 million and $207.8 million for the three-months ended September 30, 2016 and 2015, respectively. Such sales were approximately 26% and 24% of gross sales for the three-months ended September 30, 2016 and 2015, respectively. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales to customers outside the United States of approximately 2% for the three-months ended September 30, 2016 primarily due to our operations in Europe and Mexico, partially offset by our operations in Japan.
Our customers are primarily full service beverage bottlers/distributors, retail grocery and specialty chains, wholesalers, club stores, drug chains, mass merchandisers, convenience chains, food service customers and the military. Gross sales to our various customer types for the three- and nine-months ended September 30, 2016 and 2015 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 |
|
Nine-Months Ended | ||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
U.S. full service bottlers/distributors |
|
65% |
|
65% |
|
65% |
|
65% |
Club stores, drug chains & mass merchandisers |
|
7% |
|
9% |
|
8% |
|
9% |
International full service bottlers/distributors |
|
26% |
|
24% |
|
25% |
|
23% |
Retail grocery, specialty chains and wholesalers |
|
1% |
|
1% |
|
1% |
|
2% |
Other |
|
1% |
|
1% |
|
1% |
|
1% |
Our customers include Coca-Cola Refreshments USA, Inc., Coca-Cola Bottling Company, CCBCC Operations, LLC, United Bottling Contracts Company, LLC, Swire Coca-Cola, USA and certain other TCCC independent bottlers, Coca-Cola European Partners, Coca-Cola Hellenic, Coca-Cola FEMSA, Coca-Cola Amatil, Asahi, Kalil Bottling Group, Wal-Mart, Inc. (including Sams Club), Costco and certain Anheuser Busch distributors (AB Distributors). In February 2015, in accordance with our then existing agreements with the applicable AB Distributors, we sent notices of termination to the majority of the AB Distributors in the U.S. for the termination of their respective distribution agreements. The associated distribution rights relating to such terminated distribution agreements have been transitioned to TCCCs network of owned or controlled bottlers/distributors and independent bottlers/distributors as of the effective date of termination of the affected AB Distributors rights in the applicable territories. As of November 7, 2016, distribution rights in the U.S. representing approximately 89% of the target case sales have been transitioned to TCCCs distribution network. 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. TCCC, through certain wholly-owned subsidiaries (the TCCC Subsidiaries), accounted for approximately 41% and 42% of our net sales for the three-months ended September 30, 2016 and 2015, respectively. TCCC, through the TCCC Subsidiaries, accounted for approximately 43% and 41% of our net sales for the nine-months ended September 30, 2016 and 2015, respectively.
Results of Operations
The following table sets forth key statistics for the three- and nine-months ended September 30, 2016 and 2015.
(In thousands, except per share amounts) |
|
Three-Months Ended |
|
Percentage |
|
Nine-Months Ended |
|
Percentage |
| |||||||||
|
|
2016 |
|
2015 |
|
16 vs. 15 |
|
2016 |
|
2015 |
|
16 vs. 15 |
| |||||
Net sales¹ |
|
$ |
787,954 |
|
$ |
756,619 |
|
4.1% |
|
$ |
2,295,628 |
|
$ |
2,077,131 |
|
10.5% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cost of sales |
|
284,979 |
|
291,143 |
|
(2.1%) |
|
851,741 |
|
848,191 |
|
0.4% |
| |||||
Gross profit*¹ |
|
502,975 |
|
465,476 |
|
8.1% |
|
1,443,887 |
|
1,228,940 |
|
17.5% |
| |||||
Gross profit as a percentage of net sales¹ |
|
63.8% |
|
61.5% |
|
|
|
62.9% |
|
59.2% |
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating expenses²,³ |
|
212,600 |
|
174,038 |
|
22.2% |
|
610,277 |
|
725,205 |
|
(15.8%) |
| |||||
Operating expenses as a percentage of net sales |
|
27.0% |
|
23.0% |
|
|
|
26.6% |
|
34.9% |
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Gain on sale of Monster Non-Energy |
|
- |
|
- |
|
|
|
- |
|
161,470 |
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating income¹,²,³ |
|
290,375 |
|
291,438 |
|
(0.4%) |
|
833,610 |
|
665,205 |
|
25.3% |
| |||||
Operating income as a percentage of net sales |
|
36.9% |
|