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Monster Beverage Corp - Quarter Report: 2016 September (Form 10-Q)

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

 

 

For the quarterly period ended September 30, 2016

Commission File Number 001-18761

 

 

 

MONSTER BEVERAGE CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware

47-1809393

 

(State or other jurisdiction of

(I.R.S. Employer

 

incorporation or organization)

Identification No.)

 

 

1 Monster Way

Corona, California 92879

(Address of principal executive offices) (Zip code)

 

 

 

(951) 739 – 6200

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  X    No __

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes    No __

 

 

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

 

Large Accelerated Filer x

 

Accelerated filer ¨

 

 

 

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

 

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.

 



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

SEPTEMBER 30, 2016

 

 

INDEX

 

 

Part I.

FINANCIAL INFORMATION

Page No.

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015

3

 

 

 

 

Condensed Consolidated Statements of Income for the Three- and Nine-Months Ended September 30, 2016 and 2015

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three- and Nine-Months Ended September 30, 2016 and 2015

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine-Months Ended September 30, 2016 and 2015

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

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

33

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

54

 

 

 

Item 4.

Controls and Procedures

54

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

54

 

 

 

Item 1A.

Risk Factors

54

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

54

 

 

 

Item 3.

Defaults Upon Senior Securities

54

 

 

 

Item 4.

Mine Safety Disclosures

55

 

 

 

Item 5.

Other Information

55

 

 

 

Item 6.

Exhibits

55

 

 

 

 

Signatures

56

 

2



Table of Contents

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2016 AND DECEMBER 31, 2015

(In Thousands, Except Par Value) (Unaudited)

 

 

 

September 30,
2016

 

December 31,
2015

ASSETS

 

 

 

 

CURRENT ASSETS:

 

 

 

 

Cash and cash equivalents

 

  $

341,526

 

  $

2,175,417

Short-term investments

 

257,653

 

744,610

Accounts receivable, net

 

467,348

 

352,955

TCCC Transaction receivable

 

125,000

 

125,000

Inventories

 

167,840

 

156,121

Prepaid expenses and other current assets

 

35,016

 

26,967

Prepaid income taxes

 

155,641

 

18,462

Total current assets

 

1,550,024

 

3,599,532

 

 

 

 

 

INVESTMENTS

 

9,519

 

15,348

PROPERTY AND EQUIPMENT, net

 

144,625

 

97,354

DEFERRED INCOME TAXES

 

142,116

 

140,468

GOODWILL

 

1,283,643

 

1,279,715

OTHER INTANGIBLE ASSETS, net

 

1,080,813

 

427,986

OTHER ASSETS

 

25,691

 

10,874

Total Assets

 

  $

4,236,431

 

  $

5,571,277

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

Accounts payable

 

  $

172,159

 

  $

144,763

Accrued liabilities

 

91,819

 

81,786

Accrued promotional allowances

 

140,952

 

115,530

Accrued distributor terminations

 

5,650

 

11,018

Deferred revenue

 

34,407

 

32,271

Accrued compensation

 

21,820

 

22,159

Income taxes payable

 

5,835

 

2,750

Total current liabilities

 

472,642

 

410,277

 

 

 

 

 

DEFERRED REVENUE

 

365,389

 

351,590

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 11)

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

Common stock - $0.005 par value; 240,000 shares authorized;
207,384 shares issued and 190,426 outstanding as of September 30, 2016;
207,019 shares issued and 202,900 outstanding as of December 31, 2015

 

1,037

 

1,035

Additional paid-in capital

 

4,036,204

 

3,991,857

Retained earnings

 

1,934,601

 

1,394,863

Accumulated other comprehensive loss

 

(14,534)

 

(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

 

(2,558,908)

 

(556,467)

Total stockholders’ equity

 

3,398,400

 

4,809,410

Total Liabilities and Stockholders’ Equity

 

  $

4,236,431

 

  $

5,571,277

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE- AND NINE-MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

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

 

 

 

Three-Months Ended

 

Nine-Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

NET SALES

 

  $

787,954

 

  $

756,619

 

  $

2,295,628

 

$

2,077,131

 

 

 

 

 

 

 

 

 

 

 

COST OF SALES

 

284,979

 

291,143

 

851,741

 

848,191

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

502,975

 

465,476

 

1,443,887

 

1,228,940

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

212,600

 

174,038

 

610,277

 

725,205

 

 

 

 

 

 

 

 

 

 

 

GAIN ON SALE OF MONSTER NON-ENERGY

 

-

 

-

 

-

 

161,470

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

290,375

 

291,438

 

833,610

 

665,205

 

 

 

 

 

 

 

 

 

 

 

INTEREST and OTHER EXPENSE, net

 

(1,037)

 

(3,362)

 

(651)

 

(3,144)

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

289,338

 

288,076

 

832,959

 

662,061

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

97,695

 

113,502

 

293,221

 

254,070

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

  $

191,643

 

  $

174,574

 

  $

539,738

 

$

407,991

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER COMMON SHARE:*

 

 

 

 

 

 

 

 

 

Basic

 

  $

1.01

 

  $

0.85

 

  $

2.72

 

$

2.22

 

Diluted

 

  $

0.99

 

  $

0.84

 

  $

2.67

 

$

2.17

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

190,379

 

205,051

 

198,073

 

184,098

 

Diluted

 

194,431

 

208,094

 

202,093

 

188,131

 

 

 

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.

 

4



Table of Contents

 

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)

 

 

 

 

Three-Months Ended
September 30,

 

Nine-Months Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Net income, as reported

 

  $

191,643

 

  $

174,574

 

  $

539,738

 

  $

407,991

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

(57)

 

(1,778)

 

7,344

 

(9,398)

 

Available-for-sale investments:

 

 

 

 

 

 

 

 

 

Change in net unrealized gains

 

-

 

-

 

-

 

-

 

Reclassification adjustment for net gains included in net income

 

-

 

-

 

-

 

-

 

Net change in available-for-sale investments

 

-

 

-

 

-

 

-

 

Other comprehensive income (loss)

 

(57)

 

(1,778)

 

7,344

 

(9,398)

 

Comprehensive income

 

  $

191,586

 

  $

172,796

 

  $

547,082

 

  $

398,593

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(In Thousands) (Unaudited)

 

 

 

Nine-Months Ended

 

 

 

September 30, 2016

 

September 30, 2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

  $

539,738

 

  $

407,991

 

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

 

 

 

 

 

Depreciation and amortization

 

29,874

 

21,757

 

Gain on disposal of property and equipment

 

(171)

 

(212)

 

Gain on sale of Monster Non-Energy

 

-

 

(161,470)

 

Stock-based compensation

 

33,735

 

23,689

 

Deferred income taxes

 

(1,652)

 

(115,098)

 

Effect on cash of changes in operating assets and liabilities, net of effects of acquisitions:

 

 

 

 

 

Accounts receivable

 

(100,233)

 

(132,614)

 

Distributor receivables

 

(21,034)

 

393

 

Inventories

 

18,355

 

(9,076)

 

Prepaid expenses and other current assets

 

(8,805)

 

(6,863)

 

Prepaid income taxes

 

(136,899)

 

(83,276)

 

Accounts payable

 

21,795

 

75,142

 

Accrued liabilities

 

8,303

 

29,296

 

Accrued promotional allowances

 

23,411

 

15,196

 

Accrued distributor terminations

 

(5,466)

 

7,706

 

Accrued compensation

 

(346)

 

2,414

 

Income taxes payable

 

3,340

 

312,750

 

Deferred revenue

 

16,757

 

(35,991)

 

Net cash provided by operating activities

 

420,702

 

351,734

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Maturities of held-to-maturity investments

 

892,453

 

998,762

 

Sales of available-for-sale investments

 

2,993

 

4,001

 

Sales of trading investments

 

-

 

2,625

 

Proceeds from the transfer of distribution rights to TCCC

 

-

 

179,658

 

Purchases of held-to-maturity investments

 

(378,254)

 

(1,760,178)

 

Purchases of available-for-sale investments

 

(24,405)

 

-

 

Purchases of property and equipment

 

(67,527)

 

(25,627)

 

Proceeds from the sale of Monster Non-Energy

 

-

 

198,008

 

Proceeds from sale of property and equipment

 

705

 

484

 

Purchases of AFF Assets, net

 

(688,485)

 

-

 

Increase in intangibles

 

(4,255)

 

(5,352)

 

Decrease (increase) in other assets

 

56

 

(1,039)

 

Net cash used in investing activities

 

(266,719)

 

(408,658)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Principal payments on debt

 

(1,731)

 

(807)

 

Issuance of common stock

 

10,615

 

1,691,051

 

Purchases of common stock held in treasury

 

(2,002,441)

 

(758,974)

 

Net cash (used in) provided by financing activities

 

(1,993,557)

 

931,270

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

5,683

 

(3,952)

 

 

 

 

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

(1,833,891)

 

870,394

 

CASH AND CASH EQUIVALENTS, beginning of period

 

2,175,417

 

370,323

 

CASH AND CASH EQUIVALENTS, end of period

 

  $

341,526

 

  $

1,240,717

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

  $

54

 

  $

21

 

Income taxes

 

  $

429,371

 

  $

141,184

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE 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 Company’s 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.

 

7



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

1.                                    BASIS OF PRESENTATION

 

Reference is made to the Notes to Consolidated Financial Statements, in Monster Beverage Corporation and Subsidiaries (the “Company”) Annual Report on Form 10-K for the year ended December 31, 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 Company’s condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and Securities and Exchange Commission (“SEC”) rules and regulations applicable to interim financial reporting.  They do not include all the information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP.  The information set forth in these interim condensed consolidated financial statements for the three- and 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 Company’s 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 management’s 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 Company’s 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 Company’s primary flavor supplier in-house, secured the intellectual property of the Company’s 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”.

 

8



Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The following table summarizes the preliminary fair value allocations of the AFF Transaction consideration:

 

 

 

Identifiable
Assets Acquired
and Liabilities
Assumed

 

Consideration
Transferred

 

Intangibles - flavor formulas (non-amortizing)¹

 

  $

618,000

 

  $

-

 

Intangibles - flavor formulas (amortizing)

 

641

 

-

 

Intangibles - customer relationships (amortizing)

 

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 Company’s 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 Company’s 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.

 

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Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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 Company’s 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 Company’s Board of Directors, (2) TCCC transferred all of its rights in and to TCCC’s 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 Company’s energy products in most territories in the U.S. to members of TCCC’s 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 TCCC’s 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 TCCC’s 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 TCCC’s 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

 

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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
Beverage
Corporation
as reported
¹

 

KO Energy

 

Disposal of
Monster Non-
Energy

 

Other

 

Pro Forma
Combined

 

Net sales

 

  $

756,619

 

  $

-

 

  $

-

 

  $

-

 

  $

756,619

 

Net income

 

174,574

 

-

 

-

 

180

 

174,754

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine-Months Ended September 30, 2015

 

 

 

 

 

 

 

Pro Forma Adjustments

 

 

 

 

 

Monster
Beverage
Corporation
as reported
²

 

KO Energy³

 

Disposal of
Monster Non-
Energy
4

 

Other

 

Pro Forma
Combined

 

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.

 

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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
September 30,
2015

 

Nine-Months Ended
September 30,
2015

 

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 Company’s 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 Company’s 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.

 

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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 Company’s 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 Company’s 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 contract’s performance obligations; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU No. 2014-09 was to be effective for reporting periods beginning after December 15, 2016.  However, on July 9, 2015, the FASB voted to approve a one-year deferral of the effective date. This new guidance is effective for the Company beginning January 1,

 

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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 Company’s investments at:

 

September 30, 2016

 

Amortized Cost

 

Gross
Unrealized
Holding
Gains

 

Gross
Unrealized
Holding
Losses

 

Fair
Value

 

Continuous
Unrealized
Loss Position
less than 12
Months

 

Continuous
Unrealized
Loss Position
greater than 12
Months

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
Unrealized
Holding
Gains

 

Gross
Unrealized
Holding
Losses

 

Fair
Value

 

Continuous
Unrealized
Loss Position
less than 12
Months

 

Continuous
Unrealized
Loss Position
greater than 12
Months

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 Company’s 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.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

 

 

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 Company’s held-to-maturity investments at amortized cost and the fair value of the Company’s financial assets and liabilities that are recorded at fair value on a recurring basis, segregated among the appropriate levels within the fair value hierarchy at:

 

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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 Company’s short-term investments are classified within Level 1 or Level 2 of the fair value hierarchy.  The Company’s valuation of its Level 1 investments, which include money market funds, is based on quoted market prices in active markets for identical securities. The Company’s valuation of its Level 2 investments, which include municipal securities, commercial paper, 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 Company’s 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 Company’s valuation techniques.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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 Company’s foreign currency exchange contracts are recognized in interest and other (expense) income, net, in the condensed consolidated statements of income, and are largely offset by the changes in the fair value of the underlying economically hedged item.

 

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

 

September 30, 2016

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

 

Notional
Amount

 

Fair
Value

 

Balance Sheet Location

Assets:

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

Receive 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

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

December 31, 2015

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

 

Notional
Amount

 

Fair
Value

 

Balance Sheet Location

Assets:

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

Receive USD/pay GBP

 

  $

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)
recognized in income on
derivatives

 

 

 

 

Three-months ended

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

 

Location of gain (loss)
recognized in income on
derivatives

 

September 30,
2016

 

September 30,
2015

Foreign currency exchange contracts

 

Interest and other expense, net

 

  $

(882)

 

  $

3,552

 

 

 

 

 

Amount of gain (loss)
recognized in income on
derivatives

 

 

 

 

Nine-months ended

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

 

Location of gain (loss)
recognized in income on
derivatives

 

September 30,
2016

 

September 30,
2015

Foreign currency exchange contracts

 

Interest and other expense, net

 

  $

(424)

 

  $

1,634

 

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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,
2016

 

December 31,
2015

 

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,
2016

 

December 31,
2015

 

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:

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

 

 

Monster
Energy®
Drinks

 

Strategic
Brands

 

Other

 

Total

 

Balance at December 31, 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,
2016

 

December 31,
2015

 

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 Company’s prior distributors, are accounted for as deferred revenue and are recognized as revenue ratably over the anticipated life of the respective distribution agreement, generally 20 years. Revenue recognized was $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 Company’s 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 Company’s prior distributors who were sent notices of termination during the nine-months ended September 30, 2015.

 

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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 Company’s financial position or results of operations.

 

State Attorney General Inquiry – In July 2012, the Company received a subpoena from the Attorney General for the State of New York in connection with its investigation concerning the Company’s advertising, marketing, promotion, ingredients, usage and sale of its Monster Energy® brand energy drinks. Production of documents pursuant to that subpoena was completed in approximately May 2014.

 

On August 6, 2014, the Attorney General for the State of New York issued a second subpoena seeking additional documents and the deposition of a Company employee. On September 8, 2014, the Company moved to quash the second subpoena in the Supreme Court, New York County. The motion was fully briefed and was argued on March 17, 2015.  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 Company’s business, financial condition or results of operations.

 

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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 Company’s 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 Attorney’s 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 Attorney’s 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 Attorney’s 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 Court’s 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 California’s 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 California’s 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 Company’s 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 Company’s motion to strike and motion to bifurcate and/or stay claims relating to safety.

 

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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 Attorney’s 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 Company’s 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 Company’s financial position or results of operations.

 

The Company evaluates, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of the liability that is accrued, if any, or in the amount of any related insurance reimbursements recorded. As of September 30, 2016, the Company’s condensed consolidated balance sheet includes accrued loss contingencies of approximately $2.1 million.

 

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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
Translation
Losses

 

 

 

 

 

 

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 Company’s Board of Directors authorized a new share repurchase program for the repurchase of up to $250.0 million of the Company’s 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 Company’s 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 Company’s 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.

 

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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 Company’s 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 Company’s stock-based compensation plans, all stock options granted as of September 30, 2016 were granted at prices based on the fair value of the Company’s common stock on the date of grant. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes-Merton option pricing formula with the assumptions included in the table below. The Company records compensation expense for non-employee stock options based on the estimated fair value of the options as of the earlier of (1) the date at which a commitment for performance by the non-employee to earn the stock option is reached or (2) the date at which the non-employee’s performance is complete, using the Black-Scholes-Merton option pricing formula with the assumptions included in the table below. The Company uses historical data to determine the exercise behavior, volatility and forfeiture rate of the options.

 

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

 

 

 

Three-Months Ended 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 Company’s expected term represents the weighted-average period that the Company’s stock options are expected to be outstanding. The expected term is based on expected time to post-vesting exercise of options by employees. The Company uses historical exercise patterns of previously granted options to derive employee behavioral patterns used to forecast expected exercise patterns.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The following table summarizes the Company’s activities with respect to its stock option plans as follows:

 

Options

 

Number of
Shares (In
thousands)

 

Weighted-
Average
Exercise
Price Per
Share

 

Weighted-
Average
Remaining
Contractual
Term (In
years)

 

Aggregate
Intrinsic Value

Outstanding at January 1, 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 Company’s share-based payment plans. That cost is expected to be recognized over a weighted-average period of 3.0 years.

 

Restricted Stock Awards and Restricted Stock Units

 

Stock-based compensation cost for restricted stock awards and restricted stock units is measured based on the closing fair market value of the Company’s common stock at the date of grant. In the event that the Company has the option and intent to settle a restricted stock unit in cash, the award is classified as a liability and revalued at each balance sheet date.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The following table summarizes the Company’s activities with respect to non-vested restricted stock awards and non-vested restricted stock units as follows:

 

 

 

Number of
Shares (in
thousands)

 

Weighted
Average
Grant-Date
Fair Value

 

Non-vested at January 1, 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 Company’s total gross unrecognized tax benefits, not including interest and penalties, for the nine-months ended September 30, 2016:

 

 

 

Gross Unrecognized Tax
Benefits

 

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 Company’s 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 Company’s effective tax rate would not be significant. It is expected that the change in the amount of unrecognized tax benefits within the next 12 months will not be significant.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

On August 7, 2015, the Internal Revenue Service (the “IRS”) began its examination of the Company’s U.S. federal income tax returns for the years ended December 31, 2012 and 2013. On October 18, 2016, the IRS began its examination of the Company’s U.S. federal income tax return for the year ended December 31, 2014.

 

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 management’s 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 Company’s 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.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The Company’s 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 Company’s Strategic Brands segment primarily generates net operating revenues by selling “concentrates” and/or “beverage bases” to authorized bottling and canning operations. Such bottlers generally combine the concentrates and/or beverage bases with sweeteners and water, which are then filled in authorized containers bearing the Company’s respective trademarks and sold to customers directly (or in some cases through wholesalers or other bottlers). To a lesser extent, the Company’s 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 Company’s reportable segments as management does not measure or allocate such assets on a segment basis.

 

The net revenues derived from the Company’s reportable segments and other financial information related thereto for the three- and 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

 

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

 

Three-Months Ended

 

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,
2016

 

December 31,
2015

 

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.

 

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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 Company’s net sales for the three-months ended September 30, 2016 and 2015, respectively. The TCCC Subsidiaries accounted for approximately 43% and 41% of the Company’s 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 Company’s products both domestically and in certain international territories.  The Company also pays TCCC a commission based on certain sales within the TCCC distribution network.

 

TCCC commissions, based on sales to the TCCC Affiliates for the three-months ended 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 Company’s 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.

 

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

 

 

September 30,
2016

 

December 31,
2015

 

 

 

 

 

 

 

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 Company’s 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

 

 

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Table of Contents

 

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

 

Our Business

 

When this report uses the words “the Company”, “we”, “us”, and “our”, these words refer to Monster Beverage Corporation and its subsidiaries, unless the context otherwise requires. Based in Corona, California, Monster Beverage Corporation is a holding company and conducts no operating business except through its consolidated subsidiaries. The Company’s subsidiaries primarily develop and market energy drinks as well as 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.

 

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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
Ended
September 30,
2016

 

Three-Months
Ended
September 30,
2015

 

Nine-Months
Ended
September 30,
2016

 

Nine-Months
Ended
September 30,
2015

 

 

 

 

 

 

 

 

 

 

 

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®

 

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Table of Contents

 

·        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® Baller’s 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.

 

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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
September 30,

 

Nine-Months Ended
September 30,

 

 

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%

 

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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 Sam’s 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 TCCC’s 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 TCCC’s 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.

 

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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
September 30,

 

Percentage
Change

 

Nine-Months Ended
September 30,

 

Percentage
Change

 

 

 

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%