Annual Statements Open main menu

Monster Beverage Corp - Quarter Report: 2018 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, 2018

Commission File Number 001-18761

 

 

 

MONSTER BEVERAGE CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware

47-1809393

 

(State or other jurisdiction of

(I.R.S. Employer

 

incorporation or organization)

Identification No.)

 

 

1 Monster Way

Corona, California 92879

(Address of principal executive offices) (Zip code)

 

 

 

(951) 739 – 6200

(Registrant’s telephone number, including area code)

 

 

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

 

Yes  X    No __

 

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

 

Yes    No __

 

 

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

 

Large Accelerated Filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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

 

Yes ___    No  X

 

The Registrant had 552,963,481 shares of common stock, par value $0.005 per share, outstanding as of October 31, 2018.

 


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

SEPTEMBER 30, 2018

 

 

INDEX

 

 

Part I.

FINANCIAL INFORMATION

Page No.

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

3

 

 

 

 

Condensed Consolidated Statements of Income for the Three- and Nine-Months Ended September 30, 2018 and 2017

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three- and Nine-Months Ended September 30, 2018 and 2017

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine-Months Ended September 30, 2018 and 2017

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

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

32

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

51

 

 

 

Item 4.

Controls and Procedures

51

 

 

 

Part II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

51

 

 

 

Item 1A.

Risk Factors

51

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

51

 

 

 

Item 3.

Defaults Upon Senior Securities

51

 

 

 

Item 4.

Mine Safety Disclosures

52

 

 

 

Item 5.

Other Information

52

 

 

 

Item 6.

Exhibits

52

 

 

 

 

Signatures

52

 

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, 2018 AND DECEMBER 31, 2017

(In Thousands, Except Par Value) (Unaudited)

 

 

 

September 30,
2018

 

December 31, 2017

ASSETS

 

 

 

 

CURRENT ASSETS:

 

 

 

 

Cash and cash equivalents

 

  $

713,714

 

  $

528,622

Short-term investments

 

457,898

 

672,933

Accounts receivable, net

 

620,162

 

449,476

Inventories

 

262,084

 

255,745

Prepaid expenses and other current assets

 

57,599

 

40,877

Prepaid income taxes

 

41,214

 

138,724

Total current assets

 

2,152,671

 

2,086,377

 

 

 

 

 

INVESTMENTS

 

1,610

 

2,366

PROPERTY AND EQUIPMENT, net

 

242,854

 

230,276

DEFERRED INCOME TAXES

 

85,253

 

92,333

GOODWILL

 

1,331,643

 

1,331,643

OTHER INTANGIBLE ASSETS, net

 

1,042,248

 

1,034,085

OTHER ASSETS

 

15,080

 

13,932

Total Assets

 

  $

4,871,359

 

  $

4,791,012

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

Accounts payable

 

  $

278,914

 

  $

245,910

Accrued liabilities

 

112,436

 

87,475

Accrued promotional allowances

 

183,295

 

137,998

Accrued distributor terminations

 

795

 

91

Deferred revenue

 

44,232

 

43,236

Accrued compensation

 

30,237

 

34,996

Income taxes payable

 

6,453

 

10,645

Total current liabilities

 

656,362

 

560,351

 

 

 

 

 

DEFERRED REVENUE

 

319,007

 

334,354

 

 

 

 

 

OTHER LIABILITIES

 

2,723

 

1,095

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 11)

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

Common stock - $0.005 par value; 1,250,000 shares authorized; 630,825 shares issued and 552,952 shares outstanding as of September 30, 2018; 629,255 shares issued and 566,298 shares outstanding as of December 31, 2017

 

3,154

 

3,146

Additional paid-in capital

 

4,219,630

 

4,150,628

Retained earnings

 

3,675,538

 

2,928,226

Accumulated other comprehensive loss

 

(29,777)

 

(16,659)

Common stock in treasury, at cost; 77,873 shares and 62,957 shares as of September 30, 2018 and December 31, 2017, respectively

 

(3,975,278)

 

(3,170,129)

Total stockholders’ equity

 

3,893,267

 

3,895,212

Total Liabilities and Stockholders’ Equity

 

  $

4,871,359

 

  $

4,791,012

 

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE- AND NINE-MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

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

 

 

 

 

Three-Months Ended

 

Nine-Months Ended

 

 

September 30,

 

September 30,

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

NET SALES

 

  $

1,016,160

 

  $

909,476

 

  $

2,882,953

 

$

2,558,690

 

 

 

 

 

 

 

 

 

COST OF SALES

 

408,501

 

339,767

 

1,139,780

 

924,610

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

607,659

 

569,709

 

1,743,173

 

1,634,080

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

268,086

 

252,337

 

766,065

 

702,405

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

339,573

 

317,372

 

977,108

 

931,675

 

 

 

 

 

 

 

 

 

INTEREST and OTHER INCOME, net

 

2,988

 

3,996

 

5,269

 

2,103

 

 

 

 

 

 

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

342,561

 

321,368

 

982,377

 

933,778

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

74,828

 

102,624

 

228,480

 

314,422

 

 

 

 

 

 

 

 

 

NET INCOME

 

  $

267,733

 

  $

218,744

 

  $

753,897

 

$

619,356

 

 

 

 

 

 

 

 

 

NET INCOME PER COMMON SHARE:

 

 

 

 

 

 

 

 

Basic

 

  $

0.48

 

  $

0.39

 

  $

1.35

 

$

1.09

Diluted

 

  $

0.48

 

  $

0.38

 

  $

1.33

 

$

1.07

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Basic

 

552,694

 

567,878

 

559,472

 

567,550

Diluted

 

559,955

 

578,368

 

566,791

 

577,964

 

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE- AND NINE-MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(In Thousands) (Unaudited)

 

 

 

 

Three-Months Ended
September 30,

 

Nine-Months Ended
September 30,

 

 

2018

 

2017

 

2018

 

2017

Net income, as reported

 

  $

267,733

 

  $

218,744

 

  $

753,897

 

  $

619,356

Other comprehensive income:

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

(4,463)

 

1,329

 

(13,728)

 

7,641

Available-for-sale investments:

 

 

 

 

 

 

 

 

Change in net unrealized (losses) gains

 

(118)

 

(29)

 

610

 

75

Reclassification adjustment for net gains included in net income

 

-

 

-

 

-

 

-

Net change in available-for-sale investments

 

(118)

 

(29)

 

610

 

75

Other comprehensive (loss) income

 

(4,581)

 

1,300

 

(13,118)

 

7,716

Comprehensive income

 

  $

263,152

 

  $

220,044

 

  $

740,779

 

  $

627,072

 

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, 2018 AND 2017

(In Thousands) (Unaudited)

 

 

 

Nine-Months Ended
September 30,

 

 

 

2018

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

  $

753,897

 

  $

619,356

 

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

 

 

 

 

 

Depreciation and amortization

 

42,469

 

35,104

 

Gain on disposal of property and equipment

 

(634)

 

(514)

 

Stock-based compensation

 

42,436

 

39,265

 

Deferred income taxes

 

(76)

 

1,862

 

Effect on cash of changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(181,683)

 

(70,865)

 

TCCC Transaction receivable

 

-

 

125,000

 

Distributor receivables

 

7,803

 

1,605

 

Inventories

 

(10,338)

 

(46,700)

 

Prepaid expenses and other current assets

 

(16,465)

 

(9,210)

 

Prepaid income taxes

 

96,462

 

24,168

 

Accounts payable

 

39,641

 

24,653

 

Accrued liabilities

 

16,516

 

15,867

 

Accrued promotional allowances

 

48,682

 

42,064

 

Accrued distributor terminations

 

703

 

7,416

 

Accrued compensation

 

(4,357)

 

(3,230)

 

Income taxes payable

 

(1,383)

 

(4,142)

 

Other liabilities

 

1,628

 

819

 

Deferred revenue

 

(13,941)

 

(12,461)

 

Net cash provided by operating activities

 

821,360

 

790,057

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Sales of available-for-sale investments

 

927,410

 

358,107

 

Purchases of available-for-sale investments

 

(711,009)

 

(768,276)

 

Purchases of property and equipment

 

(49,862)

 

(67,738)

 

Proceeds from sale of property and equipment

 

4,009

 

855

 

Increase in intangibles

 

(6,275)

 

(5,137)

 

Increase in other assets

 

(10,125)

 

(1,216)

 

Net cash provided by (used in) investing activities

 

154,148

 

(483,405)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Principal payments on debt

 

(1,482)

 

(1,878)

 

Issuance of common stock

 

24,481

 

26,776

 

Purchases of common stock held in treasury

 

(805,149)

 

(249,173)

 

Net cash used in financing activities

 

(782,150)

 

(224,275)

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(8,266)

 

5,600

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

185,092

 

87,977

 

CASH AND CASH EQUIVALENTS, beginning of period

 

528,622

 

377,582

 

CASH AND CASH EQUIVALENTS, end of period

 

  $

713,714

 

  $

465,559

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

  $

44

 

  $

55

 

Income taxes

 

  $

134,377

 

  $

293,980

 

 

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, 2018 AND 2017

(In Thousands) (Unaudited) (Continued)

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS

 

The Company entered into capital leases for the acquisition of promotional vehicles of $1.2 million and $2.0 million for the nine-months ended September 30, 2018 and 2017, respectively.

 

Included in accrued liabilities as of September 30, 2017 were $6.0 million related to purchases of property and equipment.

 

Included in accrued liabilities as of September 30, 2018 and 2017 were $10.9 million and $4.6 million, respectively, related to additions to other intangible assets.

 

Included in accounts payable as of September 30, 2017 were available-for-sale short-term investment purchases of $4.2 million.

 

See accompanying notes to condensed consolidated financial statements.

 

7


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

1.                                    BASIS OF PRESENTATION

 

Reference is made to the Notes to Consolidated Financial Statements, in Monster Beverage Corporation and Subsidiaries (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2017 (“Form 10-K”) for a summary of significant accounting policies utilized by the Company and its consolidated subsidiaries and other disclosures, which should be read in conjunction with this Quarterly Report on Form 10-Q (“Form 10-Q”).

 

The Company’s condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and Securities and Exchange Commission (“SEC”) rules and regulations applicable to interim financial reporting. They do not include all the information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP. The information set forth in these interim condensed consolidated financial statements for the three- and nine-months ended September 30, 2018 and 2017, respectively, is unaudited and reflects all adjustments, which include only normal recurring adjustments and which in the opinion of management are necessary to make the interim condensed consolidated financial statements not misleading. Results of operations for periods covered by this report may not necessarily be indicative of results of operations for the full year.

 

The preparation of financial statements in conformity with GAAP necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.

 

2.                                    RECENT ACCOUNTING PRONOUNCEMENTS

 

Recently issued accounting pronouncements not yet adopted

 

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

 

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

 

8


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” ASU No. 2018-13 removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. ASU No. 2018-13 disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU No. 2018-13 is effective for the Company beginning on January 1, 2020, with early adoption permitted. Certain disclosures in the new guidance will need to be applied on a retrospective basis and others on a prospective basis. The Company is currently evaluating the impact of ASU No. 2018-13 on its financial position, results of operations and liquidity.

 

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

 

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which eliminates the requirement to calculate the implied fair value of goodwill, but rather requires an entity to record an impairment charge based on the excess of a reporting unit’s carrying value over its fair value. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of ASU No. 2017-04 on its financial position, results of operations and liquidity.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The accounting standard changes the methodology for measuring credit losses on financial instruments and the timing when such losses are recorded. ASU No. 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently evaluating the impact of ASU No. 2016-13 on its financial position, results of operations and liquidity.

 

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 has completed its initial assessment of ASU No. 2016-02 and currently believes the adoption will not have a material impact on its financial position, results of operations and liquidity. The Company anticipates finalizing its assessment prior to December 31, 2018.

 

Recently adopted accounting pronouncements

 

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory”, in an effort to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. FASB ASU No. 2016-16 establishes the requirement that an entity recognizes the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU No. 2016-16 was effective for financial statements issued for annual periods beginning after December 15, 2017 and interim periods within those annual periods. The Company adopted ASU No. 2016-16 effective January 1, 2018 on a modified retrospective basis, resulting in a $6.6 million reclassification of the unrecognized income tax effects related to assets transfers that occurred prior to the adoption from deferred income taxes to opening retained earnings.

 

9


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

3.                                    REVENUE RECOGNITION

 

The Company has three operating and reportable segments, (i) Monster Energy® Drinks segment (“Monster Energy® Drinks”), which is primarily comprised of the Company’s Monster Energy® drinks, (ii) Strategic Brands segment (“Strategic Brands”), which is comprised of the various energy drink brands acquired from The Coca-Cola Company (“TCCC”) in 2015, and (iii) Other segment (“Other”), which is comprised of certain products sold by American Fruits & Flavors LLC, a wholly-owned subsidiary of the Company, to independent third-party customers.

 

The Company’s Monster Energy® Drinks segment generates net operating revenues by selling ready-to-drink packaged energy drinks primarily to bottlers and full service beverage distributors. In some cases, the Company sells directly to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, drug stores, foodservice customers and the military.

 

The Company’s Strategic Brands segment primarily generates net operating revenues by selling “concentrates” and/or “beverage bases” to authorized bottling and canning operations. Such bottlers generally combine the concentrates and/or beverage bases with sweeteners, water and other ingredients to produce ready-to-drink packaged energy drinks. The ready-to-drink packaged energy drinks are then sold to other bottlers and full service distributors and to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, foodservice customers, drug stores and the military. To a lesser extent, our Strategic Brands segment generates net operating revenues by selling certain ready-to-drink packaged energy drinks to bottlers and full service beverage distributors.

 

The majority of the Company’s revenue is recognized when it satisfies a single performance obligation by transferring control of its products to a customer. Control is generally transferred when the Company’s products are either shipped or delivered based on the terms contained within the underlying contracts or agreements. Certain of the Company’s bottlers/distributors may also perform a separate function as a co-packer on the Company’s behalf. In such cases, control of the Company’s products passes to such bottlers/distributors when they notify the Company that they have taken possession or transferred the relevant portion of the Company’s finished goods. The Company’s general payment terms are short-term in duration. The Company does not have significant financing components or payment terms. The Company did not have any material unsatisfied performance obligations as of September 30, 2018 or December 31, 2017.

 

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

 

10


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

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

 

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

·      reimbursements given to the Company’s bottlers/distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products;

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

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

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

·      discounted or free products;

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

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

 

The Company’s promotional allowance programs with its bottlers/distributors and/or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one week to one year. The Company’s promotional and other allowances are calculated based on various programs with bottlers/distributors and retail customers, and accruals are established during the year for its anticipated liabilities. These accruals are based on agreed upon terms as well as the Company’s historical experience with similar programs and require management’s judgment with respect to estimating consumer participation and/or distributor and retail customer performance levels. Differences between such estimated expenses and actual expenses for promotional and other allowance costs have historically been insignificant and are recognized in earnings in the period such differences are determined.

 

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

 

 

 

Three- and Nine-Months Ended September 30, 2018

Commissions Related To:

 

As Reported

 

Without Adoption of
ASC 606

TCCC Subsidiaries

 

Reduction to net sales

 

Reduction to net sales

TCCC Related Parties

 

Reduction to net sales

 

Operating expenses

TCCC Independent Bottlers

 

Operating expenses

 

Operating expenses

 

11


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The impact of the adoption of ASC 606 on the Company’s condensed consolidated statement of income for the three- and nine-months ended September 30, 2018 was as follows:

 

 

 

Three-Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

As Reported

 

Without Adoption
of ASC 606

 

Decrease due to
Adoption of ASC
606

 

Net Sales

 

$

1,016,160

 

$

1,027,758

 

$

(11,598)

1

Operating Expenses

 

$

268,086

 

$

279,684

 

$

(11,598)

1

 

 

 

Nine-Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

As Reported

 

Without Adoption
of ASC 606

 

Decrease due to
Adoption of ASC
606

 

Net Sales

 

$

2,882,953

 

$

2,916,703

 

$

(33,750)

1

Operating Expenses

 

$

766,065

 

$

799,815

 

$

(33,750)

1

 

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

 

Disaggregation of Revenue

 

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

 

 

 

Three-Months Ended September 30, 2018

 

Net Sales

 

U.S. and
Canada

 

EMEA1

 

Asia Pacific

 

Latin
America
and
Caribbean

 

Total

 

Monster Energy® Drinks

 

$

710,172

 

$

127,286

 

$

63,758

 

$

33,930

 

$

935,146

 

Strategic Brands

 

47,645

 

18,287

 

8,231

 

278

 

74,441

 

Other

 

6,573

 

-

 

-

 

-

 

6,573

 

Total Net Sales

 

$

764,390

 

$

145,573

 

$

71,989

 

$

34,208

 

$

1,016,160

 

 

12


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

 

Nine-Months Ended September 30, 2018

 

Net Sales

 

U.S. and
Canada

 

EMEA1

 

Asia Pacific

 

Latin
America
and
Caribbean

 

Total

 

Monster Energy® Drinks

 

$

1,994,950

 

$

376,823

 

$

171,796

 

$

101,520

 

$

2,645,089

 

Strategic Brands

 

137,502

 

60,567

 

20,148

 

1,794

 

220,011

 

Other

 

17,853

 

-

 

-

 

-

 

17,853

 

Total Net Sales

 

$

2,150,305

 

$

437,390

 

$

191,944

 

$

103,314

 

$

2,882,953

 

 

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

 

Contract Liabilities

 

Amounts received from certain bottlers/distributors at inception of their distribution contracts or at the inception of certain sales/marketing programs are accounted for as deferred revenue. As of September 30, 2018, the Company had $363.2 million of deferred revenue, which is included in current and long-term deferred revenue in the Company’s condensed consolidated balance sheet. As of December 31, 2017, the Company had $377.6 million of deferred revenue, which is included in current and long-term deferred revenue in the Company’s condensed consolidated balance sheet. During the three- and nine-months ended September 30, 2018, $11.1 million and $33.3 million, respectively, of deferred revenue was recognized in net sales. See Note 10.

 

13


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

4.                                    INVESTMENTS

 

The following table summarizes the Company’s investments at:

 

September 30, 2018

 

Amortized
Cost

 

Gross
Unrealized
Holding
Gains

 

Gross
Unrealized
Holding
Losses

 

Fair
Value

 

Continuous
Unrealized
Loss Position
less than 12
Months

 

Continuous
Unrealized
Loss Position
greater than 12
Months

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

52,595

 

$

-

 

$

-

 

$

52,595

 

$

-

 

$

-

 

Certificates of deposit

 

26,068

 

-

 

-

 

26,068

 

-

 

-

 

Municipal securities

 

127,149

 

2

 

82

 

127,069

 

82

 

-

 

U.S. government agency securities

 

108,128

 

-

 

95

 

108,033

 

95

 

-

 

U.S. Treasuries

 

109,832

 

-

 

45

 

109,787

 

45

 

-

 

Variable rate demand notes

 

34,346

 

-

 

-

 

34,346

 

-

 

-

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal securities

 

1,612

 

-

 

2

 

1,610

 

2

 

-

 

Total

 

$

459,730

 

$

2

 

$

224

 

$

459,508

 

$

224

 

$

-

 

 

December 31, 2017

 

Amortized
Cost

 

Gross
Unrealized
Holding
Gains

 

Gross
Unrealized
Holding
Losses

 

Fair
Value

 

Continuous
Unrealized
Loss Position
less than 12
Months

 

Continuous
Unrealized
Loss Position
greater than 12
Months

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

81,026

 

$

-

 

$

-

 

$

81,026

 

$

-

 

$

-

 

Certificates of deposit

 

11,869

 

-

 

-

 

11,869

 

-

 

-

 

Municipal securities

 

469,604

 

1

 

740

 

468,865

 

740

 

-

 

U.S. government agency securities

 

61,307

 

-

 

88

 

61,219

 

88

 

-

 

Variable rate demand notes

 

49,954

 

-

 

-

 

49,954

 

-

 

-

 

Long-term:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

2,369

 

-

 

3

 

2,366

 

3

 

-

 

Total

 

$

676,129

 

$

1

 

$

831

 

$

675,299

 

$

831

 

$

-

 

 

During the nine-months ended September 30, 2018 and 2017, realized gains or losses recognized on the sale of investments were not significant.

 

The Company’s investments at September 30, 2018 and December 31, 2017 in commercial paper, certificates of deposit, municipal securities, U.S. government agency securities, U.S. treasuries and/or variable rate demand notes (“VRDNs”) carried investment grade credit ratings. VRDNs are floating rate municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest. All of the put options are secured by a pledged liquidity source. While they are classified as marketable investment securities, the put option allows the VRDNs to be liquidated at par on a same day, or more generally, on a seven-day settlement basis.

 

14


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

 

 

September 30, 2018

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

 

Less than 1 year:

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

52,595

 

$

52,595

 

$

81,026

 

$

81,026

 

U.S. Treasuries

 

109,832

 

109,787

 

-

 

-

 

Municipal securities

 

127,149

 

127,069

 

469,604

 

468,865

 

U.S. government agency securities

 

108,128

 

108,033

 

61,307

 

61,219

 

Certificates of deposit

 

26,068

 

26,068

 

11,869

 

11,869

 

Due 1 - 10 years:

 

 

 

 

 

 

 

 

 

Municipal securities

 

1,612

 

1,610

 

-

 

-

 

U.S. government agency securities

 

-

 

-

 

2,369

 

2,366

 

Variable rate demand notes

 

-

 

-

 

6,366

 

6,366

 

Due 11 - 20 years:

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

15,952

 

15,952

 

28,377

 

28,377

 

Due 21 - 30 years:

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

14,291

 

14,291

 

15,211

 

15,211

 

Due 31 - 40 years:

 

 

 

 

 

 

 

 

 

Variable rate demand notes

 

4,103

 

4,103

 

-

 

-

 

Total

 

$

459,730

 

$

459,508

 

$

676,129

 

$

675,299

 

 

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 that requires an entity to maximize the use of observable inputs, where available. The three levels of inputs required by the standard that the Company uses to measure fair value are summarized below.

 

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

 

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

 

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

 

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

 

15


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

September 30, 2018

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

  $

523,097

 

$

-

 

$

-

 

$

523,097

 

Money market funds

 

87,546

 

-

 

-

 

87,546

 

Certificates of deposit

 

-

 

59,104

 

-

 

59,104

 

Commercial paper

 

-

 

75,257

 

-

 

75,257

 

Variable rate demand notes

 

-

 

34,346

 

-

 

34,346

 

Municipal securities

 

-

 

153,204

 

-

 

153,204

 

U.S. government agency securities

 

-

 

128,887

 

-

 

128,887

 

U.S. Treasuries

 

-

 

111,781

 

-

 

111,781

 

Foreign currency derivatives

 

-

 

178

 

-

 

178

 

Total

 

  $

610,643

 

$

562,757

 

$

-

 

$

1,173,400

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

 Cash and cash equivalents

 

  $

610,643

 

$

103,071

 

$

-

 

$

713,714

 

 Short-term investments

 

-

 

457,898

 

-

 

457,898

 

 Accounts receivable, net

 

-

 

271

 

-

 

271

 

 Investments

 

-

 

1,610

 

-

 

1,610

 

 Accrued liabilities

 

-

 

(93

)

-

 

(93

)

Total

 

  $

610,643

 

$

562,757

 

$

-

 

$

1,173,400

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Cash

 

  $

310,885

 

$

-

 

$

-

 

$

310,885

 

Money market funds

 

112,848

 

-

 

-

 

112,848

 

Certificates of deposit

 

-

 

15,720

 

-

 

15,720

 

Commercial paper

 

-

 

99,903

 

-

 

99,903

 

Variable rate demand notes

 

-

 

49,954

 

-

 

49,954

 

Municipal securities

 

-

 

529,984

 

-

 

529,984

 

U.S. government agency securities

 

-

 

81,230

 

-

 

81,230

 

U.S. Treasuries

 

-

 

3,397

 

-

 

3,397

 

Foreign currency derivatives

 

-

 

(1,484

)

-

 

(1,484

)

Total

 

  $

423,733

 

$

778,704

 

$

-

 

$

1,202,437

 

 

 

 

 

 

 

 

 

 

 

Amounts included in:

 

 

 

 

 

 

 

 

 

 Cash and cash equivalents

 

  $

423,733

 

$

104,889

 

$

-

 

$

528,622

 

 Short-term investments

 

-

 

672,933

 

-

 

672,933

 

 Accounts receivable, net

 

-

 

95

 

-

 

95

 

 Investments

 

-

 

2,366

 

-

 

2,366

 

 Accrued liabilities

 

-

 

(1,579

)

-

 

(1,579

)

Total

 

  $

423,733

 

$

778,704

 

$

-

 

$

1,202,437

 

 

All of the Company’s short-term investments are classified within Level 1 or Level 2 of the fair value hierarchy.  The Company’s valuation of its Level 1 investments, which include money market funds, is based on quoted market prices in active markets for identical securities. The Company’s valuation of its Level 2 investments, which include municipal securities, commercial paper, certificates of deposit, VRDNs, U.S. treasuries and U.S. government agency securities, is based on other observable inputs, specifically a market approach which utilizes valuation models, pricing systems, mathematical tools and other relevant information for the same or similar securities. The Company’s valuation of its Level 2 foreign currency exchange contracts is based on quoted market prices of the same or similar instruments, adjusted for counterparty risk. There were no transfers between Level 1 and Level 2 measurements during the nine-months ended September 30, 2018 or the year-ended December 31, 2017, and there were no changes in the Company’s valuation techniques.

 

16


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

6.                                    DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The Company is exposed to foreign currency exchange rate risks related primarily to its foreign business operations. During the three- and nine-months ended September 30, 2018 and the year-ended December 31, 2017, the Company entered into forward currency exchange contracts with financial institutions to create an economic hedge to specifically manage a portion of the foreign exchange risk exposure associated with certain consolidated subsidiaries’ non-functional currency denominated assets and liabilities. All foreign currency exchange contracts of the Company that were outstanding as of September 30, 2018 have terms of one month or less. The Company does not enter into forward currency exchange contracts for speculation or trading purposes.

 

The Company has not designated its foreign currency exchange contracts as hedge transactions under ASC 815. Therefore, gains and losses on the Company’s foreign currency exchange contracts are recognized in interest and other income, 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, 2018

 

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

 

Notional
Amount

 

Fair
Value

 

Balance Sheet Location

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

 

Receive USD/pay EUR

 

  $

31,411

 

  $

111

 

Accounts receivable, net

 

Receive USD/pay GBP

 

28,315

 

105

 

Accounts receivable, net

 

Receive USD/pay ZAR

 

14,375

 

53

 

Accounts receivable, net

 

Receive NOK/pay USD

 

1,450

 

2

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

 

Receive USD/pay COP

 

  $

3,789

 

  $

(34)

 

Accrued liabilities

 

Receive SGD/pay USD

 

7,342

 

(23)

 

Accrued liabilities

 

Receive USD/pay AUD

 

12,484

 

(18)

 

Accrued liabilities

 

Receive USD/pay NZD

 

2,645

 

(7)

 

Accrued liabilities

 

Receive USD/pay MXN

 

2,044

 

(6)

 

Accrued liabilities

 

Receive RUB/pay USD

 

909

 

(5)

 

Accrued liabilities

 

 

17


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

December 31, 2017

 

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

 

Notional
Amount

 

Fair
Value

 

Balance Sheet Location

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

 

Receive CAD/pay USD

 

  $

4,892

 

  $

61

 

Accounts receivable, net

 

Receive USD/pay COP

 

2,803

 

13

 

Accounts receivable, net

 

Receive USD/pay BRL

 

1,806

 

1

 

Accounts receivable, net

 

Receive NOK/pay USD

 

1,534

 

18

 

Accounts receivable, net

 

Receive SGD/pay USD

 

223

 

2

 

Accounts receivable, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Foreign currency exchange contracts:

 

 

 

 

 

 

 

Receive USD/pay EUR

 

  $

65,131

 

  $

(642)

 

Accrued liabilities

 

Receive USD/pay GBP

 

31,342

 

(334)

 

Accrued liabilities

 

Receive USD/pay ZAR

 

21,311

 

(222)

 

Accrued liabilities

 

Receive USD/pay AUD

 

17,238

 

(177)

 

Accrued liabilities

 

Receive USD/pay MXN

 

7,720

 

(126)

 

Accrued liabilities

 

Receive USD/pay TRY

 

5,483

 

(52)

 

Accrued liabilities

 

Receive USD/pay NZD

 

1,826

 

(18)

 

Accrued liabilities

 

Receive USD/pay CLP

 

1,112

 

(8)

 

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,
2018

 

September 30,
2017

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

Interest and other income, net

 

  $

2,175

 

  $

(2,172)

 

 

 

 

 

 

 

 

 

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,
2018

 

September 30,
2017

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

Interest and other income, net

 

  $

7,909

 

  $

(11,639)

 

18


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

7.                                    INVENTORIES

 

Inventories consist of the following at:

 

 

 

September 30,
2018

 

December 31,
2017

 

Raw materials

 

  $

99,266

 

  $

78,834

 

Finished goods

 

162,818

 

176,911

 

 

 

  $

262,084

 

  $

255,745

 

 

8.                                    PROPERTY AND EQUIPMENT, NET

 

Property and equipment consist of the following at:

 

 

 

September 30,
2018

 

December 31,
2017

 

Land

 

  $

44,261

 

  $

47,373

 

Leasehold improvements

 

5,760

 

3,109

 

Furniture and fixtures

 

6,925

 

6,461

 

Office and computer equipment

 

18,384

 

14,506

 

Computer software

 

3,103

 

3,650

 

Equipment

 

176,732

 

148,434

 

Buildings

 

113,625

 

107,374

 

Vehicles

 

39,488

 

38,179

 

 

 

408,278

 

369,086

 

Less: accumulated depreciation and amortization

 

(165,424)

 

(138,810)

 

 

 

  $

242,854

 

  $

230,276

 

 

Total depreciation and amortization expense recorded was $11.3 million and $9.4 million for the three-months ended September 30, 2018 and 2017, respectively. Total depreciation and amortization expense recorded was $33.5 million and $26.2 million for the nine-months ended September 30, 2018 and 2017, respectively.

 

19


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

9.                                    GOODWILL AND OTHER INTANGIBLE ASSETS

 

The following is a roll-forward of goodwill for the nine-months ended September 30, 2018 and 2017 by reportable segment:

 

 

 

 

Monster
Energy®
Drinks

 

Strategic
Brands

 

Other

 

Total

 

Balance at December 31, 2017

 

$

693,644

 

$

637,999

 

$

-

 

$

1,331,643

 

Acquisitions

 

-

 

-

 

-

 

-

 

Balance at September 30, 2018

 

$

693,644

 

$

637,999

 

$

-

 

$

1,331,643

 

 

 

 

 

 

 

 

 

 

 

 

 

Monster
Energy®
Drinks

 

Strategic
Brands

 

Other

 

Total

 

Balance at December 31, 2016

 

$

693,644

 

$

637,999

 

$

-

 

$

1,331,643

 

Acquisitions

 

-

 

-

 

-

 

-

 

Balance at September 30, 2017

 

$

693,644

 

$

637,999

 

$

-

 

$

1,331,643

 

 

Intangible assets consist of the following at:

 

 

 

September 30,
2018

 

December 31,
2017

 

Amortizing intangibles

 

$

71,350

 

$

71,400

 

Accumulated amortization

 

(35,349)

 

(26,383)

 

 

 

36,001

 

45,017

 

Non-amortizing intangibles

 

1,006,247

 

989,068

 

 

 

$

1,042,248

 

$

1,034,085

 

 

Amortizing intangibles primarily consist of customer relationships. All amortizing intangibles have been assigned an estimated finite useful life and such intangibles are amortized on a straight-line basis over the number of years that approximate their respective useful lives, generally five to seven years. Total amortization expense recorded was $3.0 million for both the three-months ended September 30, 2018 and 2017. Total amortization expense recorded was $9.0 million and $8.9 million for the nine-months ended September 30, 2018 and 2017, respectively.

 

10.                            DISTRIBUTION AGREEMENTS

 

In accordance with ASC 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 $14.1 million and $15.9 million for the three-months ended September 30, 2018 and 2017, respectively. The Company incurred termination costs of $26.6 million and $35.9 million for the nine-months ended September 30, 2018 and 2017, respectively. Such termination costs have been expensed in full and are included in operating expenses for the three- and nine-months ended September 30, 2018 and 2017.

 

In the normal course of business, amounts received pursuant to new and/or amended distribution agreements entered into with certain distributors, relating to the costs associated with terminating agreements with the Company’s prior distributors, are accounted for as deferred revenue and are recognized as revenue ratably over the anticipated life of the respective distribution agreement, generally 20 years. Revenue recognized was $11.1 million and $11.4 million for the three-months ended September 30, 2018 and 2017, respectively. Revenue recognized was $33.3 million and $31.6 million for the nine-months ended September 30, 2018 and 2017, respectively.

 

20


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

11.                            COMMITMENTS AND CONTINGENCIES

 

The Company had purchase commitments aggregating approximately $33.8 million at September 30, 2018, which represented commitments made by the Company and its subsidiaries to various suppliers of raw materials for the production of its products. These obligations vary in terms, but are generally satisfied within one year.

 

The Company had contractual obligations aggregating approximately $180.8 million at September 30, 2018, which related primarily to sponsorships and other marketing activities.

 

The Company had operating lease commitments aggregating approximately $15.1 million at September 30, 2018, which related primarily to warehouse and office space.

 

In February 2018, the working capital line limit for the Company’s credit facility with HSBC Bank (China) Company Limited, Shanghai Branch was increased from $9.0 million to $15.0 million. At September 30, 2018, the interest rate on borrowings under the line of credit was 5.5%. As of September 30, 2018, the Company had $10.1 million outstanding on this line of credit, including interest, which is included in accounts payable in the condensed consolidated balance sheet.

 

Legal Proceedings

 

Litigation The Company, TCCC and certain affiliates are parties to various agreements setting forth, among other things, provisions relating to TCCC’s 18.5% equity holding in the Company and the terms on which the Company’s energy products are distributed globally by members of TCCC’s distribution network.  Among other provisions, the agreements restrict TCCC from competing in the energy drink category, with certain exceptions including an exception relating to the Coca-Cola brand.

 

TCCC has developed two energy products that it believes it may market under the exception relating to the Coca-Cola brand.  The Company believes that the exception does not apply.  By mutual agreement to obtain clarification, the issue was submitted to AAA arbitration on October 31, 2018.  TCCC has indicated that it has suspended the proposed launch of such products until April 2019. As the relief sought is limited, no reasonably possible range of losses, if any, can be estimated.

 

The Company has been named a defendant in personal injury lawsuits, claiming that the death or other serious injury of the plaintiffs was caused by consumption of Monster Energy® brand energy drinks. The plaintiffs in these lawsuits allege strict product liability, negligence, fraudulent concealment, breach of implied warranties and wrongful death. The Company believes that each complaint is without merit and plans a vigorous defense. The Company also believes that any damages, if awarded, would not have a material adverse effect on the Company’s financial position or results of operations.

 

Furthermore, from time to time in the normal course of business, the Company is named in other litigation, including consumer class actions, intellectual property litigation and claims from prior distributors. Although it is not possible to predict the ultimate outcome of such litigation, based on the facts known to the Company, management believes that such litigation in aggregate will likely not have a material adverse effect on the Company’s financial position or results of operations.

 

21


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The 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, 2018, the Company’s condensed consolidated balance sheet includes accrued loss contingencies of approximately $1.4 million.

 

12.                            ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Changes in accumulated other comprehensive loss by component, after tax, for the nine-months ended September 30, 2018 are as follows:

 

 

 

Currency
Translation
Losses

 

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

 

Total

 

Balance at December 31, 2017

 

$

15,818

 

$

841

 

$

16,659

 

Other comprehensive loss (income) before reclassifications

 

13,728

 

(610)

 

13,118

 

Amounts reclassified from accumulated other comprehensive loss (income)

 

-

 

-

 

-

 

Net current-period other comprehensive loss (income)

 

13,728

 

(610)

 

13,118

 

Balance at September 30, 2018

 

$

29,546

 

$

231

 

$

29,777

 

 

13.                            TREASURY STOCK

 

On May 29, 2018, the Company’s Board of Directors authorized a share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock (the “May 2018 Repurchase Program”). No shares were repurchased during the three-months ended September 30, 2018 under the May 2018 Repurchase Program. As of November 8, 2018, $196.7 million remained available for repurchase under the May 2018 Repurchase Program.

 

On August 7, 2018, the Company’s Board of Directors authorized a new repurchase program for the repurchase of up to an additional $500.0 million of the Company’s outstanding common stock (the “August 2018 Repurchase Program”). No shares were repurchased during the three-months ended September 30, 2018 under the August 2018 Repurchase Program. As of November 8, 2018, $500.0 million remained available for repurchase under the August 2018 Repurchase Program.

 

14.                            STOCK-BASED COMPENSATION

 

The Company has two stock-based compensation plans under which shares were available for grant at September 30, 2018: the Monster Beverage Corporation 2011 Omnibus Incentive Plan, including the Monster Beverage Deferred Compensation Plan as a sub plan thereunder, and the Monster Beverage Corporation 2017 Compensation Plan for Non-Employee Directors, including the Monster Beverage Deferred Compensation Plan for Non-Employee Directors as a sub plan thereunder.

 

22


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The Company recorded $14.1 million and $13.3 million of compensation expense relating to outstanding options and restricted stock units during the three-months ended September 30, 2018 and 2017, respectively. The Company recorded $42.4 million and $39.3 million of compensation expense relating to outstanding options and restricted stock units during the nine-months ended September 30, 2018 and 2017, respectively.

 

The excess tax benefit for tax deductions from non-qualified stock option exercises, disqualifying dispositions of incentive stock options and vesting of restricted stock units for the three-months ended September 30, 2018 and 2017 was $3.1 million and $2.5 million, respectively. The excess tax benefit for tax deductions from non-qualified stock option exercises, disqualifying dispositions of incentive stock options and vesting of restricted stock units for the nine-months ended September 30, 2018 and 2017 was $7.7 million and $13.8 million, respectively.

 

Stock Options

 

Under the Company’s stock-based compensation plans, all stock options granted as of September 30, 2018 were granted at prices based on the fair value of the Company’s common stock on the date of grant. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes-Merton option pricing formula with the assumptions included in the table below. The Company records compensation expense for non-employee stock options based on the estimated fair value of the options as of the earlier of (1) the date at which a commitment for performance by the non-employee to earn the stock option is reached or (2) the date at which the non-employee’s performance is complete, using the Black-Scholes-Merton option pricing formula with the assumptions included in the table below. The Company uses historical data to determine the exercise behavior, volatility and forfeiture rate of the options.

 

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

 

 

 

Three-Months Ended September 30,

 

Nine-Months Ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Dividend yield

 

0.0%

 

0.0%

 

0.0%

 

0.0%

 

Expected volatility

 

34.5%

 

35.3%

 

34.9%

 

36.6%

 

Risk-free interest rate

 

2.9%

 

1.7%

 

2.8%

 

2.1%

 

Expected term

 

6.1 years

 

5.9 years

 

6.1 years

 

6.1 years

 

 

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

 

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

 

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

 

23


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

Options

 

Number of
Shares (in
thousands)

 

Weighted-
Average
Exercise
Price Per
Share

 

Weighted-
Average
Remaining
Contractual
Term (in
years)

 

Aggregate
Intrinsic Value

 

Outstanding at January 1, 2018

 

17,819

 

$

29.62

 

6.1

 

$

600,032

 

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

 

2,615

 

$

58.76

 

 

 

 

 

Granted 04/01/18 - 06/30/18

 

360

 

$

51.72

 

 

 

 

 

Granted 07/01/18 - 09/30/18

 

11

 

$

58.77

 

 

 

 

 

Exercised

 

(1,308)

 

$

18.71

 

 

 

 

 

Cancelled or forfeited

 

(495)

 

$

43.71

 

 

 

 

 

Outstanding at September 30, 2018

 

19,002

 

$

34.45

 

6.1

 

$

454,476

 

Vested and expected to vest in the

 

 

 

 

 

 

 

 

 

future at September 30, 2018

 

18,061

 

$

33.59

 

5.9

 

$

447,291

 

Exercisable at September 30, 2018

 

10,179

 

$

22.51

 

4.3

 

$

364,103

 

 

The weighted-average grant-date fair value of options granted during the three-months ended September 30, 2018 and 2017 was $22.80 per share and $20.61 per share, respectively. The weighted-average grant-date fair value of options granted during the nine-months ended September 30, 2018 and 2017 was $22.51 per share and $18.04 per share, respectively. The total intrinsic value of options exercised during the three-months ended September 30, 2018 and 2017 was $19.2 million and $12.5 million, respectively. The total intrinsic value of options exercised during the nine-months ended September 30, 2018 and 2017 was $52.1 million and $53.4 million, respectively.

 

Cash received from option exercises under all plans for the three-months ended September 30, 2018 and 2017 was approximately $10.9 million and $7.7 million, respectively. Cash received from option exercises under all plans for the nine-months ended September 30, 2018 and 2017 was approximately $24.5 million and $26.8 million, respectively.

 

At September 30, 2018, there was $107.9 million of total unrecognized compensation expense related to non-vested options granted to employees under the Company’s share-based payment plans. That cost is expected to be recognized over a weighted-average period of 2.8 years.

 

Restricted Stock Units

 

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

 

24


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

 

 

Number of
Shares (in
thousands)

 

Weighted
Average
Grant-Date
Fair Value

 

Non-vested at January 1, 2018

 

530

 

$

45.09

 

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

 

221

 

$

58.75

 

Granted 04/01/18- 06/30/18

 

48

 

$

52.31

 

Granted 07/01/18 - 09/30/18

 

1

 

$

58.72

 

Vested

 

(263)

 

$

45.36

 

Forfeited/cancelled

 

(7)

 

$

33.60

 

Non-vested at September 30, 2018

 

530

 

$

51.48

 

 

The weighted-average grant-date fair value of restricted stock units granted during the three-months ended September 30, 2018 was $58.72 per share. No restricted stock units were granted during the three-months ended September 30, 2017. The weighted-average grant-date fair value of restricted stock units granted during the nine-months ended September 30, 2018 and 2017 was $57.59 per share and $46.65 per share, respectively.  As of September 30, 2018, 0.5 million of restricted stock units are expected to vest over their respective terms.

 

At September 30, 2018, total unrecognized compensation expense relating to non-vested restricted stock units was $19.0 million, which is expected to be recognized over a weighted-average period of 1.8 years.

 

15.                            INCOME TAXES

 

On December 22, 2017, the President of the United States signed into law the Tax Reform Act.  The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The SEC staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. A company may select between one of three scenarios to determine a reasonable estimate for certain income tax effects arising from the Tax Reform Act. Those scenarios are (i) a final estimate which effectively closes the measurement window; (ii) a reasonable estimate leaving the measurement window open for future revisions; and (iii) no estimate as the law is still being analyzed. The Company was able to provide a reasonable estimate for the revaluation of deferred taxes and the effects of the toll charge on undistributed foreign subsidiary earnings and profits (“E&P”). As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its net deferred tax assets at December 31, 2017, resulting in a provisional $39.8 million charge included in the provision for income taxes for the year ended December 31, 2017. The Tax Reform Act also provided for a one-time deemed mandatory repatriation of Post-1986 E&P through the year ended December 31, 2017.  As a result, the Company recognized a provisional $2.1 million charge in the provision for income taxes for the year ended December 31, 2017 related to such deemed mandatory repatriation. During the three-months ended September 30, 2018, the Company made an adjustment to the provisional amount and recognized an additional $1.8 million provision for income tax related to the deemed mandatory repatriation.

 

25


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The Company has not made additional measurement window adjustments to these items during the three- and nine-months ended September 30, 2018. The Company continues to evaluate the various provisions of the Tax Reform Act, including, the global intangible low-taxed income (“GILTI”) and the foreign derived intangible income (“FDII”) provisions. The ultimate impact of the Tax Reform Act may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, as well as any related actions the Company may take. The measurement window begins in the reporting period that includes the enactment date and ends when an entity has obtained, prepared and analyzed the information needed in order to complete the accounting requirements under ASC Topic 740.

 

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, 2018:

 

 

 

Gross Unrecognized Tax
Benefits

 

Balance at December 31, 2017

 

  $

6,540

 

Additions for tax positions related to the current year

 

210

 

Additions for tax positions related to the prior years

 

1,172

 

Decreases related to settlement with taxing authority

 

(2,665)

 

Balance at September 30, 2018

 

  $

5,257

 

 

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, 2018, the Company had approximately $1.0 million in accrued interest and penalties related to unrecognized tax benefits. If the Company were to prevail on all uncertain tax positions, the resultant impact on the Company’s effective tax rate would not be significant. It is expected that any change in the amount of unrecognized tax benefits within the next 12 months will not be significant.

 

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

 

On October 18, 2016, the IRS began its examination of the Company’s U.S. federal income tax return for the year ended December 31, 2014. On March 27, 2017, the IRS began its examination of the Company’s U.S. federal income tax return for the year ended December 31, 2015.

 

The Company is in various stages of examination with certain states and certain foreign jurisdictions. The Company’s 2014 through 2017 U.S. federal income tax returns are subject to examination by the IRS. The Company’s state income tax returns are subject to examination for the 2013 through 2017 tax years.

 

26


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

16.                            EARNINGS PER SHARE

 

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

 

 

 

Three-Months Ended

 

Nine-Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

552,694

 

567,878

 

559,472

 

567,550

 

Dilutive

 

7,261

 

10,490

 

7,319

 

10,414

 

Diluted

 

559,955

 

578,368

 

566,791

 

577,964

 

 

For the three-months ended September 30, 2018 and 2017, options and awards outstanding totaling 3.2 million shares and 5.9 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive. For the nine-months ended September 30, 2018 and 2017, options and awards outstanding totaling 3.0 million shares and 8.4 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.

 

17.                            SEGMENT INFORMATION

 

The Company has three operating and reportable segments, (i) Monster Energy® Drinks segment, which is primarily comprised of the Company’s Monster Energy® drinks, (ii) Strategic Brands segment, which is comprised of the various energy drink brands acquired from TCCC in 2015, and (iii) Other segment, which is comprised of certain products sold by American Fruits & Flavors LLC, a wholly-owned subsidiary of the Company, to independent third-party customers.

 

The Company’s Monster Energy® Drinks segment primarily generates net operating revenues by selling ready-to-drink packaged drinks primarily to bottlers and full service beverage distributors. In some cases, the Company sells directly to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, foodservice customers and the military.

 

The Company’s Strategic Brands segment primarily generates net operating revenues by selling “concentrates” and/or “beverage bases” to authorized bottling and canning operations. Such bottlers generally combine the concentrates and/or beverage bases with sweeteners, water and other ingredients to produce ready-to-drink packaged energy drinks. The ready-to-drink packaged energy drinks are then sold to other bottlers, full service distributors or retailers, including, retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, foodservice customers, drug stores and the military. To a lesser extent, the Company’s Strategic Brands segment generates net operating revenues by selling certain ready-to-drink packaged energy drinks to bottlers and full service beverage distributors.

 

Generally, the Monster Energy® Drinks segment generates higher per case net operating revenues, but lower per case gross profit margin percentages 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 in the Company’s reportable segments, as management does not measure or allocate such assets on a segment basis.

 

27


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The net revenues derived from the Company’s reportable segments and other financial information related thereto for the three- and nine-months ended September 30, 2018 and 2017 are as follows:

 

 

 

Three-Months Ended

 

Nine-Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Net sales:

 

 

 

 

 

 

 

 

 

Monster Energy® Drinks(1)

 

   $

935,146

 

   $

827,690

 

   $

2,645,089

 

   $

2,311,521

 

Strategic Brands

 

74,441

 

76,586

 

220,011

 

230,255

 

Other

 

6,573

 

5,200

 

17,853

 

16,914

 

Corporate and unallocated

 

-

 

-

 

-

 

-

 

 

 

   $

1,016,160

 

   $

909,476

 

   $

2,882,953

 

   $

2,558,690

 

 

 

 

Three-Months Ended

 

Nine-Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Operating Income:

 

 

 

 

 

 

 

 

 

Monster Energy® Drinks(1) (2)

 

   $

359,090

 

   $

333,210

 

   $

1,033,895

 

   $

968,864

 

Strategic Brands

 

41,661

 

42,663

 

135,054

 

137,945

 

Other

 

1,742

 

1,451

 

4,539

 

4,585

 

Corporate and unallocated

 

(62,920)

 

(59,952)

 

(196,380)

 

(179,719)

 

 

 

   $

339,573

 

   $

317,372

 

   $

977,108

 

   $

931,675

 

 

 

 

Three-Months Ended

 

Nine-Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Income before tax:

 

 

 

 

 

 

 

 

 

Monster Energy® Drinks(1) (2)

 

   $

359,216

 

   $

333,065

 

   $

1,034,521

 

   $

968,716

 

Strategic Brands

 

41,659

 

42,663

 

135,075

 

137,931

 

Other

 

1,742

 

1,451

 

4,539

 

4,585

 

Corporate and unallocated

 

(60,056)

 

(55,811)

 

(191,758)

 

(177,454)

 

 

 

   $

342,561

 

   $

321,368

 

   $

982,377

 

   $

933,778

 

 

(1)          Includes $11.1 million and $11.4 million for the three-months ended September 30, 2018 and 2017, respectively, related to the recognition of deferred revenue. Includes $33.3 million and $31.6 million for the nine-months ended September 30, 2018 and 2017, respectively, related to the recognition of deferred revenue.

 

(2)          Includes $14.1 million and $15.9 million for the three-months ended September 30, 2018 and 2017, respectively, related to distributor termination costs. Includes $26.6 million and $35.9 million for the nine-months ended September 30, 2018 and 2017, respectively, related to distributor termination costs.

 

28


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

 

Three-Months Ended

 

Nine-Months Ended

 

 

September 30,

 

September 30,

 

 

2018

 

2017

 

2018

 

2017

Depreciation and amortization:

 

 

 

 

 

 

 

 

Monster Energy® Drinks

 

   $

9,157

 

   $

7,546

 

   $

26,926

 

   $

20,959

Strategic Brands

 

1,947

 

1,836

 

5,819

 

5,474

Other

 

1,167

 

1,152

 

3,493

 

3,458

Corporate and unallocated

 

2,014

 

1,795

 

6,231

 

5,213

 

 

   $

14,285

 

   $

12,329

 

   $

42,469

 

   $

35,104

 

Corporate and unallocated expenses for the three-months ended September 30, 2018 include $42.1 million of payroll costs, of which $14.0 million was attributable to stock-based compensation expenses (see Note 14, “Stock-Based Compensation”), as well as $12.3 million attributable to professional service expenses, including accounting and legal costs, and $8.5 million of other operating expenses. Corporate and unallocated expenses for the three-months ended September 30, 2017 include $37.9 million of payroll costs, of which $13.3 million was attributable to stock-based compensation expenses (see Note 14, “Stock-Based Compensation”), as well as $11.9 million attributable to professional service expenses, including accounting and legal costs, and $10.1 million of other operating expenses.

 

Corporate and unallocated expenses for the nine-months ended September 30, 2018 include $129.9 million of payroll costs, of which $42.4 million was attributable to stock-based compensation expenses (see Note 14, “Stock-Based Compensation”), as well as $36.5 million attributable to professional service expenses, including accounting and legal costs, and $30.0 million of other operating expenses. Corporate and unallocated expenses for the nine-months ended September 30, 2017 include $114.0 million of payroll costs, of which $39.3 million was attributable to stock-based compensation expenses (see Note 14, “Stock-Based Compensation”), as well as $38.3 million attributable to professional service expenses, including accounting and legal costs, and $27.5 million of other operating expenses.

 

TCCC, through the TCCC Subsidiaries, accounted for approximately 4% and 14% of the Company’s net sales for the three-months ended September 30, 2018 and 2017, respectively. TCCC, through the TCCC Subsidiaries, accounted for approximately 4% and 21% of the Company’s net sales for the nine-months ended September 30, 2018 and 2017, respectively. As part of TCCC’s North America Refranchising initiative (the “North America Refranchising”), the territories of certain TCCC Subsidiaries have been transitioned to certain independent TCCC bottlers/distributors and/or TCCC Related Parties. Accordingly, the Company’s percentage of net sales classified as sales to the TCCC Subsidiaries significantly decreased for three- and nine-months ended September 30, 2018.

 

CCBCC Operations, LLC accounted for approximately 14% of the Company’s net sales for both the three-months ended September 30, 2018 and 2017. CCBCC Operations, LLC accounted for approximately 14% and 13% of the Company’s net sales for the nine-months ended September 30, 2018 and 2017, respectively.

 

Reyes Coca-Cola Bottling accounted for approximately 13% and 5% of the Company’s net sales for the three-months ended September 30, 2018 and 2017, respectively. Reyes Coca-Cola Bottling accounted for approximately 13% and 5% of the Company’s net sales for the nine-months ended September 30, 2018 and 2017, respectively.

 

29


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Coca-Cola European Partners accounted for approximately 9% and 10% of the Company’s net sales for the three-months ended September 30, 2018 and 2017, respectively. Coca-Cola European Partners accounted for approximately 9% of the Company’s net sales for both the nine-months ended September 30, 2018 and 2017.

 

Net sales to customers outside the United States amounted to $283.0 million and $260.1 million for the three-months ended September 30, 2018 and 2017, respectively. Net sales to customers outside the United States amounted to $818.8 million and $698.9 million for the nine-months ended September 30, 2018 and 2017, respectively.

 

Goodwill and other intangible assets for the Company’s reportable segments as of September 30, 2018 and December 31, 2017 are as follows:

 

 

 

September 30,

 

December 31,

 

 

2018

 

2017

Goodwill and other intangible assets:

 

 

 

 

Monster Energy® Drinks

 

   $

1,362,448

 

   $

1,346,648

Strategic Brands

 

991,352

 

995,582

Other

 

20,091

 

23,498

Corporate and unallocated

 

-

 

-

 

 

   $

2,373,891

 

   $

2,365,728

 

18.                            RELATED PARTY TRANSACTIONS

 

TCCC controls approximately 18.5% of the voting interests of the Company.  The TCCC Subsidiaries, the TCCC Related Parties and the TCCC Independent Bottlers, purchase and distribute certain of the Company’s products in certain domestic and international markets. The Company also pays TCCC a commission based on certain sales within the TCCC distribution network.

 

TCCC commissions, based on sales to the TCCC Subsidiaries and the TCCC Related Parties, for the three- and nine-months ended September 30, 2018 were $13.7 million and $38.1 million, respectively, and are included as a reduction to net sales. TCCC commissions, based on sales to the TCCC Independent Bottlers for the three- and nine-months ended September 30, 2018 were $4.3 million and $11.8 million, respectively, and are included in operating expenses.

 

TCCC commissions, based on sales to the TCCC Subsidiaries, for the three- and nine-months ended September 30, 2017 were $2.5 million and $8.2 million, respectively, and are included as a reduction to net sales. TCCC commissions, based on sales to the TCCC Related Parties and the TCCC Independent Bottlers, for the three- and nine-months ended September 30, 2017 were $12.7 million and $33.5 million, respectively, and are included in operating expenses.

 

Upon adoption of ASC 606, commissions paid to TCCC, based on sales to the TCCC Related Parties, are included as a reduction to net sales. Prior to January 1, 2018, such commissions, based on sales to the TCCC Related Parties, were included in operating expenses.

 

Net sales to the TCCC Subsidiaries for the three-months ended September 30, 2018 and 2017 were $42.3 million and $130.7 million, respectively.  Net sales to the TCCC Subsidiaries for the nine-months ended September 30, 2018 and 2017 were $117.0 million and $540.4 million, respectively. As part of the North America Refranchising, the territories of certain TCCC Subsidiaries have been transitioned to certain independent TCCC bottlers/distributors and/or TCCC Related Parties. Accordingly, the Company’s net sales classified as sales to the TCCC Subsidiaries significantly decreased for the three- and nine-months ended September 30, 2018.

 

30


Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The Company also purchases concentrates from TCCC which are then sold to certain of the Company’s bottlers/distributors. Concentrate purchases from TCCC were $7.4 million and $7.6 million for the three-months ended September 30, 2018 and 2017, respectively. Concentrate purchases from TCCC were $21.6 million and $20.2 million for the nine-months ended September 30, 2018 and 2017, respectively.

 

Certain TCCC Subsidiaries also contract manufacture certain of the Company’s Monster Energy® brand energy drinks. Such contract manufacturing expenses were $7.0 million and $3.6 million for the three-months ended September 30, 2018 and 2017, respectively. Such contract manufacturing expenses were $18.8 million and $8.7 million for the nine-months ended September 30, 2018 and 2017, respectively.

 

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

 

 

 

September 30,
2018

 

December 31,
2017

 

 

 

 

 

 

 

Accounts receivable, net

 

   $

43,383

 

   $

32,607

 

Accounts payable

 

   $

(62,566)

 

   $

(45,465)

 

Accrued promotional allowances

 

   $

(12,790)

 

   $

(5,884)

 

 

Two directors and officers of the Company and their families are principal owners of a company that provides promotional materials to the Company. Expenses incurred with such company in connection with promotional materials purchased during the three-months ended September 30, 2018 and 2017 were $0.2 million and $0.6 million, respectively. Expenses incurred with such company in connection with promotional materials purchased during the nine-months ended September 30, 2018 and 2017 were $1.6 million and $2.0 million, respectively.

 

31


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.

 

Overview

 

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

 

·                 Monster Energy®

·                 NOS®

·                 Monster Energy Ultra®

·                 Full Throttle®

·                 Monster Rehab®

·                 Burn®

·                 Monster MAXXTM

·                 Mother®

·                 Java Monster®

·                 Nalu®

·                 Muscle Monster®

·                 Ultra Energy®

·                 Espresso MonsterTM

·                 Play® and Power Play (stylized)®

·                 Punch Monster®

·                 Relentless®

·                 Juice Monster®

·                 BPM®

·                 Übermonster®

·                 BU®

·                 Monster Hydro®

·                 Gladiator®

·                 Caffé Monster®

·                 Samurai®

·                 Monster MULETM

·                 Mutant®

 

Our Monster Energy® brand energy drinks represented 91.9% and 90.5% of our net sales for the three-months ended September 30, 2018 and 2017, respectively.

 

We have three operating and reportable segments, (i) Monster Energy® Drinks segment (“Monster Energy® Drinks”), which is primarily comprised of the Company’s Monster Energy® drinks, (ii) Strategic Brands segment (“Strategic Brands”), which is comprised of the various energy drink brands acquired from The Coca-Cola Company (“TCCC”) in 2015 and (iii) Other segment (“Other”), which is comprised of certain products sold by American Fruits and Flavors LLC (a wholly-owned subsidiary of the Company) to independent third-party customers (“AFF Third-Party Products”).

 

During the three-months ended September 30, 2018, we continued to expand our existing energy drink portfolio and further develop our distribution markets. During the three-months ended September 30, 2018, we introduced the following products:

 

·                 Play® Mango (September 2018)

·                 Juice Monster® Pacific Punch Energy + Juice (August 2018)

·                 Relentless® Mango (August 2018)

·                 Live+ Ascend (July 2018)

·                 Live+ Ignite (July 2018)

·                 Live+ Persist (July 2018)

 

In the normal course of business, we discontinue certain products and/or product lines. Those products or product lines discontinued in the three-months ended September 30, 2018, either individually or in aggregate, did not have a material adverse impact on our financial position, results of operations or liquidity.

 

32


Table of Contents

 

Our net sales of $1.02 billion for the three-months ended September 30, 2018 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 $933.5 million for the three-months ended September 30, 2018.  Net sales of our Strategic Brands were $74.4 million for the three-months ended September 30, 2018.

 

Net sales for the three-months ended September 30, 2018 were negatively impacted by approximately $11.6 million as a result of the adoption of Accounting Standards Codification (“ASC”) 606. Under ASC 606, commissions paid to TCCC, based on sales to certain of the Company’s TCCC bottlers/distributors that TCCC consolidates, or which TCCC accounts for under the equity method (the “TCCC Related Parties”), are included as a reduction to net sales. Prior to January 1, 2018, commissions based on sales to the TCCC Related Parties, were included in operating expenses.

 

Our net sales of $1.02 billion for the three-months ended September 30, 2018 were impacted by advance purchases made by our customers due to a pre-announced price increase that became effective on November 1, 2018 on certain of our Monster Energy® brand energy drinks. We estimate that net sales for the three-months ended September 30, 2018 were increased by approximately $16.0 million as a result of such advance purchases.

 

Our Monster Energy® Drinks segment represented 92.0% and 91.0% of our consolidated net sales for the three-months ended September 30, 2018 and 2017, respectively. Our Strategic Brands segment represented 7.3% and 8.4% of our consolidated net sales for the three-months ended September 30, 2018 and 2017, respectively. Our Other segment represented 0.7% and 0.6% of our consolidated net sales for the three-months ended September 30, 2018 and 2017, respectively.

 

Net changes in foreign currency exchange rates had an unfavorable impact on net sales in the Monster Energy® Drinks segment of approximately $3.9 million for the three-months ended September 30, 2018. Net changes in foreign currency exchange rates had an unfavorable impact on net sales in the Strategic Brands segment of approximately $1.4 million for the three-months ended September 30, 2018.

 

Our growth strategy includes expanding our international business. Net sales to customers outside the United States amounted to $283.0 million and $260.1 million for the three-months ended September 30, 2018 and 2017, respectively. Such sales were approximately 28% and 29% of net sales for the three-months ended September 30, 2018 and 2017, respectively. Net changes in foreign currency exchange rates had an unfavorable impact on net sales to customers outside the United States of approximately $5.3 million for the three-months ended September 30, 2018.

 

Our customers are primarily full service beverage bottlers/distributors, retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, drug stores, foodservice customers and the military. Percentages of our gross sales to our various customer types for the three- and nine-months ended September 30, 2018 and 2017 are reflected below. Such information includes sales made by us directly to the customer types concerned, which include our full service beverage bottlers/distributors in the United States. Such full service beverage bottlers/distributors in turn sell certain of our products to some of the same customer types listed below. We limit our description of our customer types to include only our sales to our full service bottlers/distributors without reference to such bottlers’/distributors’ sales to their own customers.

 

33


Table of Contents

 

 

 

Three-Months Ended
September 30,

 

Nine-Months Ended
September 30,

 

 

2018

 

2017

 

2018

 

2017

U.S. full service bottlers/distributors

 

62%

 

62%

 

62%

 

62%

International full service bottlers/distributors

 

30%

 

30%

 

30%

 

29%

Club stores and mass merchandisers

 

6%

 

7%

 

6%

 

7%

Retail grocery, specialty chains and wholesalers

 

1%

 

1%

 

1%

 

1%

Other

 

1%

 

0%

 

1%

 

1%

 

Our customers include Coca-Cola Refreshments USA, Inc., Coca-Cola Refreshments Canada Company, Coca-Cola Bottling Company, CCBCC Operations, LLC, United Bottling Contracts Company, LLC, Reyes Coca-Cola Bottling, Great Lakes Coca-Cola Bottling, Coca-Cola Southwest Beverages LLC, Coca-Cola of Northern New England, Swire Coca-Cola, USA, Liberty Coca-Cola Beverages, Coca-Cola European Partners, Coca-Cola Hellenic, Coca-Cola FEMSA, Coca-Cola Amatil, Swire Coca-Cola group in China, COFCO Coca-Cola group in China, Coca-Cola Beverages Africa, Coca-Cola İçecek and certain other TCCC network bottlers, Asahi Soft Drinks, Co., Ltd., Kalil Bottling Group, Wal-Mart, Inc. (including Sam’s Club), Costco Wholesale Corporation and Big Geyser, Inc.  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 consolidated subsidiaries (the “TCCC Subsidiaries”), accounted for approximately 4% and 14% of our net sales for the three-months ended September 30, 2018 and 2017, respectively. The TCCC Subsidiaries accounted for approximately 4% and 21% of our net sales for the nine-months ended September 30, 2018 and 2017, respectively. As part of TCCC’s North America Refranchising initiative (the “North America Refranchising”), the territories of certain TCCC Subsidiaries have been transitioned to certain independent TCCC bottlers/distributors and/or TCCC Related Parties. Accordingly, our percentage of net sales to the TCCC Subsidiaries significantly decreased for the three- and nine-months ended September 30, 2018.

 

CCBCC Operations, LLC accounted for approximately 14% of our net sales for both the three-months ended September 30, 2018 and 2017.  CCBCC Operations, LLC accounted for approximately 14% and 13% of our net sales for the nine-months ended September 30, 2018 and 2017, respectively.

 

Reyes Coca-Cola Bottling accounted for approximately 13% and 5% of the Company’s net sales for the three-months ended September 30, 2018 and 2017, respectively. Reyes Coca-Cola Bottling accounted for approximately 13% and 5% of the Company’s net sales for the nine-months ended September 30, 2018 and 2017, respectively.

 

Coca-Cola European Partners accounted for approximately 9% and 10% of the Company’s net sales for the three-months ended September 30, 2018 and 2017, respectively. Coca-Cola European Partners accounted for approximately 9% of the Company’s net sales for both the nine-months ended September 30, 2018 and 2017.

 

34


Table of Contents

 

Results of Operations

 

The following table sets forth key statistics for the three- and nine-months ended September 30, 2018 and 2017.

 

(In thousands, except per share amounts)

 

Three-Months Ended
September 30,

 

Percentage
Change

 

Nine-Months Ended
September 30,

 

Percentage
Change

 

 

 

2018

 

2017

 

18 vs. 17

 

2018

 

2017

 

18 vs. 17

 

Net sales1,2

 

  $

1,016,160

 

  $

909,476

 

11.7%

 

  $

2,882,953

 

  $

2,558,690

 

12.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

408,501

 

339,767

 

20.2%

 

1,139,780

 

924,610

 

23.3%

 

Gross profit*1,2

 

607,659

 

569,709

 

6.7%

 

1,743,173

 

1,634,080

 

6.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit as a percentage of net sales1

 

59.8%

 

62.6%

 

 

 

60.5%

 

63.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses3,4

 

268,086

 

252,337

 

6.2%

 

766,065

 

702,405

 

9.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses as a percentage of net sales

 

26.4%

 

27.7%

 

 

 

26.6%

 

27.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income1,3

 

339,573

 

317,372

 

7.0%

 

977,108

 

931,675

 

4.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income as a percentage of net sales

 

33.4%

 

34.9%

 

 

 

33.9%

 

36.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income (expense), net

 

2,988

 

3,996

 

(25.2%)

 

5,269

 

2,103

 

150.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes1,3

 

342,561

 

321,368

 

6.6%

 

982,377

 

933,778

 

5.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

74,828

 

102,624

 

(27.1%)

 

228,480

 

314,422

 

(27.3%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes as a percentage of income before taxes

 

21.8%

 

31.9%

 

 

 

23.3%

 

33.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income1,3

 

  $

267,733

 

  $

218,744

 

22.4%

 

  $

753,897

 

  $

619,356

 

21.7%

 

Net income as a percentage of net sales

 

26.3%

 

24.1%

 

 

 

26.2%

 

24.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

  $

0.48

 

  $

0.39

 

25.8%

 

  $

1.35

 

  $

1.09

 

23.5%

 

Diluted

 

  $

0.48

 

  $

0.38

 

26.4%

 

  $

1.33

 

  $

1.07

 

24.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Case sales (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

(in 192-ounce case equivalents)

 

111,038

 

96,184

 

15.4%

 

313,410

 

273,409

 

14.6%

 

 

¹Includes $11.1 million and $11.4 million for the three-months ended September 30, 2018 and 2017, respectively, related to the recognition of deferred revenue. Includes $33.3 million and $31.6 million for the nine-months ended September 30, 2018 and 2017, respectively, related to the recognition of deferred revenue.

 

2Net sales were negatively impacted by approximately $11.6 million and $33.8 million for the three- and nine-months ended September 30, 2018, respectively, as a result of the adoption of ASC 606.

 

3Includes $14.1 million and $15.9 million for the three-months ended September 30, 2018 and 2017, respectively, of distributor termination costs. Includes $26.6 million and $35.9 million for the nine-months ended September 30, 2018 and 2017, respectively, of distributor termination costs.

 

4Without the adoption of ASC 606, an additional $11.6 million and $33.8 million of commissions would have been included in operating expenses for the three- and nine-months ended September 30, 2018, respectively (such commissions are included as a reduction to net sales).

 

*Gross profit may not be comparable to that of other entities since some entities include all costs associated with their distribution process in cost of sales, whereas others exclude certain costs and instead include such costs within another line item such as operating expenses. We include out-bound freight and warehouse costs in operating expenses rather than in cost of sales.

 

35


Table of Contents

 

Results of Operations for the Three-Months Ended September 30, 2018 Compared to the Three-Months Ended September 30, 2017.

 

Net Sales. Net sales were $1.02 billion for the three-months ended September 30, 2018, an increase of approximately $106.7 million, or 11.7% higher than net sales of $909.5 million for the three-months ended September 30, 2017. Net sales for the three-months ended September 30, 2018 were negatively impacted by approximately $11.6 million as a result of the adoption of ASC 606. Net changes in foreign currency exchange rates had an unfavorable impact on net sales of approximately $5.3 million for the three-months ended September 30, 2018. Our net sales of $1.02 billion for the three-months ended September 30, 2018 were impacted by advance purchases made by our customers due to a pre-announced price increase that became effective on November 1, 2018 on certain of our Monster Energy® brand energy drinks. We estimate that net sales for the three-months ended September 30, 2018 were increased by approximately $16.0 million as a result of such advance purchases.

 

Net sales for the Monster Energy® Drinks segment were $935.1 million for the three-months ended September 30, 2018, an increase of approximately $107.5 million, or 13.0% higher than net sales of $827.7 million for the three-months ended September 30, 2017. Net sales for the Monster Energy® Drinks segment for the three-months ended September 30, 2018 were negatively impacted by approximately $5.3 million as a result of the adoption of ASC 606. Net changes in foreign currency exchange rates had an unfavorable impact on net sales for the Monster Energy® Drinks segment of approximately $3.9 million for the three-months ended September 30, 2018. Net sales for the Monster Energy® Drinks segment increased primarily due to increased sales by volume of our Monster Energy® brand energy drinks as a result of increased domestic and international consumer demand.

 

Net sales for the Strategic Brands segment were $74.4 million for the three-months ended September 30, 2018, a decrease of approximately $2.1 million, or 2.8% lower than net sales of $76.6 million for the three-months ended September 30, 2017. Net sales for the Strategic Brands segment for the three-months ended September 30, 2018 were negatively impacted by approximately $6.3 million as a result of the adoption of ASC 606. Net changes in foreign currency exchange rates had an unfavorable impact on net sales for the Strategic Brands segment of approximately $1.4 million for the three-months ended September 30, 2018.

 

Net sales for the Other segment were $6.6 million for the three-months ended September 30, 2018, an increase of approximately $1.4 million, or 26.4% higher than net sales of $5.2 million for the three-months ended September 30, 2017.

 

Case sales, in 192-ounce case equivalents, were 111.0 million cases for the three-months ended September 30, 2018, an increase of approximately 14.9 million cases or 15.4% higher than case sales of 96.2 million cases for the three-months ended September 30, 2017. The overall average net sales per case (excluding net sales of AFF Third-Party Products of $6.6 million and $5.2 million for the three-months ended September 30, 2018 and 2017, respectively, as these sales do not have unit case equivalents) decreased to $9.09 for the three-months ended September 30, 2018, which was 3.3% lower than the average net sales per case of $9.40 for the three-months ended September 30, 2017, partially due to the adoption of ASC 606. Without the adoption of ASC 606, the overall average net sales per case (excluding net sales of AFF Third-Party Products of $6.6 million and $5.2 million for the three-months ended September 30, 2018 and 2017, respectively, as these sales do not have unit case equivalents) decreased to $9.20 for the three-months ended September 30, 2018, which was 2.2% lower than the average net sales per case of $9.40 for the three-months ended September 30, 2017.

 

36


Table of Contents

 

Gross Profit.  Gross profit was $607.7 million for the three-months ended September 30, 2018, an increase of approximately $38.0 million, or 6.7% higher than the gross profit of $569.7 million for the three-months ended September 30, 2017. The increase in gross profit dollars was primarily the result of the $110.2 million increase in net sales of our Monster Energy® brand energy drinks for the three-months ended September 30, 2018.

 

Gross profit as a percentage of net sales decreased to 59.8% for the three-months ended September 30, 2018 from 62.6% for the three-months ended September 30, 2017. Gross profit as a percentage of net sales, excluding the impact of ASC 606, was 60.3% for the three-months ended September 30, 2018.

 

The decrease in gross profit as a percentage of net sales was primarily attributable to (i) increases in certain input costs such as aluminum cans, freight in and other input costs; (ii) the $11.6 million of commissions accounted for as a reduction to net sales due to the adoption of ASC 606; (iii) increases in promotional allowances as a percentage of gross sales; (iv) a change in domestic product sales mix; and (v) geographical gross profit mix.

 

Operating Expenses.  Total operating expenses were $268.1 million for the three-months ended September 30, 2018, an increase of approximately $15.7 million, or 6.2% higher than total operating expenses of $252.3 million for the three-months ended September 30, 2017. The increase in operating expenses was primarily due to increased out-bound freight and warehouse costs of $12.8 million, increased payroll expenses of $5.9 million (of which $0.8 million was related to an increase in stock-based compensation), increased expenditures of $4.9 million for advertising, and increased expenditures of $3.1 million for sponsorships and endorsements. Commissions included in operating expenses were $4.7 million, a decrease of $8.7 million, or 65.0% lower than commissions included in operating expenses of $13.4 million for the three-months ended September 30, 2017. Without the adoption of ASC 606, an additional $11.6 million of commissions would have been included in operating expenses for the three-months ended September 30, 2018 (such commissions are included as a reduction to net sales).

 

Operating Income.  Operating income was $339.6 million for the three-months ended September 30, 2018, an increase of approximately $22.2 million, or 7.0% higher than operating income of $317.4 million for the three-months ended September 30, 2017. Operating income as a percentage of net sales decreased to 33.4% for the three-months ended September 30, 2018 from 34.9% for the three-months ended September 30, 2017. Operating income was $43.8 million and $41.9 million for the three-months ended September 30, 2018 and 2017, respectively, in connection with our operations in Europe, Middle East and Africa (“EMEA”), Asia Pacific and South America.

 

Operating income for the Monster Energy® Drinks segment was $359.1 million for the three-months ended September 30, 2018, an increase of approximately $25.9 million, or 7.8% higher than operating income of $333.2 million for the three-months ended September 30, 2017. The increase in operating income for the Monster Energy® Drinks segment was primarily the result of the $110.2 million increase in net sales of our Monster Energy® brand energy drinks for the three-months ended September 30, 2018.

 

Operating income for the Strategic Brands segment was $41.7 million for the three-months ended September 30, 2018, a decrease of approximately $1.0 million, or 2.3% lower than operating income of $42.7 million for the three-months ended September 30, 2017.

 

Operating income for the Other segment was $1.7 million for the three-months ended September 30, 2018, an increase of approximately $0.3 million, or 20.0% higher than operating income of $1.5 million for the three-months ended September 30, 2017.

 

37


Table of Contents

 

Interest and Other Income, net.  Interest and other non-operating income, net, was $3.0 million for the three-months ended September 30, 2018, as compared to interest and other non-operating income, net of $4.0 million for the three-months ended September 30, 2017. Foreign currency transaction (losses) gains were ($0.3) million and $1.8 million for the three-months ended September 30, 2018 and 2017, respectively. Interest income was $3.4 million and $2.3 million for the three-months ended September 30, 2018 and 2017, respectively.

 

Provision for Income Taxes.  Provision for income taxes was $74.8 million for the three-months ended September 30, 2018, a decrease of $27.8 million, or 27.1% lower than the provision for income taxes of $102.6 million for the three-months ended September 30, 2017. The effective combined federal, state and foreign tax rate decreased to 21.8% from 31.9% for the three-months ended September 30, 2018 and 2017, respectively. The decrease in the effective tax rate was primarily due to the reduction in the U.S. federal statutory tax rate as a result of the Tax Cuts and Jobs Act (the “Tax Reform Act”) signed into law on December 22, 2017 (before considering the potential impact of further clarification of certain matters related to the Tax Reform Act), and to a reduction in certain foreign income that is subject to U.S. taxation.  The decrease in the provision for income taxes was partially offset by the elimination of the domestic production deduction following the Tax Reform Act.

 

The recorded impact of the Tax Reform Act is provisional and the final amount may differ, possibly materially, due to, among other things, changes in estimates, interpretations and assumptions we have made, changes in IRS interpretations, the issuance of new guidance, legislative actions, changes in accounting standards or related interpretations in response to the Tax Reform Act, as well as any and future actions by certain states within the United States that have not currently adopted the Tax Reform Act.

 

Net Income.  Net income was $267.7 million for the three-months ended September 30, 2018, an increase of $49.0 million, or 22.4% higher than net income of $218.7 million for the three-months ended September 30, 2017. The increase in net income was primarily due to the $38.0 million increase in gross profit and the $27.8 million decrease in the provision for income taxes. The increase in net income was partially offset by the increase in operating expenses of $15.7 million.

 

Results of Operations for the Nine-Months Ended September 30, 2018 Compared to the Nine-Months Ended September 30, 2017.

 

Net Sales. Net sales were $2.88 billion for the nine-months ended September 30, 2018, an increase of approximately $324.3 million, or 12.7% higher than net sales of $2.56 billion for the nine-months ended September 30, 2017. Net sales for the nine-months ended September 30, 2018 were negatively impacted by approximately $33.8 million as a result of the adoption of ASC 606. Net changes in foreign currency exchange rates had a favorable impact on net sales of approximately $29.2 million for the nine-months ended September 30, 2018.

 

Net sales for the Monster Energy® Drinks segment were $2.65 billion for the nine-months ended September 30, 2018, an increase of approximately $333.6 million, or 14.4% higher than net sales of $2.31 billion for the nine-months ended September 30, 2017. Net sales for the Monster Energy® Drinks segment for the nine-months ended September 30, 2018 were negatively impacted by approximately $14.2 million as a result of the adoption of ASC 606. Net changes in foreign currency exchange rates had a favorable impact on net sales for the Monster Energy® Drinks segment of approximately $27.0 million for the nine-months ended September 30, 2018. Net sales for the Monster Energy® Drinks segment increased primarily due to increased sales by volume of our Monster Energy® brand energy drinks as a result of increased domestic and international consumer demand.

 

38


Table of Contents

 

Net sales for the Strategic Brands segment were $220.0 million for the nine-months ended September 30, 2018, a decrease of approximately $10.2