Monster Beverage Corp - Quarter Report: 2019 March (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 March 31, 2019

Commission File Number 001-18761

 

 

 

MONSTER BEVERAGE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

	Delaware	47-1809393
	(State or other jurisdiction of	(I.R.S. Employer
	incorporation or organization)	Identification No.)

 

 

1 Monster Way

Corona, California 92879

(Address of principal executive offices) (Zip code)

 

 

 

(951) 739 – 6200

(Registrant’s telephone number, including area code)

 

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

 

Yes  X    No __

 

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

 

Yes X     No __

 

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

 

Large accelerated filer x		Accelerated filer o
Non-accelerated filer o		Smaller reporting company o

 

Emerging growth company ¨

 

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

 

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

 

Yes ___    No  X

 

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

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock		MNST		Nasdaq Global Select Market

 

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

 

Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

MARCH 31, 2019

 

 

INDEX

 

 

Part I.	FINANCIAL INFORMATION	Page No.
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018	3
	Condensed Consolidated Statements of Income for the Three-Months Ended March 31, 2019 and 2018	4
	Condensed Consolidated Statements of Comprehensive Income for the Three-Months Ended March 31, 2019 and 2018	5
	Condensed Consolidated Statements of Stockholders’ Equity for the Three-Months Ended March 31, 2019 and 2018	6
	Condensed Consolidated Statements of Cash Flows for the Three-Months Ended March 31, 2019 and 2018	7
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	48
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	49
	Signatures	50

 

2

Table of Contents

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2019 AND DECEMBER 31, 2018

(In Thousands, Except Par Value) (Unaudited)

 

		March 31, 2019			December 31, 2018
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	618,344		$	637,513
Short-term investments		263,697			320,650
Accounts receivable, net		596,661			484,562
Inventories		300,780			277,705
Prepaid expenses and other current assets		63,685			44,909
Prepaid income taxes		64,133			38,831
Total current assets		1,907,300			1,804,170
PROPERTY AND EQUIPMENT, net		241,232			243,051
DEFERRED INCOME TAXES		85,215			85,687
GOODWILL		1,331,643			1,331,643
OTHER INTANGIBLE ASSETS, net		1,042,839			1,045,878
OTHER ASSETS		47,622			16,462
Total Assets		$	4,655,851		$	4,526,891
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	267,735		$	248,760
Accrued liabilities		117,350			112,507
Accrued promotional allowances		167,700			145,741
Accrued distributor terminations		10,272			-
Deferred revenue		43,591			44,045
Accrued compensation		18,211			39,903
Income taxes payable		6,113			10,189
Total current liabilities		630,972			601,145
DEFERRED REVENUE		303,241			312,224
OTHER LIABILITIES		22,818			2,621
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS’ EQUITY:
Common stock - $0.005 par value; 1,250,000 shares authorized; 634,841 shares issued and 543,547 shares outstanding as of March 31, 2019; 630,970 shares issued and 543,676 shares outstanding as of December 31, 2018		3,174			3,155
Additional paid-in capital		4,288,638			4,238,170
Retained earnings		4,176,130			3,914,645
Accumulated other comprehensive loss		(34,125)			(32,864)
Common stock in treasury, at cost; 91,294 shares and 87,294 shares as of March 31, 2019 and December 31, 2018, respectively		(4,734,997)			(4,512,205)
Total stockholders’ equity		3,698,820			3,610,901
Total Liabilities and Stockholders’ Equity		$	4,655,851		$	4,526,891

 

See accompanying notes to condensed consolidated financial statements.

 

3

Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

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

 

 

		Three-Months Ended
		March 31,
		2019			2018
NET SALES		$	945,991		$	850,921
COST OF SALES		372,459			335,664
GROSS PROFIT		573,532			515,257
OPERATING EXPENSES		262,071			235,342
OPERATING INCOME		311,461			279,915
INTEREST and OTHER INCOME, net		2,742			1,805
INCOME BEFORE PROVISION FOR INCOME TAXES		314,203			281,720
PROVISION FOR INCOME TAXES		52,718			65,670
NET INCOME		$	261,485		$	216,050
NET INCOME PER COMMON SHARE:
Basic		$	0.48		$	0.38
Diluted		$	0.48		$	0.38
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS:
Basic		542,768			566,000
Diluted		548,273			574,129

 

See accompanying notes to condensed consolidated financial statements.

 

4

Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

(In Thousands) (Unaudited)

 

 

		Three-Months Ended March 31,
		2019			2018
Net income, as reported		$	261,485		$	216,050
Other comprehensive income:
Change in foreign currency translation adjustment		(1,381)			2,723
Available-for-sale investments:
Change in net unrealized gains		120			215
Reclassification adjustment for net gains included in net income		-			-
Net change in available-for-sale investments		120			215
Other comprehensive (loss) income		(1,261)			2,938
Comprehensive income		$	260,224		$	218,988

 

See accompanying notes to condensed consolidated financial statements.

 

5

Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

													Accumulated
													Other								Total
		Common stock					Additional			Retained			Comprehensive			Treasury stock					Stockholders’
		Shares		Amount			Paid-in Capital			Earnings			Loss			Shares		Amount			Equity
Balance, December 31, 2018		630,970		$	3,155		$	4,238,170		$	3,914,645		$	(32,864)		(87,294)		$	(4,512,205)		$	3,610,901
Stock-based compensation		-		-			15,324			-			-			-		-			15,324
Exercise of stock options		3,871		19			35,144			-			-			-		-			35,163
Unrealized gain on available-for-sale securities		-		-			-			-			120			-		-			120
Repurchase of common stock		-		-			-			-			-			(4,000)		(222,792)			(222,792)
Foreign currency translation		-		-			-			-			(1,381)			-		-			(1,381)
Net income		-		-			-			261,485			-			-		-			261,485
Balance, March 31, 2019		634,841		$	3,174		$	4,288,638		$	4,176,130		$	(34,125)		(91,294)		$	(4,734,997)		$	3,698,820

 

													Accumulated
													Other								Total
		Common stock					Additional			Retained			Comprehensive			Treasury stock					Stockholders’
		Shares		Amount			Paid-in Capital			Earnings			Loss			Shares		Amount			Equity
Balance, December 31, 2017		629,255		$	3,146		$	4,150,628		$	2,928,226		$	(16,659)		(62,957)		$	(3,170,129)		$	3,895,212
Stock-based compensation		-		-			13,439			-			-			-		-			13,439
Exercise of stock options		669		4			6,498			-			-			-		-			6,502
Unrealized gain on available-for-sale securities		-		-			-			-			215			-		-			215
ASU No. 2016-16 adoption		-		-			-			(6,585)			-			-		-			(6,585)
Repurchase of common stock		-		-			-			-			-			(4,362)		(251,949)			(251,949)
Foreign currency translation		-		-			-			-			2,723			-		-			2,723
Net income		-		-			-			216,050			-			-		-			216,050
Balance, March 31, 2018		629,924		$	3,150		$	4,170,565		$	3,137,691		$	(13,721)		(67,319)		$	(3,422,078)		$	3,875,607

 

See accompanying notes to condensed consolidated financial statements.

 

6

Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

(In Thousands) (Unaudited)

 

		Three-Months Ended March 31,
		2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	261,485		$	216,050
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,870			13,991
Gain on disposal of property and equipment		(115)			(187)
Stock-based compensation		15,324			13,439
Deferred income taxes		472			-
Effect on cash of changes in operating assets and liabilities:
Accounts receivable		(116,426)			(72,699)
Distributor receivables		2,923			3,279
Inventories		(24,004)			(11,274)
Prepaid expenses and other current assets		(21,492)			(19,646)
Prepaid income taxes		(25,224)			52,410
Accounts payable		18,565			(22,616)
Accrued liabilities		(2,262)			(14,985)
Accrued promotional allowances		23,103			15,971
Accrued distributor terminations		10,272			71
Accrued compensation		(21,832)			(18,350)
Income taxes payable		(4,125)			(1,059)
Other liabilities		1,338			1,108
Deferred revenue		(9,476)			(6,592)
Net cash provided by operating activities		123,396			148,911
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of available-for-sale investments		232,387			334,216
Purchases of available-for-sale investments		(175,314)			(247,421)
Purchases of property and equipment		(8,485)			(13,049)
Proceeds from sale of property and equipment		184			3,397
Decrease in intangibles		298			280
Increase in other assets		(2,291)			(1,549)
Net cash provided by investing activities		46,779			75,874
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt		(393)			(543)
Issuance of common stock		35,163			6,501
Purchases of common stock held in treasury		(222,792)			(251,950)
Net cash used in financing activities		(188,022)			(245,992)
Effect of exchange rate changes on cash and cash equivalents		(1,322)			3,945
NET DECREASE IN CASH AND CASH EQUIVALENTS		(19,169)			(17,262)
CASH AND CASH EQUIVALENTS, beginning of period		637,513			528,622
CASH AND CASH EQUIVALENTS, end of period		$	618,344		$	511,360
SUPPLEMENTAL INFORMATION:
Cash paid during the period for:
Interest		$	15		$	16
Income taxes		$	82,002		$	15,223

 

See accompanying notes to condensed consolidated financial statements.

 

7

Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS

 

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

 

See accompanying notes to condensed consolidated financial statements.

 

8

Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.                                    BASIS OF PRESENTATION

 

Reference is made to the Notes to Consolidated Financial Statements, in Monster Beverage Corporation and Subsidiaries (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2018 (“Form 10-K”) for a summary of significant accounting policies utilized by the Company and its consolidated subsidiaries and other disclosures, which should be read in conjunction with this Quarterly Report on Form 10-Q (“Form 10-Q”).

 

The Company’s condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and Securities and Exchange Commission (“SEC”) rules and regulations applicable to interim financial reporting. They do not include all the information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP. The information set forth in these interim condensed consolidated financial statements for the three-months ended March 31, 2019 and 2018, respectively, is unaudited and reflects all adjustments, which include only normal recurring adjustments and which in the opinion of management are necessary to make the interim condensed consolidated financial statements not misleading. Results of operations for periods covered by this report may not necessarily be indicative of results of operations for the full year.

 

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

 

2.                                    RECENT ACCOUNTING PRONOUNCEMENTS

 

Recently issued accounting pronouncements not yet adopted

 

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

 

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

 

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

 

9

Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

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

 

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

 

Recently adopted accounting pronouncements

 

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

 

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

 

10

Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3.                                    REVENUE RECOGNITION

 

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

 

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

 

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

 

The majority of the Company’s revenue is recognized when it satisfies a single performance obligation by transferring control of its products to a customer. Control is generally transferred when the Company’s products are either shipped or delivered based on the terms contained within the underlying contracts or agreements. Certain of the Company’s bottlers/distributors may also perform a separate function as a co-packer on the Company’s behalf. In such cases, control of the Company’s products passes to such bottlers/distributors when they notify the Company that they have taken possession or transferred the relevant portion of the Company’s finished goods. The Company’s general payment terms are short-term in duration. The Company does not have significant financing components or payment terms. The Company did not have any material unsatisfied performance obligations as of March 31, 2019 or December 31, 2018.

 

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

 

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

 

Promotional and other allowances (variable consideration) recorded as a reduction to net sales, primarily include consideration given to the Company’s bottlers/distributors or retail customers including, but not limited to the following:

 

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

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

 

11

Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

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

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

·     discounted or free products;

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

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

 

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

 

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

 

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

 

12

Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Disaggregation of Revenue

 

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

 

		Three-Months Ended March 31, 2019
Net Sales		U.S. and Canada			EMEA1			Asia Pacific			Latin America and Caribbean			Total
Monster Energy® Drinks		$	642,826		$	124,637		$	62,456		$	40,465		$	870,384
Strategic Brands		41,750			21,908			6,225			403			70,286
Other		5,321			-			-			-			5,321
Total Net Sales		$	689,897		$	146,545		$	68,681		$	40,868		$	945,991

 

 

		Three-Months Ended March 31, 2018
Net Sales		U.S. and Canada			EMEA1			Asia Pacific			Latin America and Caribbean			Total
Monster Energy® Drinks		$	588,817		$	110,929		$	47,431		$	33,328		$	780,505
Strategic Brands		39,724			19,313			5,548			1,174			65,759
Other		4,657			-			-			-			4,657
Total Net Sales		$	633,198		$	130,242		$	52,979		$	34,502		$	850,921

 

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

 

Contract Liabilities

 

Amounts received from certain bottlers/distributors at inception of their distribution contracts or at the inception of certain sales/marketing programs are accounted for as deferred revenue. As of March 31, 2019, the Company had $346.8 million of deferred revenue, which is included in current and long-term deferred revenue in the Company’s condensed consolidated balance sheet. As of December 31, 2018, the Company had $356.3 million of deferred revenue, which is included in current and long-term deferred revenue in the Company’s condensed consolidated balance sheet. During the three-months ended March 31, 2019 and 2018, $14.2 million and $11.2 million, respectively, of deferred revenue was recognized in net sales. See Note 11.

 

4.                                    LEASES

 

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

 

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

 

 

13

Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

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

 

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

 

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

 

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

 

Operating leases:
Lease cost		$	1,115
Variable Lease cost		165
Operating Lease cost		1,280
Short term Lease cost		1,082
Finance Leases:
Amortization of ROU assets		80
Interest on finance Lease liabilities		15
Finance Lease cost		95
Total Lease cost		$	2,457

 

14

Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	889
Operating cash flows from finance leases		15
Financing cash flows from finance leases		393
Right-of-use assets obtained in exchange for lease obligations:
Finance leases		415
Operating leases		26,429

 

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

 

		Real Estate			Equipment			Total
Operating leases		$	25,072		$	509		$	25,581
Finance leases		-			1,646			1,646

 

 

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

 

		Operating Leases		Finance Leases
Weighted-average remaining least term (years)		10.7		0.7
Weighted-average discount rate		3.6%		6.2%

 

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

 

		Undiscounted Future Lease Payments
		Operating Leases			Finance Leases
2019 (excluding the three months ended March 31, 2019)		$	2,847		$	814
2020		3,187			64
2021		2,586			-
2022		2,187			-
2023		1,733			-
2024 and thereafter		14,572			-
Total lease payments		27,112			878
Less interest		(5,001)			(18)
Total		$	22,111		$	860
Accrued liabilities		$	3,028		$	860
Other liabilities		19,083			-

 

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

 

15

Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

Year Ending December 31:
2019		$	3,954
2020		2,949
2021		2,410
2022		2,114
2023		1,681
2024 and thereafter		14,860
		$	27,968

 

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

 

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

 

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

 

16

Table of Contents

 

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

5.                                    INVESTMENTS

 

The following table summarizes the Company’s investments at:

 

March 31, 2019		Amortized Cost			Gross Unrealized Holding Gains			Gross Unrealized Holding Losses			Fair Value			Continuous Unrealized Loss Position less than 12 Months			Continuous Unrealized Loss Position greater than 12 Months
Available-for-sale
Short-term:
Commercial paper		$	38,964		$	-		$	-		$	38,964		$	-		$	-
Certificates of deposit		5,024			-			-			5,024			-			-
Municipal securities		103,664			30			4			103,690			4			-
U.S. government agency securities		19,940			7			2			19,945			2			-
U.S. treasuries		89,267			13			12			89,268			12			-
Variable rate demand notes		6,806			-			-			6,806			-			-
Total		$	263,665		$	50		$	18		$	263,697		$	18		$	-
December 31, 2018		Amortized Cost			Gross Unrealized Holding Gains			Gross Unrealized Holding Losses			Fair Value			Continuous Unrealized Loss Position less than 12 Months			Continuous Unrealized Loss Position greater than 12 Months
Available-for-sale
Short-term:
Commercial paper		$	52,838		$	-		$	-		$	52,838		$	-		$	-
Certificates of deposit		14,075			-			-			14,075			-			-
Municipal securities		151,690			16			62			151,644			62			-
U.S. government agency securities		19,943			-			12			19,931			12			-
U.S. treasuries		78,189			-			32			78,157			32			-
Variable rate demand notes		4,005			-			-			4,005			-			-
Total		$	320,740		$	16		$	106		$	320,650		$	106		$	-

 

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

 

The Company’s investments at March 31, 2019 and December 31, 2018 in commercial paper, certificates of deposit, municipal securities, U.S. government agency securities, U.S. treasuries and/or variable rate demand notes (“VRDNs”) carried investment grade credit ratings. VRDNs are floating rate municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest. All of the put options are secured by a pledged liquidity source. While they are classified as marketable investment securities, the put option allows the VRDNs to be liquidated at par on a same day, or more generally, on a seven-day settlement basis.

 

17