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 |
| Commission File Number 0-18761 |
MONSTER BEVERAGE CORPORATION
(Exact name of Registrant as specified in its charter)
| Delaware | 39-1679918 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
1 Monster Way
Corona, California 92879
(Address of principal executive offices) (Zip code)
(951) 739 – 6200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No __
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes X No __
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x | Accelerated filer o |
|
|
Non-accelerated filer o (Do not check if smaller reporting company) | Smaller reporting company 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 170,171,054205,498,468 shares of common stock, par value $0.005 per share, outstanding as of April 28,July 29, 2015.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
MARCH 31,JUNE 30, 2015
|
| Page No. | ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
| Condensed Consolidated Balance Sheets as of |
| 3 |
|
|
|
|
|
|
|
| 4 | |
|
|
|
|
|
|
|
| 5 | |
|
|
|
|
|
|
|
| 6 | |
|
|
|
|
|
|
|
| 8 | |
|
|
|
|
|
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
| |
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
PART I – FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31,JUNE 30, 2015 AND DECEMBER 31, 2014
(In Thousands, Except Par Value) (Unaudited) |
|
|
| March 31, |
| December 31, |
| June 30,
|
| December 31, | ||||
ASSETS |
|
|
|
|
|
|
|
| ||||
CURRENT ASSETS: |
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 362,787 |
| $ | 370,323 |
| $ | 1,696,295 |
| $ | 370,323 |
Short-term investments |
| 647,284 |
| 781,134 |
| 1,234,858 |
| 781,134 | ||||
Accounts receivable, net |
| 343,427 |
| 280,203 |
| 372,669 |
| 280,203 | ||||
TCCC Transaction receivable |
| 125,000 |
| - | ||||||||
Distributor receivables |
| 628 |
| 552 |
| 666 |
| 552 | ||||
Inventories |
| 197,914 |
| 174,573 |
| 180,892 |
| 174,573 | ||||
Prepaid expenses and other current assets |
| 25,174 |
| 19,673 |
| 22,628 |
| 19,673 | ||||
Intangibles held-for-sale, net |
| 18,079 |
| 18,079 |
| - |
| 18,079 | ||||
Prepaid income taxes |
| 21,648 |
| 8,617 |
| 92,386 |
| 8,617 | ||||
Deferred income taxes |
| 224,954 |
| 40,275 |
| 196,985 |
| 40,275 | ||||
Total current assets |
| 1,841,895 |
| 1,693,429 |
| 3,922,379 |
| 1,693,429 | ||||
|
|
|
|
|
|
|
|
| ||||
INVESTMENTS |
| 41,240 |
| 42,940 |
| 52,364 |
| 42,940 | ||||
PROPERTY AND EQUIPMENT, net |
| 88,296 |
| 90,156 |
| 92,538 |
| 90,156 | ||||
DEFERRED INCOME TAXES |
| 54,106 |
| 54,106 |
| - |
| 54,106 | ||||
INTANGIBLES, net |
| 52,300 |
| 50,748 | ||||||||
GOODWILL |
| 1,287,777 |
| - | ||||||||
OTHER INTANGIBLE ASSETS, net |
| 428,166 |
| 50,748 | ||||||||
OTHER ASSETS |
| 7,109 |
| 7,496 |
| 8,357 |
| 7,496 | ||||
Total Assets |
| $ | 2,084,946 |
| $ | 1,938,875 |
| $ | 5,791,581 |
| $ | 1,938,875 |
|
|
|
|
|
|
|
|
| ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
| ||||
|
|
|
|
| ||||||||
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
| ||||
Accounts payable |
| $ | 167,789 |
| $ | 127,641 |
| $ | 194,731 |
| $ | 127,641 |
Accrued liabilities |
| 46,147 |
| 40,271 |
| 52,242 |
| 40,271 | ||||
Accrued promotional allowances |
| 107,229 |
| 114,047 |
| 128,059 |
| 114,047 | ||||
Accrued distributor terminations |
| 205,980 |
| - |
| 64,621 |
| - | ||||
Deferred revenue |
| 10,584 |
| 49,926 |
| 26,417 |
| 49,926 | ||||
Accrued compensation |
| 9,972 |
| 17,983 |
| 14,404 |
| 17,983 | ||||
Income taxes payable |
| 1,586 |
| 5,848 |
| 11,453 |
| 5,848 | ||||
Total current liabilities |
| 549,287 |
| 355,716 |
| 491,927 |
| 355,716 | ||||
|
|
|
|
|
|
|
|
| ||||
DEFERRED REVENUE |
| 67,305 |
| 68,009 |
| 355,379 |
| 68,009 | ||||
|
|
|
|
|
|
|
|
| ||||
COMMITMENTS AND CONTINGENCIES (Note 11) |
|
|
|
| ||||||||
DEFERRED INCOME TAXES |
| 89,455 |
| - | ||||||||
|
|
|
|
| ||||||||
COMMITMENTS AND CONTINGENCIES (Note 12) |
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
| ||||
STOCKHOLDERS’ EQUITY: |
|
|
|
|
|
|
|
| ||||
Common stock - $0.005 par value; 240,000 shares authorized; |
| 1,058 |
| 1,035 | ||||||||
Common stock - $0.005 par value; 240,000 shares authorized; |
| 1,033 |
| 1,035 | ||||||||
Additional paid-in capital |
| 636,274 |
| 426,145 |
| 3,952,030 |
| 426,145 | ||||
Retained earnings |
| 2,334,924 |
| 2,330,510 |
| 1,081,547 |
| 2,330,510 | ||||
Accumulated other comprehensive loss |
| (21,433) |
| (11,453) |
| (19,073) |
| (11,453) | ||||
Common stock in treasury, at cost; 41,451 and 39,282 shares as of March 31, 2015 and December 31, 2014, respectively |
| (1,482,469) |
| (1,231,087) | ||||||||
Common stock in treasury, at cost; 1,175 and 39,282 shares as of June 30, 2015 and December 31, 2014, respectively |
| (160,717) |
| (1,231,087) | ||||||||
Total stockholders’ equity |
| 1,468,354 |
| 1,515,150 |
| 4,854,820 |
| 1,515,150 | ||||
Total Liabilities and Stockholders’ Equity |
| $ | 2,084,946 |
| $ | 1,938,875 |
| $ | 5,791,581 |
| $ | 1,938,875 |
See accompanying notes to condensed consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE-MONTHSTHREE- AND SIX-MONTHS ENDED MARCH 31,JUNE 30, 2015 AND 2014
(In Thousands, Except Per Share Amounts) (Unaudited) |
|
| Three-Months Ended | ||||
|
| March 31, | ||||
|
| 2015 |
| 2014 | ||
|
|
|
|
| ||
NET SALES |
| $ | 626,791 |
| $ | 536,129 |
|
|
|
|
| ||
COST OF SALES |
| 257,834 |
| 249,311 | ||
|
|
|
|
| ||
GROSS PROFIT |
| 368,957 |
| 286,818 | ||
|
|
|
|
| ||
OPERATING EXPENSES |
| 361,328 |
| 137,955 | ||
|
|
|
|
| ||
OPERATING INCOME |
| 7,629 |
| 148,863 | ||
|
|
|
|
| ||
INTEREST AND OTHER INCOME, net |
| 1,233 |
| 154 | ||
|
|
|
|
| ||
INCOME BEFORE PROVISION FOR INCOME TAXES |
| 8,862 |
| 149,017 | ||
|
|
|
|
| ||
PROVISION FOR INCOME TAXES |
| 4,448 |
| 53,767 | ||
|
|
|
|
| ||
NET INCOME |
| $ | 4,414 |
| $ | 95,250 |
|
|
|
|
| ||
NET INCOME PER COMMON SHARE: |
|
|
|
| ||
Basic |
| $ | 0.03 |
| $ | 0.57 |
Diluted |
| $ | 0.03 |
| $ | 0.55 |
|
|
|
|
| ||
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS: |
|
|
|
| ||
Basic |
| 169,871 |
| 166,913 | ||
Diluted |
| 173,778 |
| 173,741 |
|
| Three-Months Ended |
| Six-Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 | ||||
|
|
|
|
|
|
|
|
| ||||
NET SALES |
| $ | 693,722 |
| $ | 687,199 |
| $ | 1,320,512 |
| $ | 1,223,329 |
|
|
|
|
|
|
|
|
| ||||
COST OF SALES |
| 299,214 |
| 307,911 |
| 557,048 |
| 557,222 | ||||
|
|
|
|
|
|
|
|
| ||||
GROSS PROFIT |
| 394,508 |
| 379,288 |
| 763,464 |
| 666,107 | ||||
|
|
|
|
|
|
|
|
| ||||
OPERATING EXPENSES |
| 189,839 |
| 163,475 |
| 551,167 |
| 301,430 | ||||
|
|
|
|
|
|
|
|
| ||||
GAIN ON SALE OF MONSTER NON-ENERGY (NOTE 3) |
| 161,470 |
| - |
| 161,470 |
| - | ||||
|
|
|
|
|
|
|
|
| ||||
OPERATING INCOME |
| 366,139 |
| 215,813 |
| 373,767 |
| 364,677 | ||||
|
|
|
|
|
|
|
|
| ||||
INTEREST AND OTHER (EXPENSE) INCOME, net |
| (1,015) |
| 178 |
| 218 |
| 332 | ||||
|
|
|
|
|
|
|
|
| ||||
INCOME BEFORE PROVISION FOR INCOME TAXES |
| 365,124 |
| 215,991 |
| 373,985 |
| 365,009 | ||||
|
|
|
|
|
|
|
|
| ||||
PROVISION FOR INCOME TAXES |
| 136,120 |
| 74,988 |
| 140,568 |
| 128,755 | ||||
|
|
|
|
|
|
|
|
| ||||
NET INCOME |
| $ | 229,004 |
| $ | 141,003 |
| $ | 233,417 |
| $ | 236,254 |
|
|
|
|
|
|
|
|
| ||||
NET INCOME PER COMMON SHARE: |
|
|
|
|
|
|
|
| ||||
Basic |
| $ | 1.29 |
| $ | 0.84 |
| $ | 1.35 |
| $ | 1.41 |
Diluted |
| $ | 1.26 |
| $ | 0.81 |
| $ | 1.31 |
| $ | 1.36 |
|
|
|
|
|
|
|
|
| ||||
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS: |
|
|
|
|
|
|
|
| ||||
Basic |
| 176,985 |
| 167,098 |
| 173,447 |
| 167,006 | ||||
Diluted |
| 181,417 |
| 173,964 |
| 177,998 |
| 173,869 |
See accompanying notes to condensed consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE THREE-MONTHSTHREE- AND SIX-MONTHS ENDED MARCH 31,JUNE 30, 2015 AND 2014
(In Thousands) (Unaudited) |
|
| Three-Months Ended | |||||
|
| 2015 |
| 2014 | |||
Net income, as reported |
| $ | 4,414 |
| $ | 95,250 |
|
Other comprehensive (loss) income: |
|
|
|
|
| ||
Change in foreign currency translation adjustment |
| (9,980) |
| 102 |
| ||
Available-for-sale investments: |
|
|
|
|
| ||
Change in net unrealized gains |
| - |
| - |
| ||
Reclassification adjustment for net gains included in net income |
| - |
| - |
| ||
Net change in available-for-sale investments |
| - |
| - |
| ||
Other comprehensive (loss) income |
| (9,980) |
| 102 |
| ||
Comprehensive (loss) income |
| $ | (5,566) |
| $ | 95,352 |
|
|
| Three-Months Ended |
| Six-Months Ended | |||||||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 | |||||
Net income, as reported |
| $ | 229,004 |
| $ | 141,003 |
| $ | 233,417 |
| $ | 236,254 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
| ||||
Change in foreign currency translation adjustment |
| 2,360 |
| 510 |
| (7,620) |
| 612 |
| ||||
Available-for-sale investments: |
|
|
|
|
|
|
|
|
| ||||
Change in net unrealized gains |
| - |
| - |
| - |
| - |
| ||||
Reclassification adjustment for net gains included in net income |
| - |
| - |
| - |
| - |
| ||||
Net change in available-for-sale investments |
| - |
| - |
| - |
| - |
| ||||
Other comprehensive income (loss) |
| 2,360 |
| 510 |
| (7,620) |
| 612 |
| ||||
Comprehensive income |
| $ | 231,364 |
| $ | 141,513 |
| $ | 225,797 |
| $ | 236,866 |
|
See accompanying notes to condensed consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTHSSIX-MONTHS ENDED MARCH 31,JUNE 30, 2015 AND 2014
(In Thousands) (Unaudited) |
|
| Three-Months Ended |
| Six-Months Ended | ||||||||||
|
| March 31, 2015 |
| March 31, 2014 |
| June 30, 2015 |
| June 30, 2014 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 4,414 |
| $ | 95,250 |
|
| $ | 233,417 |
| $ | 236,254 |
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
|
|
|
|
| |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| |||||||||
Depreciation and amortization |
| 6,470 |
| 6,453 |
|
| 13,249 |
| 12,995 |
| ||||
Gain on disposal of property and equipment |
| (46) |
| (100 | ) |
| (108) |
| (185 | ) | ||||
Gain on sale of Monster Non-Energy |
| (161,470) |
| - |
| |||||||||
Stock-based compensation |
| 6,354 |
| 6,986 |
|
| 14,837 |
| 15,089 |
| ||||
Loss on put option |
| - |
| 67 |
|
| - |
| 97 |
| ||||
Gain on investments, net |
| - |
| (66 | ) |
| - |
| (84 | ) | ||||
Deferred income taxes |
| - |
| 168 |
|
| 156,710 |
| 168 |
| ||||
Excess tax benefit from stock-based compensation |
| (184,679) |
| (2,602 | ) |
| (300,331) |
| (3,303 | ) | ||||
Effect on cash of changes in operating assets and liabilities: |
|
|
|
|
| |||||||||
Effect on cash of changes in operating assets and liabilities, net of acquisition and divestiture: |
|
|
|
|
| |||||||||
Accounts receivable |
| (68,138) |
| (42,544 | ) |
| (95,235) |
| (99,711 | ) | ||||
Distributor receivables |
| 66 |
| 947 |
|
| 191 |
| 1,242 |
| ||||
Inventories |
| (26,547) |
| 17,410 |
|
| (28,919) |
| 13,536 |
| ||||
Prepaid expenses and other current assets |
| (5,895) |
| (7,110 | ) |
| (3,322) |
| (4,189 | ) | ||||
Prepaid income taxes |
| (13,498) |
| 4,417 |
|
| (84,147) |
| 2,503 |
| ||||
Accounts payable |
| 42,742 |
| 6,068 |
|
| 72,124 |
| 36,113 |
| ||||
Accrued liabilities |
| 5,387 |
| 4,610 |
|
| 12,482 |
| 17,529 |
| ||||
Accrued promotional allowances |
| (2,160) |
| 14,708 |
|
| 18,038 |
| 31,776 |
| ||||
Accrued distributor terminations |
| 205,980 |
| - |
|
| 64,767 |
| 165 |
| ||||
Accrued compensation |
| (7,866) |
| (5,838 | ) |
| (3,493) |
| (4,618 | ) | ||||
Income taxes payable |
| (4,298) |
| 39,095 |
|
| (7,533) |
| 6,780 |
| ||||
Deferred revenue |
| (40,041) |
| (1,517 | ) |
| (40,792) |
| (3,180 | ) | ||||
Net cash (used in) provided by operating activities |
| (81,755) |
| 136,402 |
|
| (139,535) |
| 258,977 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
| ||||
Maturities of held-to-maturity investments |
| 253,732 |
| 151,035 |
|
| 480,281 |
| 324,819 |
| ||||
Sales of available-for-sale investments |
| 101 |
| - |
|
| 100 |
| - |
| ||||
Sales of trading investments |
| - |
| 1,725 |
|
| 725 |
| 3,450 |
| ||||
Proceeds from transfer of distribution rights to TCCC |
| 179,658 |
| - |
| |||||||||
Purchases of held-to-maturity investments |
| (118,283) |
| (187,718 | ) |
| (944,193) |
| (421,797 | ) | ||||
Purchases of property and equipment |
| (4,687) |
| (9,871 | ) |
| (15,827) |
| (15,074 | ) | ||||
Proceeds from the sale of Monster Non-Energy |
| 198,008 |
| - |
| |||||||||
Proceeds from sale of property and equipment |
| 102 |
| 237 |
|
| 161 |
| 310 |
| ||||
(Increase) decrease in intangibles |
| (1,552) |
| 105 |
| |||||||||
Decrease in other assets |
| 227 |
| 543 |
| |||||||||
Net cash provided by (used in) investing activities |
| 129,640 |
| (43,944 | ) | |||||||||
Increase in intangibles |
| (3,566) |
| (828 | ) | |||||||||
(Increase) decrease in other assets |
| (1,214) |
| 1,102 |
| |||||||||
Net cash used in investing activities |
| (105,867) |
| (108,018 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
| ||||
Principal payments on debt |
| (196) |
| (620 | ) |
| (530) |
| (973 | ) | ||||
Excess tax benefit from stock-based compensation |
| 184,679 |
| 2,602 |
|
| 300,331 |
| 3,303 |
| ||||
Issuance of common stock |
| 19,119 |
| 5,728 |
|
| 1,689,120 |
| 7,716 |
| ||||
Purchases of common stock held in treasury |
| (251,382) |
| (20 | ) |
| (412,217) |
| (59 | ) | ||||
Net cash (used in) provided by financing activities |
| (47,780) |
| 7,690 |
| |||||||||
Net cash provided by financing activities |
| 1,576,704 |
| 9,987 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Effect of exchange rate changes on cash and cash equivalents |
| (7,641) |
| 523 |
|
| (5,330) |
| 756 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
| (7,536) |
| 100,671 |
| |||||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
| 1,325,972 |
| 161,702 |
| |||||||||
CASH AND CASH EQUIVALENTS, beginning of period |
| 370,323 |
| 211,349 |
|
| 370,323 |
| 211,349 |
| ||||
CASH AND CASH EQUIVALENTS, end of period |
| $ | 362,787 |
| $ | 312,020 |
|
| $ | 1,696,295 |
| $ | 373,051 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
SUPPLEMENTAL INFORMATION: |
|
|
|
|
|
|
|
|
|
| ||||
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
| ||||
Interest |
| $ | 5 |
| $ | 12 |
|
| $ | 12 |
| $ | 18 |
|
Income taxes |
| $ | 22,703 |
| $ | 9,747 |
|
| $ | 76,285 |
| $ | 119,654 |
|
See accompanying notes to condensed consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTHSSIX-MONTHS ENDED MARCH 31,JUNE 30, 2015 AND 2014
(In Thousands) (Unaudited) (Continued) |
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS
The Company entered into capital leases for the acquisition of promotional vehicles of $0.2$0.9 million and $0.5 million for both the three-monthssix-months ended March 31,June 30, 2015 and 2014.2014, respectively.
During the six-months ended June 30, 2015, the Company issued 11.8 million shares of the Company’s common stock in exchange for KO Energy (see Note 3).
During the six-months ended June 30, 2015, in connection with the TCCC Transaction (as defined in Note 3), $125.0 million relating to the transfer of certain distribution rights was deposited into escrow pending certain transition milestones (see Note 3).
During the six-months ended June 30, 2015, the Company cancelled 41.5 million shares of treasury stock (see Note 14). Amounts previously recorded as treasury stock were netted against common stock and retained earnings.
See accompanying notes to condensed consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
1. BASIS OF PRESENTATION
Reference is made to the Notes to Consolidated Financial Statements, in Monster Beverage Corporation and Subsidiaries (the “Company” or, in reference to the Company’s former name, “Hansen Natural Corporation”) Annual Report on Form 10-K for the year ended December 31, 2014 (“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-monthsthree- and six-months ended March 31,June 30, 2015 and 2014 is unaudited and reflects all adjustments, which include only normal recurring adjustments and which in the opinion of management are necessary to make the interim condensed consolidated financial statements not misleading. Results of operations for periods covered by this report may not necessarily be indicative of results of operations for the full year.
The preparation of financial statements in conformity with GAAP necessarily requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.
In the second quarter of 2015, as a result of the acquisitions and divestitures described in Note 3, the Company revised its reportable segments to reflect management’s new view of the business and to align its external financial reporting with its new operating and internal financial reporting model. Historical segment information has been revised to reflect the effect of this change. See Note 18 for additional information about the Company’s new reporting segments.
2.ADDITIONS TO SIGNIFICANT ACCOUNTING POLICIES
Business Combinations – Business acquisitions are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 “Business Combinations”. ASC 805 requires the reporting entity to identify the acquirer, determine the acquisition date, recognize and measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquired entity, and recognize and measure goodwill or a gain from the purchase. The acquiree’s results are included in the Company’s consolidated financial statements from the date of acquisition. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill, or if the fair value of the assets acquired exceeds the purchase price consideration, a bargain purchase gain is recorded. Adjustments to fair value assessments are recorded to goodwill over the measurement period (not longer than twelve months). The acquisition method also requires that acquisition-related transaction and post-acquisition restructuring costs be charged to expense and requires the Company to recognize and measure certain assets and liabilities including those arising from contingencies and contingent consideration in a business combination.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
Goodwill – The Company records goodwill when the consideration paid for an acquisition exceeds the fair value of net tangible and intangible assets acquired, including related tax effects. Goodwill is not amortized; instead goodwill is tested for impairment on an annual basis, or more frequently if the Company believes indicators of impairment exist. The Company first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. If the Company determines that the fair value is less than the carrying value, the Company will use a two-step process to determine the amount of goodwill impairment. The first step requires comparing the fair value of the reporting unit to its net book value, including goodwill. A potential impairment exists if the fair value of the reporting unit is lower than its net book value. The second step of the process, performed only if a potential impairment exists, involves determining the difference between the fair value of the reporting unit’s net assets, other than goodwill, and the fair value of the reporting unit. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value.
3. ACQUISITIONS AND DIVESTITURES
On August 14, 2014,June 12, 2015, Monster Beverage 1990 Corporation (formerly Monster Beverage Corporation) (“Old Monster”), now a wholly owned subsidiary of the Company, andcompleted the transactions contemplated by the definitive agreements entered into with The Coca-Cola Company (“TCCC”) entered into definitive agreements contemplatingon August 14, 2014, which provided for a long-term strategic relationship in the global energy drink category (the “TCCC Transaction”). In
Also, on June 12, 2015, Old Monster effected a holding company reorganization in connection with the TCCC Transaction the Company, New Laser Corporation, a wholly owned subsidiary of the Company (“NewCo”),by merging New Laser Merger Corp., a wholly owned subsidiary of NewCo (“Merger Sub”), TCCC and European Refreshments, an indirect wholly owned subsidiary of TCCC, entered into a transaction agreement, and the Company TCCC and NewCo entered into an asset transfer agreement. Pursuant to the agreements, the Company will reorganize into a new holding company by merging Merger Sub into the Company,Old Monster, with the CompanyOld Monster surviving as a wholly owned subsidiary of NewCo. In the merger, each outstanding share ofCompany (the “Holding Company Reorganization”), and the Company’s common stock will be converted into one share of NewCo’s common stock.Company changed its name from New Laser Corporation to “Monster Beverage Corporation.”
SubjectIn the Holding Company Reorganization, each Old Monster common share, par value $0.005 per share, outstanding immediately prior to the terms and conditionsconsummation of the agreements, uponHolding Company Reorganization (other than any Old Monster common shares that were owned by Old Monster immediately prior to the closing of the TCCC Transaction, which were cancelled, (see Note 14)) was converted automatically into the right to receive one Company common share, par value $0.005 per share. In addition, upon consummation of the Holding Company Reorganization:
·each unexercised and unexpired stock option then outstanding under any equity compensation plan of Old Monster, whether or not then exercisable, ceased to represent a right to acquire Old Monster common shares and was converted automatically into a right to acquire the same number of Company common shares, on the same terms and conditions as were applicable under such Old Monster stock option; and
·each share of restricted stock and each restricted stock unit of Old Monster granted under all outstanding equity compensation plans ceased to represent or relate to Old Monster common shares and was converted automatically to represent or relate to Company common shares, on the same terms and conditions as were applicable to such Old Monster restricted stock and restricted stock units (including the vesting or other lapse restrictions (without acceleration thereof by virtue of the Holding Company Reorganization and the TCCC Transaction)).
Promptly following the effective time of the Holding Company Reorganization, Old Monster assigned to the Company all obligations of Old Monster under Old Monster’s equity compensation plans and each stock option agreement, restricted stock award agreement, restricted stock unit award agreement and any similar agreement entered into pursuant to such equity compensation plans. In addition, all obligations of Old Monster under any employment agreements and indemnification agreements were assigned to the Company.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
Immediately after the effective time of the Holding Company Reorganization, (1) the Company issued to TCCC will acquire34,040,534 newly issued NewCoCompany common shares representing approximately 16.7% of the total number of outstanding NewCoCompany common shares (giving(after giving effect to such issuance) (the “New Issuance”) and TCCC will be entitled to appointappointed two individuals (reduced to one in 36 months or if TCCC’s equity interest in NewCo exceeds 20%) to NewCo’sthe Company’s Board of Directors, for a specified period, (2) TCCC will transfertransferred all of its rights in and to its globalTCCC’s worldwide energy drink business (including the NOS®, Full Throttle®, Burn®, Mother®, Play® and Power Play®, and Relentless® brands)(“KO Energy”) to NewCo, and the Company, will transfer(3) Old Monster transferred all of its rights in and to its non-energy drink business (including the Hansen’s® Natural Soda, Peace Tea®, Hubert’s® Lemonade and Hansen’s® Juice Product brands)(“Monster Non-Energy”) to TCCC (3)(such transfer, together with the transfer of KO Energy, the “Asset Transfers”), (4) the Company and TCCC will amendamended the distribution coordination agreements currentlypreviously existing between them to govern the transition of third parties’ rights to distribute the Company’s energy products in most territories in the U.S. to members of TCCC’s distribution network, which consists of owned or controlled bottlers/distributors and independent bottling/distribution partners, and (4)(5) TCCC orand one of its subsidiaries will make amade an aggregate net cash payment to the Company of $2.15 billion, of which up to $625.0$125.0 million of which will beis currently held in escrow as described below (the “Escrow Agreement”), subject to release upon the achievement of milestones relating to the transfertransition of distribution rights to TCCC’s distribution network.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
Under the terms of the Escrow Agreement and the transition payment agreement expected to be entered into in connection therewith, if the distribution rights in the U.S. that are transitioned to TCCC’s distribution network represent case sales in excess of the following percentages of a target case sale amount agreed to by the parties, amounts in the escrow fund in excess of the applicable amounts below will be released to the Company:
Percentage Transitioned | Escrow Release | |
40% | Amounts in excess of $375 million | |
50% | Amounts in excess of $312.5 million | |
60% | Amounts in excess of $250 million | |
70% | Amounts in excess of $187.5 million | |
80% | Amounts in excess of $125 million | |
90% | Amounts in excess of $62.5 million | |
95% | All remaining amounts |
On the one-year anniversary of the closing of the TCCC Transaction, the then-remaining escrow amount, less an amount sufficient to cover any unresolved claims, will be released to TCCC. Any severance or other release amount described above that becomes payable following the one-year anniversary will be paid directly from TCCC to the Company.
TCCC is contractually obligated to authorize payment to the Company of the funds in escrow upon achievement of the milestones referred to above. As of April 6,August 10, 2015, distribution rights in the U.S. representing approximately 84%89% of the target case sales have been transitioned to TCCC’s distribution network. In addition, the Company has sent notices of termination representing an additional 5% of the affected third-party distributors, and the associated distribution rights for those territories will be transitioned to TCCC’s distribution network effective as of May 11, 2015. As a result, it is anticipated that $125 million will beis currently held in escrow at the closing, with the remaining $500 million to be paid to the Company at closing.escrow. The Company expects to commence steps to transition sufficient additional distribution rights, following the closing of the TCCC Transaction, which will, in due course, result in the release of all remaining amounts held in escrow. Therefore, the Company believes that achievement of the milestones is probable.
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 TCCC Transaction consideration allocation:
|
| Identifiable Assets Acquired Assumed |
|
| Consideration |
| ||
Equity issued to TCCC for cash (22.2 million shares issued) |
| $ | - |
|
| $ | 1,647,333 |
|
Equity issued to TCCC for KO Energy (11.8 million shares issued) |
| - |
|
| 1,521,802 |
| ||
KO Energy intangibles - trademarks (non-amortizing) |
| 325,500 |
|
| - |
| ||
KO Energy intangibles - customer relationships (amortizing) |
| 35,000 |
|
| - |
| ||
KO Energy intangibles - other (non-amortizing) |
| 13,700 |
|
| - |
| ||
KO Energy inventories |
| 6,144 |
|
| - |
| ||
KO Energy accounts payable |
| (2,758 | ) |
| - |
| ||
Goodwill |
| 1,287,777 |
|
| - |
| ||
Deferred tax liability |
| (143,561 | ) |
| - |
| ||
New and amended U.S. distribution rights transferred to TCCC’s distribution network |
| - |
|
| 304,658 |
| ||
Monster Non-Energy business transferred to TCCC |
| - |
|
| 198,009 |
| ||
Cash and escrow receivable |
| 2,150,000 |
|
| - |
| ||
Total |
| $ | 3,671,802 |
|
| $ | 3,671,802 |
|
The preliminary book value of the KO Energy inventories, prepaid expenses and other current assets and accounts payable approximate fair value. The fair value analysis has yet to progress to a stage where there is sufficient information for a definitive measurement of the respective fair values. Accordingly, the respective fair value allocation is preliminary and is based on valuations derived from estimated fair value assumptions used by management. The Company expects to complete its fair value analysis at a level of detail necessary to finalize the underlying fair value allocations no later than twelve months from the closing of the TCCC Transaction. Any differences between the final respective fair value allocations and the preliminary management estimates may differ materially and potentially have a material impact on the Company’s financial position, results of operations or liquidity.
The Company has determined goodwill in accordance with ASC 805-30-30-1, “Business Combinations,” which requires the recognition of goodwill for the excess of the aggregate consideration over the net of amounts of identifiable assets acquired and liabilities assumed as of the acquisition date.
The goodwill recorded as part of the TCCC Transaction is subjectnot deductible for tax purposes. The goodwill includes access to customary closing conditionsnew geographies, access to new sales channels, including vending and is nowspecialty accounts, as well as the opportunity for supply chain optimization.
The Company determined the estimated fair values of KO Energy trademarks, customer relationships and other intangibles as follows:
1.Trademarks—valued using the relief from royalty method. Royalty rates for the different brands were selected based on brand strength and profitability.
2.Customer relationships—valued using the with- and-without method assuming that the customer relationships could be rebuilt over a one-year period.
3.Other (Trade Secrets/Formulas)—valued using the cost savings method.
The Company determined the estimated fair value of the “new and amended U.S. distribution rights” transferred to TCCC’s distribution network using the discounted cash flow method. The cash flows were defined as the expected cost savings arising from the new distribution agreements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
The Company determined the estimated fair value of the Monster Non-Energy brands sold utilizing the discounted cash flow method and market multiple method. Market multiples for each brand were selected based on profitability, size and expected growth for each brand. The resulting business enterprise value derived under the income and market approaches was then adjusted for working capital and fixed assets that were not transferred to closeTCCC.
Of the approximately 34.0 million shares of the Company’s common stock issued to TCCC in the second quarterTCCC Transaction, approximately 11.8 million shares, or 34.8% of the total shares issued, were allocated to the purchase of KO Energy and approximately 22.2 million shares, or 65.2% of the total shares issued, were issued for cash. The 34.8% allocation was based on the relative fair value of KO Energy to the approximate fair value of the 34.0 million shares of Old Monster’s common stock on August 14, 2014. The remaining shares of the Company’s common stock were deemed to be issued for cash. The $2.15 billion of cash and escrow receivable was first allocated to the new and amended U.S. distribution rights and the Monster Non-Energy business based on their respective preliminary fair values, and the residual cash of $1.6 billion was then allocated to the equity issued for cash. On August 14, 2014, the date on which the terms of the TCCC Transaction were agreed to and announced, the closing market price of Old Monster’s common stock was $71.65 per share. The fair value of KO Energy per ASC 820 is approximately $880.1 million, which approximates the negotiated price for KO Energy based on the closing market price of Old Monster’s common stock on August 14, 2014. However, per ASC 805, equity securities issued as consideration in a business combination are to be recorded at fair value as of the closing date. Therefore, the value of the Company’s common stock issued to TCCC in exchange for KO Energy was $128.39 per share, the closing price of the Company’s common stock on June 12, 2015, resulting in a total consideration value transferred for KO Energy of $1.5 billion.
The Company recognized a gain of $161.5 million on the disposal of Monster Non-Energy during the three- and six-months ended June 30, 2015.
The following unaudited pro forma condensed combined financial information is presented as if the TCCC Transaction had closed on January 1, 2014:
|
| Three-Months Ended June 30, 2015 |
| |||||||||||||
|
|
|
|
|
| Pro Forma Adjustments |
|
|
| |||||||
|
| Monster |
| KO |
| Disposal of |
| Other |
| Pro Forma |
| |||||
Net sales |
| $ | 693,722 |
| $ | 57,422 |
| $ | (29,516) |
| $ | 3,089 |
| $ | 724,717 |
|
Net income |
| 229,004 |
| 41,136 |
| (100,652) |
| (11,659) |
| 157,829 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
| Three-Months Ended June 30, 2014 |
| |||||||||||||
|
|
|
|
|
| Pro Forma Adjustments |
|
|
| |||||||
|
| Monster |
| KO Energy |
| Disposal of |
| Other |
| Pro Forma |
| |||||
Net sales |
| $ | 687,199 |
| $ | 85,608 |
| $ | (43,796) |
| $ | 3,851 |
| $ | 732,862 |
|
Net income |
| 141,003 |
| 54,614 |
| (1,878) |
| (24,978) |
| 168,761 |
|
¹Includes net sales of $13.0 million and net income of $5.8 million related to the acquired KO Energy assets since the date of acquisition, June 12, 2015.
²Includes results through June 12, 2015, the date the TCCC Transaction was finalized. Net income for KO Energy includes only net revenues and direct operating expenses, rather than full “carve-out” financial statements, because such financial information would not be meaningful given that it is not possible to provide a meaningful allocation of business unit and corporate costs, interest or tax in respect of KO Energy.
³Includes results through June 12, 2015. Net income includes gain recognized on the sale of Monster Non-Energy of $161.5 million (as tax affected).
3.MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
|
| Six-Months Ended June 30, 2015 |
| |||||||||||||
|
|
|
|
|
| Pro Forma Adjustments |
|
|
| |||||||
|
| Monster |
| KO Energy² |
| Disposal of |
| Other |
| Pro Forma |
| |||||
Net sales |
| $ | 1,320,512 |
| $ | 138,127 |
| $ | (60,824) |
| $ | 6,897 |
| $ | 1,404,712 |
|
Net income |
| 233,417 |
| 100,575 |
| (101,881) |
| (36,608) |
| 195,503 |
| |||||
|
| Six-Months Ended June 30, 2014 |
| |||||||||||||
|
|
|
|
|
| Pro Forma Adjustments |
|
|
| |||||||
|
| Monster |
| KO Energy |
| Disposal of |
| Other |
| Pro Forma |
| |||||
Net sales |
| $ | 1,223,329 |
| $ | 171,216 |
| $ | (77,984) |
| $ | 7,659 |
| $ | 1,324,220 |
|
Net income |
| 236,254 |
| 109,228 |
| (3,021) |
| (50,614) |
| 291,847 |
| |||||
¹Includes net sales of $13.0 million and net income of $5.8 million related to the acquired KO Energy assets since the date of acquisition, June 12, 2015.
²Includes results through June 12, 2015, the date the TCCC Transaction was finalized. Net income for KO Energy includes only net revenues and direct operating expenses, rather than full “carve-out” financial statements, because such financial information would not be meaningful given that it is not possible to provide a meaningful allocation of business unit and corporate costs, interest or tax in respect of KO Energy.
³Includes results through June 12, 2015. Net income includes gain recognized on the sale of Monster Non-Energy of $161.5 million (as tax affected).
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
Pro-Forma Adjustments – Other include the following:
|
| Three-Months |
| Three-Months |
| Six-Months |
| Six-Months | |||||
|
| Ended |
| Ended |
| Ended |
| Ended | |||||
|
| June 30, 2015 |
| June 30, 2014 |
| June 30, 2015 |
| June 30, 2014 | |||||
Net sales: |
|
|
|
|
|
|
|
|
| ||||
Amortization of deferred revenue |
| $ | 3,089 |
| $ | 3,851 |
| $ | 6,897 |
| $ | 7,659 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net income: |
|
|
|
|
|
|
|
|
| ||||
Amortization of deferred revenue |
| $ | 3,089 |
| $ | 3,851 |
| $ | 6,897 |
| $ | 7,659 |
|
To record sales commissions |
| (6,431) |
| (9,588) |
| (15,470) |
| (19,176 | ) | ||||
To record amortization of definite lived KO Energy intangibles |
| (1,400) |
| (1,745) |
| (3,126) |
| (3,471 | ) | ||||
To eliminate TCCC Transaction expenses |
| 11,536 |
| 1,068 |
| 15,134 |
| 1,068 |
| ||||
Estimated provision for income taxes on pro forma adjustments |
| (2,616) |
| 2,470 |
| (1,322) |
| 5,359 |
| ||||
Estimated provision for income taxes on KO Energy income |
| (15,837) |
| (21,034) |
| (38,721) |
| (42,053 | ) | ||||
Total |
| $ | (11,659) |
| $ | (24,978) |
| $ | (36,608) |
| $ | (50,614 | ) |
For purposes of the unaudited pro forma financial information, a combined U.S. Federal and state statutory tax rate of 38.5% has been used. This rate does not reflect the Company’s expected effective tax rate, which includes other tax charges and benefits, and does not take into account any historical or possible future tax events that may impact the combined company.
The unaudited pro forma financial information is presented for information purposes only and is not intended to represent or be indicative of the combined results of operations that the Company would have reported had the TCCC Transaction been completed as of the date and for the periods presented, and should not be taken as representative of the Company’s consolidated results of operations following the completion of the TCCC Transaction. In addition, the unaudited pro forma financial information is not intended to project the future financial results of operations of the combined company. The unaudited pro forma combined financial information does not reflect any cost savings, operational synergies or revenue enhancements that the combined company may achieve as a result of the TCCC Transaction or the costs to combine the operations or costs necessary to achieve cost savings, operating synergies and revenue enhancements.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2014, the Company elected to early adopt FASB ASU No. 2014-08, “Presentation of Financial Statements and Property, Plant, and Equipment - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. ASU 2014-08 provides new guidance related to the definition of a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The adoption of ASU 2014-08 did not have a material impact on the Company’s financial position, results of operations or liquidity.
In June 2014, the Financial Accounting Standards Board (the “FASB”)FASB issued Accounting Standards Update (“ASU”)ASU No. 2014-12, “Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force)”. ASU 2014-12 clarifies that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. ASU 2014-12 is effective for annual periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. ASU 2014-12 may be applied either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of ASU 2014-12 is not expected to have a material impact on the Company’s financial position, results of operations or liquidity.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which supersedes previous revenue recognition guidance. ASU 2014-09 requires that a company recognize revenue at an amount that reflects the consideration to which the company expects to be entitled in exchange for transferring goods or services to a customer. In applying the new guidance, a company will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 iswas to be effective for reporting periods beginning after December 15, 20162016. However, on July 9, 2015, the FASB voted to approve a one-year deferral of the effective date. This new guidance is effective for the Company beginning January 1, 2018 and can be adopted using either a full retrospective or modified approach. The Company is currently evaluating the impact of ASU 2014-09 on its financial position, results of operations and liquidity.
4.INVESTMENTS
The following table summarizes the Company’s investments at:
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
March 31, 2015 |
| Amortized Cost |
| Gross |
| Gross |
| Fair |
| Continuous |
| Continuous | |||||||
Held-to-Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial paper |
| $ | 15,991 |
| $ | - |
| $ | 1 |
| $ | 15,990 |
| $ | - |
| $ | - |
|
Municipal securities |
| 622,082 |
| 48 |
| - |
| 622,130 |
| - |
| - |
| ||||||
U.S. Government Agencies |
| 1,401 |
| - |
| - |
| 1,401 |
| - |
| - |
| ||||||
Long-term: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Municipal securities |
| 33,662 |
| 8 |
| - |
| 33,670 |
| - |
| - |
| ||||||
U.S. Government Agencies |
| 7,578 |
| - |
| 7 |
| 7,571 |
| - |
| - |
| ||||||
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Variable rate demand notes |
| 3,900 |
| - |
| - |
| 3,900 |
| - |
| - |
| ||||||
Total |
| $ | 684,614 |
| $ | 56 |
| $ | 8 |
| 684,662 |
| $ | - |
| $ | - |
| |
Trading |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Auction rate securities |
|
|
|
|
|
|
| 3,910 |
|
|
|
|
| ||||||
Long-term: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Auction rate securities |
|
|
|
|
|
|
| - |
|
|
|
|
| ||||||
Total |
|
|
|
|
|
|
| $ | 688,572 |
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
December 31, 2014 |
| Amortized Cost |
| Gross |
| Gross |
| Fair |
| Continuous |
| Continuous |
| ||||||
Held-to-Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial paper |
| $ | 19,482 |
| $ | - |
| $ | 2 |
| $ | 19,480 |
| $ | - |
| $ | - |
|
Municipal securities |
| 744,542 |
| 105 |
| - |
| 744,647 |
| - |
| - |
| ||||||
U.S. Government Agencies |
| 9,199 |
| - |
| 1 |
| 9,198 |
| - |
| - |
| ||||||
Long-term: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Municipal securities |
| 42,940 |
| 10 |
| - |
| 42,950 |
| - |
| - |
| ||||||
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Variable rate demand notes |
| 4,001 |
| - |
| - |
| 4,001 |
| - |
| - |
| ||||||
Total |
| $ | 820,164 |
| $ | 115 |
| $ | 3 |
| 820,276 |
| $ | - |
| $ | - |
| |
Trading |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Auction rate securities |
|
|
|
|
|
|
| 3,910 |
|
|
|
|
| ||||||
Long-term: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Auction rate securities |
|
|
|
|
|
|
| - |
|
|
|
|
| ||||||
Total |
|
|
|
|
|
|
| $ | 824,186 |
|
|
|
|
|
5.INVESTMENTS
The following table summarizes the Company’s investments at:
June 30, 2015 |
| Amortized Cost |
| Gross |
| Gross |
| Fair |
| Continuous |
| Continuous | |||||||
Held-to-Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial paper |
| $ | 182,130 |
| $ | - |
| $ | - |
| $ | 182,130 |
| $ | - |
| $ | - |
|
U.S. Treasuries |
| 74,981 |
| 6 |
| - |
| 74,987 |
| - |
| - |
| ||||||
Certificates of deposit |
| 32,001 |
| - |
| - |
| 32,001 |
| - |
| - |
| ||||||
Municipal securities |
| 587,740 |
| 82 |
| 42 |
| 587,780 |
| 42 |
| - |
| ||||||
U.S. government agency securities |
| 350,859 |
| 27 |
| 10 |
| 350,876 |
| 10 |
| - |
| ||||||
Long-term: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Municipal securities |
| 52,364 |
| 33 |
| 5 |
| 52,392 |
| 5 |
| - |
| ||||||
U.S. government agency securities |
| - |
| - |
| - |
| - |
| - |
| - |
| ||||||
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Variable rate demand notes |
| 3,901 |
| - |
| - |
| 3,901 |
| - |
| - |
| ||||||
Total |
| $ | 1,283,976 |
| $ | 148 |
| $ | 57 |
| 1,284,067 |
| $ | 57 |
| $ | - |
| |
Trading |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Auction rate securities |
|
|
|
|
|
|
| 3,246 |
|
|
|
|
| ||||||
Long-term: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Auction rate securities |
|
|
|
|
|
|
| - |
|
|
|
|
| ||||||
Total |
|
|
|
|
|
|
| $ | 1,287,313 |
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
December 31, 2014 |
| Amortized Cost |
| Gross |
| Gross |
| Fair |
| Continuous |
| Continuous | |||||||
Held-to-Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial paper |
| $ | 19,482 |
| $ | - |
| $ | 2 |
| $ | 19,480 |
| $ | - |
| $ | - |
|
Municipal securities |
| 744,542 |
| 105 |
| - |
| 744,647 |
| - |
| - |
| ||||||
U.S. government agency securities |
| 9,199 |
| - |
| 1 |
| 9,198 |
| - |
| - |
| ||||||
Long-term: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Municipal securities |
| 42,940 |
| 10 |
| - |
| 42,950 |
| - |
| - |
| ||||||
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Variable rate demand notes |
| 4,001 |
| - |
| - |
| 4,001 |
| - |
| - |
| ||||||
Total |
| $ | 820,164 |
| $ | 115 |
| $ | 3 |
| 820,276 |
| $ | - |
| $ | - |
| |
Trading |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Auction rate securities |
|
|
|
|
|
|
| 3,910 |
|
|
|
|
| ||||||
Long-term: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Auction rate securities |
|
|
|
|
|
|
| - |
|
|
|
|
| ||||||
Total |
|
|
|
|
|
|
| $ | 824,186 |
|
|
|
|
|
During the three-monthsthree- and six-months ended March 31,June 30, 2015 and 2014, realized gains or losses recognized on the sale of investments were not significant. During the three-monthsthree- and six-months ended March 31,June 30, 2015 and 2014, the net gains recognized on the Company’s trading securities waswere not significant.
The Company’s investments at March 31,June 30, 2015 and December 31, 2014 in commercial paper, U.S. Treasuries, certificates of deposit, municipal securities, U.S. government agency securities 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
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
day, settlement basis. All of the Company’s investments at March 31,June 30, 2015 and December 31, 2014 in municipal, educational or other public body securities with an auction reset feature (“auction rate securities”) also carried investment grade credit ratings.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
The following table summarizes the underlying contractual maturities of the Company’s investments at:
|
| March 31, 2015 |
| December 31, 2014 |
| June 30, 2015 |
| December 31, 2014 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| Amortized Cost |
| Fair Value |
| Amortized Cost |
| Fair Value |
| Amortized Cost |
| Fair Value |
| Amortized Cost |
| Fair Value | ||||||||||
Less than 1 year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Commercial paper |
| $ | 15,991 |
| $ | 15,990 |
| $ | 19,482 |
| $ | 19,480 |
|
| $ | 182,130 |
| $ | 182,130 |
| $ | 19,482 |
| $ | 19,480 |
|
U.S. Treasuries |
| 74,981 |
| 74,987 |
| - |
| - |
| |||||||||||||||||
Certificates of deposit |
| 32,001 |
| 32,001 |
| - |
| - |
| |||||||||||||||||
Municipal securities |
| 622,082 |
| 622,130 |
| 744,542 |
| 744,647 |
|
| 587,740 |
| 587,780 |
| 744,542 |
| 744,647 |
| ||||||||
U.S. government agency securities |
| 1,401 |
| 1,401 |
| 9,199 |
| 9,198 |
|
| 350,859 |
| 350,876 |
| 9,199 |
| 9,198 |
| ||||||||
Due 1 - 10 years: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Municipal securities |
| 33,662 |
| 33,670 |
| 42,940 |
| 42,950 |
|
| 52,364 |
| 52,392 |
| 42,940 |
| 42,950 |
| ||||||||
U.S. government agency securities |
| 7,578 |
| 7,571 |
|
|
|
|
| |||||||||||||||||
Due 11 - 20 years: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Auction rate securities |
| 3,910 |
| 3,910 |
| 3,910 |
| 3,910 |
|
| 3,246 |
| 3,246 |
| 3,910 |
| 3,910 |
| ||||||||
Due 21 - 30 years: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Variable rate demand notes |
| 3,900 |
| 3,900 |
| 4,001 |
| 4,001 |
|
| 3,901 |
| 3,901 |
| 4,001 |
| 4,001 |
| ||||||||
Total |
| $ | 688,524 |
| $ | 688,572 |
| $ | 824,074 |
| $ | 824,186 |
|
| $ | 1,287,222 |
| $ | 1,287,313 |
| $ | 824,074 |
| $ | 824,186 |
|
5.6. FAIR VALUE OF CERTAIN FINANCIAL ASSETS AND LIABILITIES
Accounting Standards Codification (“ASC”)ASC 820 provides a framework for measuring fair value and requires disclosures regarding fair value measurements. ASC 820 defines fair value as the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The three levels of inputs required by the standard that the Company uses to measure fair value are summarized below.
· Level 1: Quoted prices in active markets for identical assets or liabilities.
· Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.
· Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
ASC 820 requires the use of observable market inputs (quoted market prices) when measuring fair value and requires a Level 1 quoted price to be used to measure fair value whenever possible.
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 Company’s held-to-maturity investments at amortized cost, as well asavailable-for-sale investments at fair value and the fair value of the Company’s financial assets and liabilities that are recorded at fair value on a recurring basis, segregated among the appropriate levels within the fair value hierarchy at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015 |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| |||||||||||||||||
June 30, 2015 |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| |||||||||||||||||
Cash |
| $ | 162,105 |
| $ | - |
| $ | - |
| $ | 162,105 |
|
| $ | 174,404 |
| $ | - |
| $ | - |
| $ | 174,404 |
|
Money market funds |
| 197,887 |
| - |
| - |
| 197,887 |
|
| 688,934 |
| - |
| - |
| 688,934 |
| ||||||||
Commercial paper |
| - |
| 15,991 |
| - |
| 15,991 |
|
| - |
| 365,364 |
| - |
| 365,364 |
| ||||||||
U.S. Treasuries |
| - |
| 74,981 |
| - |
| 74,981 |
| |||||||||||||||||
Certificates of deposit |
| - |
| 84,002 |
| - |
| 84,002 |
| |||||||||||||||||
Municipal securities |
| - |
| 658,539 |
| - |
| 658,539 |
|
| - |
| 662,874 |
| - |
| 662,874 |
| ||||||||
U.S. government agency securities |
| - |
| 8,979 |
| - |
| 8,979 |
|
| - |
| 925,811 |
| - |
| 925,811 |
| ||||||||
Variable rate demand notes |
| - |
| 3,900 |
| - |
| 3,900 |
|
| - |
| 3,901 |
| - |
| 3,901 |
| ||||||||
Auction rate securities |
| - |
| - |
| 3,910 |
| 3,910 |
|
| - |
| - |
| 3,246 |
| 3,246 |
| ||||||||
Put option related to auction rate securities |
| - |
| - |
| 250 |
| 250 |
|
| - |
| - |
| 189 |
| 189 |
| ||||||||
Foreign currency derivatives |
| - |
| 216 |
| - |
| 216 |
|
| - |
| - |
| (139) |
| (139) |
| ||||||||
Total |
| $ | 359,992 |
| $ | 687,625 |
| $ | 4,160 |
| $ | 1,051,777 |
|
| $ | 863,338 |
| $ | 2,116,933 |
| $ | 3,296 |
| $ | 2,983,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Amounts included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents |
| $ | 359,992 |
| $ | 2,795 |
| $ | - |
| $ | 362,787 |
|
| $ | 863,338 |
| $ | 832,957 |
| $ | - |
| $ | 1,696,295 |
|
Short-term investments |
| - |
| 643,374 |
| 3,910 |
| 647,284 |
|
| - |
| 1,231,612 |
| 3,246 |
| 1,234,858 |
| ||||||||
Accounts receivable, net |
| - |
| 393 |
| - |
| 393 |
|
| - |
| - |
| 139 |
| 139 |
| ||||||||
Investments |
| - |
| 41,240 |
| - |
| 41,240 |
|
| - |
| 52,364 |
| - |
| 52,364 |
| ||||||||
Prepaid expenses and other current assets |
| - |
| - |
| 250 |
| 250 |
|
| - |
| - |
| 189 |
| 189 |
| ||||||||
Accrued liabilities |
| - |
| (177) |
| - |
| (177) |
|
| - |
| - |
| (278) |
| (278) |
| ||||||||
Total |
| $ | 359,992 |
| $ | 687,625 |
| $ | 4,160 |
| $ | 1,051,777 |
|
| $ | 863,338 |
| $ | 2,116,933 |
| $ | 3,296 |
| $ | 2,983,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
December 31, 2014 |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||||||
Cash |
| $ | 196,090 |
| $ | - |
| $ | - |
| $ | 196,090 |
|
| $ | 196,090 |
| $ | - |
| $ | - |
| $ | 196,090 |
|
Money market funds |
| 106,928 |
| - |
| - |
| 106,928 |
|
| 106,928 |
| - |
| - |
| 106,928 |
| ||||||||
Commercial paper |
| - |
| 19,482 |
| - |
| 19,482 |
|
| - |
| 19,482 |
| - |
| 19,482 |
| ||||||||
Municipal securities |
| - |
| 854,787 |
| - |
| 854,787 |
|
| - |
| 854,787 |
| - |
| 854,787 |
| ||||||||
U.S. government agency securities |
| - |
| 9,199 |
| - |
| 9,199 |
|
| - |
| 9,199 |
| - |
| 9,199 |
| ||||||||
Variable rate demand notes |
| - |
| 4,001 |
| - |
| 4,001 |
|
| - |
| 4,001 |
| - |
| 4,001 |
| ||||||||
Auction rate securities |
| - |
| - |
| 3,910 |
| 3,910 |
|
| - |
| - |
| 3,910 |
| 3,910 |
| ||||||||
Put option related to auction rate securities |
| - |
| - |
| 250 |
| 250 |
|
| - |
| - |
| 250 |
| 250 |
| ||||||||
Foreign currency derivatives |
| - |
| (252) |
| - |
| (252) |
|
| - |
| (252) |
| - |
| (252) |
| ||||||||
Total |
| $ | 303,018 |
| $ | 887,217 |
| $ | 4,160 |
| $ | 1,194,395 |
|
| $ | 303,018 |
| $ | 887,217 |
| $ | 4,160 |
| $ | 1,194,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Amounts included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents |
| $ | 303,018 |
| $ | 67,305 |
| $ | - |
| $ | 370,323 |
|
| $ | 303,018 |
| $ | 67,305 |
| $ | - |
| $ | 370,323 |
|
Short-term investments |
| - |
| 777,224 |
| 3,910 |
| 781,134 |
|
| - |
| 777,224 |
| 3,910 |
| 781,134 |
| ||||||||
Accounts receivable, net |
| - |
| 83 |
| - |
| 83 |
|
| - |
| 83 |
| - |
| 83 |
| ||||||||
Investments |
| - |
| 42,940 |
| - |
| 42,940 |
|
| - |
| 42,940 |
| - |
| 42,940 |
| ||||||||
Prepaid expenses and other current assets |
| - |
| - |
| 250 |
| 250 |
|
| - |
| - |
| 250 |
| 250 |
| ||||||||
Accrued liabilities |
| - |
| (335) |
| - |
| (335) |
|
| - |
| (335) |
| - |
| (335) |
| ||||||||
Total |
| $ | 303,018 |
| $ | 887,217 |
| $ | 4,160 |
| $ | 1,194,395 |
|
| $ | 303,018 |
| $ | 887,217 |
| $ | 4,160 |
| $ | 1,194,395 |
|
The majority 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 commercial paper, U.S. Treasuries, certificates of deposit, municipal securities, U.S. government agency securities and VRDNs, is based on other observable inputs, specifically a market approach which utilizes valuation models, pricing systems, mathematical tools and other relevant
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
information for the same or similar securities. The Company’s valuation of its Level 2 foreign exchange contracts is based on quoted market prices of the same or similar instruments, adjusted for counterparty risk. There were no transfers between Level 1 and Level 2 measurements during the three-monthssix-months ended March 31,June 30, 2015 or the year ended December 31, 2014, and there were no changes in the Company’s valuation techniques.
|
|
|
The Company’s Level 3 assets are comprised of auction rate securities and put options. The Company’s Level 3 valuation utilized a mark-to-model approach which included estimates for interest rates, timing and amount of cash flows, credit and liquidity premiums, as well as expected holding periods for the auction rate securities. These assumptions are typically volatile and subject to change as the underlying data sources and market conditions evolve. A significant change in any single input could have a significant valuation impact; however, no single input has a more significant impact on valuation than another. There were no changes in the Company’s valuation techniques of its Level 3 assets during the three-monthssix-months ended March 31,June 30, 2015.
At March 31,June 30, 2015, the Company held auction rate securities with a face value of $4.2$3.4 million (amortized cost basis of $3.9$3.2 million). A Level 3 valuation was performed on the Company’s auction rate securities as of March 31,June 30, 2015 resulting in a fair value of $3.9$3.2 million for the Company’s trading auction rate securities (after a $0.3$0.2 million impairment), which are included in short-term investments.
In June 2011, the Company entered into an agreement (the “2011 ARS Agreement”), related to $24.5 million of par value auction rate securities (the “2011 ARS Securities”). Under the 2011 ARS Agreement, the Company has the right to sell the 2011 ARS Securities including all accrued but unpaid interest thereon (the “2011 Put Option”) as follows: (i) on or after July 1, 2013, up to $1.0 million aggregate par value; (ii)��on or after October 1, 2013, up to an additional $1.0 million aggregate par value; and (iii) in quarterly installments thereafter based on a formula of the then outstanding 2011 ARS Securities, as adjusted for normal market redemptions, with full sale rights available on or after April 1, 2016. The 2011 ARS Securities will continue to accrue interest until redeemed through the 2011 Put Option, or as determined by the auction process, or should the auction process fail, the terms outlined in the prospectus of the respective 2011 ARS Securities. Under the 2011 ARS Agreement, the Company has the obligation, should it receive written notification from the put issuer, to sell the 2011 ARS Securities at par plus all accrued but unpaid interest. During the three-monthssix-months ended March 31,June 30, 2015, no 2011$0.7 million of ARS Securities were redeemed ($13.1 million, $2.3 million, $1.3 million and $3.7 million of par value 2011 ARS Securities were redeemed at par during the years ended December 31, 2014, 2013, 2012 and 2011, respectively). Subsequent to March 31,June 30, 2015, $0.7$1.7 million of 2011 ARS Securities were redeemed at par through the exercise of a portion of the 2011 Put Option. The 2011 Put Option does not meet the definition of derivative instruments under ASC 815. Therefore, the Company elected the fair value option under ASC 825-10 in accounting for the 2011 Put Option. As of March 31,June 30, 2015, the Company recorded $0.3$0.2 million as the fair market value of the 2011 Put Option, included in prepaid expenses and other current assets.
14MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
|
|
|
The following table provides a summary reconciliation of the Company’s financial assets that are recorded at fair value on a recurring basis using significant unobservable inputs (Level 3):
|
| Three-Months Ended |
| Three-Months Ended |
| ||||||||
|
| Auction |
| Put Options |
| Auction |
| Put Options |
| ||||
Opening Balance |
| $ | 3,910 |
| $ | 250 |
| $ | 16,184 |
| $ | 1,092 |
|
Transfers into Level 3 |
| - |
| - |
| - |
| - |
| ||||
Transfers out of Level 3 |
| - |
| - |
| - |
| - |
| ||||
Total gains (losses) for the period: |
|
|
|
|
|
|
|
|
| ||||
Included in earnings |
| - |
| - |
| 67 |
| (68) |
| ||||
Included in other comprehensive income |
| - |
| - |
| - |
| - |
| ||||
Settlements |
| - |
| - |
| (1,725) |
| - |
| ||||
Closing Balance |
| $ | 3,910 |
| $ | 250 |
| $ | 14,526 |
| $ | 1,024 |
|
|
| Three-Months Ended June 30, 2015 |
| Three-Months Ended June 30, 2014 |
| |||||||||||
|
| Auction |
| Put Options |
| Auction |
| Put Options |
| |||||||
Opening Balance |
| $ | 3,910 |
| $ | 250 |
| $ | 14,526 |
| $ | 1,024 |
| |||
Transfers into Level 3 |
| - |
| - |
| - |
| - |
| |||||||
Transfers out of Level 3 |
| - |
| - |
| - |
| - |
| |||||||
Total gains (losses) for the period: |
|
|
|
|
|
|
|
|
| |||||||
Included in earnings |
| 61 |
| (61) |
| 17 |
| (30) |
| |||||||
Included in other comprehensive income |
| - |
| - |
| - |
| - |
| |||||||
Settlements |
| (725) |
| - |
| (1,724) |
| - |
| |||||||
Closing Balance |
| $ | 3,246 |
| $ | 189 |
| $ | 12,819 |
| $ | 994 |
| |||
|
|
|
|
|
|
|
|
|
| |||||||
|
| Six-Months Ended June 30, 2015 |
| Six-Months Ended June 30, 2014 |
| |||||||||||
|
| Auction |
| Put Options |
| Auction |
| Put Options |
| |||||||
Opening Balance |
| $ | 3,910 |
| $ | 250 |
| $ | 16,184 |
| $ | 1,092 |
| |||
Transfers into Level 3 |
| - |
| - |
| - |
| - |
| |||||||
Transfers out of Level 3 |
| - |
| - |
| - |
| - |
| |||||||
Total gains (losses) for the period: |
|
|
|
|
|
|
|
|
| |||||||
Included in earnings |
| 61 |
| (61) |
| 84 |
| (98) |
| |||||||
Included in other comprehensive income |
| - |
| - |
| - |
| - |
| |||||||
Settlements |
| (725) |
| - |
| (3,449) |
| - |
| |||||||
Closing Balance |
| $ | 3,246 |
| $ | 189 |
| $ | 12,819 |
| $ | 994 |
| |||
6.7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to foreign currency exchange rate risks related primarily to its foreign business operations. During the three-monthssix-months ended March 31,June 30, 2015 and the year ended December 31, 2014, the Company entered into forward currency exchange contracts with financial institutions to create an economic hedge to specifically manage a portion of the foreign exchange risk exposure associated with certain consolidated subsidiaries’ non-functional currency denominated assets and liabilities. All foreign currency exchange contracts of the Company that were outstanding as of March 31,June 30, 2015 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.
15MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
|
|
|
The notional amount and fair value of all outstanding foreign currency derivative instruments in the condensed consolidated balance sheets consist of the following at:
March 31, 2015 | ||||||||||||||||||
June 30, 2015 | June 30, 2015 |
| ||||||||||||||||
Derivatives not designated as |
| Notional |
| Fair |
| Balance Sheet Location |
|
| Notional |
| Fair |
| Balance Sheet Location |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Receive USD/pay AUD |
| $ | 8,069 |
| $ | 166 |
| Accounts receivable, net |
| |||||||||
Receive USD/pay JPY |
| 9,367 |
| 60 |
| Accounts receivable, net |
| |||||||||||
Receive USD/pay ZAR |
| 13,161 |
| 101 |
| Accounts receivable, net |
| |||||||||||
Receive USD/pay GBP |
| $ | 4,406 |
| $ | 1 |
| Accounts receivable, net |
| |||||||||
Receive USD/pay CAD |
| 4,865 |
| 60 |
| Accounts receivable, net |
| |||||||||||
Receive USD/pay MXN |
| 6,349 |
| 30 |
| Accounts receivable, net |
|
| 7,455 |
| 69 |
| Accounts receivable, net |
| ||||
Receive USD/pay CLP |
| 2,828 |
| - |
| Accounts receivable, net |
| |||||||||||
Receive USD/pay COP |
| 2,628 |
| 36 |
| Accounts receivable, net |
|
| 1,329 |
| 9 |
| Accounts receivable, net |
| ||||
|
|
|
|
|
|
|
| |||||||||||
Liabilities: |
|
|
|
|
|
|
| |||||||||||
Foreign currency exchange contracts: |
|
|
|
|
|
|
| |||||||||||
Receive EUR/pay USD |
| $ | 11,252 |
| $ | (177) |
| Accrued liabilities |
| |||||||||
|
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
| |||||||||||
December 31, 2014 | ||||||||||||||||||
Derivatives not designated as |
| Notional |
| Fair |
| Balance Sheet Location |
| |||||||||||
|
|
|
|
|
|
|
| |||||||||||
Assets: |
|
|
|
|
|
|
| |||||||||||
Foreign currency exchange contracts: |
|
|
|
|
|
|
| |||||||||||
Receive CAD/pay USD |
| $ | 19,940 |
| $ | 83 |
| Accounts receivable, net |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Receive EUR/pay USD |
| $ | 13,265 |
| $ | (75) |
| Accrued liabilities |
|
| $ | 15,517 |
| $ | (17) |
| Accrued liabilities |
|
Receive USD/pay AUD |
| 8,343 |
| (48) |
| Accrued liabilities |
|
|
| 8,551 |
|
| (72) |
| Accrued liabilities |
| ||
Receive USD/pay JPY |
| 10,620 |
| (84) |
| Accrued liabilities |
|
|
| 9,241 |
|
| (124) |
| Accrued liabilities |
| ||
Receive USD/pay ZAR |
| 14,760 |
| (105) |
| Accrued liabilities |
|
|
| 12,808 |
|
| (54) |
| Accrued liabilities |
| ||
Receive USD/pay MXN |
| 4,961 |
| (11) |
| Accrued liabilities |
| |||||||||||
Receive USD/pay CLP |
| 2,685 |
| (10) |
| Accrued liabilities |
|
|
| 3,813 |
|
| (11) |
| Accrued liabilities |
| ||
Receive USD/pay COP |
| 2,845 |
| (2) |
| Accrued liabilities |
|
December 31, 2014 |
| ||||||||
Derivatives not designated as |
| Notional |
| Fair |
| Balance Sheet Location |
| ||
|
|
|
|
|
|
|
| ||
Assets: |
|
|
|
|
|
|
| ||
Foreign currency exchange contracts: |
|
|
|
|
|
|
| ||
Receive CAD/pay USD |
| $ | 19,940 |
| $ | 83 |
| Accounts receivable, net |
|
|
|
|
|
|
|
|
| ||
Liabilities: |
|
|
|
|
|
|
| ||
Foreign currency exchange contracts: |
|
|
|
|
|
|
| ||
Receive EUR/pay USD |
| $ | 13,265 |
| $ | (75) |
| Accrued liabilities |
|
Receive USD/pay AUD |
|
| 8,343 |
|
| (48) |
| Accrued liabilities |
|
Receive USD/pay JPY |
|
| 10,620 |
|
| (84) |
| Accrued liabilities |
|
Receive USD/pay ZAR |
|
| 14,760 |
|
| (105) |
| Accrued liabilities |
|
Receive USD/pay MXN |
|
| 4,961 |
|
| (11) |
| Accrued liabilities |
|
Receive USD/pay CLP |
|
| 2,685 |
|
| (10) |
| Accrued liabilities |
|
Receive USD/pay COP |
|
| 2,845 |
|
| (2) |
| Accrued liabilities |
|
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
The net losses on derivative instruments in the condensed consolidated statements of income were as follows:
|
|
|
| Amount of loss |
|
|
|
| Amount of loss |
| ||||||||
|
|
|
| Three-months ended |
|
|
|
| Three-months ended |
| ||||||||
Derivatives not designated as |
| Location of loss |
| March 31, |
| March 31, |
|
| Location of loss |
| June 30, 2015 |
| June 30, 2014 |
| ||||
|
|
|
|
|
|
|
| |||||||||||
Foreign currency exchange contracts |
| Interest and other income, net |
| $ | (1,856) |
| $ | (359) |
|
| Interest and other income, net |
| $ | (63) |
| $ | (406) |
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
| Amount of loss |
| |||||||||||||
|
|
|
| Six-months ended |
| |||||||||||||
Derivatives not designated as |
| Location of loss |
| June 30, 2015 |
| June 30, 2014 |
| |||||||||||
Foreign currency exchange contracts |
| Interest and other income, net |
| $ | (1,919) |
| $ | (765) |
| |||||||||
|
|
|
|
|
|
|
|
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
7.8. INVENTORIES
Inventories consist of the following at:
|
| March 31, |
| December 31, |
| ||
Raw materials |
| $ | 65,311 |
| $ | 59,938 |
|
Finished goods |
| 132,603 |
| 114,635 |
| ||
|
| $ | 197,914 |
| $ | 174,573 |
|
|
| June 30, |
| December 31, |
| ||
Raw materials |
| $ | 58,586 |
| $ | 59,938 |
|
Finished goods |
| 122,306 |
| 114,635 |
| ||
|
| $ | 180,892 |
| $ | 174,573 |
|
8.9. PROPERTY AND EQUIPMENT, Net
Property and equipment consist of the following at:
|
| June 30, |
| December 31, |
| ||
Land |
| $ | 6,792 |
| $ | 6,792 |
|
Leasehold improvements |
| 2,807 |
| 2,796 |
| ||
Furniture and fixtures |
| 3,487 |
| 3,371 |
| ||
Office and computer equipment |
| 10,519 |
| 10,072 |
| ||
Computer software |
| 1,955 |
| 1,317 |
| ||
Equipment |
| 92,807 |
| 84,263 |
| ||
Buildings |
| 39,096 |
| 37,311 |
| ||
Vehicles |
| 29,022 |
| 27,813 |
| ||
|
| 186,485 |
| 173,735 |
| ||
Less: accumulated depreciation and amortization |
| (93,947) |
| (83,579) |
| ||
|
| $ | 92,538 |
| $ | 90,156 |
|
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
|
| March 31, 2015 |
| December 31, 2014 | ||
Land |
| $ | 6,792 |
| $ | 6,792 |
Leasehold improvements |
| 2,723 |
| 2,796 | ||
Furniture and fixtures |
| 3,359 |
| 3,371 | ||
Office and computer equipment |
| 10,229 |
| 10,072 | ||
Computer software |
| 1,774 |
| 1,317 | ||
Equipment |
| 86,887 |
| 84,263 | ||
Buildings |
| 37,746 |
| 37,311 | ||
Vehicles |
| 27,235 |
| 27,813 | ||
|
| 176,745 |
| 173,735 | ||
Less: accumulated depreciation and amortization |
| (88,449) |
| (83,579) | ||
|
| $ | 88,296 |
| $ | 90,156 |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
9.10. INTANGIBLES, NetGOODWILL AND OTHER INTANGIBLE ASSETS
IntangiblesThe following is a roll-forward of goodwill for the six-months ended June 30, 2015 by reportable segment:
|
| Finished |
| Concentrate |
| Total |
| ||||
Balance at December 31, 2014 |
| $ | - |
| $ | - |
| $ | - |
| |
Acquisitions |
| 785,277 |
| 502,500 |
| 1,287,777 |
| ||||
Balance at June 30, 2015 |
| $ | 785,277 |
| $ | 502,500 |
| $ | 1,287,777 |
| |
Intangible assets consist of the following at:
|
| March 31, |
| December 31, |
| June 30, |
| December 31, |
| |||||
Amortizing intangibles |
| $ | 233 |
| $ | 233 |
| $ | 35,249 |
| $ | 233 |
| |
Accumulated amortization |
| (50) |
| (50) |
| (396) |
| (50) |
| |||||
|
| 183 |
| 183 |
| 34,853 |
| 183 |
| |||||
Non-amortizing intangibles |
| 52,117 |
| 50,565 |
| 393,313 |
| 50,565 |
| |||||
|
| $ | 52,300 |
| $ | 50,748 |
| $ | 428,166 |
| $ | 50,748 |
|
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, ranging from one to 25 years (weighted-average life of 17 years).generally 5 years. Total amortization expense recorded was $0.001$0.3 million and $0.1 million for the three-months ended March 31,June 30, 2015 and 2014, respectively. At March 31,Total amortization expense recorded was $0.3 million and $0.25 million for the six-months ended June 30, 2015 $18.0 millionand 2014, respectively. Non-amortizing intangibles primarily consist of non-amortizing intangibles and $0.1 million of amortizing intangibles (net of accumulated amortization) are subject to divestiture under the TCCC Transaction and are included in intangibles held-for-sale in the accompanying consolidated balance sheet at March 31, 2015.indefinite-lived tradenames.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
10.11. DISTRIBUTION AGREEMENTS
As part of the TCCC Transaction, the amended distribution coordination agreements to be entered into with TCCC provideprovided for the transition of third parties’ rights to distribute the Company’s products in most territories in the U.S. and Canada to members of TCCC’s distribution network, which consists of owned or controlled bottlers/distributors and independent bottling/distribution partners. In February 2015, in accordance with its then existing agreements with certain affected third-party distributors, the CompanyOld Monster sent notices of termination to the applicable affected third-party distributors in the U.S., providing for the termination of their respective distribution agreements. The associated distribution rights relating to such terminated distribution agreements have been transitioned to bethe TCCC distribution network as of the effective at various dates beginningdate of termination of the affected third-party distributors’ rights in March 2015.the applicable territories. As of August 10, 2015, distribution rights in the U.S. representing approximately 89% of the target case sales (see Note 3), have been transitioned to TCCC’s distribution network.
In accordance with ASC No. 420 “Exit or Disposal Cost Obligations”, the Company expenses distributor termination costs in the period in which the written notification of termination occurs. As a result, the Company incurred termination costs of $206.0$12.2 million and $218.2 million for the three-monthsthree- and six-months ended March 31,June 30, 2015. Such termination costs have been expensed in full and are included in operating expenses for the three-monthsthree- and six-months ended March 31,June 30, 2015.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
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 $43.3$3.2 million and $3.7$3.8 million for the three-months ended March 31,June 30, 2015 and 2014, respectively. Revenue recognized was $46.5 million and $7.5 million for the six-months ended June 30, 2015 and 2014, respectively. Included in the $43.3$46.5 million of revenue recognized for the three-monthssix-months ended March 31,June 30, 2015 was $39.8 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors who were sent notices of termination during the first quarter of 2015, as described above.
11.12. COMMITMENTS AND CONTINGENCIES
The Company had purchase commitments aggregating approximately $22.5$39.3 million at March 31,June 30, 2015, 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 $93.3$87.2 million at March 31,June 30, 2015, which related primarily to sponsorships and other marketing activities.
The Company had operating lease commitments aggregating approximately $11.5$11.2 million at March 31,June 30, 2015, which related primarily to warehouse and office space.
In April 2015, the Company entered into an agreement, subject to the attainment of requisite entitlements, to acquire approximately 56 acres of vacant land located in Jurupa Valley, CA for an estimated purchase price of $38.1 million. The Company planswas unable to construct a new warehouse on such land, which will replace its existing leased warehouse space located in Corona, CA. The Company has deposited $0.5 million into escrow with the balance due at closing. There is no assurance the Company will be successful in obtainingsecure the requisite entitlements.entitlements and therefore terminated this agreement.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
Legal Proceedings
On October 17, 2012, Wendy Crossland and Richard Fournier filedThe Company has been named a lawsuitdefendant in the Superior Court of the State of California, County of Riverside, styled Wendy Crossland and Richard Fournier v. Monster Beverage Corporation, against the Companyvarious personal injury lawsuits, claiming that the death or other serious injury of their 14 year old daughter (Anais Fournier)the plaintiffs was caused by her consumption of two 24-ounce Monster Energy® drinks over the course of two daysdrinks. The plaintiffs in December 2011. The plaintiffsthese lawsuits allege strict product liability, negligence, fraudulent concealment, breach of implied warranties and wrongful death. The plaintiffs claim general damages in excess of $25,000 and punitive damages. The Company filed a demurrer and a motion to strike the plaintiffs’ complaint on November 19, 2012, and the plaintiffs filed a first amended complaint on December 19, 2012. The Company filed its answer to the first amended complaint on June 7, 2013. The parties attended a court ordered mediation on January 23, 2014. Discovery has commenced and trial has been scheduled for August 21, 2015. The Company believes that the plaintiffs’each complaint is without merit and plans a vigorous defense. The Company also believes that any such damages, if awarded, would not have a material adverse effect on the Company’s financial position or results of operations.
The Company has also been named as a defendant in other complaints containing similar allegations to those presented in the Fournier lawsuit, each of which the Company believes is also without merit and would not have a material adverse effect on the Company’s financial position or results of operations in the event any damages were awarded.
State Attorney General Inquiry – In July 2012, the Company received a subpoena from the Attorney General for the State of New York in connection with its investigation concerning the Company’s advertising, marketing, promotion, ingredients, usage and sale of its Monster Energy® brand of energy drinks. Production of documents pursuant to that subpoena was completed in approximately May 2014.
On August 6, 2014, the Attorney General for the State of New York issued a second subpoena seeking additional documents and the deposition of a Company employee. On September 8, 2014, the Company moved to quash the second subpoena in the Supreme Court, New York County. The motion was fully briefed and was argued on March 17, 2015. No decision has been rendered. It is unknown what, if any, action the state attorney general may take against the Company, the relief which may be sought in the event of any such proceeding or whether such proceeding could have a material adverse effect on the Company’s business, financial condition or results of operations.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
San Francisco City Attorney Litigation – On October 31, 2012, the Company received a written request for information from the City Attorney for the City and County of San Francisco concerning the Company’s advertising and marketing of its Monster Energy® brand of energy drinks and specifically concerning the safety of its products for consumption by adolescents. In a letter dated March 29, 2013, the San Francisco City Attorney threatened to bring suit against the Company if it did not agree to take the following five steps immediately: (i) “Reformulate its products to lower the caffeine content to safe levels” - (ii) “Provide adequate warning labels”; (iii) “Cease promoting over-consumption in marketing”; (iv) “Cease use of alcohol and drug references in marketing”; and (v) “Cease targeting minors.”
(i) The Company Action – On April 29, 2013, the Company and its wholly owned subsidiary, Monster Energy Company, filed a complaint for declaratory and injunctive relief against the San Francisco City Attorney (the “Company Action”) in United States District Court for the Central District of California (the “Central District Court”), styled Monster Beverage Corp., et al. v. Dennis Herrera. The Company sought a declaration from the Central District Court that the San Francisco City Attorney’s investigation and demands are impermissible and preempted, subject to the doctrine of primary jurisdiction, are unconstitutional in that they violate the First and Fourteenth Amendments’ prohibitions against compelled speech, content-based speech and commercial speech, are impermissibly void-for-vagueness, and/or violate the Commerce Clause. On June 3, 2013, the City Attorney filed a motion to dismiss the Company Action, arguing in part that the complaint should be dismissed in light of the San Francisco Action (described below) filed on May 6, 2013. On August 22, 2013, the Central District Court granted in part and denied in part the City Attorney’s motion.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
On October 17, 2013, the City Attorney filed a renewed motion to dismiss the Company Action and on December 16, 2013, the Central District Court granted the City Attorney’s renewed motion, dismissing the Company Action. The Company filed a Notice of Appeal to the Ninth Circuit on December 18, 2013. The appeal is fully briefed but has not yet been set for argument.
(ii) The San Francisco Action – On May 6, 2013, the San Francisco City Attorney filed a complaint for declaratory and injunctive relief, civil penalties and restitution for alleged violation of California’s Unfair Competition Law, Business & Professions Code sections 17200, et seq., styled People Of The State Of California ex rel. Dennis Herrera, San Francisco City Attorney v. Monster Beverage Corporation, in San Francisco Superior Court (the “San Francisco Action”). The City Attorney alleges that the Company (1) mislabeled its products as a dietary supplement, in violation of California’s Sherman Food, Drug and Cosmetic Law, California Health & Safety Code sections 109875 et. seq.; (2) is selling an “adulterated” product because caffeine is not generally recognized as safe (“GRAS”) due to the alleged lack of scientific consensus concerning the safety of the levels of caffeine in the Company’s products; and (3) is engaged in unfair and misleading business practices because its marketing (a) does not disclose the health risks that energy drinks pose for children and teens; (b) fails to warn against and promotes unsafe consumption; (c) implicitly promotes mixing of energy drinks with alcohol or drugs; and (d) is deceptive because it includes unsubstantiated claims about the purported special benefits of its “killer” ingredients and “energy blend.” The City Attorney sought a declaration that the Company has engaged in unfair and unlawful business acts and practices in violation of the Unfair Competition Law; an injunction from performing or proposing to perform any acts in violation of the Unfair Competition Law; restitution; and civil penalties.
After a motion to strike filed by the Company was granted in part, on March 20, 2014, the City Attorney filed an amended complaint, adding allegations supporting the theory for relief as to which the Court had granted the motion to strike. On April 18, 2014, the Company filed a renewed motion to strike, as well as a motion asking the Court to bifurcate and/or stay claims relating to the safety of Monster Energy® drinks, pending resolution of the ongoing FDA investigation of the safety and labeling of food products to which caffeine is added. On May 22, 2014, the Court denied the Company’s motion to strike and motion to bifurcate and/or stay claims relating to safety.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
On September 5, 2014, the City Attorney filed a second amended complaint, adding Monster Energy Company as a defendant. The Company and Monster Energy Company filed answers to the second amended complaint on October 4, 2014 and November 10, 2014, respectively. Discovery is ongoing.
The Court has set the case for a two-week bench trial beginning on February 8, 2016.
The Company denies that it has violated the Unfair Competition Law or any other law and believes that the City Attorney’s claims and demands are preempted and unconstitutional, as alleged in the action the Company filed in the Central District Court. The Company intends to vigorously defend against this lawsuit. At this time, no evaluation of the likelihood of an unfavorable outcome or range of potential loss can be expressed.
The actions or investigations described above have not progressed to a point where a reasonably possible range of losses associated with their ultimate outcome can be estimated at this time. If the final resolution of any such litigation or proceedings is unfavorable, the Company’s financial condition, operating results and cash flows could be materially affected.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
In addition to the above matters, the Company has been named as a defendant in various false advertising putative class actions and in a private attorney general action. In these actions, plaintiffs allege that defendants misleadingly labeled and advertised Monster Energy® brand products that allegedly were ineffective for the advertised benefits (including, but not limited to, an allegation that the products do not hydrate as advertised because they contain caffeine). The plaintiffs further allege that the Monster Energy® brand products at issue are unsafe because they contain one or more ingredients that allegedly could result in illness, injury or death. In connection with these product safety allegations, the plaintiffs claim that the product labels did not provide adequate warnings and/or that the Company did not include sufficiently specific statements with respect to contra-indications and/or adverse reactions associated with the consumption of its energy drink products (including, but not limited to, claims that certain ingredients, when consumed individually or in combination with other ingredients, could result in high blood pressure, palpitations, liver damage or other negative health effects and/or that the products themselves are unsafe). Based on these allegations, the plaintiffs assert claims for violation of state consumer protection statutes, including unfair competition and false advertising statutes, and for breach of warranty and unjust enrichment. In their prayers for relief, the plaintiffs seek, inter alia, compensatory and punitive damages, restitution, attorneys’ fees, and, in some cases, injunctive relief. The Company regards these cases and allegations as having no merit. Furthermore, the Company is subject to litigation from time to time in the normal course of business, including intellectual property litigation and claims from terminated distributors.
Although it is not possible to predict the ultimate outcome of such litigation, based on the facts known to the Company, management believes that such litigation in the aggregate will likely not have a material adverse effect on the Company’s financial position or results of operations.
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 March 31,June 30, 2015, the Company’s consolidated balance sheets includesheet includes accrued loss contingencies of approximately $5.5 million, and receivables for insurance reimbursements of approximately $1.8$2.4 million.
12.13. ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in accumulated other comprehensive loss by component, after tax, for the three-monthssix-months ended March 31,June 30, 2015 are as follows:
|
| Currency | ||
| ||||
Balance at December 31, 2014 |
| $ | 11,453 | |
Other comprehensive loss before reclassifications |
|
| ||
Amounts reclassified from accumulated other comprehensive loss |
| - | ||
Net current-period other comprehensive loss |
|
| ||
Balance at |
| $ |
|
13.14. TREASURY STOCK PURCHASE
On June 12, 2015, as part of the TCCC Transaction, the Company cancelled 41.5 million shares of treasury stock owned by the Company. The cancelled stock had a carrying value of approximately $1,482.6 million. The Company’s accounting policy upon the formal retirement of treasury stock is to deduct its par value from common stock and to reflect any excess of cost over par as a deduction from retained earnings.
On April 7, 2013, the Company’s Board of Directors authorized a new share repurchase program for the repurchase of up to $200.0 million of the Company’s outstanding common stock (the “April 2013 Repurchase Plan”). During the three-monthssix-months ended March 31,June 30, 2015, no shares of common stock were purchased under the April 2013 Repurchase Plan.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
During the three-months ended March 31,period from April 1, 2015 2.2to June 12, 2015, 0.001 million shares were purchased from employees in lieu of cash payments for options exercised or withholding taxes due for a total amount of $251.4$0.1 million. While such purchases are considered common stock repurchases, they are not counted as purchases against the Company’s authorized share repurchase programs, including the April 2013 Repurchase Plan. These shares are included in the cancellation of treasury shares as described above in connection with the TCCC Transaction.
During the period from June 13, 2015 to June 30, 2015, 1.2 million shares were purchased from employees in lieu of cash payments for options exercised or withholding taxes due for a total amount of $160.7 million. While such purchases are considered common stock repurchases, they are not counted as purchases against the Company’s authorized share repurchase programs, including the April 2013 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying condensed consolidated balance sheet at June 30, 2015.
14.MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
15. STOCK-BASED COMPENSATION
The Company has two stock-based compensation plans under which shares were available for grant at March 31,June 30, 2015: the Monster Beverage Corporation 2011 Omnibus Incentive Plan (the “2011 Omnibus Incentive Plan”) and the 2009 Monster Beverage Corporation Stock Incentive Plan for Non-Employee Directors (the “2009 Directors Plan”).
The Company recorded $6.4$8.5 million and $7.0$8.1 million of compensation expense relating to outstanding options, restricted stock awards, stock appreciation rights and restricted stock units during the three-months ended March 31,June 30, 2015 and 2014, respectively. The Company recorded $14.8 million and $15.1 million of compensation expense relating to outstanding options, restricted stock awards, stock appreciation rights and restricted stock units during the six-months ended June 30, 2015 and 2014, respectively.
The excess tax benefit realized for tax deductions from non-qualified stock option exercises, disqualifying dispositions of incentive stock options, vesting of restricted stock units and restricted stock awards for the three-months ended March 31,June 30, 2015 and 2014 was $184.7$115.6 million and $2.6$0.7 million, respectively. The excess tax benefit realized for tax deductions from non-qualified stock option exercises, disqualifying dispositions of incentive stock options, vesting of restricted stock units and restricted stock awards for the six-months ended June 30, 2015 and 2014 was $300.3 million and $3.3 million, respectively.
Stock Options
Under the Company’s stock-based compensation plans, all stock options granted as of March 31,June 30, 2015 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 March 31, |
| Three-Months Ended June 30, |
| Six-Months Ended June 30, |
| ||||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 |
| 2015 |
| 2014 |
|
Dividend yield |
| 0.0% |
| 0.0% |
| 0.0% |
| 0.0% |
| 0.0% |
| 0.0% |
|
Expected volatility |
| 37.1% |
| 43.1% |
| 37.0% |
| 37.4% |
| 37.1% |
| 42.4% |
|
Risk-free interest rate |
| 1.6% |
| 1.6% |
| 1.5% |
| 1.6% |
| 1.6% |
| 1.6% |
|
Expected term |
| 5.8 years |
| 5.9 years |
| 5.8 years |
| 5.6 years |
| 5.8 years |
| 5.9 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.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
Expected Term: The Company’s expected term represents the weighted-average period that the Company’s stock options are expected to be outstanding. The expected term is based on expected time to post-vesting exercise of options by employees. The Company uses historical exercise patterns of previously granted options to derive employee behavioral patterns used to forecast expected exercise patterns.
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 |
| Weighted- |
| Weighted- |
| Aggregate |
| ||
Outstanding at January 1, 2015 |
| 13,066 |
| $ | 19.73 |
| 3.1 |
| $ | 1,158,412 |
|
Granted 01/01/15 - 03/31/15 |
| 903 |
| $ | 133.68 |
|
|
|
|
| |
Exercised |
| (4,589) |
| $ | 4.17 |
|
|
|
|
| |
Cancelled or forfeited |
| (16) |
| $ | 40.61 |
|
|
|
|
| |
Outstanding at March 31, 2015 |
| 9,364 |
| $ | 38.30 |
| 4.8 |
| $ | 937,246 |
|
Vested and expected to vest in the future at March 31, 2015 |
| 8,869 |
| $ | 35.23 |
| 4.6 |
| $ | 915,012 |
|
Exercisable at March 31, 2015 |
| 6,284 |
| $ | 17.00 |
| 2.9 |
| $ | 762,806 |
|
|
|
|
|
|
| Weighted- |
|
| ||
|
|
|
| Weighted- |
| Average |
|
| ||
|
|
|
| Average |
| Remaining |
|
| ||
|
| Number of |
| Exercise |
| Contractual |
|
| ||
Options |
| Shares (In |
| Price Per |
| Term (In |
| Aggregate | ||
Outstanding at January 1, 2015 |
| 13,066 |
| $ | 19.73 |
| 3.1 |
| $ | 1,158,412 |
Granted 01/01/15 - 03/31/15 |
| 903 |
| $ | 133.68 |
|
|
|
| |
Granted 04/01/15 - 06/30/15 |
| 33 |
| $ | 133.43 |
|
|
|
| |
Exercised |
| (7,052) |
| $ | 5.93 |
|
|
|
| |
Cancelled or forfeited |
| (60) |
| $ | 57.50 |
|
|
|
| |
Outstanding at June 30, 2015 |
| 6,890 |
| $ | 49.01 |
| 6.0 |
| $ | 586,962 |
Vested and expected to vest in the future at June 30, 2015 |
| 6,446 |
| $ | 45.78 |
| 5.8 |
| $ | 569,888 |
Exercisable at June 30, 2015 |
| 4,052 |
| $ | 23.45 |
| 4.2 |
| $ | 448,009 |
The weighted-average grant-date fair value of options granted during the three-months ended March 31,June 30, 2015 and 2014 was $50.16$49.72 per share and $29.86$25.71 per share, respectively. The weighted-average grant-date fair value of options granted during the six-months ended June 30, 2015 and 2014 was $50.14 per share and $29.35 per share, respectively. The total intrinsic value of options exercised during the three-months ended March 31,June 30, 2015 and 2014 was $515.7$314.0 million and $11.4$3.7 million, respectively. The total intrinsic value of options exercised during the six-months ended June 30, 2015 and 2014 was $829.7 million and $15.1 million, respectively.
Cash received from option exercises under all plans for the three-months ended March 31,June 30, 2015 and 2014 was approximately $19.0$22.7 million and $5.7$2.0 million, respectively. Cash received from option exercises under all plans for the six-months ended June 30, 2015 and 2014 was approximately $41.7 million and $7.7 million, respectively.
At March 31,June 30, 2015, there was $88.2$81.6 million of total unrecognized compensation expense related to non-vested options granted to employees under the Company’s share-based payment plans. That cost is expected to be recognized over a weighted-average period of 3.23.1 years.
Restricted Stock Awards and Restricted Stock Units
Stock-based compensation cost for restricted stock awards and restricted stock units is measured based on the closing fair market value of the Company’s common stock at the date of grant. In the event that the Company has the option and intent to settle a restricted stock unit in cash, the award is classified as a liability and revalued at each balance sheet date.
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 awards and non-vested restricted stock units as follows:
|
|
|
| Weighted | |||||||
|
| Number of |
| Average | |||||||
|
| Shares (in |
| Grant-Date | |||||||
|
| Number of |
| Weighted |
|
| thousands) |
| Fair Value | ||
Non-vested at January 1, 2015 |
| 149 |
| $ | 61.09 |
|
| 149 |
| $ | 61.09 |
Granted |
| 83 |
| $ | 135.48 |
| |||||
Granted 01/01/15 - 03/31/15 |
| 83 |
| $ | 135.48 | ||||||
Granted 04/01/15 - 06/30/15 |
|
|
|
|
| ||||||
Vested |
| (16) |
| $ | 57.05 |
|
| (21) |
| $ | 59.10 |
Forfeited/cancelled |
| (2) |
| $ | 57.45 |
|
| (11) |
| $ | 61.66 |
Non-vested at March 31, 2015 |
| 214 |
| $ | 90.23 |
| |||||
Non-vested at June 30, 2015 |
| 200 |
| $ | 91.94 |
No restricted stock units or restricted stock awards were granted during the three-months ended June 30, 2015. The weighted-average grant-date fair value of restricted stock units and restricted stock awards granted during the three-months ended March 31, 2015June 30, 2014 was $135.48$69.00 per share. NoThe weighted-average grant-date fair value of restricted stock units and restricted stock awards were granted during the three-monthssix-months ended March 31, 2014.June 30, 2015 and 2014 was $135.48 and $69.00 per share, respectively. As of March 31,June 30, 2015, 0.2 million of restricted stock units and restricted stock awards are expected to vest over their respective terms.
At March 31,June 30, 2015, total unrecognized compensation expense relating to non-vested restricted stock awards and non-vested restricted stock units was $16.2$14.4 million, which is expected to be recognized over a weighted-average period of 2.42.2 years.
15.16. �� INCOME TAXES
The following is a roll-forward of the Company’s total gross unrecognized tax benefits, not including interest and penalties, for the three-monthssix-months ended March 31,June 30, 2015:
|
| Gross Unrecognized Tax |
| |
Balance at December 31, 2014 |
| $ | 935 |
|
Additions for tax positions related to the current year |
| - |
| |
Additions for tax positions related to the prior year |
| - |
| |
Decreases related to settlement with taxing authority |
| - |
| |
Balance at March 31, 2015 |
| $ | 935 |
|
Gross Unrecognized Tax | ||||
Balance at December 31, 2014 | $ | 935 | ||
Additions for tax positions related to the current year | - | |||
Additions for tax positions related to the prior year | - | |||
Decreases related to settlement with taxing authority | - | |||
Balance at June 30, 2015 | $ | 935 |
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 March 31,June 30, 2015, the Company had accrued approximately $0.4$0.5 million in interest and penalties related to unrecognized tax benefits. If the Company were to prevail on all uncertain tax positions, the resultant impact on the Company’s effective tax rate would not be significant. It is expected that the change in the amount of unrecognized tax benefits within the next 12 months will not be significant.
The Company is subject to U.S. federal income tax as well as to income tax in multiple state and foreign jurisdictions.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
On March 8, 2013, the Internal Revenue Service (“IRS”) began its examination of the Company’s U.S. federal income tax returns for the years ended December 31, 2010 and 2011. The examination was completed in January 2015 with no material adjustments. The Company is also in various stages of examination with certain states and certain foreign jurisdictions. The 2012 and 2013 U.S. federal income tax returns are subject to IRS examination. State income tax returns are subject to examination for the 2010 through 2013 tax years.
16.EARNINGS PER SHARE
A reconciliation of the weighted-average shares used in the basic and diluted earnings per common share computations is presented below:
|
| Three-Months Ended |
| ||
|
| March 31, |
| ||
|
| 2015 |
| 2014 |
|
Weighted-average shares outstanding: |
|
|
|
|
|
Basic |
| 169,871 |
| 166,913 |
|
Dilutive securities |
| 3,907 |
| 6,828 |
|
Diluted |
| 173,778 |
| 173,741 |
|
For the three-months ended March 31, 2015 and 2014, options and awards outstanding totaling 0.4 million shares and 0.6 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.
17.SEGMENT INFORMATION
The Company has two operating and reportable segments, namely Direct Store Delivery (“DSD”), whose principal products comprise energy drinks, and Warehouse (“Warehouse”), whose principal products comprise juice-based and soda beverages. The DSD segment develops, markets and sells products primarily through an exclusive distributor network, whereas the Warehouse segment develops, markets and sells products primarily direct to retailers. Corporate and unallocated amounts that do not relate to DSD or Warehouse segments have been allocated to “Corporate & Unallocated.” No asset information has been provided for the Company’s reportable segments as management does not measure or allocate assets on a segment basis. Following the consummation of the TCCC Transaction, the Company anticipates that it will have two operating and reporting segments: Finished Products, the principal products of which will likely include the Company’s Monster Energy® drink products that currently make up the majority of the DSD segment, and Concentrate, the principal products of which will likely include the various energy drink brands transferred to the Company from TCCC.
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 DSD and Warehouse segments and other financial information related thereto are as follows:
|
| Three-Months Ended March 31, 2015 |
| ||||||||||
|
| DSD |
| Warehouse |
| Corporate and |
| Total |
| ||||
Net sales |
| $ | 605,811 | (1) | $ | 20,980 |
| $ | - |
| $ | 626,791 | (1) |
Contribution margin* |
| 57,660 | (2) | (40) |
| - |
| 57,620 | (2) | ||||
Corporate and unallocated expenses |
| - |
| - |
| (49,991) |
| (49,991) |
| ||||
Operating income |
|
|
|
|
|
|
| 7,629 | (1), (2) | ||||
Interest and other income, net |
| 42 |
| - |
| 1,191 |
| 1,233 |
| ||||
Income before provision for income taxes |
|
|
|
|
|
|
| 8,862 | (1), (2) | ||||
Depreciation and amortization |
| (5,119) |
| (75) |
| (1,276) |
| (6,470) |
| ||||
|
|
|
| ||||||||||
|
| Three-Months Ended March 31, 2014 |
| ||||||||||
|
| DSD |
| Warehouse |
| Corporate and |
| Total |
| ||||
Net sales |
| $ | 514,355 | (1) | $ | 21,774 |
| $ | - |
| $ | 536,129 | (1) |
Contribution margin* |
| 186,468 | (2) | 296 |
| - |
| 186,764 | (2) | ||||
Corporate and unallocated expenses |
| - |
| - |
| (37,901) |
| (37,901) |
| ||||
Operating income |
|
|
|
|
|
|
| 148,863 | (1), (2) | ||||
Other income (expense) |
| 26 |
| - |
| 128 |
| 154 |
| ||||
Income before provision for income taxes |
|
|
|
|
|
|
| 149,017 | (1), (2) | ||||
Depreciation and amortization |
| (4,944) |
| (81) |
| (1,428) |
| (6,453) |
|
(1) Includes $43.3 million and $3.7 million for the three-months ended March 31, 2015 and 2014, respectively, related to the recognition of deferred revenue. Included in the $43.3 million recognition of deferred revenue for the three-months ended March 31, 2015, is $39.8 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors who were sent notices of termination during the first quarter of 2015.
(2) Includes $206.0 million and $0.01 million for the three-months ended March 31, 2015 and 2014, respectively, related to distributor termination costs.
*Contribution margin is defined as gross profit less certain operating expenses deemed by management to be directly attributable to the respective reportable segment. Contribution margin is used by management as a key indicator of reportable segment profitability.
Revenue is derived from sales to external customers. Operating expenses that pertain to each segment are allocated to the appropriate segment.
Corporate and unallocated expenses were $50.0 million for the three-months ended March 31, 2015 and included $28.5 million of payroll costs, of which $6.4 million was attributable to stock-based compensation expense (see Note 14, “Stock-Based Compensation”), $14.5 million of professional service expenses, including accounting and legal costs and $7.0 million of other operating expenses. Corporate and unallocated expenses were $37.9 million for the three-months ended March 31, 2014 and included $21.1 million of payroll costs, of which $7.0 million was attributable to stock-based compensation expense (see Note 14, “Stock-Based Compensation”), $10.1 million attributable to professional service expenses, including accounting and legal costs, and $6.7 million attributable to other operating expenses.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
The Company is in various stages of examination with certain states and certain foreign jurisdictions. The 2012 and 2013 U.S. federal income tax returns are subject to examination by the Internal Revenue Service. State income tax returns are subject to examination for the 2010 through 2013 tax years.
17.EARNINGS PER SHARE
A reconciliation of the weighted-average shares used in the basic and diluted earnings per common share computations is presented below:
|
| Three-Months Ended |
| Six-Months Ended | ||||
|
| June 30, |
| June 30, | ||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 |
Weighted-average shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
| 176,985 |
| 167,098 |
| 173,447 |
| 167,006 |
Dilutive securities |
| 4,432 |
| 6,866 |
| 4,551 |
| 6,863 |
Diluted |
| 181,417 |
| 173,964 |
| 177,998 |
| 173,869 |
For the three-months ended June 30, 2015 and 2014, options and awards outstanding totaling 1.1 million shares and 1.2 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive. For the six-months ended June 30, 2015 and 2014, options and awards outstanding totaling 0.8 million shares and 0.9 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.
18.SEGMENT INFORMATION
In the second quarter of 2015, as a result of the acquisitions and divestitures in connection with the TCCC Transaction, the Company revised its reportable segments to reflect managements’ current view of the business and to align its external financial reporting with its new operating and internal financial reporting model. Historical segment information has been revised to reflect the effect of this change.
The Company has three operating and reportable segments, (i) Finished Products, which is comprised of the Company’s Monster Energy® drink products (previously comprising the majority of the former Direct Store Delivery segment) (“Finished Products”), (ii) Concentrate, the principal products of which include the various energy drink brands acquired from TCCC as a result of the TCCC Transaction (“Concentrate”) and (iii) Other, the principal products of which include the brands disposed of as a result of the TCCC Transaction (previously comprising the majority of the former Warehouse segment and the Peace Tea® brand).
The Company’s Finished Product segment generates net operating revenues by selling finished energy drinks to full service beverage distributors, retail grocery and specialty chains, wholesalers, club stores, drug chains, mass merchandisers, convenience chains, health food distributors, food service customers and the military.
The Company’s Concentrate segment generates net operating revenues by selling “concentrates” and/or “beverage bases” to authorized bottling and canning operations. Such bottlers generally combine the concentrates and/or beverage bases with sweeteners and water to produce finished beverages. The finished energy drinks are packaged in authorized containers bearing the Company’s respective trademarks, such as cans and bottles, and are then sold to retailers directly or, in some cases, through wholesalers or other bottlers.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
Generally, the Finished Products segment generates higher net operating revenues but lower gross profit margins than the Concentrate segment.
Corporate and unallocated amounts that do not relate to a reportable segment have been allocated to “Corporate & Unallocated.” No asset information, other than goodwill and other intangible assets, has been provided for in the Company’s reportable segments as management does not measure or allocate such assets on a segment basis.
The net revenues derived from the Company’s reportable segments and other financial information related thereto for the three- and six-months ended June 30, 2015 and 2014 are as follows:
|
| Three-Months Ended |
| Six-Months Ended | |||||||||
|
| June 30, |
| June 30, | |||||||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 | |||||
Net sales: |
|
|
|
|
|
|
|
| |||||
Finished Products(1) |
| $ | 651,228 |
| $ | 643,404 |
| $ | 1,246,710 |
| $ | 1,145,345 | |
Concentrate |
| 12,978 |
| - |
| 12,978 |
| - | |||||
Other |
| 29,516 |
| 43,795 |
| 60,824 |
| 77,984 | |||||
Corporate and unallocated |
| - |
| - |
| - |
| - | |||||
|
| $ | 693,722 |
| $ | 687,199 |
| $ | 1,320,512 |
| $ | 1,223,329 | |
|
|
|
|
| |||||||||
|
| Three-Months Ended |
| Six-Months Ended | |||||||||
|
| June 30, |
| June 30, | |||||||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 | |||||
Operating Income: |
|
|
|
|
|
|
|
| |||||
Finished Products(1) (2) |
| $ | 251,551 |
| $ | 254,414 |
| $ | 307,172 |
| $ | 439,317 | |
Concentrate |
| 9,084 |
| - |
| 9,084 |
| - | |||||
Other(3) |
| 163,661 |
| 3,053 |
| 165,660 |
| 4,914 | |||||
Corporate and unallocated |
| (58,157) |
| (41,654) |
| (108,149) |
| (79,554) | |||||
|
| $ | 366,139 |
| $ | 215,813 |
| $ | 373,767 |
| $ | 364,677 | |
|
|
|
|
| |||||||||
|
| Three-Months Ended |
| Six-Months Ended | |||||||||
|
| June 30, |
| June 30, | |||||||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 | |||||
Income before tax: |
|
|
|
|
|
|
|
| |||||
Finished Products(1) (2) |
| $ | 251,740 |
| $ | 254,686 |
| $ | 307,435 |
| $ | 439,616 | |
Concentrate |
| 9,084 |
| - |
| 9,084 |
| - | |||||
Other(3) |
| 163,661 |
| 3,053 |
| 165,660 |
| 4,914 | |||||
Corporate and unallocated |
| (59,361) |
| (41,748) |
| (108,194) |
| (79,521) | |||||
|
| $ | 365,124 |
| $ | 215,991 |
| $ | 373,985 |
| $ | 365,009 | |
(1)Includes $3.2 million and $3.8 million for the three-months ended June 30, 2015 and 2014, respectively, related to the recognition of deferred revenue. Includes $46.5 million and $7.5 million for the six-months ended June 30, 2015 and 2014, respectively, related to the recognition of deferred revenue.
(2)Includes $12.2 million and $0.5 million for the three-months ended June 30, 2015 and 2014, respectively, related to distributor termination costs. Includes $218.2 million and $0.5 million for the six-months ended June 30, 2015 and 2014, respectively, related to distributor termination costs.
(3)Includes $161.5 million gain on the sale of Monster Non-Energy for the three- and six-months ended June 30, 2015.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
|
| Three-Months Ended |
| Six-Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 | ||||
Depreciation and amortization |
|
|
|
|
|
|
|
| ||||
Finished Products |
| $ | 5,093 |
| $ | 4,971 |
| $ | 10,148 |
| $ | 9,870 |
Concentrate |
| 345 |
| - |
| 345 |
| - | ||||
Other |
| 92 |
| 129 |
| 231 |
| 256 | ||||
Corporate and unallocated |
| 1,250 |
| 1,445 |
| 2,525 |
| 2,869 | ||||
|
| $ | 6,780 |
| $ | 6,545 |
| $ | 13,249 |
| $ | 12,995 |
|
| June 30, |
| December 31, |
| ||
|
| 2015 |
| 2014 |
| ||
Goodwill and other intangible assets: |
|
|
|
|
| ||
Finished Products |
| $ | 839,588 |
| $ | 50,748 |
|
Concentrate |
| 876,355 |
| - |
| ||
Other |
| - |
| 18,079 |
| ||
Corporate and unallocated |
| - |
| - |
| ||
|
| $ | 1,715,943 |
| $ | 68,827 |
|
Corporate and unallocated expenses for the three-months ended June 30, 2015 include $28.3 million of payroll costs, of which $8.5 million was attributable to stock-based compensation expense (see Note 15, “Stock-Based Compensation”), as well as $21.8 million attributable to professional service expenses, including accounting and legal costs, and $8.1 million of other operating expenses. Corporate and unallocated expenses for the three-months ended June 30, 2014 include $21.6 million of payroll costs, of which $8.1 million was attributable to stock-based compensation expense (see Note 15, “Stock-Based Compensation”), as well as $15.3 million attributable to professional service expenses, including accounting and legal costs, and $4.8 million attributable to other operating expenses.
Corporate and unallocated expenses for the six-months ended June 30, 2015 include $56.9 million of payroll costs, of which $14.8 million was attributable to stock-based compensation expense (see Note 15, “Stock-Based Compensation”), as well as $36.3 million attributable to professional service expenses, including accounting and legal costs, and $14.9 million attributable to other operating expenses. Corporate and unallocated expenses for the six-months ended June 30, 2014 include $42.6 million of payroll costs, of which $15.1 million was attributable to stock-based compensation expense (see Note 15, “Stock-Based Compensation”), as well as $25.4 million attributable to professional service expenses, including accounting and legal costs, and $11.6 million attributable to other operating expenses.
Coca-Cola Refreshments USA Inc. (“CCR”), a customer of the DSD segment, accounted for approximately 35%45% and 31%28% of the Company’s net sales for the three-months ended March 31,June 30, 2015 and 2014, respectively. CCR accounted for approximately 40% and 29% of the Company’s net sales for the six-months ended June 30, 2015 and 2014, respectively.
Net sales to customers outside the United States amounted to $113.0$151.3 million and $115.8$148.4 million for the three-months ended March 31,June 30, 2015 and 2014, respectively. Net sales to customers outside the United States amounted to $264.3 million and $264.1 million for the six-months ended June 30, 2015 and 2014, respectively.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company’s net sales by product line were as follows:(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
|
| Three-Months Ended | ||||
|
| March 31, | ||||
Product Line |
| 2015 |
| 2014 | ||
Energy drinks |
| $ | 552,729 |
| $ | 499,013 |
Non-carbonated (primarily juice based beverages and Peace Tea® iced teas) |
| 24,513 |
| 26,446 | ||
Carbonated (primarily soda beverages) |
| 6,202 |
| 7,014 | ||
Other |
| 43,347 |
| 3,656 | ||
|
| $ | 626,791 |
| $ | 536,129 |
18.19. RELATED PARTY TRANSACTIONS
As a result of the TCCC Transaction, TCCC controls more than 10% of the voting interests of the Company. TCCC, through certain affiliated companies (collectively, the “TCCC Companies”) purchases and distributes certain of the Company’s products both domestically and in certain international territories. The Company also pays TCCC a sales commission on certain sales to third party distributors within the TCCC bottling network. Net sales to the TCCC Companies for the three-months ended June 30, 2015 and 2014 were $310.8 million and $192.7 million, respectively. Net Sales to the TCCC Companies for the six-months ended June 30, 2015 and 2014 were $529.8 million and $358.7 million respectively. Commission expenses for the three-months ended June 30, 2015 and 2014 were $1.8 million and $0.3 million, respectively. Commission expenses for the six-months ended June 30, 2015 and 2014 were $1.8 million and $0.9 million, respectively. Accounts receivable, accounts payable and accrued promotional allowances related to the TCCC Companies are as follows at:
|
| June 30, |
| December 31, |
| ||
|
|
|
|
|
| ||
Accounts receivable, net |
| $ | 168,497 |
| $ | 79,404 |
|
Accounts payable |
| $ | 18,264 |
| $ | 13,203 |
|
Accrued promotional allowances |
| $ | 38,569 |
| $ | 21,160 |
|
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 March 31,June 30, 2015 and 2014 were $0.9$0.3 million and $0.07$0.2 million, respectively. Expenses incurred with such company in connection with promotional materials purchased during the six-months ended June 30, 2015 and 2014 were $1.2 million and $0.3 million, respectively.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Business
Monster Beverage 1990 Corporation (formerly Monster Beverage Corporation) (“Old Monster”) was incorporated in Delaware on April 25, 1990. As a result of the TCCC Transaction (as defined and described below), Old Monster effected a holding company reorganization on June 12, 2015, pursuant to which it became a wholly owned subsidiary of New Laser Corporation, which then changed its name to “Monster Beverage Corporation”.
Our principal place of business is located at 1 Monster Way, Corona, California 92879 and our telephone number is (951) 739-6200. When this report uses the words “the Company”, “NewCo”, “Hansen Natural Corporation” (the Company’s former name), “we”, “us”, and “our”, these words refer to Monster Beverage Corporation and its subsidiaries, unless the context otherwise requires. We are a holding company and conduct no operating business except through our consolidated subsidiaries.
Acquisitions and Divestitures
On August 14, 2014,June 12, 2015, Old Monster, now a wholly owned subsidiary of the Company, andcompleted the transactions contemplated by the definitive agreements entered into with The Coca-Cola Company (“TCCC”) entered into definitive agreements contemplatingon August 14, 2014, which provided for a long-term strategic relationship in the global energy drink category (the “TCCC Transaction”). In
Also, on June 12, 2015, Old Monster effected a holding company reorganization in connection with the TCCC Transaction the Company, New Laser Corporation, a wholly owned subsidiary of the Company (“NewCo”),by merging New Laser Merger Corp., a wholly owned subsidiary of NewCo (“Merger Sub”), TCCC and European Refreshments, an indirect wholly owned subsidiary of TCCC, entered into a transaction agreement, and the Company TCCC and NewCo entered into an asset transfer agreement. Pursuant to the agreements, the Company will reorganize into a new holding company by merging Merger Sub into the Company,Old Monster, with the CompanyOld Monster surviving as a wholly owned subsidiary of NewCo. In the merger, each outstanding share ofCompany (the “Holding Company Reorganization”), and the Company’s common stock will be converted into one share of NewCo’s common stock.Company changed its name from New Laser Corporation to “Monster Beverage Corporation.”
SubjectIn the Holding Company Reorganization, each Old Monster common share, par value $0.005 per share, outstanding immediately prior to the terms and conditionsconsummation of the agreements, uponHolding Company Reorganization (other than any Old Monster common shares owned by Old Monster immediately prior to the closing of the TCCC Transaction, which were cancelled) was converted automatically into the right to receive one Company common share, par value $0.005 per share. In addition, upon consummation of the Holding Company Reorganization:
· each unexercised and unexpired stock option then outstanding under any equity compensation plan of Old Monster, whether or not then exercisable, ceased to represent a right to acquire Old Monster common shares and was converted automatically into a right to acquire the same number of Company common shares, on the same terms and conditions as were applicable under such Old Monster stock option; and
·each share of restricted stock and each restricted stock unit of Old Monster granted under all outstanding equity compensation plans ceased to represent or relate to Old Monster common shares and was converted automatically to represent or relate to Company common shares, on the same terms and conditions as were applicable to such Old Monster restricted stock and restricted stock units (including the vesting or other lapse restrictions (without acceleration thereof by virtue of the Holding Company Reorganization and the TCCC Transaction)).
Promptly following the effective time of the Holding Company Reorganization, Old Monster assigned to the Company all obligations of Old Monster under Old Monster’s equity compensation plans and each stock option agreement, restricted stock award agreement, restricted stock unit award agreement and any similar agreement entered into pursuant to such equity compensation plans. In addition, all obligations of Old Monster under any employment agreements and indemnification agreements were assigned to the Company.
Immediately after the effective time of the Holding Company Reorganization, (1) the Company issued to TCCC will acquire34,040,534 newly issued NewCoCompany common shares representing approximately 16.7% of the total number of outstanding NewCoCompany common shares (giving(after giving effect to such issuance) (the “New Issuance”) and TCCC will be entitled to appointappointed two individuals (reduced to one in 36 months or if TCCC’s equity interest in NewCo exceeds 20%) to NewCo’sthe Company’s Board of Directors, for a specified period, (2) TCCC will transfertransferred all of its rights in and to its globalTCCC’s worldwide energy drink business (including the(“KO Energy”) including NOS®, Full Throttle®, Burn®, Mother®, Play® and, Power Play®, Relentless®, Nalu® and Relentless® brands)other brands (the “Strategic Brands”) to NewCo, and the Company, will transfer(3) Old Monster transferred all of its rights in and to its non-energy drink business (including the Hansen’s® Natural Soda, Peace Tea®, Hubert’s® Lemonade and Hansen’s® Juice Product brands)(“Monster Non-Energy”) to TCCC (3)(such transfer, together with the transfer of KO Energy, the “Asset Transfers”), (4) the Company and TCCC will amendamended the distribution coordination agreements currentlypreviously existing between them to govern the transition of third parties’ rights to distribute the Company’s energy products in most territories in the U.S. to members of TCCC’s distribution network, which consists of owned or controlled bottlers/distributors and independent bottling/distribution partners, and (4)(5) TCCC orand one of its subsidiaries will make amade an aggregate net cash payment to the Company of $2.15 billion, of which up to $625.0$125.0 million of which will beis currently held in escrow as described below (the “Escrow Agreement”), subject to release upon the achievement of milestones relating to the transfertransition of distribution rights to TCCC’s distribution network.
Under the terms of the Escrow Agreement and the transition payment agreement expected to be entered into in connection therewith, if the distribution rights in the U.S. that are transitioned to TCCC’s distribution network represent case sales in excess of the following percentages of a target case sale amount agreed to by the parties, amounts in the escrow fund in excess of the applicable amounts below will be released to the Company:
Percentage Transitioned |
| Escrow Release |
40% |
| Amounts in excess of $375 million |
50% |
| Amounts in excess of $312.5 million |
60% |
| Amounts in excess of $250 million |
70% |
| Amounts in excess of $187.5 million |
80% |
| Amounts in excess of $125 million |
90% |
| Amounts in excess of $62.5 million |
95% |
| All remaining amounts |
On the one-year anniversary of the closing of the TCCC Transaction, the then-remaining escrow amount, less an amount sufficient to cover any unresolved claims, will be released to TCCC. Any severance or other release amount described above that becomes payable following the one-year anniversary will be paid directly from TCCC to the Company.
TCCC is contractually obligated to authorize payment to the Company of the funds in escrow upon achievement of the milestones referred to above. In February 2015, in accordance with its existing agreements with the applicable third-party distributors, the Company sent notices of termination to certain affected third-party distributors in the U.S., providing for the termination of their respective distribution agreements, to be effective at various dates beginning in March 2015. As of April 6,August 10, 2015, distribution rights in the U.S. representing approximately 84%89% of the target case sales have been transitioned to TCCC’s distribution network. In addition, the Company has sent notices of termination representing an additional 5% of the affected third-party distributors, and the associated distribution rights for those territories will be transitioned to TCCC’s distribution network effective as of May 11, 2015. As a result, it is anticipated that $125 million will beis currently held in escrow at the closing, with the remaining $500 million to be paid to the Company at closing.escrow. The Company expects to commence steps to transition sufficient additional distribution rights, following the closing of the Transactions, which will, in due course, result in the release of all remaining amounts held in escrow. Therefore, the Company believes that achievement of the milestones is probable.
The closing of the transaction is subject to customary closing conditions and is now expected to close in the second quarter of 2015.
In accordance with ASC No. 420 “Exit or Disposal Cost Obligations”, the Company expenses distributor termination costs in the period in which the written notification of termination occurs. As a result, the Company incurred termination amounts of $206.0$12.2 million and $218.2 million for the three-monthsthree- and six-months ended March 31,June 30, 2015 related to the distribution rights transferred to TCCC’s distribution network. Such termination amounts have been expensed in full and are included in operating expenses for the three-monthsthree- and six-months ended March 31,June 30, 2015. In addition, the Company recognized as income $39.8 million related to accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors who were sent notices of termination during the first quarter of 2015.
The following table summarizes the selected items discussed above for the three-monthsthree- and six-months ended March 31,June 30, 2015:
Income Statement Items (in thousands):
Included in Net Sales: |
|
|
| |
Accelerated recognition of deferred revenue |
| $ | 39,761 |
|
|
|
|
| |
Included in Operating Expenses: |
|
|
| |
Distributor termination costs |
| $ | 205,980 |
|
|
|
|
| |
Net Impact on Operating Income |
| $ | (166,219 | ) |
Income Statement Items (in thousands): |
| Three-Months |
| Six-Months | ||
|
|
|
|
| ||
Included in Net Sales: |
|
|
|
| ||
Accelerated recognition of deferred revenue |
| $ | - |
| $ | 39,761 |
|
|
|
|
| ||
Included in Operating Expenses: |
|
|
|
| ||
Distributor termination costs |
| $ | 12,207 |
| $ | 218,187 |
TCCC Transaction expenses |
| $ | 11,536 |
| $ | 15,134 |
|
|
|
|
| ||
Gain on sale of Monster Non-Energy |
| $ | 161,470 |
| $ | 161,470 |
|
|
|
|
| ||
Net Impact on Operating Income |
| $ | 137,727 |
| $ | (32,090) |
Overview
We develop, market, sell and distribute “alternative” beverage category beverages primarily under the following brand names:
· Monster Energy® | · | |
· Monster Rehab® | · | |
· Monster Energy Extra Strength Nitrous Technology® | · | |
· Java Monster® | · | |
· Muscle Monster® | · | |
· Punch Monster® | · | |
· Juice Monster® | · | |
· M3® | ·Relentless® | |
·Übermonster® | ·Samurai® | |
·BU® | ·BPM® | |
·Gladiator® | ·Ultra® |
Our Monster Energy® drinks, which represented 88.1%93.9% and 92.9%93.6% of our net sales for the three-months ended March 31,June 30, 2015 and 2014, respectively, include the following:
· Monster Energy® |
| |
· Lo-Carb Monster Energy® |
| |
· Monster Assault® |
| |
· Juice |
| |
· Juice |
| |
· Monster Energy® Absolutely Zero |
| |
· Monster Energy® Import |
| |
· Punch Monster® Baller’s Blend (formerly Dub Edition) | ||
· Punch Monster® Mad Dog (formerly Dub Edition) |
| |
· Monster Rehab® Tea + Lemonade + Energy | ||
· Monster Rehab® Rojo Tea + Energy |
| |
· Monster Rehab® Green Tea + Energy |
| |
· Monster Rehab® Tea + Orangeade + Energy |
| |
· Monster Rehab® Tea + Pink Lemonade + Energy | ·Java Monster® Kona Blend | ·Java Monster® Loca Moca® ·Java Monster® Mean Bean® ·Java Monster® Vanilla Light ·Java Monster® Irish Blend® ·Java Monster® Cappuccino ·Monster Energy Extra Strength Nitrous Technology® Super Dry™ ·Monster Energy Extra Strength Nitrous Technology® Anti-Gravity® ·Monster Cuba-Lima® ·Monster Energy® Zero Ultra ·Monster Energy® Ultra Blue™ · Monster Energy® Ultra Red™ |
· Monster Rehab® Peach Tea + Energy | ·Muscle Monster® Vanilla ·Muscle Monster® Chocolate ·Muscle Monster® Coffee ·Muscle Monster® Strawberry ·Muscle Monster® Peanut Butter Cup ·Monster Energy® Valentino Rossi | · Monster Energy® Ultra Black™ |
| · Monster Energy® Ultra Sunrise® | |
| · Monster Energy® Ultra Citron™ | |
| · Monster Energy® | |
| · Übermonster® Energy Brew™ | |
| · M3® Monster Energy® Super Concentrate | |
|
We have twoThe Company has three operating and reportable segments, namely Direct Store Delivery (“DSD”), the principal products of which comprise energy drinks, and Warehouse (“Warehouse”), the principal products of which comprise juice-based and soda beverages. The DSD segment develops, markets and sells products primarily through an exclusive distributor network, whereas the Warehouse segment develops, markets and sells products primarily direct to retailers. Following the consummation of the TCCC Transaction, the Company anticipates that it will have two operating and reporting segments:(i) Finished Products, the principal productswhich is comprised of which will likely include the Company’sour Monster Energy® drink products that currently make up(previously comprising the majority of the DSD segment, andformer Direct Store Delivery segment) (“Finished Products”), (ii) Concentrate, the principal products of which will likely include the variousStrategic Brands of energy drinkdrinks acquired from TCCC (“Concentrate”) and (iii) Other, the principal products of which include the brands transferred todisposed of as a result of the Company from TCCC.
TableTCCC Transaction (previously comprising the majority of Contentsthe former Warehouse segment and the Peace Tea® brand).
During the three-monthssix-months ended March 31,June 30, 2015, we continued to expand our existing product lines and flavors and further developed our markets. In particular, we continued to focus on developing and marketing beverages that fall within the category generally described as the “alternative” beverage category. During the three-monthssix-months ended March 31,June 30, 2015, we introduced the following products:products (in addition to those acquired as part of the TCCC Transaction):
·Monster Energy® Ultra Citron™, a carbonated energy drink which contains zero calories and zero sugar (January 2015).
·Monster Rehab® Peach Tea + Energy (January 2015).
In the normal course of business we discontinue certain products and/or product lines. Those products or product lines discontinued during the three-monthssix-months ended March 31,June 30, 2015 (other than those disposed of as part of the TCCC Transaction), either individually or in aggregate, did not have a material adverse impact on our financial position, results of operations or liquidity.
Our net sales of $626.8$693.7 million for the three-months ended March 31,June 30, 2015 represented record sales for our firstsecond 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 $552.2$651.2 million for the three-months ended March 31, 2015, an increase of $54.2 million, or 59.8%June 30, 2015. Net sales of our overall increase in net salesStrategic Brands acquired as part of the TCCC Transaction were $13.0 million for the three-months ended March 31,June 30, 2015. Net
The impact of the transitions of a substantial majority of our Monster distribution rights in the United States during the first half of 2015; the lower inventory levels maintained by certain bottlers within the TCCC network versus our prior Anheuser-Busch, Inc. (“AB”) distributors, and the uncertainty faced by many of our independent international distributors outside of the TCCC network, given the anticipated implementation of the TCCC Transaction, all negatively affected our net sales forgrowth throughout the three-months ended March 31,June 30, 2015. In addition, net sales during the three-months ended June 30, 2015, included $39.8 million relatedwere also negatively affected by out-of-stocks which occurred in certain geographies due to the accelerated amortization of the deferred revenue balanceslearning curve associated with certain of the Company’s prior distributors, which represented 43.9% of our overall increase in net sales.transitions to the TCCC network.
Changes in foreign currency exchange rates had an unfavorable impact on net sales of approximately 2%3.5% for the three-months ended March 31,June 30, 2015, which was primarily due to a stronger U.S. dollar compared to certain local currencies in which we conduct certain of our international business.
Our DSDFinished Products segment represented 96.7%93.9% and 95.9%93.6% of our consolidated net sales for the three-months ended March 31,June 30, 2015 and 2014, respectively. Our WarehouseConcentrate segment represented 3.3% and 4.1%1.9% of our consolidated net sales for the three-months ended March 31,June 30, 2015. Our Other segment represented 4.2% and 6.4% of our consolidated net sales for the three-months ended June 30, 2015 and 2014, respectively.
Our sales and marketing strategy for all our beverages is to focus our efforts on developing brand awareness through image enhancing programs and product sampling. We use our branded vehicles and other promotional vehicles at events where we offer samples of our products to consumers. We utilize “push-pull” methods to enhance shelf and display space exposure in sales outlets (including racks, coolers and barrel coolers), advertising, in-store promotions and in-store placement of point-of-sale materials to encourage demand from consumers for our products. We also support our brands with prize promotions, price promotions, competitions, endorsements from selected public and sports figures, personality endorsements (including from television and other well-known sports personalities), sampling and sponsorship of selected causes, events, athletes and teams. In-store posters, outdoor posters, print, radio and television advertising (directly and through our sponsorships and endorsements) and coupons may also be used to promote our brands. We are currently evaluating the future strategy for the positioning of the Strategic Brands.
We believe that one of the keys to success in the beverage industry is differentiation, making our brands and products visually distinctive from other beverages on the shelves of retailers. We review our products and packaging on an ongoing basis and, where practical, endeavor to make them different, better and unique. The labels and graphics for many of our products are redesigned from time to time to maximize their visibility and identification, wherever they may be placed in stores, which we will continue to reevaluate from time to time.
All of our beverage products are manufactured by various third party bottlers and co-packers situated throughout the United States and abroad, under separate arrangements with each party.
Our growth strategy includes expanding our international business. Gross sales to customers outside the United States amounted to $141.0$187.2 million and $144.3$180.2 million for the three-months ended March 31,June 30, 2015 and 2014, respectively. Such sales were approximately 21%24% and 23% of gross sales for the three-months ended March 31,June 30, 2015 and 2014, respectively. Changes in foreign currency exchange rates had an unfavorable impact on gross sales to customers outside the United Sates of approximately 11%16% for the three-months ended March 31,June 30, 2015, which was primarily due to a stronger U.S. dollar compared to certain local currencies in which we conduct certain of our international business.
Our customers are primarily full service beverage bottlers/distributors, retail grocery and specialty chains, wholesalers, club stores, drug chains, mass merchandisers, convenience chains, health food distributors, food service customers and the military. Gross sales to our various customer types for the three-monthsthree- and six-months ended March 31,June 30, 2015 and 2014 are reflected below. Such information includes sales made by us directly to the customer types concerned, which include our full service beverage distributors in the United States. Such full service beverage 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 distributors without reference to such distributors’ sales to their own customers.
|
| Three-Months Ended |
| Six-Months Ended | ||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 |
Full service bottlers/distributors |
| 63% |
| 62% |
| 64% |
| 62% |
Club stores, drug chains & mass merchandisers |
| 10% |
| 9% |
| 9% |
| 9% |
Outside the U.S. |
| 24% |
| 23% |
| 23% |
| 23% |
Retail grocery, specialty chains and wholesalers |
| 3% |
| 4% |
| 3% |
| 4% |
Other |
| 0% |
| 2% |
| 1% |
| 2% |
|
| Three-Months Ended |
| ||
|
| March 31, |
| ||
|
| 2015 |
| 2014 |
|
Full service distributors |
| 65% |
| 62% |
|
Club stores, drug chains & mass merchandisers |
| 9% |
| 9% |
|
Outside the U.S. |
| 21% |
| 23% |
|
Retail grocery, specialty chains and wholesalers |
| 3% |
| 4% |
|
Other |
| 2% |
| 2% |
|
Our customers include Coca-Cola Refreshments USA Inc. (“CCR”), Coca-Cola Enterprises, Coca-Cola Refreshments Canada, Ltd. (formerly(formerly known as Coca-Cola Bottling Company), CCBCC Operations, LLC, United Bottling Contracts Company, LLC, certain bottlers of the Coca-Cola Hellenic Bottling Company, Swire Coca-Cola, USA and certain other TCCC independent bottlers, Anheuser-Busch, Inc. (“AB”),AB, select independent AB distributors, Asahi, Kalil Bottling Group, Wal-Mart, Inc. (including Sam’s Club) and Costco. In February 2015, in accordance with its then existing agreements with the applicable AB Distributors, the CompanyOld Monster sent notices of termination to the majority of the AB Distributors in the U.S. for the termination of their respective distribution agreements, to be effective at various dates beginning in March 2015.agreements. The associated distribution rights relating to such terminated distribution agreements have been or will be transitioned to TCCC’s network of owned or controlled bottlers/distributors and independent bottling and distribution partners as of the effective date of termination of the affected AB Distributors’ rights in the applicable territories. As of August 10, 2015, distribution rights in the U.S. representing approximately 89% of the target case sales have been transitioned to TCCC’s distribution network. A decision by any large customer to decrease amounts purchased from us or to cease carrying our products could have a material negative effect on our financial condition and consolidated results of operations. CCR accounted for approximately 35%45% and 31%28% of our net sales for the three-months ended March 31,June 30, 2015 and 2014, respectively. CCR accounted for approximately 40% and 29% of our net sales for the six-months ended June 30, 2015 and 2014, respectively.
Results of Operations
The following table sets forth key statistics for the three-monthsthree- and six-months ended March 31,June 30, 2015 and 2014, respectively.
|
| Three-Months Ended |
| Percentage |
| ||||||||||||||||||||||
(In thousands, except per share amounts) |
| March 31, |
| Change |
|
| Three-Months Ended |
| Percentage |
| Six-Months Ended |
| Percentage |
| |||||||||||||
|
| 2015 |
| 2014 |
| 15 vs. 14 |
|
| 2015 |
| 2014 |
| 15 vs. 14 |
| 2015 |
| 2014 |
| 15 vs. 14 |
| |||||||
Net sales¹ |
| $ | 626,791 |
| $ | 536,129 |
| 16.9% |
|
| $ | 693,722 |
| $ | 687,199 |
| 0.9% |
| $ | 1,320,512 |
| $ | 1,223,329 |
| 7.9% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Cost of sales |
| 257,834 |
| 249,311 |
| 3.4% |
|
| 299,214 |
| 307,911 |
| (2.8%) |
| 557,048 |
| 557,222 |
| (0.0%) |
| |||||||
Gross profit*¹ |
| 368,957 |
| 286,818 |
| 28.6% |
|
| 394,508 |
| 379,288 |
| 4.0% |
| 763,464 |
| 666,107 |
| 14.6% |
| |||||||
Gross profit as a percentage of net sales¹ |
| 58.9% |
| 53.5% |
|
|
|
| 56.9% |
| 55.2% |
|
|
| 57.8% |
| 54.5% |
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Operating expenses² |
| 361,328 |
| 137,955 |
| 161.9% |
|
| 189,839 |
| 163,475 |
| 16.1% |
| 551,167 |
| 301,430 |
| 82.9% |
| |||||||
Operating expenses as a percentage of net sales |
| 57.6% |
| 25.7% |
|
|
|
| 27.4% |
| 23.8% |
|
|
| 41.7% |
| 24.6% |
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Operating income |
| 7,629 |
| 148,863 |
| (94.9%) |
| ||||||||||||||||||||
Gain on sale of Monster Non-Energy |
| 161,470 |
| - |
|
|
| 161,470 |
| - |
|
|
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Operating income¹‚² |
| 366,139 |
| 215,813 |
| 69.7% |
| 373,767 |
| 364,677 |
| 2.5% |
| ||||||||||||||
Operating income as a percentage of net sales |
| 1.2% |
| 27.8% |
|
|
|
| 52.8% |
| 31.4% |
|
|
| 28.3% |
| 29.8% |
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Interest and other income, net |
| 1,233 |
| 154 |
| 700.6% |
| ||||||||||||||||||||
Interest and other (expense) income, net |
| (1,015) |
| 178 |
| (670.2%) |
| 218 |
| 332 |
| (34.3%) |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Income before provision for income taxes |
| 8,862 |
| 149,017 |
| (94.1%) |
| ||||||||||||||||||||
Income before provision for income taxes¹‚² |
| 365,124 |
| 215,991 |
| 69.0% |
| 373,985 |
| 365,009 |
| 2.5% |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Provision for income taxes |
| 4,448 |
| 53,767 |
| (91.7%) |
|
| 136,120 |
| 74,988 |
| 81.5% |
| 140,568 |
| 128,755 |
| 9.2% |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Income taxes as a percentage of income before taxes |
| 50.2% |
| 36.1% |
|
|
|
| 37.3% |
| 34.7% |
|
|
| 37.6% |
| 35.3% |
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income |
| $ | 4,414 |
| $ | 95,250 |
| (95.4%) |
| ||||||||||||||||||
Net income¹‚² |
| $ | 229,004 |
| $ | 141,003 |
| 62.4% |
| $ | 233,417 |
| $ | 236,254 |
| (1.2%) |
| ||||||||||
Net income as a percentage of net sales |
| 0.7% |
| 17.8% |
|
|
|
| 33.0% |
| 20.5% |
|
|
| 17.7% |
| 19.3% |
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Basic |
| $0.03 |
| $0.57 |
| (95.4%) |
|
| $ | 1.29 |
| $ | 0.84 |
| 53.3% |
| $ | 1.35 |
| $ | 1.41 |
| (4.8%) |
| |||
Diluted |
| $0.03 |
| $0.55 |
| (95.4%) |
|
| $ | 1.26 |
| $ | 0.81 |
| 55.7% |
| $ | 1.31 |
| $ | 1.36 |
| (3.4%) |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Case sales (in thousands) |
|
|
|
|
|
|
| ||||||||||||||||||||
(in 192-ounce case equivalents) |
| 57,779 |
| 51,926 |
| 11.3% |
| ||||||||||||||||||||
Case sales (in thousands) (in 192-ounce case equivalents) |
| 68,037 |
| 65,587 |
| 3.7% |
| 125,816 |
| 117,514 |
| 7.1% |
|
¹Includes $43.3$3.2 million and $3.7$3.8 million for the three-months ended March 31,June 30, 2015 and 2014, respectively, related to the recognition of deferred revenue. Includes $46.5 million and $7.5 million for the six-months ended June 30, 2015 and 2014, respectively, related to the recognition of deferred revenue. Included in the $43.3$46.5 million recognition of deferred revenue for the three-monthssix-months ended March 31,June 30, 2015, is $39.8 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors who were sent notices of termination during the first quarter of 2015.
²Includes $206.0$12.2 million and $0.01$0.5 million for the three-months ended March 31,June 30, 2015 and 2014, respectively, related to distributor termination costs. Includes $218.2 million and $0.5 million for the six-months ended June 30, 2015 and 2014, respectively, related to distributor termination costs.
*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.
Results of Operations for the Three-Months Ended March 31,June 30, 2015 Compared to the Three-Months Ended March 31,June 30, 2014.
Net Sales. Net sales were $626.8$693.7 million for the three-months ended March 31,June 30, 2015, an increase of approximately $90.7$6.5 million, or 16.9%0.9% higher than net sales of $536.1$687.2 million for the three-months ended March 31,June 30, 2014. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $54.2$7.8 million of the overall increase in net sales. Net sales of our Monster Energy® brand energy drinks increased partially due to increased sales by volume as a result of increased domestic and international consumer demand. Net sales of our Strategic Brands were $13.0 million for the three-months ended June 30, 2015. No other individual product line contributed either a material increase or decrease to net sales for the three-months ended June 30, 2015.
Changes in foreign currency exchange rates had an unfavorable impact on net sales of approximately 3.5% for the three-months ended June 30, 2015, which was primarily due to a stronger U.S. dollar compared to certain local currencies in which we conduct certain of our international business.
Case sales, in 192-ounce case equivalents, were 68.0 million cases for the three-months ended June 30, 2015, an increase of approximately 2.4 million cases or 3.7% higher than case sales of 65.6 million cases for the three-months ended June 30, 2014. The overall average net sales per case decreased to $10.20 for the three-months ended June 30, 2015, which was 2.7% lower than the average net sales per case of $10.48 for the three-months ended June 30, 2014. The lower net sales per case was primarily attributable to sales of concentrates and/or beverage bases in the Concentrate segment, which generally generate lower net operating revenues than those products within the Finished Products segment.
Net sales for the Finished Products segment were $651.2 million for the three-months ended June 30, 2015, an increase of approximately $7.8 million, or 59.8%1.2% higher than net sales of $643.4 million for the three-months ended June 30, 2014.
Net sales for the Concentrate segment were $13.0 million for the three-months ended June 30, 2015 (effectively from June 13 to June 30). There were no net sales for the Concentrate segment for the three-months ended June 30, 2014.
Net sales for the Other segment, the principal products of which include the brands disposed of as a result of the TCCC Transaction (previously comprising the majority of the former Warehouse segment and the Peace Tea brand®), were $29.5 million for the three-months ended June 30, 2015 (effectively from April 1 to June 12), a decrease of approximately $14.3 million, or 32.6% lower than net sales of $43.8 million for the three-months ended June 30, 2014.
Gross Profit. Gross profit was $394.5 million for the three-months ended June 30, 2015, an increase of approximately $15.2 million, or 4.0% higher than the gross profit of $379.3 million for the three-months ended June 30, 2014. Gross profit as a percentage of net sales increased to 56.9% for the three-months ended June 30, 2015 from 55.2% for the three-months ended June 30, 2014. The increase in gross profit dollars was primarily the result of the $13.0 million of net sales for the Concentrate segment as well as the $7.8 million increase in net sales of our Monster Energy® brand energy drinks. The increase in gross profit as a percentage of net sales was primarily attributable to net sales of the Concentrate segment, which generally has higher gross margins than net sales of the Finished Products segment, as well as the decrease in the net sales of the Other segment, which generally has lower gross margins than net sales of the Finished Products segment, changes in product sales mix and lower costs of certain raw materials.
Operating Expenses. Total operating expenses were $189.8 million for the three-months ended June 30, 2015, an increase of approximately $26.4 million, or 16.1% higher than total operating expenses of $163.5 million for the three-months ended June 30, 2014. The increase in operating expenses was primarily due to increased costs of $11.7 million associated with terminating certain existing distributors, increased expenditures of $10.5 million for professional service costs and transaction expenses related to the TCCC Transaction, increased payroll expenses of $8.4 million (of which $4.5 million was related to payroll taxes in connection with the exercise of certain stock options), and increased expenditures of $3.6 million for sponsorships and endorsements.
Contribution Margin. Contribution margin for the Finished Products segment was $251.6 million for the three-months ended June 30, 2015, a decrease of approximately $2.9 million, or 1.1% lower than contribution margin of $254.4 million for the three-months ended June 30, 2014. The decrease in contribution margin for the Finished Products segment was primarily the result of increased expenditures of $11.7 million relating to the costs associated with terminating certain existing distributors. Contribution margin for the Concentrate segment was $9.1 million for the three-months ended June 30, 2015 (effectively from June 13 to June 30). There was no contribution margin for the Concentrate segment for the three-months ended June 30, 2014. Contribution margin for the Other segment (excluding the $161.5 million gain on the sale of the Monster Non-Energy business) was $2.2 million, as compared to $3.1 million for the three-months ended June 30, 2014.
Operating Income. Operating income was $366.1 million for the three-months ended June 30, 2015, an increase of approximately $150.3 million, or 69.7% higher than operating income of $215.8 million for the three-months ended June 30, 2014. Operating income as a percentage of net sales increased to 52.8% for the three-months ended June 30, 2015 from 31.4% for the three-months ended June 30, 2014, primarily due to the $161.5 million gain on the sale of Monster Non-Energy. The increase in operating income in dollars was also primarily due to the gain on the sale of Monster Non-Energy as well as a $15.2 million increase in gross profit. The increase in operating income in dollars was partially offset by an increase of $26.4 million in operating expenses. Operating income was $11.8 million and $12.9 million for the three-months ended June 30, 2015 and 2014, respectively, in relation to our operations in Africa, Asia, Australia, Europe, the Middle East and South America.
Interest and Other (Expense) Income, net. Interest and other (expense) income, net was ($1.0) million for the three-months ended June 30, 2015, as compared to interest and other (expense) income, net of $0.2 million for the three-months ended June 30, 2014. Foreign currency transaction gains (losses) were ($1.7) million and ($0.4) million for the three-months ended June 30, 2015 and 2014, respectively. Interest income was $0.5 million and $0.3 million for the three-months ended June 30, 2015 and 2014, respectively.
Provision for Income Taxes. Provision for income taxes was $136.1 million for the three-months ended June 30, 2015, an increase of $61.1 million or 81.5% higher than the provision for income taxes of $75.0 million for the three-months ended June 30, 2014. The effective combined federal, state and foreign tax rate increased to 37.3% from 34.7% for the three-months ended June 30, 2015 and 2014, respectively. The increase in the effective tax rate was primarily due to the disallowance for tax purposes of certain costs related to the TCCC Transaction as well as the decrease in tax benefits relating to the domestic production deduction. The increase in the effective tax rate was partially offset by the release of the valuation allowances against the deferred tax assets of certain foreign jurisdictions.
Net Income. Net income was $229.0 million for the three-months ended June 30, 2015, an increase of $88.0 million or 62.4% higher than net income of $141.0 million for the three-months ended June 30, 2014. The increase in net income was primarily attributable to the $161.5 million gain on the sale of Monster Non-Energy, partially offset by a $61.1 million increase in income taxes.
Results of Operations for the Six-Months Ended June 30, 2015 Compared to the Six-Months Ended June 30, 2014.
Net Sales. Net sales were $1,320.5 million for the six-months ended June 30, 2015, an increase of approximately $97.2 million, or 7.9% higher than net sales of $1,223.3 million for the six-months ended June
30, 2014. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $101.4 million of the overall increase in net sales. Net sales of our Monster Energy® brand energy drinks increased partially due to increased sales by volume as a result of increased domestic and international consumer demand. Net sales for the three-monthssix-months ended March 31,June 30, 2015 included $39.8 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors, which represented 43.9% of our overall increase in net sales.distributors. No other individual product line contributed either a material increase or decrease to net sales for the three-monthssix-months ended March 31,June 30, 2015.
Changes in foreign currency exchange rates had an unfavorable impact on net sales of approximately 2%2.7% for the three-monthssix-months ended March 31,June 30, 2015, which was primarily due to a stronger U.S. dollar compared to certain local currencies in which we conduct certain of our international business.
Case sales, in 192-ounce case equivalents, were 57.8125.8 million cases for the three-monthssix-months ended March 31,June 30, 2015, an increase of approximately 5.98.3 million cases or 11.3%7.1% higher than case sales of 51.9117.5 million cases for the three-monthssix-months ended March 31,June 30, 2014. The overall average net sales per case increased to $10.85$10.50 for the three-monthssix-months ended March 31,June 30, 2015, which was 5.1%0.8% higher than the average net sales per case of $10.32$10.41 for the three-monthssix-months ended March 31,June 30, 2014. Included in net sales was $39.8 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors who were sent notices of termination during the first quarter of 2015.
Net sales for the DSDFinished Products segment were $605.8$1,246.7 million for the three-monthssix-months ended March 31,June 30, 2015, an increase of approximately $91.5$101.4 million, or 17.8%8.9% higher than net sales of $514.4$1,145.3 million for the three-monthssix-months ended March 31,June 30, 2014. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $54.2 million, or 59.2%, of the overall increase in net sales for the DSD segment. Net sales for the DSD segment of our Monster Energy® brand energy drinks increased partially due to increased sales by volume as a result of increased domestic and international consumer demand. Net sales for the DSD segment for the three-months ended March 31, 2015 included $39.8 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors, which represented 43.5% of our overall increase in net sales for the DSD segment. No other individual product line contributed either a material increase or decrease to net sales for the DSD segment for the three-months ended March 31, 2015.
Net sales for the WarehouseConcentrate segment were $21.0$13.0 million for the three-monthssix-months ended March 31,June 30, 2015 (effectively from June 13 to June 30). There were no net sales for the Concentrate segment for the six-months ended June 30, 2014.
Net sales for the Other segment, the principal products of which include the brands disposed of as a result of the TCCC Transaction (previously comprising the majority of the former Warehouse segment and the Peace tea brand®), were $60.8 million for the six-months ended June 30, 2015, a decrease of approximately $0.8$17.2 million, or 3.7%22.0% lower than net sales of $21.8$78.0 million for the three-monthssix-months ended March 31,June 30, 2014.
Gross Profit. Gross profit was $369.0$763.5 million for the three-monthssix-months ended March 31,June 30, 2015, an increase of approximately $82.1$97.4 million, or 28.6%14.6% higher than the gross profit of $286.8$661.1 million for the three-monthssix-months ended March 31,June 30, 2014. Gross profit as a percentage of net sales increased to 58.9%57.8% for the three-monthssix-months ended March 31,June 30, 2015 from 53.5%54.5% for the three-monthssix-months ended March 31,June 30, 2014. The increase in gross profit dollars was primarily the result of the $54.2$101.4 million increase in net sales of our Monster Energy® brand energy drinks, as well as the $39.8 million accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors.distributors and the $13.0 million of net sales for the Concentrate segment. The increase in gross profit as a percentage of net sales was primarily attributable to the $39.8 million accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors, as well as due to changes in product sales mix and lower costs of certain sweeteners and other raw materials.
Operating Expenses. Total operating expenses were $361.3$551.2 million for the three-monthssix-months ended March 31,June 30, 2015, an increase of approximately $223.4$249.7 million, or 161.9%82.9% higher than total operating expenses of $138.0$301.4 million for the three-monthssix-months ended March 31,June 30, 2014. The increase in operating expenses was primarily due to increased costs of $206.0$217.7 million associated with terminating certain existing distributors. To a lesser extent, the increase in operating expenses was attributable to increased payroll expenses of $8.5$16.9 million (of which $7.2$11.7 million was related to payroll taxes in connection with the exercise of certain stock options), increased expenditures of $3.7 million for premiums, increased expenditures of $3.7 million for sponsorships and endorsements, and expenditures of $3.6$14.1 million for professional service costs and transaction expenses related to the TCCC Transaction.Transaction and increased expenditures of $7.3 million for sponsorships and endorsements.
Contribution Margin. Contribution margin for the DSDFinished Products segment was $57.7$307.2 million for the three-monthssix-months ended March 31,June 30, 2015, a decrease of approximately $128.8$132.1 million, or 69.1%30.1% lower than contribution margin of $186.5$439.3 million for the three-monthssix-months ended March 31,June 30, 2014. The decrease in the contribution margin for the DSDFinished Products segment was primarily the result of the increased expenditures of $206.0$217.7 million relating to the costs associated with terminating certain existing distributors. Contribution margin for the WarehouseConcentrate segment was ($0.04)$9.1 million for the three-monthssix-months ended March 31, 2015, approximately $0.3 million lower thanJune 30, 2015. There was no contribution margin of $0.3for the Concentrate segment for the six-months ended June 30, 2014. Contribution margin for the Other segment was $165.7 million for the three-monthssix-months ended March 31,June 30, 2015 (effectively from Jan 1 to June 12), as compared to $4.9 million for the six-months ended June 30, 2014. The increase in contribution margin for the Other segment was primarily the result of the $161.5 million gain on the sale of Monster Non-Energy.
Operating Income. Operating income was $7.6$373.8 million for the three-monthssix-months ended March 31,June 30, 2015, a decreasean increase of approximately $141.2$9.1 million, or 94.9% lower2.5% higher than operating income of $148.9$364.7 million for the three-monthssix-months ended March 31,June 30, 2014. Operating income as a percentage of net sales decreased to 1.2%28.3% for the three-monthssix-months ended March 31,June 30, 2015 from 27.8%29.8% for the three-monthssix-months ended March 31,June 30, 2014, primarily due to the increase in operating expenses as a percentage of net sales. The decreaseincrease in operating income in dollars was primarily due to an increasethe $161.5 million gain on the sale of $223.4 million in operating expenses, partially offset by an $82.1Monster Non-Energy and the $97.4 million increase in gross profit. The increase in operating income in dollars was offset by increased costs of $217.7 million associated with terminating certain existing distributors as well as the increase in other operating expenses. Operating income was $4.4$16.2 million and $1.7$14.6 million for the three-monthssix-months ended March 31,June 30, 2015 and 2014, respectively, in relation to our operations in Africa, Asia, Australia, Europe, the Middle East and South America.
Interest and Other (Expense) Income, net. Interest and other (expense) income, net was $1.2$0.2 million for the three-monthssix-months ended March 31,June 30, 2015, as compared to interest and other income, net of $0.2$0.3 million for the three-monthssix-months ended March 31,June 30, 2014. Foreign currency transaction gains (losses) were $0.8($0.8) million and ($0.2)0.6) million for the three-monthssix-months ended March 31,June 30, 2015 and 2014, respectively. The decrease in foreign currency losses during the three-months ended March 31, 2015 was primarily related to our foreign currency transactions in Europe. Interest income was $0.5$0.8 million and $0.4$0.6 million for the three-monthssix-months ended March 31,June 30, 2015 and 2014, respectively.
Provision for Income Taxes. Provision for income taxes was $4.4$140.6 million for the three-monthssix-months ended March 31,June 30, 2015, a decreasean increase of $49.3$11.8 million or 91.7% lower9.2% higher than the provision for income taxes of $53.8$128.8 million for the three-monthssix-months ended March 31,June 30, 2014. The effective combined federal, state and foreign tax rate increased to 50.2%37.6% from 36.1%35.3% for the three-monthssix-months ended March 31,June 30, 2015 and 2014, respectively. The increase in the effective tax rate was primarily due to the disallowance for tax purposes of certain costs related to the TCCC Transaction as well as the decrease in tax benefits relating to the domestic production deduction. The increase in the ratio of (i)effective tax rate was partially offset by the net losses in certain foreign subsidiaries that have no related income tax benefit as a resultrelease of the prior establishment of valuation allowances on theiragainst the deferred tax assets to (ii) the overall income before tax.of certain foreign jurisdictions.
Net Income. Net income was $4.4$233.4 million for the three-monthssix-months ended March 31,June 30, 2015, a decrease of $90.8$2.8 million or 95.4%1.2% lower than net income of $95.3$236.3 million for the three-monthssix-months ended March 31,June 30, 2014. The decrease in net income was primarily attributable to the increase in operating expenses of $223.4 million, partially offset by an $82.1 million increase in gross profit.
Non-GAAP Financial Measures
Gross Sales**. Gross sales were $710.2$789.9 million for the three-months ended March 31,June 30, 2015, an increase of approximately $96.5$11.0 million, or 15.7%1.4% higher than gross sales of $613.7$779.0 million for the three-months ended March 31,June 30, 2014. The increase in gross sales of our Monster Energy® brand energy drinks represented approximately $15.3 million of the overall increase in gross sales. Gross sales of our Monster Energy® brand energy drinks increased partially due to increased sales by volume as a result of increased domestic and international consumer demand. Gross sales of our Strategic Brands were $13.0 million for the three-months ended June 30, 2015. Promotional and other allowances, as described in the footnote below, were $96.2 million for the three-months ended June 30, 2015, an increase of $4.4 million, or 4.8% higher than promotional and other allowances of $91.8 million for the three-months ended June 30, 2014. Promotional and other allowances as a percentage of gross sales increased to 12.2% from 11.8% for the three-months ended June 30, 2015 and 2014, respectively.
Changes in foreign currency exchange rates had an unfavorable impact on gross sales of approximately 3.8% for the three-months ended June 30, 2015, which was primarily due to a stronger U.S. dollar compared to certain local currencies in which we conduct certain of our international business.
Gross sales were $1,500.1 million for the six-months ended June 30, 2015, an increase of approximately $107.4 million, or 7.7% higher than gross sales of $1,392.7 million for the six-months ended June 30, 2014. The increase in the gross sales of our Monster Energy® brand energy drinks represented approximately $60.4$75.4 million, or 62.6%70.2%, of the overall increase in gross sales. Gross sales of our Monster Energy® brand energy drinks increased primarily due to increased sales by volume as a result of increased domestic and international consumer demand. Gross sales for the three-monthssix-months ended March 31,June 30, 2015
included $39.8 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors, which represented 41.2%37.1% of our overall increase in gross sales. No other individual product line contributed either a material increase or decrease to gross sales for the three-monthssix-months ended March 31,June 30, 2015. Promotional and other allowances, as described in the footnote below, were $83.4$179.6 million for the three-monthssix-months ended March 31,June 30, 2015, an increase of $5.8$10.3 million, or 7.5%6.1% higher than promotional and other allowances of $77.6$169.4 million for the three-monthssix-months ended March 31,June 30, 2014. Promotional and other allowances as a percentage of gross sales decreased to 11.7%12.0% from 12.6%12.2% for the three-monthssix-months ended March 31,June 30, 2015 and 2014, respectively.
Changes in foreign currency exchange rates had an unfavorable impact on gross sales of approximately 2%3.0% for the three-monthssix-months ended March 31,June 30, 2015, which was primarily due to a stronger U.S. dollar compared to certain local currencies in which we conduct certain of our international business.
**Gross sales is used internally by management as an indicator of and to monitor operating performance, including sales performance of particular products, salesperson performance, product growth or declines and overall Company performance. The use of gross sales allows evaluation of sales performance before the effect of any promotional items, which can mask certain performance issues. We therefore believe that the presentation of gross sales provides a useful measure of our operating performance. Gross sales is not a measure that is recognized under GAAP and should not be considered as an alternative to net sales, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of net sales. Additionally, gross sales may not be comparable to similarly titled measures used by other companies, as gross sales has been defined by our internal reporting practices. In addition, gross sales may not be realized in the form of cash receipts as promotional payments and allowances may be deducted from payments received from certain customers.
The following table reconciles the non-GAAP financial measure of gross sales with the most directly comparable GAAP financial measure of net sales:
|
| Three-Months Ended |
| Percentage |
| |||||||||||||||||||||
(In thousands, except per share amounts) |
| March 31, |
| Change |
|
| Three-Months Ended |
| Percentage |
| Six-Months Ended |
| Percentage |
| ||||||||||||
|
| 2015 |
| 2014 |
| 15 vs. 14 |
|
| 2015 |
| 2014 |
| 15 vs. 14 |
| 2015 |
| 2014 |
| 15 vs. 14 |
| ||||||
Gross sales, net of discounts and returns |
| $ | 710,193 |
| $ | 613,723 |
| 15.7% |
|
| $ | 789,923 |
| $ | 778,956 |
| 1.4% |
| $ | 1,500,115 |
| $ | 1,392,679 |
| 7.7% |
|
Less: Promotional and other allowances*** |
| 83,402 |
| 77,594 |
| 7.5% |
|
| 96,201 |
| 91,757 |
| 4.8% |
| 179,603 |
| 169,350 |
| 6.1% |
| ||||||
Net Sales |
| $ | 626,791 |
| $ | 536,129 |
| 16.9% |
|
| $ | 693,722 |
| $ | 687,199 |
| 0.9% |
| $ | 1,320,512 |
| $ | 1,223,329 |
| 7.9% |
|
***Although the expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the disclosure thereof does not conform with GAAP presentation requirements. Additionally, our definition of promotional and other allowances may not be comparable to similar items presented by other companies. Promotional and other allowances primarily include consideration given to the Company’s distributors or retail customers including, but not limited to the following: (i) discounts granted off list prices to support price promotions to end-consumers by retailers; (ii) reimbursements given to the Company’s distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products; (iii) the Company’s agreed share of fees given to distributors and/or directly to retailers for advertising, in-store marketing and promotional activities; (iv) the Company’s agreed share of slotting, shelf space allowances and other fees given directly to retailers; (v) incentives given to the Company’s distributors and/or retailers for achieving or exceeding certain predetermined sales goals; (vi) discounted or free products; (vii) contractual fees given to the Company’s distributors related to sales made by the Company direct to certain customers that fall within the distributors’ sales territories; and (viii) commissions paid to our customers. The presentation of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and the spending levels incurred or correlated with such sales. Promotional and other allowances constitute a material portion of our marketing activities. The Company’s promotional allowance programs with its numerous 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 primary drivers of our promotional and other allowance activities for the three-monthsthree- and six-months ended March 31,June 30, 2015 and 2014 were (i) to increase sales volume and trial, (ii) to address market conditions, and (iii) to secure shelf and display space at retail.
Liquidity and Capital Resources
Cash flows (used in) provided by operating activities. We used $81.8$139.5 million of cash in operating activities for the three-monthssix-months ended March 31,June 30, 2015, as compared with net cash provided by operating activities of $136.4$259.0 million for the three-monthssix-months ended March 31,June 30, 2014. The decrease of $218.2$398.5 million in cash flows from operations was primarily the result of an increase in the excess tax benefit from stock-based compensation of $300.3 million and an increase in accounts receivable.
Tablethe $161.5 million gain on the sale of ContentsMonster Non-Energy.
For the three-monthssix-months ended March 31,June 30, 2015, cash used inprovided by operating activities was primarily attributable to a $184.7 million excess tax benefit from stock-based compensation, a $68.1 million increase in accounts receivable, a $40.0 million decrease in deferred revenue, a $26.5 million increase in inventories, a $13.5 million increase in prepaid income taxes, a $7.9 million decrease in accrued compensation, a $4.3 million decrease in income tax payable and a $2.2 million decrease in accrued promotional allowances. For the three-months ended March 31, 2015, cash used in operating activities was reduced due to a $206.0 million increase in accrued distributor terminations, a $42.7 million increase in accounts payable and a $5.4 million increase in accrued liabilities as well as net income earned of $4.4$233.4 million and adjustments for certain non-cash expenses, consisting of, $6.5$14.8 million of stock-based compensation and $13.3 million of depreciation and amortizationother amortization. For the six-months ended June 30, 2015, cash provided by operating activities also increased due to a $156.7 million change in deferred income taxes, a $72.1 million increase in accounts payable, a $64.8 million decrease in accrued distributor terminations, an $18.0 million increase in accrued promotional allowances and $6.4a $12.5 million increase in accrued liabilities. For the six-months ended June 30, 2015, cash used in operating activities was due to a $300.3 million excess tax benefit from stock option exercises, a $161.5 million gain on the sale of stock-based compensation.Monster Non-Energy, a $95.2 million increase in accounts receivable, an $84.1 million increase in prepaid income taxes, a $40.8 million decrease in deferred revenue, a $28.9 million increase in inventories, a $7.5 million decrease in income taxes payable, a $3.5 million decrease in accrued compensation and a $3.3 million increase in prepaid expenses and other current assets.
For the three-monthssix-months ended March 31,June 30, 2014, cash provided by operating activities was primarily attributable to net income earned of $95.3$236.3 million and adjustments for certain non-cash expenses, consisting of $7.0$15.1 million of stock-based compensation and $6.5$13.0 million of depreciation and other amortization. For the three-monthssix-months ended March 31,June 30, 2014, cash provided by operating activities also increased due to a $39.1$36.1 million increase in income taxesaccounts payable, a $17.4 million decrease in inventory, a $14.7$31.8 million increase in accrued promotional allowances, a $6.1$13.5 million increasedecrease in accounts payable,inventory, a $4.6$17.5 million increase in accrued liabilities, a $6.8 million increase in income taxes payable and a $4.4$2.5 million decrease in prepaid income taxes. For the three-monthssix-months ended March 31,June 30, 2014, cash provided by operating activities was reduced due to a $42.5$99.7 million increase in accounts receivable, a $7.1$4.6 million decrease in accrued compensation, a $4.2 million increase in prepaid expenses and other current assets, a $5.8 million decrease in accrued compensation, a $2.6$3.3 million tax benefit from the exercise of stock options and a $1.5$3.2 million decrease in deferred revenue.
Cash flows provided by (used in)used in investing activities. We generated $129.6used $105.9 million of cash from investing activities for the three-monthssix-months ended March 31,June 30, 2015 as compared to cash used of $43.9$108.0 million for the three-months March 31,six-months ended June 30, 2014. The increase in cash flows provided by investing activities of $173.6 million was primarily the result of the overall decrease in our investments in order to repurchase our common stock during the three-months ended March 31, 2015 (2.2 million shares were purchased from employees in lieu of cash payments for options exercised or withholding taxes due for a total amount of $251.4 million).
Net cash provided by investing activities was $129.6 million for the three-months ended March 31, 2015, as compared to net cash used in investing activities of $43.9 million for the three-months ended March 31, 2014. For the three-monthssix-months ended March 31,June 30, 2015, cash used in investing activities was primarily attributable to purchases of held-to-maturity investments, purchases of property and equipment, and additions to intangibles. For the three-monthssix-months ended March 31,June 30, 2014, cash used in investing activities was primarily attributable to purchases of held-to-maturity investments and to purchases of property and equipment. For the six-months ended June 30, 2015, cash provided by investing activities also included $198.0 million from the sale of Monster Non-Energy and $179.7 million from the transfer of distribution rights pursuant to the TCCC Transaction. For both the three-monthssix-months ended March 31,June 30, 2015 and 2014, cash provided by investing activities was primarilyalso attributable to maturities of held-to-maturity investments. For both the three-monthssix-months ended March 31,June 30, 2015 and 2014, cash used in investing activities also included the acquisitions of fixed assets consisting of vans and promotional vehicles, coolers and other equipment to support our marketing and promotional activities, production equipment, furniture and fixtures, office and computer equipment, computer software, and equipment used for sales and administrative activities, as well as certain leasehold improvements. We expect to
continue to use a portion of our cash in excess of our requirements for operations for purchasing short-term and long-term investments, and for other corporate purposes, leasehold improvements, the acquisition of capital equipment, specifically, vans, trucks and promotional vehicles, coolers, other promotional equipment, merchandise displays, warehousing racks as well as items of production equipment required to produce certain of our existing and/or new products and to develop our brand in international markets. From time to time, we may also purchase additional real property related to our beverage business and/or acquire compatible businesses as a use of cash in excess of our requirements for operations.
Cash flows (used in) provided by financing activities.We used $47.8generated $1,576.7 million of cash in financing activities for the three-monthssix-months ended March 31,June 30, 2015 as compared to cash provided by financing activities of $7.7$10.0 million for the three-monthssix-months ended March 31,June 30, 2014. The decreaseincrease in cash flows provided by financing activities of $55.5$1,566.7 million was primarily the result of the repurchasesissuance of our common stock to TCCC during the three-monthssix-months ended March 31,June 30, 2015 (2.2 million shares were purchased from employees in lieu of cash payments for options exercised or withholding taxes due for a total amount of $251.4 million).
For the three-months ended March 31, 2015, cash used in financing activities was primarily attributable to repurchases of our common stock amounting to $251.4 million. For the three-months ended March 31, 2015 cash provided by financing activities was primarily related to a $184.7 million excess tax benefit from stock-based compensation and the $19.1 million received from the issuance of common stock in connection with the exercise of certain stock options. For the three-months ended March 31, 2014, cash provided by financing activities was primarily attributable to $5.7 million received from the issuance of common stock in connection with the exercise of certain stock options and a $2.6 million excess tax benefit from stock-based compensation.TCCC Transaction.
Purchases of inventories, increases in accounts receivable and other assets, acquisition of property and equipment (including real property and coolers), leasehold improvements, acquisition and maintenance of trademarks, payments of accounts payable, income taxes payable and purchases of our common stock are expected to remain our principal recurring use of cash.
Cash and cash equivalents, short-term and long-term investments. At March 31,June 30, 2015, we had $362.8$1,696.3 million in cash and cash equivalents and $688.5$1,287.2 million in short-term and long-term investments. We have historically invested these amounts in U.S. Treasury bills, U.S. government agency securities and municipal securities (which may have an auction reset feature), commercial paper and money market funds meeting certain criteria. We maintain our investments for cash management purposes and not for purposes of speculation. Our risk management policies emphasize credit quality (primarily based on short-term ratings by nationally recognized statistical organizations) in selecting and maintaining our investments. We regularly assess market risk of our investments and believe our current policies and investment practices adequately limit those risks. However, certain of these investments are subject to general credit, liquidity, market and interest rate risks. These market risks associated with our investment portfolio may have an adverse effect on our future results of operations, liquidity and financial condition.
Of our $362.8$1,696.3 million of cash and cash equivalents held at March 31,June 30, 2015, $101.4$117.5 million was held by our foreign subsidiaries. No short-term or long-term investments were held by our foreign subsidiaries at March 31,June 30, 2015. We do not intend, nor do we foresee a need, to repatriate undistributed earnings of our foreign subsidiaries other than to repay certain intercompany debt owed to our U.S. operations. Under current tax laws, if funds in excess of intercompany amounts owed were repatriated to our U.S. operations, we would be required to accrue and pay additional income taxes on such excess funds at the tax rates then in effect.
We believe that cash available from operations, including our cash resources and access to credit, will be sufficient for our working capital needs, including purchase commitments for raw materials and inventory, increases in accounts receivable, payments of tax liabilities, expansion and development needs, purchases of shares of our common stock, as well as any purchases of capital assets, equipment and properties, through at least the next 12 months. Based on our current plans, at this time we estimate that capital expenditures are likely to be less than $120.0 million through March 31,June 30, 2016. However, following the consummation of the TCCC Transaction, we anticipate changes to our cash and cash equivalents and capital expenditures, which may cause a change in the estimates provided above; see Notes to Condensed Consolidated Financial Statements — Note 2. Acquisitions and Divestitures.
The following represents a summary of the Company’s contractual commitments and related scheduled maturities as of March 31,June 30, 2015:
|
| Payments due by period (in thousands) |
| ||||||||||||||||||||||||||||||||||
|
|
|
| Less than |
| 1-3 |
| 3-5 |
| More than |
|
| Payments due by period (in thousands) |
| |||||||||||||||||||||||
Obligations |
| Total |
| 1 year |
| years |
| years |
| 5 years |
|
| Total |
| Less than |
| 1-3 |
| 3-5 |
| More than |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Contractual Obligations¹ |
| $ | 93,293 |
| $ | 54,873 |
| $ | 36,391 |
| $ | 2,029 |
| $ | - |
|
| $ | 87,244 |
| $ | 54,621 |
| $ | 31,513 |
| $ | 1,110 |
| $ | - |
| |||||
Capital Leases |
| 461 |
| 461 |
| - |
| - |
| - |
|
| 813 |
| 813 |
| - |
| - |
| - |
| |||||||||||||||
Operating Leases |
| 11,528 |
| 5,035 |
| 4,501 |
| 963 |
| 1,029 |
|
| 11,233 |
| 5,341 |
| 4,013 |
| 949 |
| 930 |
| |||||||||||||||
Purchase Commitments² |
| 22,480 |
| 22,480 |
| - |
| - |
| - |
|
| 39,292 |
|
| 39,292 |
|
| - |
|
| - |
|
| - |
|
| ||||||||||
|
| $ | 127,762 |
| $ | 82,849 |
| $ | 40,892 |
| $ | 2,992 |
| $ | 1,029 |
|
| $ | 138,582 |
|
| $ | 100,067 |
|
| $ | 35,526 |
|
| $ | 2,059 |
|
| $ | 930 |
|
|
¹Contractual obligations include our obligations related to sponsorships and other commitments.
²Purchase commitments include obligations made by us and our subsidiaries to various suppliers for raw materials used in the production of our products. These obligations vary in terms, but are generally satisfied within one year.
In addition, approximately $0.9 million of unrecognized tax benefits have been recorded as liabilities as of March 31,June 30, 2015. It is expected that the amount of unrecognized tax benefits will not significantly change within the next 12 months. We have also recorded a liability for potential penalties and interest of $0.4$0.5 million as of March 31,June 30, 2015.
In April 2015, wethe Company entered into an agreement, subject to the attainment of requisite entitlements, to acquire approximately 56 acres of vacant land located in Jurupa Valley, CA for an estimated purchase price of $38.1 million. We planThe Company was unable to construct a new warehouse on such land, which will replace our existing leased warehouse space located in Corona, CA. We have deposited $0.5 million into escrow with the balance due at closing. There is no assurance we will be successful in obtainingsecure the requisite entitlements.entitlements and therefore terminated this agreement.
Sales
The table below discloses selected quarterly data regarding sales for the three-monthsthree- and six-months ended March 31,June 30, 2015 and 2014, respectively. Data from any one or more quarters or periods is not necessarily indicative of annual results or continuing trends.
Sales of beverages are expressed in unit case volume. A “unit case” means a unit of measurement equal to 192 U.S. fluid ounces of finished beverage (24 eight-ounce servings). Unit case volume means the number of unit cases (or unit case equivalents) of beverages sold by us.
Our quarterly results of operations reflect seasonal trends that are primarily the result of increased demand in the warmer months of the year. It has been our experience that beverage sales tend to be lower during the first and fourth quarters of each calendar year. Because the primary historical market for our products is California, which has a year-long temperate climate, the effect of seasonal fluctuations on quarterly results may have been somewhat mitigated; however, such fluctuations may become more pronounced with the expansion of the distribution of our products outside of California. In addition, our experience with our energy drink products suggests they may be less seasonal than the seasonality expected from traditional beverages. Quarterly fluctuations may also be affected by other factors including the introduction of new products, the opening of new markets where temperature fluctuations are more pronounced, the addition of new bottlers, customers and distributors, changes in the sales mix of our products, continued growth in countries located in the southern hemisphere and changes in advertising and promotional expenses.
(In thousands, except average |
| Three-Months Ended |
| |||||||||||||||||||||
net sales per case) |
| March 31, |
| |||||||||||||||||||||
|
| 2015 |
| 2014 |
| |||||||||||||||||||
(In thousands, except average |
| Three-Months Ended |
| Six-Months Ended |
| |||||||||||||||||||
|
|
|
|
|
|
| 2015 |
| 2014 |
| 2015 |
|
| 2014 |
|
| ||||||||
Net sales¹ |
| $ | 626,791 |
| $ | 536,129 |
|
| $ | 693,722 |
|
| $ | 687,199 |
|
| $ | 1,320,512 |
|
| $ | 1,223,329 |
|
|
Case sales (192-ounce case equivalents) |
| 57,779 |
| 51,926 |
|
| 68,037 |
|
| 65,587 |
|
| 125,816 |
|
| 117,514 |
|
| ||||||
Average net sales per case |
| $ | 10.85 |
| $ | 10.32 |
|
| $ | 10.20 |
|
| $ | 10.48 |
|
| $ | 10.50 |
|
| $ | 10.41 |
|
|
¹Includes $39.8 million for the three-monthssix-months ended March 31,June 30, 2015, related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors who were sent notices of termination during the first quarter of 2015. Excluding the acceleration of deferred revenue, the average net sales price per case decreased to $10.16$10.18 for the three-monthssix-months ended March 31,June 30, 2015, which was 1.6%2.2% lower than the average net sales per case of $10.32$10.41 for the three-monthssix-months ended March 31,June 30, 2014.
See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Our Business” for additional information related to the increase in sales.
Critical Accounting Policies
There have been no material changes to our critical accounting policies from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our Form 10-K for the fiscal year ended December 31, 2014.2014, except as disclosed in Note 2.
Recent Accounting Pronouncements
In September 2014, the Company elected to early adopt FASB ASU No. 2014-08, “Presentation of Financial Statements and Property, Plant, and Equipment - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. ASU 2014-08 provides new guidance related to the definition of a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The adoption of ASU 2014-08 did not have a material impact on the Company’s financial position, results of operations or liquidity.
In June 2014, the Financial Accounting Standards Board (the “FASB”)FASB issued Accounting Standards Update (“ASU”)ASU No. 2014-12, “Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force)”. ASU 2014-12 clarifies that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. ASU 2014-12 is effective for annual periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. ASU 2014-12 may be applied either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of ASU 2014-12 is not expected to have a material impact on the Company’s financial position, results of operations or liquidity.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which supersedes previous revenue recognition guidance. ASU 2014-09 requires that a company recognize revenue at an amount that reflects the consideration to which the company expects to be entitled in exchange for transferring goods or services to a customer. In applying the new guidance, a company will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 iswas to be effective for reporting periods beginning after December 15, 20162016. However, on July 9, 2015, the FASB voted to approve a one-year deferral of the effective date. This new guidance is effective for the Company beginning January 1, 2018 and can be adopted using either a full retrospective or modified approach. The Company is currently evaluating the impact of ASU 2014-09 on its financial position, results of operations and liquidity.
Inflation
We believe inflation did not have a significant impact on our results of operations for the periods presented.
Forward-Looking Statements
Certain statements made in this report may constitute forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) (the “Exchange Act”) regarding the expectations of management with respect to revenues, profitability, adequacy of funds from operations and our existing credit facility, among other things. All statements containing a projection of revenues, income (loss), earnings (loss) per share, capital expenditures, dividends, capital structure or other financial items, a statement of management’s plans and objectives for future operations, or a statement of future economic performance contained in management’s discussion and analysis of financial condition and results of operations, including statements related to new products, volume growth and statements encompassing general optimism about future operating results and non-historical information, are forward-looking statements within the meaning of the Act. Without limiting the foregoing, the words “believes,” “thinks,” “anticipates,” “plans,” “expects,” and similar expressions are intended to identify forward-looking statements.
Management cautions that these statements are qualified by their terms and/or important factors, many of which are outside our control, involve a number of risks, uncertainties and other factors, that could cause actual results and events to differ materially from the statements made including, but not limited to, the following:
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
·Our ability to recognize any benefits from the TCCC Transaction;
TableThe effect of Contentsour extensive commercial arrangements with TCCC on our future performance;
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
·The effect of TCCC becoming one of our significant shareholders and the potential divergence of TCCC’s interests from those of our other shareholders;
TableDisruption in distribution or sales and/or decline in sales due to the termination and/or appointment of Contentsexisting and/or new domestic and/or international distributors;
·Lack of anticipated demand for our products in domestic and/or international markets;
The foregoing list of important factors and other risks detailed from time to time in our reports filed with the SEC is not exhaustive. See the section entitled “Risk Factors” in our Form 10-K for the fiscal year ended December 31, 2014, for a more complete discussion of these risks and uncertainties and for other risks and uncertainties. Those factors and the other risk factors described therein are not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results.
Consequently, our actual results could be materially different from the results described or anticipated by our
forward-looking statements, due to the inherent uncertainty of estimates, forecasts and projections and may be better or worse than anticipated. Given these uncertainties, you should not rely on forward-looking statements. Forward-looking statements represent our estimates and assumptions only as of the date that they were made. We expressly disclaim any duty to provide updates to forward-looking statements, and the estimates and assumptions associated with them, after the date of this report, in order to reflect changes in circumstances or expectations or the occurrence of unanticipated events except to the extent required by applicable securities laws.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk during the three-months ended March 31,June 30, 2015 compared with the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2014.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures –— Under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Exchange Act) as of the end of the period covered by this report. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are adequate and effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in rules and forms of the SEC and (2) accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting –— There were no changes in the Company’s internal controls over financial reporting during the quarter ended March 31,June 30, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The information required by this Item is incorporated herein by reference to the Notes to Condensed Consolidated Financial Statements—Note 11.12. Commitments and Contingencies: Legal Proceedings in Part I, Item 1, of this Quarterly Report on Form 10-Q.
|
Our Risk Factors are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the period ended December 31, 2014.2014, except for the following:
During the three-months ended March 31,period from April 1, 2015 2.2to June 12, 2015, 0.001 million shares were purchased from employees in lieu of cash payments for options exercised or withholding taxes due for a total amount of $251.4$0.1 million. While such purchases are considered common stock repurchases, they are not counted as purchases against ourthe Company’s authorized share repurchase program,programs, including the April 2013 Repurchase Plan. These shares are included in the cancellation of treasury shares as described above relating to the TCCC Transaction.
During the period from June 13, 2015 to June 30, 2015, 1.2 million shares were purchased from employees in lieu of cash payments for options exercised or withholding taxes due for a total amount of $160.7 million. While such purchases are considered common stock repurchases, they are not counted as purchases against the Company’s authorized share repurchase programs, including the April 2013 Repurchase Plan.
|
None.
|
Not applicable.
|
The 2015 Annual Meeting of Stockholders (the “2015 Annual Meeting”) of the Company has been scheduled for August 7, 2015. Because the date of the 2015 Annual Meeting is more than 30 days after the anniversary date of the Company’s 2014 Annual Meeting of Stockholders, in accordance with Rule 14a-5(f) under the Exchange Act, the Company is informing stockholders of the change.
For stockholders who wish to present a proposal to be considered for inclusion in our proxy statement and for consideration at the 2015 Annual Meeting, pursuant to Rule 14a-8 under the Exchange Act, the proposal must be delivered to the Office of the Secretary at the Company’s principal executive offices prior to the close of business on May 18, 2015. Stockholder proposals must otherwise comply with the requirements of Rule 14a-8 of the Exchange Act.None.
Changing the date of the 2015 Annual Meeting does not affect the notification deadline for stockholders who wish to present a proposal for nominations or other business for consideration at the 2015 Annual Meeting, but who do not intend for the proposal to be included in our proxy statement. Pursuant to the advance notice provisions contained in our by-laws, such notification deadline has passed.
|
10.1*# |
| |
|
| |
10.2* | Amended and Restated International Distribution Coordination Agreement, dated as of | |
|
| |
31.1* | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
|
| |
31.2* | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
|
| |
32.1* | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
|
| |
32.2* | Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101* | The following financial information from Monster Beverage Corporation’s Quarterly Report on Form 10-Q for the quarter ended |
* Filed herewith
** Previously filed
# Confidential treatment has been requested for certain information contained in this exhibit. Such information has been omitted and filed separately with the SEC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| MONSTER BEVERAGE CORPORATION |
| Registrant |
|
|
|
|
Date: | /s/ RODNEY C. SACKS |
| Rodney C. Sacks |
| Chairman of the Board of Directors |
| and Chief Executive Officer |