Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2019
Commission File Number 001-18761
MONSTER BEVERAGE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
47-1809393
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
1 Monster Way
Corona, California 92879
(Address of principal executive offices) (Zip code)
(951) 739 - 6200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
MNST
Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No X
The registrant had 537,681,684 shares of common stock, par value $0.005 per share, outstanding as of October 30, 2019.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 2019
INDEX
Part I.
FINANCIAL INFORMATION
Page No.
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
3
Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018
Condensed Consolidated Statements of Income for the Three- and Nine-Months Ended September 30, 2019 and 2018
4
Condensed Consolidated Statements of Comprehensive Income for the Three- and Nine-Months Ended September 30, 2019 and 2018
5
Condensed Consolidated Statements of Stockholders’ Equity for the Nine-Months Ended September 30, 2019 and 2018
6
Condensed Consolidated Statements of Cash Flows for the Nine-Months Ended September 30, 2019 and 2018
8
Notes to Condensed Consolidated Financial Statements
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
45
Item 4.
Controls and Procedures
Part II.
OTHER INFORMATION
Legal Proceedings
46
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
47
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
48
Signatures
49
2
PART I – FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2019 AND DECEMBER 31, 2018
(In Thousands, Except Par Value) (Unaudited)
September 30,
December 31,
2019
2018
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
717,617
637,513
Short-term investments
587,356
320,650
Accounts receivable, net
647,983
484,562
Inventories
317,745
277,705
Prepaid expenses and other current assets
58,390
44,909
Prepaid income taxes
31,669
38,831
Total current assets
2,360,760
1,804,170
INVESTMENTS
14,370
—
PROPERTY AND EQUIPMENT, net
251,760
243,051
DEFERRED INCOME TAXES, net
85,148
85,687
GOODWILL
1,331,643
OTHER INTANGIBLE ASSETS, net
1,047,473
1,045,878
OTHER ASSETS
46,212
16,462
Total Assets
5,137,366
4,526,891
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
304,773
248,760
Accrued liabilities
112,318
112,507
Accrued promotional allowances
197,239
145,741
Deferred revenue
43,805
44,045
Accrued compensation
35,747
39,903
Income taxes payable
20,334
10,189
Total current liabilities
714,216
601,145
DEFERRED REVENUE
292,101
312,224
OTHER LIABILITIES
23,071
2,621
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Common stock - $0.005 par value; 1,250,000 shares authorized; 636,235 shares issued and 540,591 shares outstanding as of September 30, 2019; 630,970 shares issued and 543,676 shares outstanding as of December 31, 2018
3,181
3,155
Additional paid-in capital
4,370,280
4,238,170
Retained earnings
4,767,526
3,914,645
Accumulated other comprehensive loss
(43,083)
(32,864)
Common stock in treasury, at cost; 95,644 shares and 87,294 shares as of September 30, 2019 and December 31, 2018, respectively
(4,989,926)
(4,512,205)
Total stockholders’ equity
4,107,978
3,610,901
Total Liabilities and Stockholders’ Equity
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE- AND NINE-MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(In Thousands, Except Per Share Amounts) (Unaudited)
Three-Months Ended
Nine-Months Ended
NET SALES
1,133,577
1,016,160
3,183,613
2,882,953
COST OF SALES
460,575
408,501
1,275,796
1,139,780
GROSS PROFIT
673,002
607,659
1,907,817
1,743,173
OPERATING EXPENSES
277,559
268,086
821,923
766,065
OPERATING INCOME
395,443
339,573
1,085,894
977,108
INTEREST and OTHER INCOME, net
3,121
2,988
8,835
5,269
INCOME BEFORE PROVISION FOR INCOME TAXES
398,564
342,561
1,094,729
982,377
PROVISION FOR INCOME TAXES
99,641
74,828
241,848
228,480
NET INCOME
298,923
267,733
852,881
753,897
NET INCOME PER COMMON SHARE:
Basic
0.55
0.48
1.57
1.35
Diluted
1.56
1.33
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS:
544,469
552,694
543,804
559,472
548,422
559,955
548,387
566,791
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands) (Unaudited)
Net income, as reported
Other comprehensive loss:
Change in foreign currency translation adjustment
(14,359)
(4,463)
(10,586)
(13,728)
Available-for-sale investments:
Change in net unrealized gains
(118)
367
610
Reclassification adjustment for net gains included in net income
Net change in available-for-sale investments
Other comprehensive loss
(14,327)
(4,581)
(10,219)
(13,118)
Comprehensive income
284,596
263,152
842,662
740,779
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 (In Thousands) (Unaudited)
Accumulated
Additional
Other
Total
Common stock
Paid-in
Retained
Comprehensive
Treasury stock
Stockholders'
Shares
Amount
Capital
Earnings
Loss
Equity
Balance, December 31, 2018
630,970
(87,294)
Stock-based compensation
15,324
Exercise of stock options
3,871
19
35,144
35,163
Unrealized gain, net on available-for-sale securities
120
Repurchase of common stock
(4,000)
(222,792)
Foreign currency translation
(1,381)
Net income
261,485
Balance, March 31, 2019
634,841
3,174
4,288,638
4,176,130
(34,125)
(91,294)
(4,734,997)
3,698,820
15,575
1,288
45,964
45,970
215
(10)
(621)
5,154
292,473
Balance, June 30, 2019
636,129
3,180
4,350,177
4,468,603
(28,756)
(91,304)
(4,735,618)
4,057,586
15,991
106
1
4,112
4,113
(4,340)
(254,308)
Balance, September 30, 2019
636,235
(95,644)
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 (In Thousands) (Unaudited) (Continued)
Balance, December 31, 2017
629,255
3,146
4,150,628
2,928,226
(16,659)
(62,957)
(3,170,129)
3,895,212
13,439
669
6,498
6,502
ASU No. 2016-16 adoption
(6,585)
(4,362)
(251,949)
2,723
216,050
Balance, March 31, 2018
629,924
3,150
4,170,565
3,137,691
(13,721)
(67,319)
(3,422,078)
3,875,607
14,906
406
7,112
7,114
513
Adjustment to excess tax from prior periods
2,093
(10,554)
(553,200)
(11,988)
270,116
Balance, June 30, 2018
630,330
3,152
4,194,676
3,407,807
(25,196)
(77,873)
(3,975,278)
3,605,161
14,091
495
10,861
10,863
Balance, September 30, 2018
630,825
3,154
4,219,628
3,675,540
(29,777)
3,893,267
7
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
47,843
42,469
Gain on disposal of property and equipment
(7)
(634)
46,890
42,436
Deferred income taxes
540
(76)
Effect on cash of changes in operating assets and liabilities:
Accounts receivable
(179,838)
(181,683)
Distributor receivables
5,813
7,803
(44,947)
(10,338)
Prepaid expenses and other assets
(16,121)
(16,465)
6,174
96,462
69,480
39,641
(9,592)
16,516
55,799
48,682
Accrued distributor terminations
703
(3,901)
(4,357)
10,311
(1,383)
Other liabilities
(631)
1,628
(19,631)
(13,941)
Net cash provided by operating activities
821,069
821,360
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of available-for-sale investments
558,128
927,410
Purchases of available-for-sale investments
(835,964)
(711,009)
Purchases of property and equipment
(44,392)
(49,862)
Proceeds from sale of property and equipment
810
4,009
Increase in intangibles
(5,478)
(6,275)
Increase in other assets
(1,289)
(10,125)
Net cash (used in) provided by investing activities
(328,185)
154,148
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt
(12,841)
(1,482)
Issuance of common stock
85,245
24,481
Purchases of common stock held in treasury
(477,721)
(805,149)
Net cash used in financing activities
(405,317)
(782,150)
Effect of exchange rate changes on cash and cash equivalents
(7,463)
(8,266)
NET INCREASE IN CASH AND CASH EQUIVALENTS
80,104
185,092
CASH AND CASH EQUIVALENTS, beginning of period
528,622
CASH AND CASH EQUIVALENTS, end of period
713,714
SUPPLEMENTAL INFORMATION:
Cash paid during the period for:
Interest
306
44
Income taxes
226,883
134,377
(In Thousands) (Unaudited) (Continued)
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS
Included in accrued liabilities as of September 30, 2019 and 2018 were $8.6 million and $10.9 million, respectively, related to additions to other intangible assets.
Included in accounts payable as of September 30, 2019 were available-for-sale short-term investment purchases of $3.0 million.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
1.
BASIS OF PRESENTATION
Reference is made to the Notes to Consolidated Financial Statements, in Monster Beverage Corporation and Subsidiaries (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2018 (“Form 10-K”) for a summary of significant accounting policies utilized by the Company and its consolidated subsidiaries and other disclosures, which should be read in conjunction with this Quarterly Report on Form 10-Q (“Form 10-Q”).
The Company’s condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and Securities and Exchange Commission (“SEC”) rules and regulations applicable to interim financial reporting. They do not include all the information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP. The information set forth in these interim condensed consolidated financial statements for the three- and nine-months ended September 30, 2019 and 2018, respectively, is unaudited and reflects all adjustments, which include only normal recurring adjustments and which in the opinion of management are necessary to make the interim condensed consolidated financial statements not misleading. Results of operations for periods covered by this report may not necessarily be indicative of results of operations for the full year.
The preparation of financial statements in conformity with GAAP necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.
2.
RECENT ACCOUNTING PRONOUNCEMENTS
Recently issued accounting pronouncements not yet adopted
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15, “Intangibles–Goodwill and Other–Internal–Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.” ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract, with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU No. 2018-15 is effective for the Company on a prospective or retrospective basis beginning on January 1, 2020, with early adoption permitted. The Company is currently evaluating the impact of ASU No. 2018-15 on its financial position, results of operations and liquidity.
In August 2018, the FASB issued ASU No. 2018-14, “Compensation–Retirement Benefits–Defined Benefit Plans–General (Topic 715): Disclosure Framework–Changes to the Disclosure Requirements for Defined Benefit Plans.” ASU No. 2018-14 removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and requires certain additional disclosures. ASU No. 2018-14 is effective for the Company on a retrospective basis beginning in the year ending December 31, 2020, with early adoption permitted. The Company is currently evaluating the impact of ASU No. 2018-14 on its financial position, results of operations and liquidity.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” ASU No. 2018-13 removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. ASU No. 2018-13 disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU No. 2018-13 is effective for the Company beginning on January 1, 2020, with early adoption permitted. Certain disclosures in the new guidance will need to be applied on a retrospective basis and others on a prospective basis. The Company is currently evaluating the impact of ASU No. 2018-13 on its financial position, results of operations and liquidity.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles and Other (Topic 350): Simplifying the Test for Goodwill Impairment", which eliminates the requirement to calculate the implied fair value of goodwill, but rather requires an entity to record an
impairment charge based on the excess of a reporting unit's carrying value over its fair value. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of ASU No. 2017-04 on its financial position and results of operations.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The accounting standard changes the methodology for measuring credit losses on financial instruments and the timing when such losses are recorded. ASU No. 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. The Company is currently evaluating the impact of ASU No. 2016-13 on its financial position, results of operations and liquidity.
Recently adopted accounting pronouncements
In February 2018, the FASB issued ASU No. 2018-02 (ASU No. 2018-02), “Income Statement - Reporting Comprehensive Income (Topic 220)”, which amended the previous guidance to allow for certain tax effects “stranded” in accumulated other comprehensive income, which are impacted by the Tax Reform Act signed into law on December 22, 2017, to be reclassified from accumulated other comprehensive income into retained earnings. This amendment pertains only to those items impacted by the new tax law and does not apply to any future tax effects stranded in accumulated other comprehensive income. This standard was effective for fiscal years beginning after December 15, 2018, and allowed for early adoption. The adoption of ASU No. 2018-02 did not have an impact on the Company’s financial position, results of operations and liquidity.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. ASU No. 2016-02 requires the recognition of lease assets and lease liabilities on the balance sheet for leases classified as operating leases under previous guidance. The accounting for finance leases (capital leases) was substantially unchanged. The original guidance required application on a modified retrospective basis with adjustments to the earliest comparative period presented. In August 2018, the FASB issued ASU No. 2018-11, “Targeted Improvements to ASC 842,” which included an option to not restate comparative periods in transition and elect to use the effective date of ASU No. 2016-02 as the date of initial application, which the Company elected. As a result, the consolidated balance sheet prior to January 1, 2019 was not restated, and continues to be reported under previous guidance that did not require the recognition of operating lease liabilities and corresponding lease assets on the consolidated balance sheet. With the adoption of ASU No. 2016-02 on January 1, 2019, the Company recorded operating lease right-of-use assets of $26.3 million and operating lease liabilities of $22.6 million. The adoption of ASU No. 2016-02 had an immaterial impact on the Company’s condensed consolidated statement of income and condensed consolidated statement of cash flows for the nine-month period ended September 30, 2019. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to carry forward the historical lease classification, not reassess prior conclusions related to expired or existing contracts that are or that contain leases, and not reassess the accounting for initial direct costs. Additional information and disclosures required by ASU No. 2016-02 are contained in Note 4.
3.
REVENUE RECOGNITION
The Company has three operating and reportable segments, (i) Monster Energy® Drinks segment (“Monster Energy® Drinks”), which is primarily comprised of the Company’s Monster Energy® drinks and Reign Total Body FuelTM high performance energy drinks, (ii) Strategic Brands segment (“Strategic Brands”), which is comprised primarily of the various energy drink brands acquired from The Coca-Cola Company (“TCCC”) in 2015 as well as the Company’s affordable energy brands, and (iii) Other segment (“Other”), which is comprised of certain products sold by American Fruits and Flavors LLC (“AFF”), a wholly-owned subsidiary of the Company, to independent third-party customers (the “AFF Third-Party Products”).
The Company's Monster Energy® Drinks segment generates net operating revenues by selling ready-to-drink packaged energy drinks primarily to bottlers and full service beverage distributors. In some cases, the Company sells directly to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, drug stores, foodservice customers and the military.
The Company's Strategic Brands segment primarily generates net operating revenues by selling “concentrates” and/or “beverage bases” to authorized bottling and canning operations. Such bottlers generally combine the concentrates and/or beverage bases with sweeteners, water and other ingredients to produce ready-to-drink packaged energy drinks. The ready-to-drink packaged energy
11
drinks are then sold by such bottlers to other bottlers and full service distributors and to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, foodservice customers, drug stores and the military. To a lesser extent, the Strategic Brands segment generates net operating revenues by selling certain ready-to-drink packaged energy drinks to bottlers and full service beverage distributors.
The majority of the Company's revenue is recognized when it satisfies a single performance obligation by transferring control of its products to a customer. Control is generally transferred when the Company's products are either shipped or delivered based on the terms contained within the underlying contracts or agreements. Certain of the Company's bottlers/distributors may also perform a separate function as a co-packer on the Company's behalf. In such cases, control of the Company's products passes to such bottlers/distributors when they notify the Company that they have taken possession or transferred the relevant portion of the Company's finished goods. The Company's general payment terms are short-term in duration. The Company does not have significant financing components or payment terms. The Company did not have any material unsatisfied performance obligations as of September 30, 2019 or December 31, 2018.
The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers.
Distribution expenses to transport the Company's products, where applicable, and warehousing expense after manufacture are accounted for within operating expenses.
Promotional and other allowances (variable consideration) recorded as a reduction to net sales, primarily include consideration given to the Company's bottlers/distributors or retail customers including, but not limited to the following:
The Company's promotional allowance programs with its bottlers/distributors and/or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, typically ranging from one week to one year. The Company's promotional and other allowances are calculated based on various programs with bottlers/distributors and retail customers, and accruals are established at the time of initial product sale for the Company's anticipated liabilities. These accruals are based on agreed upon terms as well as the Company's historical experience with similar programs and require management's judgment with respect to estimating consumer participation and/or distributor and retail customer performance levels. Differences between such estimated expenses and actual expenses for promotional and other allowance costs have historically been insignificant and are recognized in earnings in the period such differences are determined.
Amounts received pursuant to new and/or amended distribution agreements entered into with certain distributors relating to the costs associated with terminating the Company’s prior distributors, are accounted for as revenue ratably over the anticipated life of the respective distribution agreements, generally over 20 years.
12
The Company also enters into license agreements that generate revenues associated with third-party sales of non-beverage products bearing the Company’s trademarks including, but not limited to, clothing, hats, t-shirts, jackets, helmets and automotive wheels.
Disaggregation of Revenue
The following tables disaggregate the Company's revenue by geographical markets and reportable segments:
Three-Months Ended September 30, 2019
Latin
America
U.S. and
and
Net Sales
Canada
EMEA1
Asia Pacific
Caribbean
Monster Energy® Drinks
737,457
178,569
97,153
48,205
1,061,384
Strategic Brands
43,205
16,673
6,243
212
66,333
5,860
Total Net Sales
786,522
195,242
103,396
48,417
Three-Months Ended September 30, 2018
710,172
127,286
63,758
33,930
935,146
47,645
18,287
8,231
278
74,441
6,573
764,390
145,573
71,989
34,208
Nine-Months Ended September 30, 2019
2,118,835
458,655
242,561
130,826
2,950,877
132,375
62,374
20,024
990
215,763
16,973
2,268,183
521,029
262,585
131,816
Nine-Months Ended September 30, 2018
1,994,950
376,823
171,796
101,520
2,645,089
137,502
60,567
20,148
1,794
220,011
17,853
2,150,305
437,390
191,944
103,314
1Europe, Middle East and Africa (“EMEA”)
13
Contract Liabilities
Amounts received from certain bottlers/distributors at inception of their distribution contracts or at the inception of certain sales/marketing programs are accounted for as deferred revenue. As of September 30, 2019, the Company had $335.9 million of deferred revenue, which is included in current and long-term deferred revenue in the Company’s condensed consolidated balance sheet. As of December 31, 2018, the Company had $356.3 million of deferred revenue, which is included in current and long-term deferred revenue in the Company’s condensed consolidated balance sheet. During the three-months ended September 30, 2019 and 2018, $10.7 million and $11.1 million, respectively, of deferred revenue was recognized in net sales. During the nine-months ended September 30, 2019 and 2018, $35.6 million and $33.3 million, respectively, of deferred revenue was recognized in net sales. See Note 11.
4.
LEASES
The Company leases identified assets comprising real estate and equipment. Real estate leases consist primarily of office and warehouse space and equipment leases consist of vehicles and warehouse equipment. At the inception of a contract, the Company assesses whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether the Company obtains the right to substantially all the economic benefit from the use of the asset throughout the term, and (3) whether the Company has the right to direct the use of the asset. At inception of a lease, the Company allocates the consideration in the contract to each lease and non-lease component based on the component’s relative stand-alone price to determine the lease payments. Lease and non-lease components are accounted for separately.
Leases are classified as either finance leases or operating leases based on criteria in Accounting Standards Codification (“ASC”) 842. The Company’s operating leases are generally comprised of real estate and warehouse equipment, and the Company’s finance leases are generally comprised of vehicles. Operating leases are included in Other Assets, Accrued Liabilities and Other Liabilities in the condensed consolidated balance sheet. Finance leases are included in Property and Equipment and Accrued Liabilities in the condensed consolidated balance sheet.
Right-of-use (“ROU”) assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As the Company’s leases generally do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date if the implicit rate cannot be determined. ROU assets also include any lease payments made and exclude lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
Certain of the Company’s real estate leases contain variable lease payments, including payments based on an index or rate. Variable lease payments based on an index or rate are initially measured using the index or rate in effect at the lease commencement date. Additional payments based on the change in an index or rate, or payments based on a change in the Company’s portion of the operating expenses, including real estate taxes and insurance, are recorded as a period expense when incurred.
Lease expense for operating leases, consisting of lease payments, is recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability. Lease expense for finance leases consists of the amortization of the ROU asset on a straight-line basis over the asset’s estimated useful life and interest expense is calculated using the amortized cost basis.
The Company’s leases have remaining lease terms of less than one year to 15 years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within one year. The Company has elected not to recognize ROU assets and lease liabilities for short-term operating leases that have a term of 12 months or less.
14
The components of lease cost for the three- and nine-months ended September 30, 2019 was as follows:
Three-Months
Nine-Months
Ended September 30,
Operating leases:
Lease cost
1,223
3,548
Variable lease cost
168
503
Operating lease cost
1,391
4,051
Short term lease cost
993
2,552
Finance leases:
Amortization of ROU assets
172
346
Interest on finance lease liabilities
43
Finance lease cost
185
389
Total lease cost
2,569
6,992
Supplemental cash flow information for leases for the nine-months ended September 30, 2019 was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
3,026
Operating cash flows from finance leases
Financing cash flows from finance leases
1,497
ROU assets obtained in exchange for lease obligations:
Finance leases
2,499
Operating leases
27,965
ROU assets for operating and finance leases at September 30, 2019 were comprised of the following:
Real Estate
Equipment
24,384
497
24,881
3,525
The weighted-average remaining lease term and weighted-average discount rate for operating and finance leases at September 30, 2019 was as follows:
Operating Leases
Finance Leases
Weighted-average remaining lease term (years)
10.4
0.8
Weighted-average discount rate
3.6
%
3.2
15
The following table reconciles the undiscounted future lease payments for operating and finance leases to the operating and finance leases recorded in the condensed consolidated balance sheet at September 30, 2019:
Undiscounted Future Lease Payments
2019 (excluding the nine-months ended September 30, 2019)
1,014
678
2020
3,509
1,187
2021
2,888
2022
2,349
2023
1,894
2024 and thereafter
14,707
Total lease payments
26,361
1,865
Less interest
(4,666)
(23)
21,695
1,842
3,061
18,634
As of September 30, 2019, the Company did not have any significant additional operating or finance leases that have not yet commenced.
The Company’s future minimum operating lease commitments, as of December 31, 2018, under ASC 840, the predecessor to ASC 842, were as follows:
Year Ending December 31:
3,954
2,949
2,410
2,114
1,681
14,860
27,968
16
5.
The following table summarizes the Company’s investments at:
Continuous
Gross
Unrealized
Loss Position
Amortized
Holding
Fair
less than 12
greater than 12
September 30, 2019
Cost
Gains
Losses
Value
Months
Available-for-sale
Short-term:
Commercial paper
81,869
Certificates of deposit
2,502
Municipal securities
138,072
151
138,214
U.S. government agency securities
41,186
37
41,156
U.S. treasuries
294,099
179
294,268
Variable rate demand notes
29,347
Long-term:
11,174
11,177
3,198
3,193
601,447
344
65
601,726
December 31, 2018
52,838
14,075
151,690
62
151,644
19,943
19,931
78,189
78,157
4,005
320,740
During the nine-months ended September 30, 2019 and 2018, realized gains or losses recognized on the sale of investments were not significant.
The Company’s investments at September 30, 2019 and December 31, 2018 in commercial paper, certificates of deposit, municipal securities, U.S. government agency securities, U.S. treasuries and/or variable rate demand notes (“VRDNs”) carried investment grade credit ratings. VRDNs are floating rate municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest. All of the put options are secured by a pledged liquidity source. While they are classified as marketable investment securities, the put option allows the VRDNs to be liquidated at par on a same day, or more generally, on a seven-day settlement basis.
17
The following table summarizes the underlying contractual maturities of the Company’s investments at:
Amortized Cost
Fair Value
Less than 1 year:
Due 1 - 10 years:
5,412
Due 11 - 20 years:
12,197
Due 21 - 30 years:
9,721
Due 31 - 40 years:
2,017
6.
FAIR VALUE OF CERTAIN FINANCIAL ASSETS AND LIABILITIES
ASC 820 provides a framework for measuring fair value and requires disclosures regarding fair value measurements. ASC 820 defines fair value as the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available. The three levels of inputs required by the standard that the Company uses to measure fair value are summarized below.
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.
18
The following tables present the fair value of the Company’s financial assets and liabilities that are recorded at fair value on a recurring basis, segregated among the appropriate levels within the fair value hierarchy at:
Level 1
Level 2
Level 3
Cash
557,925
Money market funds
69,362
11,533
95,972
159,884
80,879
314,441
Foreign currency derivatives
30
627,287
692,086
1,319,373
Amounts included in:
90,330
Investments
(138)
393,936
191,358
60,422
177,118
39,092
(492)
585,294
372,377
957,671
52,219
(535)
All of the Company’s short-term and long-term investments are classified within Level 1 or Level 2 of the fair value hierarchy. The Company’s valuation of its Level 1 investments, which include money market funds, is based on quoted market prices in active markets for identical securities. The Company’s valuation of its Level 2 investments, which include municipal securities, commercial paper, certificates of deposit, VRDNs, U.S. treasuries and U.S. government agency securities, is based on other observable inputs, specifically a market approach which utilizes valuation models, pricing systems, mathematical tools and other relevant information for the same or similar securities. The Company’s valuation of its Level 2 foreign currency exchange contracts is based on quoted market prices of the same or similar instruments, adjusted for counterparty risk. There were no transfers between Level 1 and Level 2 measurements during the nine-months ended September 30, 2019 or during the year-ended December 31, 2018, and there were no changes in the Company’s valuation techniques.
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- and nine-months ended September 30, 2019 and the year-ended December 31, 2018, the Company entered into forward currency exchange contracts with financial institutions to create an economic hedge to specifically manage a portion of the foreign exchange risk exposure associated with certain consolidated subsidiaries’ non-functional currency denominated assets and liabilities. All foreign currency exchange contracts of the Company that were outstanding as of September 30, 2019 have terms of one month or less. The Company does not enter into forward currency exchange contracts for speculation or trading purposes.
The Company has not designated its foreign currency exchange contracts as hedge transactions under ASC 815. Therefore, gains and losses on the Company’s foreign currency exchange contracts are recognized in interest and other income, net, in the condensed consolidated statements of income, and are largely offset by the changes in the fair value of the underlying economically hedged item.
The notional amount and fair value of all outstanding foreign currency derivative instruments in the condensed consolidated balance sheets consist of the following at:
Derivatives not designated as
hedging instruments under
Notional
ASC 815-20
Balance Sheet Location
Assets:
Foreign currency exchange contracts:
Receive USD/pay GBP
35,513
86
Receive USD/pay AUD
9,625
29
Receive USD/pay COP
3,040
23
Receive USD/pay ZAR
2,748
Receive USD/pay NZD
2,581
Liabilities:
Receive EUR/pay USD
39,576
(136)
Receive USD/pay SGD
1,156
(2)
Receive SGD/pay USD
8,341
Receive NOK/pay USD
902
40,648
(323)
15,124
(105)
8,618
(68)
2,931
(33)
2,952
(4)
Receive USD/pay EUR
6,894
20
The net gains on derivative instruments in the condensed consolidated statements of income were as follows:
Amount of gain
recognized in income on
derivatives
Location of gain
Three-months ended
Foreign currency exchange contracts
Interest and other income, net
627
2,175
Nine-months ended
475
7,909
8.
INVENTORIES
Inventories consist of the following at:
Raw materials
136,555
94,421
Finished goods
181,190
183,284
9.
PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following at:
Land
44,261
Leasehold improvements
8,487
5,909
Furniture and fixtures
7,649
6,932
Office and computer equipment
21,066
18,717
Computer software
4,252
3,278
193,326
183,727
Buildings
126,052
115,242
Vehicles
40,610
39,026
445,703
417,092
Less: accumulated depreciation and amortization
(193,943)
(174,041)
Total depreciation and amortization expense recorded was $11.6 million and $11.3 million for the three-months ended September 30, 2019 and 2018, respectively. Total depreciation and amortization expense recorded was $36.3 million and $33.5 million for the nine-months ended September 30, 2019 and 2018, respectively.
21
10. GOODWILL AND OTHER INTANGIBLE ASSETS
The following is a roll-forward of goodwill for the nine-months ended September 30, 2019 and September 30, 2018 by reportable segment:
Monster
Energy®
Strategic
Drinks
Brands
Balance at December 31, 2018
693,644
637,999
Acquisitions
Balance at September 30, 2019
Balance at December 31, 2017
Balance at September 30, 2018
Intangible assets consist of the following at:
Amortizing intangibles
66,952
71,350
Accumulated amortization
(46,227)
(38,311)
20,725
33,039
Non-amortizing intangibles
1,026,748
1,012,839
Amortizing intangibles primarily consist of customer relationships. All amortizing intangibles have been assigned an estimated finite useful life and such intangibles are amortized on a straight-line basis over the number of years that approximate their respective useful lives, generally five to seven years. Total amortization expense recorded was $2.9 million and $3.0 million for the three-months ended September 30, 2019 and 2018, respectively. Total amortization expense recorded was $8.7 million and $9.0 million for the nine-months ended September 30, 2019 and 2018, respectively.
The following is the future estimated amortization expense related to amortizing intangibles as of September 30, 2019:
2,887
7,668
4,424
4,399
1,106
241
11. DISTRIBUTION AGREEMENTS
In accordance with ASC 420, the Company expenses distributor termination costs in the period in which the written notification of termination occurs. The Company incurred no termination costs during the three-months ended September 30, 2019. The Company incurred termination costs of $14.1 million for the three-months ended September 30, 2018. The Company incurred termination costs of $11.0 million and $26.6 million for the nine-months ended September 30, 2019 and 2018, respectively.
22
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 $10.7 million and $11.1 million for the three-months ended September 30, 2019 and 2018, respectively. Revenue recognized was $35.6 million and $33.3 million for the nine-months ended September 30, 2019 and 2018, respectively.
12. COMMITMENTS AND CONTINGENCIES
The Company had purchase commitments aggregating approximately $29.3 million at September 30, 2019, 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 $171.6 million at September 30, 2019, which related primarily to sponsorships and other marketing activities.
In February 2018, the working capital line limit for the Company's credit facility with HSBC Bank (China) Company Limited, Shanghai Branch, was increased from $9.0 million to $15.0 million. At September 30, 2019, the interest rate on borrowings under the line of credit was 5.5%. As of September 30, 2019, the Company had no amounts outstanding on this line of credit.
During the three-months ended September 30, 2019, the Company entered into an agreement to acquire a manufacturing plant and adjoining land in Athy, County Kildare, Ireland for a purchase price of $12.0 million, of which an initial $1.2 million was paid in October 2019. The acquisition of the facility is expected to close in late December 2019. The Company intends to utilize the facility to produce and supply ingredients for certain of its international markets.
In addition, during the three-months ended September 30, 2019, the Company entered into an agreement to purchase approximately 7.66 acres of land in San Fernando, California for a purchase price of $33.7 million. The Company intends to construct a new production facility on such land in order to consolidate AFF’s operations into a single location. The full purchase price was paid in October 2019.
Litigation - The Company is currently a defendant in a number of personal injury lawsuits, claiming that the death or other serious injury of the plaintiffs was caused by consumption of Monster Energy® brand energy drinks. The plaintiffs in these lawsuits allege strict product liability, negligence, fraudulent concealment, breach of implied warranties and wrongful death. The Company believes that each complaint is without merit and plans a vigorous defense. The Company also believes that any damages, if awarded, would not have a material adverse effect on the Company’s financial position or results of operations.
Furthermore, from time to time in the normal course of business, the Company is named in other litigation, including consumer class actions, intellectual property litigation and claims from prior distributors. Although it is not possible to predict the ultimate outcome of such litigation, based on the facts known to the Company, management believes that such litigation in aggregate will likely not have a material adverse effect on the Company’s financial position or results of operations.
The Company evaluates, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of the liability that is accrued, if any, or in the amount of any related insurance reimbursements recorded. As of September 30, 2019, the Company’s condensed consolidated balance sheet included accrued loss contingencies of approximately $2.0 million.
13. ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in accumulated other comprehensive loss by component, after tax, for the nine-months ended September 30, 2019 and 2018 are as follows:
Currency
(Gains) Losses
Translation
on Available-for-
Sale Securities
32,775
89
32,864
Other comprehensive income before reclassifications
10,586
(367)
10,219
Amounts reclassified from accumulated other comprehensive loss (income)
Net current-period other comprehensive (income) loss
43,361
(278)
43,083
15,818
841
16,659
Other comprehensive loss (income) before reclassifications
13,728
(610)
13,118
Net current-period other comprehensive loss (income)
29,546
231
29,777
14. TREASURY STOCK
On August 7, 2018, the Company's Board of Directors authorized a share repurchase program for the purchase of up to $500.0 million of the Company's outstanding common stock (the “August 2018 Repurchase Plan”). During the three-months ended September 30, 2019, the Company purchased 0.4 million shares of common stock at an average purchase price of $58.32 per share, for a total amount of $20.6 million (excluding broker commissions), which exhausted the availability under the August 2018 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying condensed consolidated balance sheet at September 30, 2019.
On February 26, 2019, the Company’s Board of Directors authorized a new share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock (the “February 2019 Repurchase Plan”). During the three-months ended September 30, 2019, the Company purchased 4.0 million shares of common stock at an average purchase price of $58.62 per share, for a total amount of $233.7 million (excluding broker commissions), under the February 2019 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying condensed consolidated balance sheet at September 30, 2019. As of November 6, 2019, $36.6 million remained available for repurchase under the February 2019 Repurchase Plan.
During the three-months ended September 30, 2019, no shares of common stock were purchased from employees in lieu of cash payments for options exercised or withholding taxes due.
15. STOCK-BASED COMPENSATION
The Company has two stock-based compensation plans under which shares were available for grant at September 30, 2019: the Monster Beverage Corporation 2011 Omnibus Incentive Plan, including the Monster Beverage Corporation Deferred Compensation Plan as a sub plan thereunder, and the Monster Beverage Corporation 2017 Compensation Plan for Non-Employee Directors, including the Monster Beverage Corporation Deferred Compensation Plan for Non-Employee Directors as a sub plan thereunder.
24
The Company recorded $16.0 million and $14.1 million of compensation expense relating to outstanding options and restricted stock units during the three-months ended September 30, 2019 and 2018, respectively. The Company recorded $46.9 million and $42.4 million of compensation expense relating to outstanding options and restricted stock units during the nine-months ended September 30, 2019 and 2018, respectively.
The tax benefit for tax deductions from non-qualified stock option exercises, disqualifying dispositions of incentive stock options and vesting of restricted stock units for the three-months ended September 30, 2019 and 2018 was $0.5 million and $3.1 million, respectively. The tax benefit for tax deductions from non-qualified stock option exercises, disqualifying dispositions of incentive stock options and vesting of restricted stock units for the nine-months ended September 30, 2019 and 2018 was $26.7 million and $7.7 million, respectively.
Stock Options
Under the Company’s stock-based compensation plans, all stock options granted as of September 30, 2019 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 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 uses historical data to determine the exercise behavior, volatility and forfeiture rate of the options.
The following weighted-average assumptions were used to estimate the fair value of options granted during:
Three-Months Ended September 30,
Nine-Months Ended September 30,
Dividend yield
0
Expected volatility
30.2
34.5
34.9
Risk-free interest rate
1.4
2.9
2.4
2.8
Expected term
5.8
years
6.1
6.0
Expected Volatility: The Company uses historical volatility as it provides a reasonable estimate of the expected volatility. Historical volatility is based on the most recent volatility of the stock price over a period of time equivalent to the expected term of the option.
Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. treasury zero-coupon yield curve in effect at the time of grant for the expected term of the option.
Expected Term: The Company’s expected term represents the weighted-average period that the Company’s stock options are expected to be outstanding. The expected term is based on the expected time to post-vesting exercise of options by employees. The Company uses historical exercise patterns of previously granted options to derive employee behavioral patterns used to forecast expected exercise patterns.
25
The following table summarizes the Company’s activities with respect to its stock option plans as follows:
Weighted-
Average
Remaining
Number of
Exercise
Contractual
Shares (in
Price Per
Term (In
Aggregate
Options
thousands)
Share
years)
Intrinsic Value
Outstanding at January 1, 2019
18,890
34.61
303,627
Granted 01/01/19 - 03/31/19
1,570
59.52
Granted 04/01/19 - 06/30/19
Granted 07/01/19 - 09/30/19
52
58.54
Exercised
(4,999)
17.05
Cancelled or forfeited
(373)
50.42
Outstanding at September 30, 2019
15,140
42.69
6.5
237,041
Vested and expected to vest in the future at September 30, 2019
14,290
41.98
6.4
233,489
Exercisable at September 30, 2019
7,557
33.14
5.2
188,583
The weighted-average grant-date fair value of options granted during the three-months ended September 30, 2019 and 2018 was $18.32 per share and $22.80 per share, respectively. The weighted-average grant-date fair value of options granted during the nine-months ended September 30, 2019 and 2018 was $20.24 per share and $22.51 per share, respectively.
The total intrinsic value of options exercised during the three-months ended September 30, 2019 and 2018 was $2.4 million and $19.2 million, respectively. The total intrinsic value of options exercised during the nine-months ended September 30, 2019 and 2018 was $213.8 million and $52.1 million, respectively.
Cash received from option exercises under all plans for the three-months ended September 30, 2019 and 2018 was $4.1 million and $10.9 million, respectively. Cash received from option exercises under all plans for the nine-months ended September 30, 2019 and 2018 was $85.2 million and $24.5 million, respectively.
At September 30, 2019, there was $90.4 million of total unrecognized compensation expense related to non-vested options granted to employees under the Company’s stock-based payment plans. That cost is expected to be recognized over a weighted-average period of 2.5 years.
Restricted Stock Units
The cost of stock-based compensation for restricted stock units is measured based on the closing fair market value of the Company’s common stock at the date of grant. In the event that the Company has the option and intent to settle a restricted stock unit in cash, the award is classified as a liability and revalued at each balance sheet date.
26
The following table summarizes the Company’s activities with respect to non-vested restricted stock units as follows:
Weighted
Grant-Date
Non-vested at January 1, 2019
529
51.55
548
59.66
63.48
66.00
Vested
(265)
50.10
Forfeited/cancelled
(6)
59.67
Non-vested at September 30, 2019
825
57.63
The weighted-average grant-date fair value of restricted stock units granted during the three-months ended September 30, 2019 and 2018 was $66.00 per share and $58.72 per share, respectively. The weighted-average grant-date fair value of restricted stock units granted during the nine-months ended September 30, 2019 and 2018 was $59.79 per share and $57.59 per share, respectively. As of September 30, 2019, 0.7 million of restricted stock units are expected to vest over their respective terms.
At September 30, 2019, total unrecognized compensation expense relating to non-vested restricted stock units was $33.4 million, which is expected to be recognized over a weighted-average period of 2.9 years.
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 nine-months ended September 30, 2019:
Gross Unrecognized Tax
Benefits
5,035
Additions for tax positions related to the current year
Additions for tax positions related to the prior years
1,171
Decreases related to settlement with taxing authority
6,206
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Company’s condensed consolidated financial statements. As of September 30, 2019, the Company had approximately $1.4 million in accrued interest and penalties related to unrecognized tax benefits. If the Company were to prevail on all uncertain tax positions, the resultant impact on the Company’s effective tax rate would not be significant. It is expected that any change in the amount of unrecognized tax benefits within the next 12 months will not be significant.
The Company is subject to U.S. federal income tax as well as to income tax in multiple state and foreign jurisdictions.
On October 18, 2016, the IRS began its examination of the Company’s U.S. federal income tax return for the year ended December 31, 2014. On March 27, 2017, the IRS began its examination of the Company’s U.S. federal income tax return for the year ended December 31, 2015.
The Company is in various stages of examination with certain states and certain foreign jurisdictions, including Revenue Commissioners, Her Majesty’s Revenue and Customs, among others. The Company’s 2014 through 2018 U.S. federal income tax returns are subject to examination by the IRS. The Company’s state income tax returns are subject to examination for the 2014 through 2018 tax years.
27
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 (in thousands):
Weighted-average shares outstanding:
Dilutive
3,953
7,261
4,583
7,319
For the three-months ended September 30, 2019 and 2018, options and awards outstanding totaling 4.7 million shares and 3.2 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive. For the nine-months ended September 30, 2019 and 2018, options and awards outstanding totaling 4.3 million shares and 3.0 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.
18. SEGMENT INFORMATION
The Company has three operating and reportable segments, (i) Monster Energy® Drinks segment, which is primarily comprised of the Company’s Monster Energy® drinks and Reign Total Body FuelTM high performance energy drinks, (ii) Strategic Brands segment, which is comprised primarily of the various energy drink brands acquired from TCCC in 2015 as well as the Company’s affordable energy brands, and (iii) Other segment, which is comprised of the AFF Third-Party Products.
The Company’s Monster Energy® Drinks segment primarily generates net operating revenues by selling ready-to-drink packaged drinks primarily to bottlers and full service beverage distributors. In some cases, the Company sells directly to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, foodservice customers and the military.
The Company’s Strategic Brands segment primarily generates net operating revenues by selling “concentrates” and/or “beverage bases” to authorized bottling and canning operations. Such bottlers generally combine the concentrates and/or beverage bases with sweeteners, water and other ingredients to produce ready-to-drink packaged energy drinks. The ready-to-drink packaged energy drinks are then sold by such bottlers to other bottlers, full service distributors or retailers, including, retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, foodservice customers, drug stores and the military. To a lesser extent, the Company’s Strategic Brands segment generates net operating revenues by selling certain ready-to-drink packaged energy drinks to bottlers and full service beverage distributors.
Generally, the Monster Energy® Drinks segment generates higher per case net operating revenues, but lower per case gross profit margin percentages than the Strategic Brands segment.
Corporate and unallocated amounts that do not relate to a reportable segment have been allocated to “Corporate & Unallocated.” No asset information, other than goodwill and other intangible assets, has been provided in the Company’s reportable segments, as management does not measure or allocate such assets on a segment basis.
28
The net revenues derived from the Company’s reportable segments and other financial information related thereto for the three- and nine-months ended September 30, 2019 and 2018 are as follows:
Net sales:
Monster Energy® Drinks(1)
1,061,383
5,861
Corporate and unallocated
Operating Income:
Monster Energy® Drinks(1) (2)
433,848
359,090
1,187,652
1,033,895
35,107
41,661
130,762
135,054
1,005
1,742
4,539
(74,517)
(62,920)
(235,546)
(196,380)
Income before tax:
434,003
359,216
1,187,916
1,034,521
35,106
41,659
130,758
135,075
3,031
(71,550)
(60,056)
(226,976)
(191,758)
Depreciation and amortization:
9,319
9,157
29,449
26,926
1,990
1,947
5,925
5,819
1,162
1,167
3,475
3,493
2,050
2,014
6,172
6,231
14,521
14,285
45,021
Corporate and unallocated expenses for the three-months ended September 30, 2019 include $50.1 million of payroll costs, of which $16.0 million was attributable to stock-based compensation expenses (see Note 15 “Stock-Based Compensation”), as well as $13.3 million attributable to professional service expenses, including accounting and legal costs, and $11.1 million of other operating
expenses. Corporate and unallocated expenses for the three-months ended September 30, 2018 include $42.1 million of payroll costs, of which $14.0 million was attributable to stock-based compensation expenses (see Note 15, “Stock-Based Compensation”), as well as $12.3 million attributable to professional service expenses, including accounting and legal costs, and $8.5 million of other operating expenses.
Corporate and unallocated expenses for the nine-months ended September 30, 2019 include $151.0 million of payroll costs, of which $46.9 million was attributable to stock-based compensation expenses (see Note 15 “Stock-Based Compensation”), as well as $49.2 million attributable to professional service expenses, including accounting and legal costs, and $35.3 million of other operating expenses. Corporate and unallocated expenses for the nine-months ended September 30, 2018 include $129.9 million of payroll costs, of which $42.4 million was attributable to stock-based compensation expenses (see Note 15, “Stock-Based Compensation”), as well as $36.5 million attributable to professional service expenses, including accounting and legal costs, and $30.0 million of other operating expenses.
CCBCC Operations, LLC accounted for approximately 13% and 14% of the Company's net sales for the three-months ended September 30, 2019 and 2018, respectively. CCBCC Operations, LLC accounted for approximately 13% and 14% of the Company's net sales for the nine-months ended September 30, 2019 and 2018, respectively.
Reyes Coca-Cola Bottling accounted for approximately 12% and 13% of the Company's net sales for the three-months ended September 30, 2019 and 2018, respectively. Reyes Coca-Cola Bottling accounted for approximately 12% and 13% of the Company's net sales for the nine-months ended September 30, 2019 and 2018, respectively.
Coca-Cola European Partners accounted for approximately 10% and 9% of the Company's net sales for the three-months ended September 30, 2019 and 2018, respectively. Coca-Cola European Partners accounted for approximately 10% and 9% of the Company's net sales for the nine-months ended September 30, 2019 and 2018, respectively.
Net sales to customers outside the United States amounted to $379.8 million and $283.0 million for the three-months ended September 30, 2019 and 2018, respectively. Such sales were approximately 34% and 28% of net sales for the three-months ended September 30, 2019 and 2018, respectively. Net sales to customers outside the United States amounted to $1.01 billion and $818.8 million for the nine-months ended September 30, 2019 and 2018, respectively. Such sales were approximately 32% and 28% of net sales for the nine-months ended September 30, 2019 and 2018, respectively.
Goodwill and other intangible assets for the Company's reportable segments as of September 30, 2019 and December 31, 2018 are as follows:
Goodwill and other intangible assets:
1,377,824
1,368,620
985,742
989,944
15,550
18,957
2,379,116
2,377,521
19. RELATED PARTY TRANSACTIONS
TCCC controls approximately 18.9% of the voting interests of the Company. The TCCC Subsidiaries, the TCCC Related Parties and the TCCC independent bottlers, purchase and distribute the Company’s products in domestic and certain international markets. The Company also pays TCCC a commission based on certain sales within the TCCC distribution network.
TCCC commissions, based on sales to the TCCC Subsidiaries and the TCCC Related Parties, were $11.6 million and $13.7 million for the three-months ended September 30, 2019 and 2018, respectively, and are included as a reduction to net sales. TCCC
commissions, based on sales to the TCCC Subsidiaries and the TCCC Related Parties, were $39.5 million and $38.1 million for the nine-months ended September 30, 2019 and 2018, respectively, and are included as a reduction to net sales.
TCCC commissions, based on sales to TCCC independent bottlers/distributors, were $4.7 million and $4.3 million for the three-months ended September 30, 2019 and 2018, respectively, and are included in operating expenses. TCCC commissions, based on sales to TCCC independent bottlers/distributors, were $13.6 million and $11.8 million for the nine-months ended September 30, 2019 and 2018, respectively, and are included in operating expenses.
Net sales to the TCCC Subsidiaries for the three-months ended September 30, 2019 and 2018 were $21.0 million and $42.3 million, respectively. Net sales to the TCCC Subsidiaries for the nine-months ended September 30, 2019 and 2018 were $59.5 million and $117.0 million, respectively. As part of TCCC’s North America refranchising, the territories of certain TCCC Subsidiaries have been transitioned to certain independent TCCC bottlers/distributors and/or TCCC Related Parties. Accordingly, the Company’s net sales classified as sales to the TCCC Subsidiaries significantly decreased for the three- and nine-months ended September 30, 2019.
The Company also purchases concentrates from TCCC which are then sold to certain of the Company's bottlers/distributors. Concentrate purchases from TCCC were $6.3 million and $7.4 million for the three-months ended September 30, 2019 and 2018, respectively. Concentrate purchases from TCCC were $20.2 million and $21.6 million for the nine-months ended September 30, 2019 and 2018, respectively.
Certain TCCC Subsidiaries also contract manufacture certain of the Company’s energy drinks. Such contract manufacturing expenses were $4.2 million and $7.0 million for the three-months ended September 30, 2019 and 2018, respectively. Such contract manufacturing expenses were $13.1 million and $18.8 million for the nine-months ended September 30, 2019 and 2018, respectively.
Accounts receivable, accounts payable and accrued promotional allowances related to the TCCC Subsidiaries are as follows at:
35,520
25,312
(25,601)
(54,430)
(6,185)
(4,044)
One director of the Company and his family, and one director's family, are principal owners of a company that provides promotional materials to the Company. Expenses incurred with such company in connection with promotional materials purchased during the three-months ended September 30, 2019 and 2018 were $0.5 million and $0.2 million, respectively. Expenses incurred with such company in connection with promotional materials purchased during the nine-months ended September 30, 2019 and 2018 were $1.1 million and $1.6 million, respectively.
In December 2018, the Company and a director of the Company entered into a 50-50 partnership that purchased land, and real property thereon, in Kona, Hawaii for the purpose of producing coffee products. The Company’s initial 50% contribution of $1.9 million was accounted for as an equity investment and is included in other assets (non-current) in the accompanying condensed consolidated balance sheet at December 31, 2018. During the three-months ended September 30, 2019, the Company made no additional capital contributions and recorded an equity loss of $0.02 million. During the nine-months ended September 30, 2019, the Company made an additional $0.05 million capital contribution and recorded an equity loss of $0.06 million. As of September 30, 2019, the Company’s equity investment is $1.9 million and is included in other assets (non-current) in the accompanying condensed consolidated balance sheet at September 30, 2019.
20. SUBSEQUENT EVENTS
On November 6, 2019, the Company’s Board of Directors authorized a new share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock. As of November 6, 2019, $36.6 million remained available for repurchase under the February 2019 Repurchase Plan. The aggregate amount available to repurchase the Company’s common stock is currently $536.6 million.
31
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Business
When this report uses the words “the Company”, “we”, “us”, and “our”, these words refer to Monster Beverage Corporation and its subsidiaries, unless the context otherwise requires. Based in Corona, California, Monster Beverage Corporation is a holding company and conducts no operating business except through its consolidated subsidiaries. The Company’s subsidiaries primarily develop and market energy drinks.
Overview
We develop, market, sell and distribute energy drink beverages and concentrates for energy drink beverages, primarily under the following brand names:
● Monster Energy®
● NOS®
● Monster Energy Ultra®
● Full Throttle®
● Monster Rehab®
● Burn®
● Monster MAXX®
● Mother®
● Java Monster®
● Nalu®
● Muscle Monster®
● Ultra Energy®
● Espresso Monster®
● Play® and Power Play(stylized)®
● Punch Monster®
● Relentless®
● Juice Monster®
● BPM®
● Monster Hydro®
● BU®
● Monster® HydroSport
● Gladiator®
● Caffé Monster®
● Samurai®
● Predator®
● Live+TM
● Reign Total Body FuelTM
● Monster Dragon TeaTM
We have three operating and reportable segments, (i) Monster Energy® Drinks segment (“Monster Energy® Drinks”), which is primarily comprised of our Monster Energy® drinks and Reign Total Body FuelTM high performance energy drinks, (ii) Strategic Brands segment (“Strategic Brands”), which is comprised primarily of the various energy drink brands acquired from The Coca-Cola Company (“TCCC”) in 2015 as well as our affordable energy brands, and (iii) Other segment (“Other”), which is comprised of certain products sold by American Fruits and Flavors LLC, a wholly-owned subsidiary, to independent third-party customers (the “AFF Third-Party Products”).
During the three-months ended September 30, 2019, we continued to expand our existing energy drink portfolio and further develop our distribution markets. During the three-months ended September 30, 2019, we introduced the following products:
In the normal course of business, we discontinue certain products and/or product lines. Those products or product lines discontinued in the three-months ended September 30, 2019, 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 $1.13 billion for the three-months ended September 30, 2019 represented record sales for our third fiscal quarter. Net sales for the three-months ended September 30, 2019 were positively impacted by approximately $31.6 million as a result
of a price increase effective from November 1, 2018 in the United States (“the U.S. Price Increase”) and effective from February 1, 2019 in Canada (the “Canada Price Increase”), on certain of our Monster Energy® brand energy drinks. Net changes in foreign currency exchange rates had an unfavorable impact on net sales of approximately $12.2 million for the three-months ended September 30, 2019. Our comparative net sales of $1.02 billion for the three-months ended September 30, 2018 were positively impacted by advance purchases of approximately $16.0 million made by our customers in anticipation of the U.S. Price Increase.
The vast majority of our net sales are derived from our Monster Energy® Drinks segment. Net sales of our Monster Energy® Drinks segment were $1.06 billion for the three-months ended September 30, 2019. Net sales of our Strategic Brands segment were $66.3 million for the three-months ended September 30, 2019. Our Monster Energy® Drinks segment represented 93.6% and 92.0% of our net sales for the three-months ended September 30, 2019 and 2018, respectively. Our Strategic Brands segment represented 5.9% and 7.3% of our net sales for the three-months ended September 30, 2019 and 2018, respectively. Our Other segment represented 0.5% and 0.7% of our net sales for the three-months ended September 30, 2019 and 2018, respectively.
Our growth strategy includes expanding our international business. Net sales to customers outside the United States were $379.8 million for the three-months ended September 30, 2019, an increase of approximately $96.8 million, or 34.2% higher than net sales to customers outside of the United States of $283.0 million for the three-months ended September 30, 2018. Such sales were approximately 34% and 28% of net sales for the three-months ended September 30, 2019 and 2018, respectively.
Our customers are primarily full service beverage bottlers/distributors, retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, drug stores, foodservice customers and the military. Percentages of our gross sales to our various customer types for the three- and nine-months ended September 30, 2019 and 2018 are reflected below. Such information includes sales made by us directly to the customer types concerned, which include our full service beverage bottlers/distributors in the United States. Such full service beverage bottlers/distributors in turn sell certain of our products to some of the same customer types listed below. We limit our description of our customer types to include only our sales to our full service bottlers/distributors without reference to such bottlers’/distributors’ sales to their own customers.
U.S. full service bottlers/distributors
56
58
International full service bottlers/distributors
35
33
Club stores and mass merchandisers
Retail grocery, specialty chains and wholesalers
Our customers include Coca-Cola Refreshments Canada Company (until September 27, 2018), Coca-Cola Canada Bottling Limited (from September 28, 2018), Coca-Cola Consolidated, Inc., Coca-Cola Bottling Company United, Inc., Reyes Coca-Cola Bottling, LLC, Great Lakes Coca-Cola Distribution, LLC, Coca-Cola Southwest Beverages LLC, The Coca-Cola Bottling Company of Northern New England, Inc., Swire Pacific Holdings, Inc. (USA), Liberty Coca-Cola Beverages, LLC, Coca-Cola European Partners, Coca-Cola Hellenic, Coca-Cola FEMSA, Coca-Cola Amatil, Swire Coca-Cola (China), COFCO Coca-Cola, Coca-Cola Beverages Africa, Coca-Cola İçecek and certain other TCCC network bottlers, Asahi Soft Drinks, Co., Ltd., Kalil Bottling Group (until March 5, 2019), Big Geyser, Inc. (until April 5, 2019), Wal-Mart, Inc. (including Sam’s Club) and Costco Wholesale Corporation. 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.
Coca-Cola Consolidated, Inc. accounted for approximately 13% and 14% of our net sales for the three-months ended September 30, 2019 and 2018, respectively. Coca-Cola Consolidated, Inc. accounted for approximately 13% and 14% of our net sales for the nine-months ended September 30, 2019 and 2018, respectively.
Reyes Coca-Cola Bottling accounted for approximately 12% and 13% of our net sales for the three-months ended September 30, 2019 and 2018, respectively. Reyes Coca-Cola Bottling accounted for approximately 12% and 13% of our net sales for the nine-months ended September 30, 2019 and 2018, respectively.
Coca-Cola European Partners accounted for approximately 10% and 9% of our net sales for the three-months ended September 30, 2019 and 2018, respectively. Coca-Cola European Partners accounted for approximately 10% and 9% of our net sales for the nine-months ended September 30, 2019 and 2018, respectively.
Results of Operations
The following table sets forth key statistics for the three- and nine-months ended September 30, 2019 and 2018.
Percentage
(In thousands, except per share amounts)
Change
19 vs. 18
Net sales1
11.6
Cost of sales
12.7
11.9
Gross profit*1
10.8
9.4
Gross profit as a percentage of net sales
59.4
59.8
59.9
60.5
Operating expenses2
3.5
7.3
Operating expenses as a percentage of net sales
24.5
26.4
25.8
26.6
Operating income1,2
16.5
11.1
Operating income as a percentage of net sales
33.4
34.1
33.9
4.5
67.7
Income before provision for income taxes1,2
16.3
11.4
Provision for income taxes
33.2
5.9
Income taxes as a percentage of income before taxes
25.0
21.8
22.1
23.3
Net income1,2
13.1
Net income as a percentage of net sales
26.3
26.8
26.2
Net income per common share:
13.3
16.4
14.0
16.9
Case sales (in thousands)
(in 192-ounce case equivalents)
121,854
111,038
9.7
342,734
313,410
¹Includes $10.7 million and $11.1 million for the three-months ended September 30, 2019 and 2018, respectively, related to the recognition of deferred revenue. Includes $35.6 million and $33.3 million for the nine-months ended September 30, 2019 and 2018, respectively, related to the recognition of deferred revenue.
2Includes $0.0 million and $14.1 million for the three-months ended September 30, 2019 and 2018, respectively, of distributor termination costs. Includes $11.0 million and $26.6 million for the nine-months ended September 30, 2019 and 2018, respectively, of 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 September 30, 2019 Compared to the Three-Months Ended September 30, 2018.
Net Sales. Net sales were $1.13 billion for the three-months ended September 30, 2019, an increase of approximately $117.4 million, or 11.6% higher than net sales of $1.02 billion for the three-months ended September 30, 2018. Net sales for the three-months ended September 30, 2019 were positively impacted by approximately $31.6 million as a result of the U.S. Price Increase and the Canada Price Increase, on certain of our Monster Energy® brand energy drinks. The comparative net sales for the three-months ended September 30, 2018 were positively impacted by advance purchases made by our customers in anticipation of the U.S. Price Increase. We estimate net sales for the three-months ended September 30, 2018 were increased by approximately $16.0 million as a result of such advance purchases. Net changes in foreign currency exchange rates had an unfavorable impact on net sales of approximately $12.2 million for the three-months ended September 30, 2019.
Net sales for the Monster Energy® Drinks segment were $1.06 billion for the three-months ended September 30, 2019, an increase of approximately $126.2 million, or 13.5% higher than net sales of $935.1 million for the three-months ended September 30,
34
2018. Net sales for the Monster Energy® Drinks segment increased primarily due to (i) sales of our Reign Total Body FuelTM high performance energy drinks, introduced in the first quarter of 2019, (ii) the price increases described above and (iii) increased worldwide sales by volume of our Monster Energy® brand energy drinks as a result of increased consumer demand. Net changes in foreign currency exchange rates had an unfavorable impact on net sales for the Monster Energy® Drinks segment of approximately $10.8 million for the three-months ended September 30, 2019.
Net sales for the Strategic Brands segment were $66.3 million for the three-months ended September 30, 2019, a decrease of approximately $8.1 million, or 10.9% lower than net sales of $74.4 million for the three-months ended September 30, 2018. Net changes in foreign currency exchange rates had an unfavorable impact on net sales for the Strategic Brands segment of approximately $1.4 million for the three-months ended September 30, 2019.
Net sales for the Other segment were $5.9 million for the three-months ended September 30, 2019, a decrease of approximately $0.7 million, or 10.8% lower than net sales of $6.6 million for the three-months ended September 30, 2018.
Case sales, in 192-ounce case equivalents, were 121.9 million cases for the three-months ended September 30, 2019, an increase of approximately 10.8 million cases or 9.7% higher than case sales of 111.0 million cases for the three-months ended September 30, 2018. The overall average net sales per case (excluding net sales of AFF Third-Party Products of $5.9 million and $6.6 million for the three-months ended September 30, 2019 and 2018, respectively, as these sales do not have unit case equivalents) increased to $9.25 for the three-months ended September 30, 2019, which was 1.8% higher than the average net sales per case of $9.09 for the three-months ended September 30, 2018.
Gross Profit. Gross profit was $673.0 million for the three-months ended September 30, 2019, an increase of approximately $65.3 million, or 10.8% higher than the gross profit of $607.7 million for the three-months ended September 30, 2018. The increase in gross profit dollars was primarily the result of the $126.2 million increase in net sales of our Monster Energy® Drinks segment for the three-months ended September 30, 2019.
Gross profit as a percentage of net sales decreased to 59.4% for the three-months ended September 30, 2019 from 59.8% for the three-months ended September 30, 2018. The decrease for the three-months ended September 30, 2019 was primarily the result of geographical and product sales mix. Such decrease was partially offset by the sales price increases discussed above as well as reduced input costs.
Operating Expenses. Total operating expenses were $277.6 million for the three-months ended September 30, 2019, an increase of approximately $9.5 million, or 3.5% higher than total operating expenses of $268.1 million for the three-months ended September 30, 2018. The increase in operating expenses was primarily due to increased payroll expenses of $10.4 million (of which $1.9 million was related to an increase in stock-based compensation), increased expenditures of $6.1 million for other marketing expenses and increased expenditures of $3.5 million for sponsorships and endorsements. The increase in operating expenses was partially offset by decreased expenditures of $14.1 million related to the costs associated with distributor terminations and decreased out-bound freight and warehouse costs of $4.7 million.
Operating Income. Operating income was $395.4 million for the three-months ended September 30, 2019, an increase of approximately $55.9 million, or 16.5% higher than operating income of $339.6 million for the three-months ended September 30, 2018. Operating income as a percentage of net sales increased to 34.9% for the three-months ended September 30, 2019 from 33.4% for the three-months ended September 30, 2018. Operating income was $72.6 million and $43.8 million for the three-months ended September 30, 2019 and 2018, respectively, in connection with our operations in Europe, Middle East and Africa (“EMEA”), Asia Pacific and South America.
Operating income* for the Monster Energy® Drinks segment was $433.8 million for the three-months ended September 30, 2019, an increase of approximately $74.8 million, or 20.8% higher than operating income of $359.1 million for the three-months ended September 30, 2018. The increase in operating income for the Monster Energy® Drinks segment was primarily the result of the $126.2 million increase in net sales of our Monster Energy® Drinks segment for the three-months ended September 30, 2019.
Operating income* for the Strategic Brands segment was $35.1 million for the three-months ended September 30, 2019, a decrease of approximately $6.6 million, or 15.7% lower than operating income of $41.7 million for the three-months ended September 30, 2018.
Operating income* for the Other segment was $1.0 million for the three-months ended September 30, 2019, a decrease of approximately $0.7 million, or 42.3% lower than operating income of $1.7 million for the three-months ended September 30, 2018.
*Exclusive of corporate and unallocated expenses.
Interest and Other Income, net. Interest and other non-operating income, net, was $3.1 million for the three-months ended September 30, 2019, as compared to interest and other non-operating income, net, of $3.0 million for the three-months ended September 30, 2018. Foreign currency transaction losses were $2.8 million and $0.3 million for the three-months ended September 30, 2019 and 2018, respectively. Interest income was $6.1 million and $3.4 million for the three-months ended September 30, 2019 and 2018, respectively.
Provision for Income Taxes. Provision for income taxes was $99.6 million for the three-months ended September 30, 2019, an increase of $24.8 million, or 33.2% higher than the provision for income taxes of $74.8 million for the three-months ended September 30, 2018. The effective combined federal, state and foreign tax rate increased to 25.0% from 21.8% for the three-months ended September 30, 2019 and 2018, respectively. The increase in the effective tax rate was primarily attributable to increased income taxes in certain foreign jurisdictions as well as a decrease in the equity compensation deduction. In addition, the comparative effective tax rate for the three-months ended September 30, 2018 included a non-recurring tax benefit.
Net Income. Net income was $298.9 million for the three-months ended September 30, 2019, an increase of $31.2 million, or 11.7% higher than net income of $267.7 million for the three-months ended September 30, 2018. The increase in net income was primarily due to the $65.3 million increase in gross profit. The increase in net income was partially offset by an increase in the provision for income taxes of $24.8 million and an increase in operating expenses of $9.5 million.
Results of Operations for the Nine-Months Ended September 30, 2019 Compared to the Nine-Months Ended September 30, 2018.
Net Sales. Net sales were $3.18 billion for the nine-months ended September 30, 2019, an increase of approximately $300.7 million, or 10.4% higher than net sales of $2.88 billion for the nine-months ended September 30, 2018. Net sales for the nine-months ended September 30, 2019 were positively impacted by approximately $89.2 million as a result of the U.S. Price Increase and the Canada Price Increase, on certain of our Monster Energy® brand energy drinks. Net changes in foreign currency exchange rates had an unfavorable impact on net sales of approximately $60.1 million for the nine-months ended September 30, 2019.
Net sales for the Monster Energy® Drinks segment were $2.95 billion for the nine-months ended September 30, 2019, an increase of approximately $305.8 million, or 11.6% higher than net sales of $2.65 billion for the nine-months ended September 30, 2018. Net sales for the Monster Energy® Drinks segment increased primarily due to (i) sales of our Reign Total Body FuelTM high performance energy drinks, introduced in the first quarter of 2019, (ii) the price increases described above, and (iii) increased worldwide sales by volume of our Monster Energy® brand energy drinks as a result of increased consumer demand. Net changes in foreign currency exchange rates had an unfavorable impact on net sales for the Monster Energy® Drinks segment of approximately $51.1 million for the nine-months ended September 30, 2019.
Net sales for the Strategic Brands segment were $215.8 million for the nine-months ended September 30, 2019, a decrease of approximately $4.2 million, or 1.9% lower than net sales of $220.0 million for the nine-months ended September 30, 2018. Net changes in foreign currency exchange rates had an unfavorable impact on net sales for the Strategic Brands segment of approximately $9.0 million for the nine-months ended September 30, 2019.
Net sales for the Other segment were $17.0 million for the nine-months ended September 30, 2019, a decrease of approximately $0.9 million, or 4.9% lower than net sales of $17.9 million for the nine-months ended September 30, 2018.
Case sales, in 192-ounce case equivalents, were 342.7 million cases for the nine-months ended September 30, 2019, an increase of approximately 29.3 million cases or 9.4% higher than case sales of 313.4 million cases for the nine-months ended September 30, 2018. The overall average net sales per case (excluding net sales of AFF Third-Party Products of $17.0 million and $17.9 million for the nine-months ended September 30, 2019 and 2018, respectively, as these sales do not have unit case equivalents) increased to $9.24 for the nine-months ended September 30, 2019, which was 1.1% higher than the average net sales per case of $9.14 for the nine-months ended September 30, 2018. The increase in the average net sales per case was primarily attributable to a price increase effective from
36
November 1, 2018 in the United States and effective from February 1, 2019 in Canada, on certain of our Monster Energy® brand energy drinks.
Gross Profit. Gross profit was $1.91 billion for the nine-months ended September 30, 2019, an increase of approximately $164.6 million, or 9.4% higher than the gross profit of $1.74 billion for the nine-months ended September 30, 2018. The increase in gross profit dollars was primarily the result of the $305.8 million increase in net sales of our Monster Energy® Drinks segment for the nine-months ended September 30, 2019.
Gross profit as a percentage of net sales decreased to 59.9% for the nine-months ended September 30, 2019 from 60.5% for the nine-months ended September 30, 2018. The decrease for the nine-months ended September 30, 2019 was primarily the result of geographical and product sales mix. Such decrease was partially offset by the sales price increases discussed above.
Operating Expenses. Total operating expenses were $821.9 million for the nine-months ended September 30, 2019, an increase of approximately $55.9 million, or 7.3% higher than total operating expenses of $766.1 million for the nine-months ended September 30, 2018. The increase in operating expenses was primarily due to increased payroll expenses of $26.4 million (of which $4.5 million was related to an increase in stock-based compensation), increased expenditures of $13.0 million for professional service fees, including legal and accounting costs, increased expenditures of $10.4 million for sponsorships and endorsements, and increased expenditures of $10.8 million in other marketing expenses. The increase in operating expenses was partially offset by decreased expenditures of $15.6 million related to the costs associated with distributor terminations.
Operating Income. Operating income was $1.09 billion for the nine-months ended September 30, 2019, an increase of approximately $108.8 million, or 11.1% higher than operating income of $977.1 million for the nine-months ended September 30, 2018. Operating income as a percentage of net sales increased to 34.1% for the nine-months ended September 30, 2019 from 33.9% for the nine-months ended September 30, 2018. Operating income was $180.1 million and $135.0 million for the nine-months ended September 30, 2019 and 2018, respectively, in connection with our operations in Europe, Middle East and Africa (“EMEA”), Asia Pacific and South America.
Operating income* for the Monster Energy® Drinks segment was $1.19 billion for the nine-months ended September 30, 2019, an increase of approximately $153.8 million, or 14.9% higher than operating income of $1.03 billion for the nine-months ended September 30, 2018. The increase in operating income for the Monster Energy® Drinks segment was primarily the result of the $305.8 million increase in net sales of our Monster Energy® Drinks segment for the nine-months ended September 30, 2019.
Operating income* for the Strategic Brands segment was $130.8 million for the nine-months ended September 30, 2019, a decrease of approximately $4.3 million, or 3.2% lower than operating income of $135.1 million for the nine-months ended September 30, 2018.
Operating income* for the Other segment was $3.0 million for the nine-months ended September 30, 2019, a decrease of approximately $1.5 million, or 33.3% lower than operating income of $4.5 million for the nine-months ended September 30, 2018.
Interest and Other Income, net. Interest and other non-operating income, net, was $8.8 million for the nine-months ended September 30, 2019, as compared to interest and other non-operating income, net, of $5.3 million for the nine-months ended September 30, 2018. Foreign currency transaction losses were $3.9 million and $3.6 million for the nine-months ended September 30, 2019 and 2018, respectively. Interest income was $13.5 million and $9.1 million for the nine-months ended September 30, 2019 and 2018, respectively.
Provision for Income Taxes. Provision for income taxes was $241.8 million for the nine-months ended September 30, 2019, an increase of $13.4 million, or 5.9% higher than the provision for income taxes of $228.5 million for the nine-months ended September 30, 2018. The effective combined federal, state and foreign tax rate decreased to 22.1% from 23.3% for the nine-months ended September 30, 2019 and 2018, respectively. The decrease in effective tax rate was primarily attributable to an increase in equity compensation deductions. The decrease in the provision for income taxes was partially offset by increased income taxes in certain foreign jurisdictions. In addition, the comparative effective tax rate for the nine-months ended September 30, 2018 included a non-recurring tax benefit.
Net Income. Net income was $852.9 million for the nine-months ended September 30, 2019, an increase of $99.0 million, or 13.1% higher than net income of $753.9 million for the nine-months ended September 30, 2018. The increase in net income was primarily due to the $164.6 million increase in gross profit. The increase in net income was partially offset by the increase in operating expenses of $55.9 million and an increase in the provision for income taxes of $13.4 million.
Non-GAAP Financial Measures
Gross Sales**. Gross sales were $1.32 billion for the three-months ended September 30, 2019, an increase of approximately $133.8 million, or 11.3% higher than gross sales of $1.18 billion for the three-months ended September 30, 2018. Gross sales for the three-months ended September 30, 2019 were positively impacted by approximately $31.6 million as a result of the U.S. Price Increase and the Canada Price Increase, on certain of our Monster Energy® brand energy drinks. The comparative gross sales for the three-months ended September 30, 2018 were positively impacted by advance purchases made by our customers in anticipation of the U.S. Price Increase. We estimate gross sales for the three-months ended September 30, 2018 were increased by approximately $18.0 million as a result of such advance purchases. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales of approximately $15.1 million for the three-months ended September 30, 2019.
Gross sales for the Monster Energy® Drinks segment were $1.24 billion for the three-months ended September 30, 2019, an increase of approximately $143.3 million, or 13.1% higher than gross sales of $1.09 billion for the three-months ended September 30, 2018. Gross sales for the Monster Energy® Drinks segment increased primarily due to (i) sales of our Reign Total Body FuelTM high performance energy drinks, introduced in the first quarter of 2019, (ii) the price increases described above and (iii) increased worldwide sales by volume of our Monster Energy® brand energy drinks as a result of increased consumer demand. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales for the Monster Energy® Drinks segment of approximately $13.7 million for the three-months ended September 30, 2019.
Gross sales of our Strategic Brands segment were $76.7 million for the three-months ended September 30, 2019, a decrease of $8.8 million, or 10.3% lower than gross sales of $85.5 million for the three-months ended September 30, 2018. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales in the Strategic Brands segment of approximately $1.4 million for the three-months ended September 30, 2019.
Gross sales of our Other segment were $5.9 million for the three-months ended September 30, 2019, a decrease of $0.7 million, or 10.8% lower than gross sales of $6.6 million for the three-months ended September 30, 2018.
Promotional allowances, commissions and other expenses, as described in the footnote below, were $184.7 million for the three-months ended September 30, 2019, an increase of $16.4 million, or 9.7% higher than promotional allowances, commissions and other expenses of $168.3 million for the three-months ended September 30, 2018. Promotional allowances, commissions and other expenses as a percentage of gross sales decreased to 14.0% from 14.2% for the three-months ended September 30, 2019 and 2018, respectively.
Gross Sales**. Gross sales were $3.70 billion for the nine-months ended September 30, 2019, an increase of approximately $328.8 million, or 9.8% higher than gross sales of $3.37 billion for the nine-months ended September 30, 2018. Gross sales for the nine-months ended September 30, 2019 were positively impacted by approximately $89.2 million as a result of U.S. Price Increase and the Canada Price Increase, on certain of our Monster Energy® brand energy drinks. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales of approximately $71.7 million for the nine-months ended September 30, 2019.
Gross sales for the Monster Energy® Drinks segment were $3.43 billion for the nine-months ended September 30, 2019, an increase of approximately $336.8 million, or 10.9% higher than gross sales of $3.09 billion for the nine-months ended September 30, 2018. Gross sales for the Monster Energy® Drinks segment increased primarily due to (i) sales of our Reign Total Body FuelTM high performance energy drinks, introduced in the first quarter of 2019, (ii) the price increases described above, and (iii) increased sales by volume of our Monster Energy® brand energy drinks as a result of increased domestic and international consumer demand. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales for the Monster Energy® Drinks segment of approximately $62.7 million for the nine-months ended September 30, 2019.
Gross sales of our Strategic Brands segment were $246.6 million for the nine-months ended September 30, 2019, a decrease of $7.2 million, or 2.8% lower than gross sales of $253.8 million for the nine-months ended September 30, 2018. Net changes in foreign
38
currency exchange rates had an unfavorable impact on gross sales in the Strategic Brands segment of approximately $9.0 million for the nine-months ended September 30, 2019.
Gross sales of our Other segment were $17.0 million for the nine-months ended September 30, 2019, a decrease of $0.9 million, or 4.9% lower than gross sales of $17.9 million for the nine-months ended September 30, 2018.
Promotional allowances, commissions and other expenses, as described in the footnote below, were $511.5 million for the nine-months ended September 30, 2019, an increase of $28.1 million, or 5.8% higher than promotional allowances, commissions and other expenses of $483.4 million for the nine-months ended September 30, 2018. Promotional allowances, commissions and other expenses as a percentage of gross sales decreased to 13.8% from 14.4% for the nine-months ended September 30, 2019 and 2018, respectively.
**Gross sales are 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. The use of 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:
(In thousands)
Gross sales, net of discounts and returns
1,318,267
1,184,444
11.3
3,695,128
3,366,334
9.8
Less: Promotional allowances, commissions and other expenses***
184,690
168,284
511,515
483,381
***Although the expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the presentation thereof does not conform to 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 our bottlers/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 our bottlers/distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products; (iii) our agreed share of fees given to bottlers/distributors and/or directly to retailers for advertising, in-store marketing and promotional activities; (iv) our agreed share of slotting, shelf space allowances and other fees given directly to retailers, club stores and/or wholesalers; (v) incentives given to our bottlers/distributors and/or retailers for achieving or exceeding certain predetermined sales goals; (vi) discounted or free products; (vii) contractual fees given to our bottlers/distributors related to sales made by us direct to certain customers that fall within the bottlers’/distributors’ sales territories; and (viii) certain commissions paid based on sales to our bottlers/distributors. 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. Our promotional allowance programs with our numerous bottlers/distributors and/or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one week to one year. The primary drivers of our promotional and other allowance activities for the three- and nine-months ended September 30, 2019 and 2018 were (i) to increase sales volume and trial, (ii) to address market conditions, and (iii) to secure shelf and display space at retail.
Sales
The table below discloses selected quarterly data regarding sales for the three- and nine-months ended September 30, 2019 and 2018, 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 finished products or concentrates as if converted into finished products 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
39
year. However, our experience with our energy drink products suggests they may be less seasonal than the seasonality of traditional beverages. In addition, our continued growth internationally may further reduce the impact of seasonality on our business. 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 and changes in advertising and promotional expenses.
(In thousands, except average net sales per case)
Net sales
Less: AFF third-party sales
(5,860)
(6,573)
(16,973)
(17,853)
Adjusted net sales1
1,127,717
1,009,587
3,166,640
2,865,100
Case sales by segment:
103,987
91,806
286,284
257,746
17,867
19,232
56,450
55,664
-
Total case sales
Average net sales per case
9.25
9.09
9.24
9.14
1Excludes Other segment net sales of $5.9 million and $6.6 million for the three-months ended September 30, 2019 and 2018, respectively, comprised of net sales of AFF Third-Party Products to independent third-party customers, as these sales do not have unit case equivalents. Excludes Other segment net sales of $17.0 million and $17.9 million for the nine-months ended September 30, 2019 and 2018, respectively, comprised of net sales of AFF Third-Party Products to independent third-party customers, as these sales do not have unit case equivalents.
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.
Liquidity and Capital Resources
Cash flows provided by operating activities. Cash provided by operating activities was $821.1 million for the nine-months ended September 30, 2019, as compared with cash provided by operating activities of $821.4 million for the nine-months ended September 30, 2018.
For the nine-months ended September 30, 2019, cash provided by operating activities was primarily attributable to net income earned of $852.9 million and adjustments for certain non-cash expenses, consisting of $47.8 million of depreciation and amortization and $46.9 million of stock-based compensation. For the nine-months ended September 30, 2019, cash provided by operating activities also increased due to a $69.5 million increase in accounts payable, a $55.8 million increase in accrued promotional allowances, a $10.3 million increase in income taxes payable, a $6.2 million decrease in prepaid income taxes and a $5.8 million decrease in distributor receivables. For the nine-months ended September 30, 2019, cash used in operating activities was primarily attributable to a $179.8 million increase in accounts receivable, a $44.9 million increase in inventories, a $19.6 million decrease in deferred revenue, a $16.1 million increase in prepaid expenses and other assets, a $9.6 million decrease in accrued liabilities and a $3.9 million decrease in accrued compensation.
For the nine-months ended September 30, 2018, cash provided by operating activities was primarily attributable to net income earned of $753.9 million and adjustments for certain non-cash expenses, consisting of $42.4 million of stock-based compensation and $42.5 million of depreciation and other amortization. For the nine-months ended September 30, 2018, cash provided by operating activities also increased due to a $96.5 million decrease in prepaid income taxes, a $48.7 million increase in accrued promotional allowances, a $39.6 million increase in accounts payable, a $16.5 million increase in accrued liabilities, a $7.8 million decrease in distributor receivables and a $1.6 million increase in other liabilities. For the nine-months ended September 30, 2018, cash used in operating activities was primarily attributable to a $181.7 million increase in accounts receivable, a $16.5 million increase in prepaid
40
expenses and other assets, a $13.9 million decrease in deferred revenue, a $10.3 million increase in inventories, a $4.4 million decrease in accrued compensation and a $1.4 million decrease in income taxes payable.
Cash flows (used in) provided by investing activities. Cash used in investing activities was $328.2 million for the nine-months ended September 30, 2019 as compared to cash provided by investing activities of $154.1 million for the nine-months ended September 30, 2018.
For both the nine-months ended September 30, 2019 and 2018, cash provided by investing activities was primarily attributable to sales of available-for-sale investments. For both the nine-months ended September 30, 2019 and 2018, cash used in investing activities was primarily attributable to purchases of available-for-sale investments. For both the nine-months ended September 30, 2019 and 2018, 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, equipment used for sales and administrative activities, certain leasehold improvements, as well as acquisitions of and/or improvements to real property. 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, 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) to develop our brand in international markets and for other corporate purposes. From time to time, we may also use cash to purchase additional real property related to our beverage business and/or acquire compatible businesses.
Cash flows used in financing activities. Cash used in financing activities was $405.3 million for the nine-months ended September 30, 2019 as compared to cash used in financing activities of $782.2 million for the nine-months ended September 30, 2018. The cash used in financing activities for both the nine-months ended September 30, 2019 and 2018 was primarily the result of the repurchases of our common stock. The cash provided by financing activities for both the nine-months ended September 30, 2019, and 2018 was primarily attributable to the issuance of our common stock under our stock-based compensation plans.
Purchases of inventories, increases in accounts receivable and other assets, acquisition of property and equipment (including real property, personal property and coolers), leasehold improvements, advances for or the purchase of equipment for our bottlers, 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 September 30, 2019, we had $717.6 million in cash and cash equivalents, $587.4 million in short-term investments and $14.4 million in long-term investments. We have historically invested these amounts in U.S. treasuries, U.S. government agency securities and municipal securities, commercial paper, certificates of deposit, variable rate demand notes 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 $717.6 million of cash and cash equivalents held at September 30, 2019, $420.8 million was held by our foreign subsidiaries. No short-term or long-term investments were held by our foreign subsidiaries at September 30, 2019.
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 capital assets, purchases of equipment, purchases of real property and purchases of shares of our common stock, 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 $150.0 million through September 30, 2020. However, future business opportunities may cause a change in this estimate.
The following represents a summary of the Company’s contractual commitments and related scheduled maturities as of September 30, 2019:
41
Payments due by period (in thousands)
Less than
1-3
3-5
More than
Obligations
1 year
5 years
Contractual Obligations1
171,556
97,659
67,097
6,800
3,771
5,476
3,648
13,466
Purchase Commitments2
29,258
229,040
132,553
72,573
10,448
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 $6.2 million of unrecognized tax benefits have been recorded as liabilities as of September 30, 2019. It is expected that the amount of unrecognized tax benefits will not significantly change within the next 12 months. As of September 30, 2019, we had $1.4 million of accrued interest and penalties related to unrecognized tax benefits.
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 Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (“Form 10-K”).
Recent Accounting Pronouncements
The information required by this Item is incorporated herein by reference to the Notes to Condensed Consolidated Financial Statements - Note 2. Recent Accounting Pronouncements, in Part I, Item 1, of this Quarterly Report on Form 10-Q.
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 Exchange 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, and 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:
42
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 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 September 30, 2019 compared with the disclosures in Part II, Item 7A of our Form 10-K.
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 September 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this Item is incorporated herein by reference to the Notes to Condensed Consolidated Financial Statements - Note 12. Commitments and Contingencies: Legal Proceedings in Part I, Item 1, of this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
Our risk factors are discussed in our Form 10-K. There have been no material changes with respect to the risk factors disclosed in our Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 7, 2018, the Company’s Board of Directors authorized a share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock (the “August 2018 Repurchase Plan”). During the three-months ended September 30, 2019, the Company purchased 0.4 million shares of common stock at an average purchase price of $58.32 per share, for a total amount of $20.6 million (excluding broker commissions), which exhausted the availability under the August 2018 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying condensed consolidated balance sheet at September 30, 2019.
On November 6, 2019, the Company’s Board of Directors authorized a new share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock and, accordingly, the aggregate amount available to repurchase the Company’s common stock is currently $536.6 million.
The following tabular summary reflects the Company’s repurchase activity during the quarter ended September 30, 2019:
Maximum Number (or
Approximate Dollar
Total Number of
Value) of Shares that
Shares Purchased
May Yet Be Purchased
Total Number
as Part of Publicly
Under the Plans or
of Shares
Average Price
Announced Plans
Programs (In
Period
Purchased
per Share¹
or Programs
thousands)²
Jul 1 – Jul 31, 2019
520,610
Aug 1 – Aug 31, 2019
78,699
55.56
516,236
Sep 1 - Sep 30, 2019
4,261,205
58.65
266,237
¹Excluding broker commissions paid.
²Net of broker commissions paid.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.OTHER INFORMATION
ITEM 6.EXHIBITS
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 September 30, 2019, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018, (ii) Condensed Consolidated Statements of Income for the three- and nine-months ended September 30, 2019 and 2018, (iii) Condensed Consolidated Statements of Comprehensive Income for the three- and nine-months ended September 30, 2019 and 2018, (iv) Condensed Consolidated Statements of Stockholders’ Equity for the nine-months ended September 30, 2019 and 2018, (v) Condensed Consolidated Statements of Cash Flows for the nine-months ended September 30, 2019 and 2018, and (vi) the Notes to Condensed Consolidated Financial Statements.
104*
The cover page from Monster Beverage Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in iXBRL (Inline eXtensible Business Reporting Language) and contained in Exhibit 101.
* Filed herewith
SIGNATURES
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.
Registrant
Date: November 7, 2019
/s/ RODNEY C. SACKS
Rodney C. Sacks
Chairman of the Board of Directors
and Chief Executive Officer