Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2020
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 526,563,592 shares of common stock, par value $0.005 per share, outstanding as of April 30, 2020.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
MARCH 31, 2020
INDEX
Part I.
FINANCIAL INFORMATION
Page No.
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019
3
Condensed Consolidated Statements of Income for the Three-Months Ended March 31, 2020 and 2019
4
Condensed Consolidated Statements of Comprehensive Income for the Three-Months Ended March 31, 2020 and 2019
5
Condensed Consolidated Statements of Stockholders’ Equity for the Three-Months Ended March 31, 2020 and 2019
6
Condensed Consolidated Statements of Cash Flows for the Three-Months Ended March 31, 2020 and 2019
7
Notes to Condensed Consolidated Financial Statements
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
30
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
43
Item 4.
Controls and Procedures
Part II.
OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
45
Defaults Upon Senior Securities
46
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
47
Signatures
48
2
PART I – FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2020 AND DECEMBER 31, 2019
(In Thousands, Except Par Value) (Unaudited)
March 31,
December 31,
2020
2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
701,836
797,957
Short-term investments
233,513
533,063
Accounts receivable, net
670,570
540,330
Inventories
352,305
360,731
Prepaid expenses and other current assets
71,865
54,868
Prepaid income taxes
18,633
29,360
Total current assets
2,048,722
2,316,309
INVESTMENTS
13,922
12,905
PROPERTY AND EQUIPMENT, net
295,570
298,640
DEFERRED INCOME TAXES, net
84,777
GOODWILL
1,331,643
OTHER INTANGIBLE ASSETS, net
1,053,107
1,052,105
OTHER ASSETS
53,756
53,973
Total Assets
4,881,497
5,150,352
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable
305,529
274,045
Accrued liabilities
145,224
114,075
Accrued promotional allowances
171,406
166,761
Deferred revenue
44,844
44,237
Accrued compensation
21,827
47,262
Income taxes payable
12,711
14,717
Total current liabilities
701,541
661,097
DEFERRED REVENUE
278,393
287,469
OTHER LIABILITIES
30,617
30,505
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Common stock - $0.005 par value; 1,250,000 shares authorized; 637,104 shares issued and 526,839 shares outstanding as of March 31, 2020; 636,460 shares issued and 536,698 shares outstanding as of December 31, 2019
3,186
3,182
Additional paid-in capital
4,428,580
4,397,511
Retained earnings
5,301,315
5,022,480
Accumulated other comprehensive loss
(62,682)
(32,387)
Common stock in treasury, at cost; 110,265 shares and 99,762 shares as of March 31, 2020 and December 31, 2019, respectively
(5,799,453)
(5,219,505)
Total stockholders’ equity
3,870,946
4,171,281
Total Liabilities and Stockholders’ Equity
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE-MONTHS ENDED MARCH 31, 2020 AND 2019
(In Thousands, Except Per Share Amounts) (Unaudited)
Three-Months Ended
NET SALES
1,062,097
945,991
COST OF SALES
424,901
372,459
GROSS PROFIT
637,196
573,532
OPERATING EXPENSES
272,208
262,071
OPERATING INCOME
364,988
311,461
INTEREST and OTHER INCOME, net
872
2,742
INCOME BEFORE PROVISION FOR INCOME TAXES
365,860
314,203
PROVISION FOR INCOME TAXES
87,025
52,718
NET INCOME
278,835
261,485
NET INCOME PER COMMON SHARE:
Basic
0.52
0.48
Diluted
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS:
536,061
542,768
540,518
548,273
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands) (Unaudited)
Net income, as reported
Other comprehensive loss:
Change in foreign currency translation adjustment
(30,599)
(1,381)
Available-for-sale investments:
Change in net unrealized gains
304
120
Reclassification adjustment for net gains included in net income
—
Net change in available-for-sale investments
Other comprehensive loss
(30,295)
(1,261)
Comprehensive income
248,540
260,224
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Accumulated
Additional
Other
Total
Common stock
Paid-in
Retained
Comprehensive
Treasury stock
Stockholders'
Shares
Amount
Capital
Earnings
Loss
Equity
Balance, December 31, 2019
636,460
(99,762)
Stock-based compensation
17,098
Exercise of stock options
644
13,971
13,975
Unrealized gain, net on available-for-sale securities
Repurchase of common stock
(10,503)
(579,948)
Foreign currency translation
Net income
Balance, March 31, 2020
637,104
(110,265)
Balance, December 31, 2018
630,970
3,155
4,238,170
3,914,645
(32,864)
(87,294)
(4,512,205)
3,610,901
15,324
3,871
19
35,144
35,163
(4,000)
(222,792)
Balance, March 31, 2019
634,841
3,174
4,288,638
4,176,130
(34,125)
(91,294)
(4,734,997)
3,698,820
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
16,546
14,870
Gain on disposal of property and equipment
(58)
(115)
Impairment of intangibles
3,000
Deferred income taxes
472
Effect on cash of changes in operating assets and liabilities:
Accounts receivable
(147,660)
(116,426)
Distributor receivables
176
2,923
1,037
(24,004)
Prepaid expenses and other assets
(18,081)
(21,492)
8,078
(25,224)
19,328
18,565
34,500
(2,262)
9,439
23,103
Accrued distributor terminations
(282)
10,272
(24,807)
(21,832)
(1,552)
(4,125)
Other liabilities
(192)
1,338
(4,273)
(9,476)
Net cash provided by operating activities
191,132
123,396
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of available-for-sale investments
513,534
232,387
Purchases of available-for-sale investments
(214,697)
(175,314)
Purchases of property and equipment
(11,119)
(8,485)
Proceeds from sale of property and equipment
217
184
(Increase) decrease in intangibles
(6,811)
298
Increase in other assets
(1,148)
(2,291)
Net cash provided by investing activities
279,976
46,779
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt
(733)
(393)
Issuance of common stock
Purchases of common stock held in treasury
(559,210)
Net cash used in financing activities
(545,968)
(188,022)
Effect of exchange rate changes on cash and cash equivalents
(21,261)
(1,322)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(96,121)
(19,169)
CASH AND CASH EQUIVALENTS, beginning of period
637,513
CASH AND CASH EQUIVALENTS, end of period
618,344
SUPPLEMENTAL INFORMATION:
Cash paid during the period for:
Interest
11
15
Income taxes
79,993
82,002
(In Thousands) (Unaudited) (Continued)
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS
Included in accrued liabilities as of March 31, 2020 and 2019 were $12.9 million and $12.3 million, respectively, related to additions to other intangible assets.
Included in accounts payable as of March 31, 2020 were $20.7 million of treasury stock repurchases.
8
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, 2019 for a summary of significant accounting policies utilized by the Company and its consolidated subsidiaries and other disclosures, which should be read in conjunction with this Quarterly Report on Form 10-Q (“Form 10-Q”).
The Company’s condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and Securities and Exchange Commission (“SEC”) rules and regulations applicable to interim financial reporting. They do not include all the information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP. The information set forth in these interim condensed consolidated financial statements for the three-months ended March 31, 2020 and 2019, 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 December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, “Simplifying the Accounting for Income Taxes”, as part of its simplification initiative to reduce the cost and complexity in accounting for income taxes. ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of ASU No. 2019-12 on its financial position, results of operations and liquidity.
Recently adopted accounting pronouncements
In August 2018, the FASB issued 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 was effective for the Company on a prospective or retrospective basis beginning on January 1, 2020. The adoption of ASU No. 2018-15 did not have a material impact on the Company’s 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. The adoption of ASU No. 2018-14 did not have a material impact on the Company’s 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 was effective for the Company beginning on January 1, 2020. Certain disclosures in the new guidance will need to be applied on a retrospective basis and others on a prospective basis. The adoption of ASU No. 2018-13 did not have a material impact on the Company’s 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. The adoption of ASU No. 2017-04 did not have a material impact on the Company’s financial position, results of operations and liquidity.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The accounting standard changes the methodology for measuring credit losses on financial instruments and the timing when such losses are recorded. ASU No. 2016-13 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. The adoption of ASU No. 2016-13 did not have a material impact on the Company’s disclosures, financial position, results of operations and liquidity.
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 Fuel® high performance energy drinks (ii) Strategic Brands segment (“Strategic Brands”), which is primarily comprised of the various energy drink brands acquired from The Coca-Cola Company (“TCCC”) in 2015 as well as the Company’s affordable energy brands, and (iii) Other segment (“Other”), which is comprised of certain products sold by American Fruits and Flavors, LLC, a wholly-owned subsidiary of the Company, to independent third-party customers (the “AFF Third-Party Products”).
The Company’s Monster Energy® Drinks segment generates net operating revenues by selling ready-to-drink packaged energy drinks primarily to bottlers and full service beverage bottlers/distributors (“bottlers/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, value stores, e-commerce retailers 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/distributors and to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, foodservice customers, drug stores, value stores, e-commerce retailers 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/distributors.
The majority of the Company’s revenue is recognized when it satisfies a single performance obligation by transferring control of its products to a customer. Control is generally transferred when the Company’s products are either shipped or delivered based on the terms contained within the underlying contracts or agreements. Certain of the Company’s bottlers/distributors may also perform a separate function as a co-packer on the Company’s behalf. In such cases, control of the Company’s products passes to such bottlers/distributors when they notify the Company that they have taken possession or transferred the relevant portion of the Company’s finished goods. The Company’s general payment terms are short-term in duration. The Company does not have significant financing components or payment terms. The Company did not have any material unsatisfied performance obligations as of March 31, 2020 and December 31, 2019.
The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers.
10
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 bottler/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 bottlers/distributors relating to the costs associated with terminating the Company’s prior distributors, are accounted for as revenue ratably over the anticipated life of the respective distribution agreements, generally over 20 years.
The Company also enters into license agreements that generate revenues associated with third-party sales of non-beverage products bearing the Company’s trademarks including, but not limited to, clothing, hats, t-shirts, jackets, helmets and automotive wheels.
Management believes that adequate provision has been made for cash discounts, returns and spoilage based on the Company’s historical experience.
Disaggregation of Revenue
The following tables disaggregate the Company’s revenue by geographical markets and reportable segments:
Three-Months Ended March 31, 2020
Latin
America
U.S. and
and
Net Sales
Canada
EMEA1
Asia Pacific
Caribbean
Monster Energy® Drinks
690,018
164,771
85,904
51,761
992,454
Strategic Brands
37,870
20,346
5,317
1,005
64,538
5,105
Total Net Sales
732,993
185,117
91,221
52,766
Three-Months Ended March 31, 2019
642,826
124,637
62,456
40,465
870,384
41,750
21,908
6,225
403
70,286
5,321
689,897
146,545
68,681
40,868
1Europe, Middle East and Africa (“EMEA”)
Contract Liabilities
Amounts received from certain bottlers/distributors at inception of their distribution contracts or at the inception of certain sales/marketing programs are accounted for as deferred revenue. As of March 31, 2020, the Company had $323.2 million of deferred revenue, which is included in current and long-term deferred revenue in the Company’s condensed consolidated balance sheet. As of December 31, 2019, the Company had $331.7 million of deferred revenue, which is included in current and long-term deferred revenue in the Company’s condensed consolidated balance sheet. During the three-months ended March 31, 2020 and 2019, $10.6 million and $14.2 million, respectively, of deferred revenue was recognized in net sales. See Note 11.
4.
LEASES
The Company leases identified assets comprising real estate and equipment. Real estate leases consist primarily of office and warehouse space and equipment leases consist of vehicles and warehouse equipment. At the inception of a contract, the Company assesses whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether the Company obtains the right to substantially all the economic benefit from the use of the asset throughout the term, and (3) whether the Company has the right to direct the use of the asset. At inception of a lease, the Company allocates the consideration in the contract to each lease and non-lease component based on the component’s relative stand-alone price to determine the lease payments. Lease and non-lease components are accounted for separately.
Leases are classified as either finance leases or operating leases based on criteria in Accounting Standards Codification (“ASC”) 842. The Company’s operating leases are comprised of real estate and warehouse equipment, and the Company’s finance leases are comprised of vehicles.
Right-of-use (“ROU”) assets and lease 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 estimated rate of interest for collateralized borrowing over a similar term of the lease payments at the
12
commencement date. ROU assets also include any lease payments made and exclude lease incentives. Lease terms 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 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 and is included in operating expenses in the condensed consolidated statement of income. 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 is included in operating expenses in the condensed consolidated statement of income. Interest expense on finance leases is calculated using the amortized cost basis and is included in other income, net in the condensed consolidated statement of income.
The Company’s leases have remaining lease terms of less than one year to 14 years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within one year. The Company has elected not to recognize ROU assets and lease liabilities for short-term operating leases that have a term of 12 months or less.
The components of lease cost were comprised of the following:
Three-Months
Ended March 31,
Operating lease cost
1,445
1,115
Short-term lease cost
707
1,082
Variable lease cost
162
165
Finance leases:
Amortization of ROU assets
148
80
Interest on lease liabilities
Finance lease cost
159
95
Total lease cost
2,473
2,457
Supplemental cash flow information for the following periods:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
1,083
889
Operating cash flows from finance leases
Financing cash flows from finance leases
733
393
ROU assets obtained in exchange for lease obligations:
Finance leases
1,465
415
Operating leases
1,163
26,429
13
ROU assets for operating and finance leases were comprised of the following at:
March 31, 2020
Real Estate
Equipment
Balance Sheet Location
30,291
384
30,675
Other Assets
3,569
Property and Equipment, net
December 31, 2019
30,926
416
31,342
2,632
Operating and finance lease liabilities recognized in the condensed consolidated balance sheets were as follows at:
Operating Leases
Finance Leases
2,830
2,209
25,284
28,114
2,812
1,485
25,651
28,463
The weighted-average remaining lease terms and weighted-average discount rates for operating and finance leases at March 31, 2020 and December 31, 2019 were as follows:
Weighted-average remaining lease term (years)
9.8
0.8
Weighted-average discount rate
3.2
%
2.7
10.1
0.6
3.1
2.9
14
The following table reconciles the undiscounted future lease payments for operating and finance leases to the operating and finance leases recorded in the condensed consolidated balance sheet at March 31, 2020:
Undiscounted Future Lease Payments
2020 (excluding the three-months ended March 31, 2020)
2,806
1,938
2021
3,450
296
2022
3,482
2023
3,068
2024
2,791
2025 and thereafter
17,692
Total lease payments
33,289
2,234
Less imputed interest
(5,175)
(25)
As of March 31, 2020, the Company did not have any significant additional operating or finance leases that have not yet commenced.
5.
The following table summarizes the Company’s investments at:
Continuous
Gross
Unrealized
Loss Position
Amortized
Holding
Fair
less than 12
greater than 12
Cost
Gains
Losses
Value
Months
Available-for-sale
Short-term:
Commercial paper
57,107
Municipal securities
95,819
114
113
95,820
U.S. government agency securities
21,441
62
21,503
U.S. treasuries
46,055
399
46,454
Variable rate demand notes
12,628
Long-term:
4,083
54
4,137
6,292
32
6,264
3,512
3,522
246,937
643
145
247,435
83,478
Certificates of deposit
28,049
147,983
20
148,108
40,620
35
40,590
211,055
134
31
211,158
21,680
1,562
1
1,561
5,267
5,266
6,077
6,078
545,771
285
88
545,968
During the three-months ended March 31, 2020 and 2019, realized gains or losses recognized on the sale of investments were not significant.
The Company’s investments at March 31, 2020 and December 31, 2019 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.
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:
3,911
3,905
Due 11 - 20 years:
3,485
8,886
Due 21 - 30 years:
3,217
6,885
Due 31 - 40 years:
2,015
2,004
16
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.
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
497,556
Money market funds
194,560
1,607
106,292
28,931
50,590
Foreign currency derivatives
(301)
692,116
256,854
948,970
Amounts included in:
9,720
203
Investments
(504)
17
518,178
191,131
96,867
167,224
73,634
247,162
(687)
709,309
633,929
1,343,238
88,648
329
(1,016)
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 three-months ended March 31, 2020 or during the year-ended December 31, 2019, 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-months ended March 31, 2020 and the year-ended December 31, 2019, the Company entered into forward currency exchange contracts with financial institutions to create an economic hedge to specifically manage a portion of the foreign exchange risk exposure associated with certain consolidated subsidiaries’ non-functional currency denominated assets and liabilities. All foreign currency exchange contracts of the Company that were outstanding as of March 31, 2020 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.
18
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
Assets:
Foreign currency exchange contracts:
Receive USD/pay GBP
46,342
Receive USD/pay AUD
14,276
60
Receive USD/pay NZD
1,812
Receive USD/pay COP
4,174
Receive USD/pay SEK
2,160
Receive USD/pay ZAR
910
Receive USD/pay NOK
1,008
Receive USD/pay DKK
1,304
Receive SGD/pay USD
914
Liabilities:
Receive EUR/pay USD
34,987
(272)
Receive USD/pay RUB
11,840
(147)
Receive RSD/pay USD
11,530
(85)
26,731
246
9,018
59
Receive NOK/pay USD
2,122
Receive USD/pay SGD
1,555
38,406
(695)
12,819
(172)
12,777
(55)
3,071
(33)
3,349
(32)
3,793
(18)
1,283
(11)
The net gains (losses) on derivative instruments in the condensed consolidated statements of income were as follows:
Amount of gain (loss)
recognized in income on
derivatives
Location of gain (loss)
Three-months ended
Foreign currency exchange contracts
Interest and other income, net
(1,087)
8.
INVENTORIES
Inventories consist of the following at:
Raw materials
140,990
134,885
Finished goods
211,315
225,846
9.
PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following at:
Land
78,275
Leasehold improvements
11,517
10,417
Furniture and fixtures
8,272
8,426
Office and computer equipment
22,578
22,766
Computer software
4,788
4,450
216,125
214,293
Buildings
126,755
126,338
Vehicles
40,964
41,109
509,274
506,074
Less: accumulated depreciation and amortization
(213,704)
(207,434)
Total depreciation and amortization expense recorded was $12.4 million and $12.0 million for the three-months ended March 31, 2020 and 2019, respectively.
10. GOODWILL AND OTHER INTANGIBLE ASSETS
The following is a roll-forward of goodwill for the three-months ended March 31, 2020 and March 31, 2019 by reportable segment:
Monster
Energy®
Strategic
Drinks
Brands
Balance at December 31, 2019
693,644
637,999
Acquisitions
Balance at March 31, 2020
Balance at December 31, 2018
Balance at March 31, 2019
Intangible assets consist of the following at:
Amortizing intangibles
66,954
66,949
Accumulated amortization
(52,021)
(49,128)
14,933
17,821
Non-amortizing intangibles
1,038,174
1,034,284
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 for both the three-months ended March 31, 2020 and 2019. The Company recorded an impairment charge of $3.0 million on a Strategic Brand trademark in the three-months ended March 31, 2020.
The following is the future estimated amortization expense related to amortizing intangibles as of March 31, 2020:
4,783
4,429
4,404
1,111
193
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 termination costs of $0.04 million and $10.7 million for the three-months ended March 31, 2020 and 2019, respectively.
21
In the normal course of business, amounts received pursuant to new and/or amended distribution agreements entered into with certain bottlers/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 $10.6 million and $14.2 million for the three-months ended March 31, 2020 and 2019, respectively.
12. COMMITMENTS AND CONTINGENCIES
The Company had purchase commitments aggregating approximately $70.5 million at March 31, 2020, 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 $200.5 million at March 31, 2020, 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 March 31, 2020, the interest rate on borrowings under the line of credit was 5.5%. As of March 31, 2020, the Company had no amounts outstanding on this line of credit.
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 March 31, 2020, the Company’s consolidated balance sheet included accrued loss contingencies of approximately $15.6 million.
13. ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in accumulated other comprehensive loss (income) by component, after tax, for the three-months ended March 31, 2020 and 2019 are as follows:
Currency
(Gains) Losses
Translation
on Available-for-
Sale Securities
32,581
(194)
32,387
Other comprehensive loss (income) before reclassifications
30,599
(304)
30,295
Amounts reclassified from accumulated other comprehensive loss (income)
Net current-period other comprehensive loss (income)
63,180
(498)
62,682
22
32,775
89
32,864
1,381
(120)
1,261
34,156
(31)
34,125
14. TREASURY STOCK
On February 26, 2019, 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 “February 2019 Repurchase Plan”). During the three-months ended March 31, 2020, the Company purchased 0.6 million shares of common stock at an average purchase price of $58.16 per share, for a total amount of $36.6 million (excluding broker commissions), which exhausted the availability under the February 2019 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying condensed consolidated balance sheet at March 31, 2020.
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 (the “November 2019 Repurchase Plan”). During the three-months ended March 31, 2020, the Company purchased 9.1 million shares of common stock at an average purchase price of $54.86 per share, for a total amount of $499.9 million (excluding broker commissions), which exhausted the availability under the November 2019 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying condensed consolidated balance sheet at March 31, 2020.
On March 13, 2020, 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 “March 2020 Repurchase Plan”). During the three-months ended March 31, 2020, the Company purchased 0.8 million shares of common stock at an average purchase price of $57.01 per share, for a total amount of $42.9 million (excluding broker commissions), under the March 2020 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying condensed consolidated balance sheet at March 31, 2020. As of May 8, 2020, $441.5 million remained available for repurchase under the March 2020 Repurchase Plan.
During the three-months ended March 31, 2020, 11,007 shares of common stock were purchased from employees in lieu of cash payments for options exercised or withholding taxes due for a total amount of $0.6 million. While such purchases are considered common stock repurchases, they are not counted as purchases against our authorized share repurchase programs. Such shares are included in common stock in treasury in the accompanying condensed consolidated balance sheet at March 31, 2020.
15. STOCK-BASED COMPENSATION
The Company has two stock-based compensation plans under which shares were available for grant at March 31, 2020: 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.
The Company recorded $17.1 million and $15.3 million of compensation expense relating to outstanding options, restricted stock units and performance share units during the three-months ended March 31, 2020 and 2019, 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 and performance share units for the three-months ended March 31, 2020 and 2019 was $1.7 million and $22.4 million, respectively.
23
Stock Options
Under the Company’s stock-based compensation plans, all stock options granted as of March 31, 2020 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 March 31,
Dividend yield
0.0
Expected volatility
30.5
30.2
Risk-free interest rate
0.7
2.4
Expected term
5.8
years
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.
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, 2020
14,941
42.88
6.3
308,884
Granted 01/01/20 - 03/31/20
1,027
62.45
Exercised
(372)
37.52
Cancelled or forfeited
52.50
Outstanding at March 31, 2020
15,563
44.28
6.4
204,418
Vested and expected to vest in the future at March 31, 2020
14,755
43.58
6.2
202,679
Exercisable at March 31, 2020
9,301
36.98
5.2
182,359
The weighted-average grant-date fair value of options granted during the three-months ended March 31, 2020 and 2019 was $18.78 per share and $20.30 per share, respectively.
The total intrinsic value of options exercised during the three-months ended March 31, 2020 and 2019 was $10.9 million and $178.5 million, respectively.
24
Cash received from option exercises under all plans for the three-months ended March 31, 2020 and 2019 was $14.0 million and $35.2 million, respectively.
At March 31, 2020, there was $86.8 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 2.7 years.
Restricted Stock Units and Performance Share Units
The cost of stock-based compensation for restricted stock units and performance share 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 or performance share unit in cash, the award is classified as a liability and revalued at each balance sheet date.
The following table summarizes the Company’s activities with respect to non-vested restricted stock units and performance share units as follows:
Weighted
Grant-Date
Non-vested at January 1, 2020
825
57.62
Granted 01/01/20 - 03/31/201
392
62.39
Vested
(271)
55.53
Forfeited/cancelled
(1)
59.67
Non-vested at March 31, 2020
945
60.21
1The grant activity for performance share units is recorded based on the target performance level earning 100% of target performance share units. The actual number of performance share units earned could range from 0% to 200% of target dependent on the pre-established performance goals.
The weighted-average grant-date fair value of restricted stock units and performance share units granted during the three-months ended March 31, 2020 was $62.39 per share. The weighted-average grant-date fair value of restricted stock units granted during the three-months ended March 31, 2019 was $59.66 per share. No performance share units were granted during the three-months ended March 31, 2019. As of March 31, 2020, 0.8 million of restricted stock units and performance share units are expected to vest over their respective terms.
At March 31, 2020, total unrecognized compensation expense relating to non-vested restricted stock units and performance share units was $47.2 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 three-months ended March 31, 2020:
Gross Unrecognized Tax
Benefits
2,993
Additions for tax positions related to the current year
Additions for tax positions related to the prior years
Decreases related to settlement with taxing authority
25
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Company’s condensed consolidated financial statements. As of March 31, 2020, the Company had approximately $0.4 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.
The Company is in various stages of examination with certain states and certain foreign jurisdictions, including the United Kingdom and Ireland. The Company’s 2016 through 2019 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 2015 through 2019 tax years.
17. EARNINGS PER SHARE
A reconciliation of the weighted-average shares used in the basic and diluted earnings per common share computations is presented below (in thousands):
Weighted-average shares outstanding:
Dilutive
4,457
5,505
For the three-months ended March 31, 2020 and 2019, options and awards outstanding totaling 4.8 million shares and 4.3 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 Fuel® high performance energy drinks, (ii) Strategic Brands segment, which is primarily comprised 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/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, value stores, e-commerce retailers and the military.
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.
26
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.
The net revenues derived from the Company’s reportable segments and other financial information related thereto for the three-months ended March 31, 2020 and 2019 are as follows:
Net sales:
Monster Energy® Drinks(1)
Corporate and unallocated
Operating Income:
Monster Energy® Drinks(1) (2)
411,141
342,999
36,719
45,581
787
902
(83,659)
(78,021)
Income before tax:
411,178
343,016
45,577
(82,824)
(75,292)
Depreciation and amortization:
9,651
9,798
2,030
1,963
1,165
1,155
2,479
1,954
15,325
27
Corporate and unallocated expenses for the three-months ended March 31, 2020 include $55.3 million of payroll costs, of which $17.1 million was attributable to stock-based compensation expenses (see Note 15 “Stock-Based Compensation”), as well as $16.3 million attributable to professional service expenses, including accounting and legal costs, and $12.1 million of other operating expenses. Corporate and unallocated expenses for the three-months ended March 31, 2019 include $50.4 million of payroll costs, of which $15.3 million was attributable to stock-based compensation expenses (see Note 15 “Stock-Based Compensation”), as well as $17.5 million attributable to professional service expenses, including accounting and legal costs, and $10.1 million of other operating expenses.
Coca-Cola Consolidated, Inc. accounted for approximately 12% and 13% of the Company’s net sales for the three-months ended March 31, 2020 and 2019, respectively.
Reyes Coca-Cola Bottling, LLC accounted for approximately 11% and 12% of the Company’s net sales for the three-months ended March 31, 2020 and 2019, respectively.
Coca-Cola European Partners accounted for approximately 10% and 9% of the Company’s net sales for the three-months ended March 31, 2020 and 2019, respectively.
Net sales to customers outside the United States amounted to $356.8 million and $284.1 million for the three-months ended March 31, 2020 and 2019, respectively. Such sales were approximately 34% and 30% of net sales for the three-months ended March 31, 2020 and 2019, respectively.
Goodwill and other intangible assets for the Company’s reportable segments as of March 31, 2020 and December 31, 2019 are as follows:
Goodwill and other intangible assets:
1,391,507
1,384,940
979,963
984,393
13,280
14,415
2,384,750
2,383,748
19. RELATED PARTY TRANSACTIONS
TCCC controls approximately 19.4% of the voting interests of the Company. The TCCC Subsidiaries, the TCCC Related Parties and certain TCCC independent bottlers/distributors, 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 $10.9 million and $12.1 million for the three-months ended March 31, 2020 and 2019, respectively, and are included as a reduction to net sales.
TCCC commissions, based on sales to certain TCCC independent bottlers/distributors, were $4.4 million and $3.8 million for the three-months ended March 31, 2020 and 2019, respectively, and are included in operating expenses.
Net sales to the TCCC Subsidiaries for the three-months ended March 31, 2020 and 2019 were $19.5 million and $17.3 million, respectively.
The Company also purchases concentrates from TCCC which are then sold to certain of the Company’s bottlers/distributors. Concentrate purchases from TCCC were $4.2 million and $6.6 million for the three-months ended March 31, 2020 and 2019, respectively.
28
Certain TCCC Subsidiaries also contract manufacture certain of the Company’s energy drinks. Such contract manufacturing expenses were $4.0 million and $4.5 million for the three-months ended March 31, 2020 and 2019, respectively.
Accounts receivable, accounts payable, accrued promotional allowances and accrued liabilities related to the TCCC Subsidiaries are as follows at:
49,289
21,670
(18,356)
(18,217)
(6,007)
(5,321)
(14,451)
One director of the Company through certain trusts, and a family member of one director, are principal owners of a company that provides promotional materials to the Company. Expenses incurred with such company in connection with promotional materials purchased during the three-months ended March 31, 2020 and 2019 were $0.7 million and $0.3 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 March 31, 2020. During the three-months ended March 31, 2020, the Company made no additional capital contributions and recorded an equity loss of $0.03 million. As of March 31, 2020, the Company’s equity investment is $1.8 million and is included in other assets (non-current) in the accompanying condensed consolidated balance sheet.
20. SUBSEQUENT EVENTS
In April 2020, the Company entered into an agreement to acquire a three-story office building located in Uxbridge, United Kingdom for approximately $10.0 million. The acquisition of the building is expected to close in mid-May 2020. The building is currently being leased by the Company.
29
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.
The COVID – 19 Pandemic
The current COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our employees, communities and business operations, as well as the global economy and financial markets. The human and economic consequences of the COVID-19 pandemic as well as the measures being taken by governments, and as a result businesses (including the Company and its suppliers, full service beverage bottlers/distributors (“bottlers/distributors”), co-packers and other service providers) and the public at large to limit the COVID-19 pandemic’s spread, has directly and indirectly impacted our business and results of operations. The duration and severity of this impact will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning the COVID-19 pandemic, the actions taken to limit its spread and the economic impact on local, regional, national and international markets. See the section entitled “Risk Factors” in Item 1A of this Quarterly Report.
Over the past few months, we have been actively addressing the COVID-19 pandemic with a global task force team working to mitigate the potential impacts to our people and business.
Health and Safety of our Employees and Business Partners
From the beginning of the COVID-19 pandemic, our top priority has been the health, safety and well-being of our employees. Early in March 2020, we implemented global travel restrictions and work-from-home policies for employees who are able to work remotely. For those employees who are unable to work remotely, safety precautions have been instituted, which were developed and adopted in line with guidance from public health authorities and professional consultants. We are incredibly proud of the teamwork exhibited by our employees, co-packers and bottlers/distributors around the world who are ensuring the integrity of our supply chain.
Customer Demand
The COVID-19 pandemic did not have a material adverse impact on our net and gross sales for the three-months ended March 31, 2020. Our April sales were materially adversely impacted by the COVID-19 pandemic, however bottler/distributor sales of the Company’s products to retail in the United States were markedly less adversely impacted. Since mid-March 2020, we have seen a shift in consumer channel preferences and package configurations, including an increase in at-home consumption and a decrease in immediate consumption. To date, our sales in the second quarter of 2020 have been adversely affected as a result of a decrease in foot traffic in the convenience and gas channel (which is our largest channel) and food service on-premise, while our e-commerce, club store, mass merchandiser and grocery and related business remain stable. The duration of these trends and the magnitude of such impacts cannot be precisely estimated at this time, as they are affected by a number of factors (many of which are outside our control).
Any reduced demand for our products or change in consumer purchasing and consumption patterns, as well as continued economic uncertainty as a result of the COVID-19 pandemic, could adversely affect the financial conditions of retailers and consumers, resulting in reduced or canceled orders for our products, purchase returns and closings of retail or wholesale establishments or other locations in which our products are sold.
Our Distribution and Supply Chain
As of the date of this filing, we do not foresee a material impact on the ability of our co-packers to manufacture and our bottlers/distributors to distribute our products as a result of the COVID-19 pandemic. In addition, we are not experiencing raw material or finished product shortages in our supply chain. However, depending on the duration of any COVID-19 pandemic related issues, we may experience material disruptions in our supply chain as the pandemic continues.
Liquidity and Capital Resources
As of the date of this filing, we expect to maintain substantial liquidity as we manage through the current environment as described in the “Liquidity and Capital Resources” section below.
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 Super Fuel®
● Gladiator®
● Monster Dragon Tea®
● Samurai®
● Caffé Monster®
● Live+®
● Reign Total Body Fuel®
● Predator®
● Reign Inferno® Thermogenic Fuel
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 Fuel® 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 March 31, 2020, we continued to expand our existing energy drink portfolio and further develop our distribution markets. During the three-months ended March 31, 2020, 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 March 31, 2020, either individually or in aggregate, did not have a material adverse impact on our financial position, results of operations or liquidity.
Many of the above launches were negatively impacted by the COVID-19 pandemic and we did not achieve planned distribution levels, in part due to certain retailers postponing implementation of their new planned spring schematics, which included our innovation products. We are developing plans with our bottlers/distributors to reprioritize these recent innovation launches to ensure that we are able to maximize their distribution, as soon as normalcy returns, particularly in the convenience and gas channel.
Our net sales of $1.06 billion for the three-months ended March 31, 2020 represented record sales for our first fiscal quarter. The vast majority of our net sales are derived from our Monster Energy® Drinks segment. Net sales of our Monster Energy® Drinks segment were $992.5 million for the three-months ended March 31, 2020. Net sales of our Strategic Brands segment were $64.5 million for the three-months ended March 31, 2020. Our Monster Energy® Drinks segment represented 93.4% and 92.0% of our net sales for the three-months ended March 31, 2020 and 2019, respectively. Our Strategic Brands segment represented 6.1% and 7.4% of our net sales for the three-months ended March 31, 2020 and 2019, respectively. Our Other segment represented 0.5% and 0.6% of our net sales for the three-months ended March 31, 2020 and 2019, respectively.
Our growth strategy includes expanding our international business. Net sales to customers outside the United States were $356.8 million for the three-months ended March 31, 2020, an increase of approximately $72.7 million, or 25.6% higher than net sales to customers outside of the United States of $284.1 million for the three-months ended March 31, 2019. Such sales were approximately 34% and 30% of net sales for the three-months ended March 31, 2020 and 2019, respectively.
Our customers are primarily 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-months ended March 31, 2020 and 2019 are reflected below. Such information includes sales made by us directly to the customer types concerned, which include our bottlers/distributors in the United States. Such 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
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International full service bottlers/distributors
Club stores and mass merchandisers
Retail grocery, specialty chains and wholesalers
0
Our customers include Coca-Cola Canada Bottling Limited, 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., Wal-Mart, Inc. (including Sam’s Club), Costco Wholesale Corporation and Amazon.com, Inc. A decision by any large customer to decrease amounts purchased from us or to cease carrying our products could have a material negative effect on our financial condition and consolidated results of operations.
Coca-Cola Consolidated, Inc. accounted for approximately 12% and 13% of our net sales for the three-months ended March 31, 2020 and 2019, respectively.
Reyes Coca-Cola Bottling, LLC accounted for approximately 11% and 12% of our net sales for the three-months ended March 31, 2020 and 2019, respectively.
Coca-Cola European Partners accounted for approximately 10% and 9% of our net sales for the three-months ended March 31, 2020 and 2019, respectively.
Results of Operations
The following table sets forth key statistics for the three-months ended March 31, 2020 and 2019.
Percentage
(In thousands, except per share amounts)
Change
20 vs. 19
Net sales1
12.3
Cost of sales
14.1
Gross profit*1
11.1
Gross profit as a percentage of net sales
60.0
60.6
Operating expenses2
3.9
Operating expenses as a percentage of net sales
25.6
27.7
Operating income1,2
17.2
Operating income as a percentage of net sales
34.4
32.9
(68.2)
Income before provision for income taxes1,2
16.4
Provision for income taxes
65.1
Income taxes as a percentage of income before taxes
23.8
16.8
Net income1,2
6.6
Net income as a percentage of net sales
26.3
27.6
Net income per common share:
8.0
8.2
Case sales (in thousands)
(in 192-ounce case equivalents)
115,599
101,284
1Includes $10.6 million and $14.2 million for the three-months ended March 31, 2020 and 2019, respectively, related to the recognition of deferred revenue.
2Includes $0.04 million and $10.7 million for the three-months ended March 31, 2020 and 2019, 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 March 31, 2020 Compared to the Three-Months Ended March 31, 2019.
Net Sales. Net sales were $1.06 billion for the three-months ended March 31, 2020, an increase of approximately $116.1 million, or 12.3% higher than net sales of $946.0 million for the three-months ended March 31, 2019. Net changes in foreign currency exchange rates had an unfavorable impact on net sales of approximately $10.4 million for the three-months ended March 31, 2020.
Net sales for the Monster Energy® Drinks segment were $992.5 million for the three-months ended March 31, 2020, an increase of approximately $122.1 million, or 14.0% higher than net sales of $870.4 million for the three-months ended March 31, 2019. Net sales for the Monster Energy® Drinks segment increased primarily due to increased worldwide sales by volume of our Monster Energy® brand energy drinks as a result of increased consumer demand as well as enhanced distribution and increased consumer demand for our
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Reign Total Body Fuel® high performance energy drinks. Net changes in foreign currency exchange rates had an unfavorable impact on net sales for the Monster Energy® Drinks segment of approximately $10.0 million for the three-months ended March 31, 2020.
Net sales for the Strategic Brands segment were $64.5 million for the three-months ended March 31, 2020, a decrease of approximately $5.7 million, or 8.2% lower than net sales of $70.3 million for the three-months ended March 31, 2019. Net changes in foreign currency exchange rates had an unfavorable impact on net sales for the Strategic Brands segment of approximately $0.4 million for the three-months ended March 31, 2020.
Net sales for the Other segment were $5.1 million for the three-months ended March 31, 2020, a decrease of approximately $0.2 million, or 4.1% lower than net sales of $5.3 million for the three-months ended March 31, 2019.
Case sales, in 192-ounce case equivalents, were 115.6 million cases for the three-months ended March 31, 2020, an increase of approximately 14.3 million cases or 14.1% higher than case sales of 101.3 million cases for the three-months ended March 31, 2019. The overall average net sales per case (excluding net sales of the AFF Third-Party Products of $5.1 million and $5.3 million for the three-months ended March 31, 2020 and 2019, respectively, as these sales do not have unit case equivalents) decreased to $9.14 for the three-months ended March 31, 2020, which was 1.6% lower than the average net sales per case of $9.29 for the three-months ended March 31, 2019. The decrease in the average net sales per case was primarily the result of unfavorable net changes in foreign currency exchange rates as well as increased promotional allowances as a percentage of net sales.
Gross Profit. Gross profit was $637.2 million for the three-months ended March 31, 2020, an increase of approximately $63.7 million, or 11.1% higher than the gross profit of $573.5 million for the three-months ended March 31, 2019. The increase in gross profit dollars was primarily the result of the $122.1 million increase in net sales of our Monster Energy® Drinks segment for the three-months ended March 31, 2020.
Gross profit as a percentage of net sales decreased to 60.0% for the three-months ended March 31, 2020 from 60.6% for the three-months ended March 31, 2019. The decrease for the three-months ended March 31, 2020 was primarily the result of geographical sales mix and increases in promotional allowances as a percentage of gross sales. Such decrease was partially offset by product sales mix as well as reduced input costs.
Operating Expenses. Total operating expenses were $272.2 million for the three-months ended March 31, 2020, an increase of approximately $10.1 million, or 3.9% higher than total operating expenses of $262.1 million for the three-months ended March 31, 2019. The increase in operating expenses was primarily due to increased payroll expenses of $8.2 million (of which $1.8 million was related to an increase in stock-based compensation), increased out-bound freight and warehouse costs of $3.1 million, a $3.0 million Strategic Brand trademark impairment charge and increased expenditures of $2.3 million for other marketing expenses. The increase in operating expenses was partially offset by decreased expenditures of $10.7 million related to the costs associated with distributor terminations and decreased expenditures of $4.3 million for sponsorships and endorsements.
Operating Income. Operating income was $365.0 million for the three-months ended March 31, 2020, an increase of approximately $53.5 million, or 17.2% higher than operating income of $311.5 million for the three-months ended March 31, 2019. Operating income as a percentage of net sales increased to 34.4% for the three-months ended March 31, 2020 from 32.9% for the three-months ended March 31, 2019. Operating income was $71.7 million and $52.0 million for the three-months ended March 31, 2020 and 2019, 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, exclusive of corporate and unallocated expenses, was $411.1 million for the three-months ended March 31, 2020, an increase of approximately $68.2 million, or 19.9% higher than operating income of $343.0 million for the three-months ended March 31, 2019. The increase in operating income for the Monster Energy® Drinks segment was primarily the result of the $122.1 million increase in net sales of our Monster Energy® Drinks segment for the three-months ended March 31, 2020.
Operating income for the Strategic Brands segment, exclusive of corporate and unallocated expenses, was $36.7 million for the three-months ended March 31, 2020, a decrease of approximately $8.9 million, or 19.4% lower than operating income of $45.6 million for the three-months ended March 31, 2019.
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Operating income for the Other segment, exclusive of corporate and unallocated expenses, was $0.8 million for the three-months ended March 31, 2020, a decrease of approximately $0.1 million, or 12.8% lower than operating income of $0.9 million for the three-months ended March 31, 2019.
Interest and Other Income, net. Interest and other non-operating income, net, was $0.9 million for the three-months ended March 31, 2020, as compared to interest and other non-operating income, net, of $2.7 million for the three-months ended March 31, 2019. Foreign currency transaction losses were $2.9 million and $0.2 million for the three-months ended March 31, 2020 and 2019, respectively. Interest income was $4.5 million and $3.3 million for the three-months ended March 31, 2020 and 2019, respectively.
Provision for Income Taxes. Provision for income taxes was $87.0 million for the three-months ended March 31, 2020, an increase of $34.3 million, or 65.1% higher than the provision for income taxes of $52.7 million for the three-months ended March 31, 2019. The effective combined federal, state and foreign tax rate increased to 23.8% from 16.8% for the three-months ended March 31, 2020 and 2019, respectively. The increase in the effective tax rate was primarily attributable to a decrease in the equity compensation deduction.
Net Income. Net income was $278.8 million for the three-months ended March 31, 2020, an increase of $17.4 million, or 6.6% higher than net income of $261.5 million for the three-months ended March 31, 2019. The increase in net income was primarily due to the $63.7 million increase in gross profit. The increase in net income was partially offset by an increase in the provision for income taxes of $34.3 million and an increase in operating expenses of $10.1 million.
Non-GAAP Financial Measures
Gross Sales**. Gross sales were $1.24 billion for the three-months ended March 31, 2020, an increase of approximately $145.6 million, or 13.4% higher than gross sales of $1.09 billion for the three-months ended March 31, 2019. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales of approximately $11.2 million for the three-months ended March 31, 2020.
Gross sales for the Monster Energy® Drinks segment were $1.16 billion for the three-months ended March 31, 2020, an increase of approximately $151.9 million, or 15.1% higher than gross sales of $1.01 billion for the three-months ended March 31, 2019. Gross sales for the Monster Energy® Drinks segment increased primarily due to increased worldwide sales by volume of our Monster Energy® brand energy drinks as a result of increased consumer demand as well as enhanced distribution and increased consumer demand for our Reign Total Body Fuel® high performance energy drinks. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales for the Monster Energy® Drinks segment of approximately $10.8 million for the three-months ended March 31, 2020.
Gross sales of our Strategic Brands segment were $73.4 million for the three-months ended March 31, 2020, a decrease of $6.1 million, or 7.6% lower than gross sales of $79.5 million for the three-months ended March 31, 2019. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales in the Strategic Brands segment of approximately $0.4 million for the three-months ended March 31, 2020.
Gross sales of our Other segment were $5.1 million for the three-months ended March 31, 2020, a decrease of $0.2 million, or 4.1% lower than gross sales of $5.3 million for the three-months ended March 31, 2019.
Promotional allowances, commissions and other expenses, as described in the footnote below, were $174.0 million for the three-months ended March 31, 2020, an increase of $29.5 million, or 20.4% higher than promotional allowances, commissions and other expenses of $144.4 million for the three-months ended March 31, 2019. Promotional allowances, commissions and other expenses as a percentage of gross sales increased to 14.1% from 13.2% for the three-months ended March 31, 2020 and 2019, 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
1,236,060
1,090,426
13.4
Less: Promotional allowances, commissions and other expenses***
173,963
144,435
20.4
***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-months ended March 31, 2020 and 2019 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-months ended March 31, 2020 and 2019, 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 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/distributors, changes in the sales mix of our products and
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changes in advertising and promotional expenses. The COVID-19 pandemic may also have an impact on consumer behavior and change the seasonal fluctuation of our business.
(In thousands, except average net sales per case)
Net sales
Less: AFF third-party sales
(5,105)
Adjusted net sales1
1,056,992
940,670
Case sales by segment:
98,252
83,475
17,346
17,809
Total case sales
115,598
Average net sales per case
9.14
9.29
1Excludes Other segment net sales of $5.1 million and $5.3 million for the three-months ended March 31, 2020 and 2019, respectively, comprised of net sales of the 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.
Cash and cash equivalents, short-term and long-term investments. 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. Our sources and uses of cash were not materially impacted by the COVID-19 pandemic in the three-months ended March 31, 2020 and, to date, we have not identified any material liquidity deficiencies as a result of the COVID-19 pandemic. Based on the information currently available to us, we do not expect the impact of the COVID-19 pandemic to have a material impact on our liquidity. We will continue to monitor and assess the impact the COVID-19 pandemic may have on our business, financial condition and/or operating results.
At March 31, 2020, we had $701.8 million in cash and cash equivalents, $233.5 million in short-term investments and $13.9 million in long-term investments. We have historically invested these amounts in U.S. treasuries, U.S. government agency securities, 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.
Based on our current plans, at this time we estimate that capital expenditures (exclusive of common stock repurchases) are likely to be less than $150.0 million through March 31, 2021. However, future business opportunities may cause a change in this estimate.
Cash flows provided by operating activities. Cash provided by operating activities was $191.1 million for the three-months ended March 31, 2020, as compared with cash provided by operating activities of $123.4 million for the three-months ended March 31, 2019.
For the three-months ended March 31, 2020, cash provided by operating activities was primarily attributable to net income earned of $278.8 million and adjustments for certain non-cash expenses, consisting of $17.1 million of stock-based compensation, $16.5
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million of depreciation and amortization and $3.0 million of intangible asset impairment. For the three-months ended March 31, 2020, cash provided by operating activities also increased due to a $34.5 million increase in accrued liabilities, a $19.3 million increase in accounts payable, a $9.4 million increase in accrued promotional allowances, an $8.1 million decrease in prepaid income taxes and a $1.0 million decrease in inventories. For the three-months ended March 31, 2020, cash used in operating activities was primarily attributable to a $147.7 million increase in accounts receivable, a $24.8 million decrease in accrued compensation, an $18.1 million increase in prepaid expenses and other assets, a $4.3 million decrease in deferred revenue and a $1.6 million decrease in income tax payable.
For the three-months ended March 31, 2019, cash provided by operating activities was primarily attributable to net income earned of $261.5 million and adjustments for certain non-cash expenses, consisting of $15.3 million of stock-based compensation and $14.9 million of depreciation and other amortization. For the three-months ended March 31, 2019, cash provided by operating activities also increased due to a $23.1 million increase in accrued promotional allowances, an $18.6 million increase in accounts payable, a $10.3 million increase in accrued distributor terminations, a $2.9 million decrease in distributor receivables and a $1.3 million increase in other liabilities. For the three-months ended March 31, 2019, cash used in operating activities was primarily attributable to a $116.4 million increase in accounts receivable, a $25.2 million increase in prepaid income taxes, a $24.0 million increase in inventories, a $21.8 million decrease in accrued compensation, a $21.5 million increase in prepaid expenses and other current assets, a $9.5 million decrease in deferred revenue, a $4.1 million decrease in income taxes payable and a $2.3 million decrease in accrued liabilities.
Cash flows provided by investing activities. Cash provided by investing activities was $280.0 million for the three-months ended March 31, 2020 as compared to cash provided by investing activities of $46.8 million for the three-months ended March 31, 2019.
For both the three-months ended March 31, 2020 and 2019, cash provided by investing activities was primarily attributable to sales of available-for-sale investments. For both the three-months ended March 31, 2020 and 2019, cash used in investing activities was primarily attributable to purchases of available-for-sale investments. For both the three-months ended March 31, 2020 and 2019, 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 $546.0 million for the three-months ended March 31, 2020 as compared to cash used in financing activities of $188.0 million for the three-months ended March 31, 2019. The cash used in financing activities for both the three-months ended March 31, 2020 and 2019 was primarily the result of the repurchases of our common stock. The cash provided by financing activities for both the three-months ended March 31, 2020, and 2019 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.
Of our $701.8 million of cash and cash equivalents held at March 31, 2020, $430.0 million was held by our foreign subsidiaries. No short-term or long-term investments were held by our foreign subsidiaries at March 31, 2020.
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The following represents a summary of the Company’s contractual commitments and related scheduled maturities as of March 31, 2020:
Payments due by period (in thousands)
Less than
1-3
3-5
More than
Obligations
1 year
5 years
Contractual Obligations1
200,516
141,728
56,337
2,451
3,710
6,814
5,740
17,025
Purchase Commitments2
70,513
306,552
218,185
63,151
8,191
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 $3.0 million of unrecognized tax benefits have been recorded as liabilities as of March 31, 2020. It is expected that the amount of unrecognized tax benefits will not significantly change within the next 12 months. As of March 31, 2020, we had $0.4 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, 2019 (“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.
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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:
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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 and in Item 1A of this Quarterly Report 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
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uncertainty of estimates, forecasts and projections and may be better or worse than anticipated. Given these uncertainties, you should not rely on forward-looking statements. Forward-looking statements represent our estimates and assumptions only as of the date that they were made. We expressly disclaim any duty to provide updates to forward-looking statements, and the estimates and assumptions associated with them, after the date of this report, in order to reflect changes in circumstances or expectations or the occurrence of unanticipated events except to the extent required by applicable securities laws.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk during the three-months ended March 31, 2020 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 March 31, 2020, 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
In addition to the other information set forth in this Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations and the condensed consolidated financial statements and related notes, you should carefully consider the risks discussed in “Part I, Item 1A – Risk Factors” in our Form 10-K, as supplemented below. If any of these risks actually occur or continue to occur, our business, reputation, financial condition and/or operating results could be materially adversely affected. The risk factors summarized below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, reputation, financial condition and/or operating results.
The COVID-19 pandemic has had, and we expect will continue to have, certain negative impacts on our business and operations, and such impacts may have a material adverse effect on our business and results of operations.
The current COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our employees, communities and business operations, as well as the global economy and financial markets. The human and economic consequences of the COVID-19 pandemic as well as the measures being taken by governments, businesses (including the Company and our suppliers, bottlers/distributors, co-packers and other service providers) and the public at large to limit the COVID-19 pandemic, have and will, directly and indirectly impact our business and results of operations, including, without limitation, the following:
44
Any of the negative impacts of the COVID-19 pandemic, including those described above, alone or in combination with others, may have a material adverse effect on our business, reputation, operating results and/or financial condition. Any of these negative impacts, alone or in combination with others, could exacerbate many of the risk factors discussed in “Part I, Item 1A – Risk Factors” in our Form 10-K, any of which could materially affect our business, reputation, operating results and/or financial condition. The full extent to which the COVID-19 pandemic will negatively affect our business, reputation, operating results and/or financial condition will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following tabular summary reflects the Company’s repurchase activity during the quarter ended March 31, 2020:
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
Jan 1 – Jan 31, 2020
536,606
Feb 1 – Feb 29, 2020
March 13, 2020 Authorization
500,000
Mar 1 – Mar 31, 2020
10,491,889
55.22
457,133
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
10.1+*
Form of 2020 Annual Incentive Award Agreement for grants under the Monster Beverage Corporation 2011 Omnibus Incentive Plan
10.2+*
Form of Performance Share Unit Award Agreement for grants under the Monster Beverage Corporation 2011 Omnibus Incentive Plan
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 March 31, 2020, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019, (ii) Condensed Consolidated Statements of Income for the three-months ended March 31, 2020 and 2019, (iii) Condensed Consolidated Statements of Comprehensive Income for the three-months ended March 31, 2020 and 2019, (iv) Condensed Consolidated Statements of Stockholders’ Equity for the three-months ended March 31, 2020 and 2019, (v) Condensed Consolidated Statements of Cash Flows for the three-months ended March 31, 2020 and 2019, 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 March 31, 2020, formatted in iXBRL (Inline eXtensible Business Reporting Language) and contained in Exhibit 101.
* Filed herewith
+ Management contract or compensatory plans or arrangements
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: May 8, 2020
/s/ RODNEY C. SACKS
Rodney C. Sacks
Chairman of the Board of Directors
and Chief Executive Officer