Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 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 527,916,757 shares of common stock, par value $0.005 per share, outstanding as of October 30, 2020.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 2020
INDEX
Part I.
FINANCIAL INFORMATION
Page No.
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019
3
Condensed Consolidated Statements of Income for the Three- and Nine-Months Ended September 30, 2020 and 2019
4
Condensed Consolidated Statements of Comprehensive Income for the Three- and Nine-Months Ended September 30, 2020 and 2019
5
Condensed Consolidated Statements of Stockholders’ Equity for the Three- and Nine-Months Ended September 30, 2020 and 2019
6
Condensed Consolidated Statements of Cash Flows for the Nine-Months Ended September 30, 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
33
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
48
Item 4.
Controls and Procedures
49
Part II.
OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
51
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
52
Signatures
53
2
PART I – FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2020 AND DECEMBER 31, 2019
(In Thousands, Except Par Value) (Unaudited)
September 30,
December 31,
2020
2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
1,074,730
797,957
Short-term investments
599,326
533,063
Accounts receivable, net
740,813
540,330
Inventories
318,956
360,731
Prepaid expenses and other current assets
75,958
54,868
Prepaid income taxes
16,064
29,360
Total current assets
2,825,847
2,316,309
INVESTMENTS
20,571
12,905
PROPERTY AND EQUIPMENT, net
304,687
298,640
DEFERRED INCOME TAXES, net
84,777
GOODWILL
1,331,643
OTHER INTANGIBLE ASSETS, net
1,059,537
1,052,105
OTHER ASSETS
70,621
53,973
Total Assets
5,697,683
5,150,352
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
281,522
274,045
Accrued liabilities
168,398
114,075
Accrued promotional allowances
200,668
166,761
Deferred revenue
45,538
44,237
Accrued compensation
45,555
47,262
Income taxes payable
32,082
14,717
Total current liabilities
773,763
661,097
DEFERRED REVENUE
268,281
287,469
OTHER LIABILITIES
26,318
30,505
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS’ EQUITY:
Common stock - $0.005 par value; 1,250,000 shares authorized; 638,458 shares issued and 527,893 shares outstanding as of September 30, 2020; 636,460 shares issued and 536,698 shares outstanding as of December 31, 2019
3,192
3,182
Additional paid-in capital
4,513,743
4,397,511
Retained earnings
5,960,338
5,022,480
Accumulated other comprehensive loss
(32,529)
(32,387)
Common stock in treasury, at cost; 110,565 shares and 99,762 shares as of September 30, 2020 and December 31, 2019, respectively
(5,815,423)
(5,219,505)
Total stockholders’ equity
4,629,321
4,171,281
Total Liabilities and Stockholders’ Equity
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE- AND NINE-MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(In Thousands, Except Per Share Amounts) (Unaudited)
Three-Months Ended
Nine-Months Ended
NET SALES
1,246,362
1,133,577
3,402,355
3,183,613
COST OF SALES
509,831
460,575
1,369,160
1,275,796
GROSS PROFIT
736,531
673,002
2,033,195
1,907,817
OPERATING EXPENSES
277,930
277,559
802,343
821,923
OPERATING INCOME
458,601
395,443
1,230,852
1,085,894
INTEREST and OTHER (EXPENSE) INCOME, net
(4,568)
3,121
(5,491)
8,835
INCOME BEFORE PROVISION FOR INCOME TAXES
454,033
398,564
1,225,361
1,094,729
PROVISION FOR INCOME TAXES
106,379
99,641
287,503
241,848
NET INCOME
347,654
298,923
937,858
852,881
NET INCOME PER COMMON SHARE:
Basic
0.66
0.55
1.77
1.57
Diluted
0.65
1.75
1.56
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS:
527,637
544,469
530,194
543,804
533,263
548,422
535,011
548,387
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands) (Unaudited)
Net income, as reported
Other comprehensive income (loss):
Change in foreign currency translation adjustment
21,217
(14,359)
(338)
(10,586)
Available-for-sale investments:
Change in net unrealized gains
(308)
32
196
367
Reclassification adjustment for net gains included in net income
—
Net change in available-for-sale investments
Other comprehensive income (loss)
20,909
(14,327)
(142)
(10,219)
Comprehensive income
368,563
284,596
937,716
842,662
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Accumulated
Other
Total
Common stock
Additional
Retained
Comprehensive
Treasury stock
Stockholders’
Shares
Amount
Paid-in 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
304
Repurchase of common stock
(10,503)
(579,948)
Foreign currency translation
(30,599)
Net income
278,835
Balance, March 31, 2020
637,104
3,186
4,428,580
5,301,315
(62,682)
(110,265)
(5,799,453)
3,870,946
15,936
820
29,863
29,867
200
(298)
(15,822)
9,044
311,369
Balance, June 30, 2020
637,924
3,190
4,474,379
5,612,684
(53,438)
(110,563)
(5,815,275)
4,221,540
17,668
534
21,696
21,698
Unrealized loss, net on available-for-sale securities
(2)
(148)
Balance, September 30, 2020
638,458
(110,565)
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
120
(4,000)
(222,792)
(1,381)
261,485
Balance, March 31, 2019
634,841
3,174
4,288,638
4,176,130
(34,125)
(91,294)
(4,734,997)
3,698,820
15,575
1,288
45,964
45,970
215
(10)
(621)
5,154
292,473
Balance, June 30, 2019
636,129
3,180
4,350,177
4,468,603
(28,756)
(91,304)
(4,735,618)
4,057,586
15,991
106
1
4,112
4,113
(4,340)
(254,308)
Balance, September 30, 2019
636,235
3,181
4,370,280
4,767,526
(43,083)
(95,644)
(4,989,926)
4,107,978
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
45,879
47,843
Gain on disposal of property and equipment
(210)
(7)
Impairment of intangibles
7,000
53,042
46,890
Deferred income taxes
540
Effect on cash of changes in operating assets and liabilities:
Accounts receivable
(201,677)
(179,838)
Distributor receivables
341
5,813
39,490
(44,947)
Prepaid expenses and other assets
(20,446)
(16,121)
11,460
6,174
(9,724)
69,480
53,501
(9,592)
31,915
55,799
Accrued distributor terminations
(150)
(1,214)
(3,901)
17,969
10,311
Other liabilities
(562)
(631)
(15,236)
(19,631)
Net cash provided by operating activities
949,236
821,069
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of available-for-sale investments
795,858
558,128
Purchases of available-for-sale investments
(849,276)
(835,964)
Purchases of property and equipment
(42,062)
(44,392)
Proceeds from sale of property and equipment
880
810
Additions to intangibles
(19,686)
(5,478)
Increase in other assets
(26,228)
(1,289)
Net cash used in investing activities
(140,514)
(328,185)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt
(2,500)
(12,841)
Issuance of common stock
65,540
85,245
Purchases of common stock held in treasury
(595,918)
(477,721)
Net cash used in financing activities
(532,878)
(405,317)
Effect of exchange rate changes on cash and cash equivalents
929
(7,463)
NET INCREASE IN CASH AND CASH EQUIVALENTS
276,773
80,104
CASH AND CASH EQUIVALENTS, beginning of period
637,513
CASH AND CASH EQUIVALENTS, end of period
717,617
SUPPLEMENTAL INFORMATION:
Cash paid during the period for:
Interest
39
306
Income taxes
257,563
226,883
(In Thousands) (Unaudited) (Continued)
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS
Included in accrued liabilities as of September 30, 2020 and 2019 were $14.3 million and $8.6 million, respectively, related to additions to other intangible assets.
Included in accounts payable as of September 30, 2020 and 2019 were available-for-sale short-term investment purchases of $20.3 million and $3.0 million, respectively.
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- and nine-months ended September 30, 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”) No. 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 No. 2019-12 removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU No. 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 September 30, 2020 and December 31, 2019.
10
The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers.
Distribution expenses to transport the Company’s products, where applicable, and warehousing expense after manufacture are accounted for within operating expenses.
Promotional and other allowances (variable consideration) recorded as a reduction to net sales, primarily include consideration given to the Company’s bottlers/distributors or retail customers including, but not limited to the following:
The Company’s promotional allowance programs with its bottlers/distributors and/or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, typically ranging from one week to one year. The Company’s promotional and other allowances are calculated based on various programs with bottlers/distributors and retail customers, and accruals are established at the time of initial product sale for the Company’s anticipated liabilities. These accruals are based on agreed upon terms as well as the Company’s historical experience with similar programs and require management’s judgment with respect to estimating consumer participation and/or 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.
11
Disaggregation of Revenue
The following tables disaggregate the Company’s revenue by geographical markets and reportable segments:
Three-Months Ended September 30, 2020
Latin
America
U.S. and
and
Net Sales
Canada
EMEA1
Asia Pacific
Caribbean
Monster Energy® Drinks
786,960
206,947
120,589
48,924
1,163,420
Strategic Brands
46,005
19,192
6,658
2,469
74,324
8,618
Total Net Sales
841,583
226,139
127,247
51,393
Three-Months Ended September 30, 2019
737,457
178,569
97,153
48,205
1,061,384
43,205
16,673
6,243
212
66,333
5,860
786,522
195,242
103,396
48,417
Nine-Months Ended September 30, 2020
2,223,925
501,639
319,325
138,671
3,183,560
125,030
52,333
17,161
3,904
198,428
20,367
2,369,322
553,972
336,486
142,575
Nine-Months Ended September 30, 2019
2,118,835
458,655
242,561
130,826
2,950,877
132,375
62,374
20,024
990
215,763
16,973
2,268,183
521,029
262,585
131,816
1Europe, Middle East and Africa (“EMEA”)
12
Contract Liabilities
Amounts received from certain bottlers/distributors at inception of their distribution contracts or at the inception of certain sales/marketing programs are accounted for as deferred revenue. As of September 30, 2020, the Company had $313.8 million of deferred revenue, which is included in current and long-term deferred revenue in the Company’s condensed consolidated balance sheet. As of December 31, 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 September 30, 2020 and 2019, $10.5 million and $10.7 million, respectively, of deferred revenue was recognized in net sales. See Note 11. During the nine-months ended September 30, 2020 and 2019, $31.6 million and $35.6 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 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 interest and other (expense) income, net in the condensed consolidated statement of income.
The Company’s leases have remaining lease terms of less than one year to 13 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.
13
The components of lease cost were comprised of the following:
Three-Months
Nine-Months
Ended September 30,
Operating lease cost
1,161
1,223
3,499
3,548
Short-term lease cost
856
993
2,440
2,552
Variable lease cost
242
168
564
503
Finance leases:
Amortization of ROU assets
177
172
511
346
Interest on lease liabilities
34
43
Finance lease cost
186
185
545
389
Total lease cost
2,445
2,569
7,048
6,992
Supplemental cash flow information for the following periods:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases
3,081
3,026
Operating cash outflows from finance leases
Financing cash outflows from finance leases
2,500
1,497
ROU assets obtained in exchange for lease obligations:
Finance leases
2,231
2,499
Operating leases
2,117
27,965
ROU assets for operating and finance leases recognized in the condensed consolidated balance sheets were comprised of the following at:
September 30, 2020
Real Estate
Equipment
Balance Sheet Location
22,783
214
22,997
Other Assets
2,781
Property and Equipment, net
December 31, 2019
30,926
416
31,342
2,632
14
Operating and finance lease liabilities recognized in the condensed consolidated balance sheets were as follows at:
Operating Leases
Finance Leases
2,982
1,214
17,535
20,517
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 September 30, 2020 and December 31, 2019 were as follows:
Weighted-average remaining lease term (years)
9.7
0.6
Weighted-average discount rate
3.6
%
2.1
10.1
3.1
2.9
The following table reconciles the undiscounted future lease payments for operating and finance leases to the operating and finance leases recorded in the condensed consolidated balance sheet at September 30, 2020:
Undiscounted Future Lease Payments
2020 (excluding the nine-months ended September 30, 2020)
811
588
2021
3,573
633
2022
2,898
2023
2,185
2024
1,890
2025 and thereafter
13,188
Total lease payments
24,545
1,221
Less imputed interest
(4,028)
As of September 30, 2020, the Company did not have any significant additional operating or finance leases that have not yet commenced.
15
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
91,445
Certificates of deposit
19,959
U.S. government agency securities
66,435
21
66,453
U.S. treasuries
421,093
398
22
421,469
Long-term:
10,205
10,204
10,370
10,367
619,507
419
29
619,897
83,478
28,049
Municipal securities
147,983
145
20
148,108
40,620
35
40,590
211,055
134
31
211,158
Variable rate demand notes
21,680
1,562
1,561
5,267
5,266
6,077
6,078
545,771
285
88
545,968
During the three- and nine-months ended September 30, 2020 and 2019, realized gains or losses recognized on the sale of investments were not significant.
The Company’s investments at September 30, 2020 and December 31, 2019 carried investment grade credit ratings.
Variable rate demand notes (“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.
16
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:
3,905
Due 11 - 20 years:
8,886
Due 21 - 30 years:
6,885
Due 31 - 40 years:
2,004
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.
17
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
719,429
Money market funds
319,984
76,657
467,153
Foreign currency derivatives
(770)
1,039,413
654,444
1,693,857
Amounts included in:
35,317
Investments
(955)
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 is based on quoted market prices in active markets for identical securities. The Company’s valuation of its Level 2 investments is based on other observable inputs, specifically a market approach which utilizes valuation models, pricing systems, mathematical tools and other relevant information for the same or similar securities. The Company’s valuation of its Level 2 foreign currency exchange contracts is based on quoted market prices of the same or similar instruments, adjusted for counterparty risk. There were no transfers between Level 1 and Level 2 measurements during the nine-months ended September 30, 2020 or during the year-ended December 31, 2019, and there were no changes in the Company’s valuation techniques.
18
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 nine-months ended September 30, 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 September 30, 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 (expense) income, net, in the condensed consolidated statements of income, and are largely offset by the changes in the fair value of the underlying economically hedged item.
The notional amount and fair value of all outstanding foreign currency derivative instruments in the condensed consolidated balance sheets consist of the following at:
Derivatives not designated as
hedging instruments under
Notional
ASC 815-20
Assets:
Foreign currency exchange contracts:
Receive SGD/pay USD
13,748
90
Receive RSD/pay USD
14,253
63
Receive NOK/pay USD
2,579
Liabilities:
Receive USD/pay GBP
51,990
(282)
Receive USD/pay EUR
35,815
(182)
Receive USD/pay RUB
9,343
(162)
Receive USD/pay AUD
9,448
(145)
Receive USD/pay CNY
11,915
(70)
Receive USD/pay COP
4,670
(61)
Receive USD/pay ZAR
1,542
(39)
Receive USD/pay NZD
1,247
(11)
Receive USD/pay DKK
1,367
(3)
Receive EUR/pay USD
26,731
246
9,018
59
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
The net gains on derivative instruments in the condensed consolidated statements of income were as follows:
Amount of gain
recognized in income on
derivatives
Location of gain
Three-months ended
Foreign currency exchange contracts
Interest and other (expense) income, net
260
627
Nine-months ended
4,318
475
8.
INVENTORIES
Inventories consist of the following at:
Raw materials
150,123
134,885
Finished goods
168,833
225,846
9.
PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following at:
Land
85,512
78,275
Leasehold improvements
12,789
10,417
Furniture and fixtures
8,297
8,426
Office and computer equipment
20,723
22,766
Computer software
5,847
4,450
206,151
214,293
Buildings
143,221
126,338
Vehicles
41,575
41,109
524,115
506,074
Less: accumulated depreciation and amortization
(219,428)
(207,434)
Total depreciation and amortization expense recorded was $11.7 million and $11.6 million for the three-months ended September 30, 2020 and 2019, respectively. Total depreciation and amortization expense recorded was $36.4 million and $36.3 million for the nine-months ended September 30, 2020 and 2019, respectively.
10. GOODWILL AND OTHER INTANGIBLE ASSETS
The following is a roll-forward of goodwill for the nine-months ended September 30, 2020 and September 30, 2019 by reportable segment:
Monster
Energy®
Strategic
Drinks
Brands
Balance at December 31, 2019
693,644
637,999
Acquisitions
Balance at September 30, 2020
Balance at December 31, 2018
Balance at September 30, 2019
Intangible assets consist of the following at:
Amortizing intangibles
66,953
66,949
Accumulated amortization
(55,674)
(49,128)
11,279
17,821
Non-amortizing intangibles
1,048,258
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 $1.1 million and $2.9 million for the three- months ended September 30, 2020 and 2019, respectively. Total amortization expense recorded was $6.5 million and $8.7 million for the nine- months ended September 30, 2020 and 2019, respectively. The Company recorded impairment charges of $3.0 million and $7.0 million on a Strategic Brand trademark during the three- and nine-months ended September 30, 2020, respectively.
The following is the future estimated amortization expense related to amortizing intangibles as of September 30, 2020:
1,126
4,429
4,405
1,111
195
11. DISTRIBUTION AGREEMENTS
In accordance with ASC 420, the Company expenses distributor termination costs in the period in which the written notification of termination occurs. The Company incurred no termination costs for the three- months ended September 30, 2020 and 2019. The Company incurred termination costs of $0.2 million and $11.0 million for the nine-months ended September 30, 2020 and 2019, respectively.
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 $10.5 million and $10.7 million for the three- months ended September 30, 2020 and 2019, respectively. Revenue recognized was $31.6 million and $35.6 million for the nine-months ended September 30, 2020 and 2019, respectively.
12. COMMITMENTS AND CONTINGENCIES
The Company had purchase commitments aggregating approximately $62.2 million at September 30, 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 $142.2 million at September 30, 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 September 30, 2020, the interest rate on borrowings under the line of credit was 5.5%. As of September 30, 2020, the Company had no amounts outstanding on this line of credit.
Litigation — From time to time in the normal course of business, the Company is named in litigation, including labor and employment matters, personal injury matters, consumer class actions, intellectual property matters 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.
On September 18, 2020, a derivative complaint was filed on purported behalf of the Company in the United States District Court for the Central District of California. The action is styled Falat v. Sacks, et al., 8:20-cv-01782, and asserts claims against certain officers, directors, and employees of the Company, including Rodney C. Sacks, Hilton H. Schlosberg, Guy P. Carling, Thomas J. Kelly, Emelie C. Tirre, Mark J. Hall, Kathleen E. Ciaramello, Gary P. Fayard, Jeanne P. Jackson, Steven G. Pizula, Benjamin M. Polk, Sydney Selati and Mark S. Vidergauz (collectively, the "Individual Defendants"). The Company is named as a nominal defendant.
The derivative complaint alleges, among other things, that the Individual Defendants breached their fiduciary duties to the Company by allowing others to cause, or themselves causing, the Company to hide discrimination and failing to ensure sufficient diversity, including by permitting conduct to occur that was inconsistent with statements made in the Company's policies and disclosures, and failing to ensure the Company's compliance with laws regarding diversity and anti-discrimination. The complaint also asserts claims for abuse of control, unjust enrichment and violation of Section 14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The complaint seeks from the Individual Defendants an unspecified amount of damages, restitution, punitive damages and costs to be paid to the Company, and seeks to require the Company to adopt corporate governance reforms, and other equitable relief.
The Company believes that the action should be dismissed because the plaintiff failed to make a demand on the Company as required by Federal Rule of Civil Procedure 23.1 or to show that demand would have been futile. The Company also understands that the Individual Defendants intend to file a motion to dismiss the complaint for failure to state a claim, among other reasons. While the Company continues to evaluate these claims, management believes that such litigation will likely not have a material adverse effect on the Company's financial position or results of operations.
The Company evaluates, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of the liability that is accrued, if any, or in the amount of any related insurance reimbursements recorded. As of September 30, 2020, the Company’s condensed consolidated balance sheet included accrued loss contingencies of approximately $16.6 million.
13. ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in accumulated other comprehensive loss (income) by component, after tax, for the nine-months ended September 30, 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
338
(196)
142
Amounts reclassified from accumulated other comprehensive loss (income)
Net current-period other comprehensive loss (income)
32,919
(390)
32,529
32,775
89
32,864
10,586
(367)
10,219
43,361
(278)
43,083
23
14. TREASURY STOCK
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 September 30, 2020, no shares were purchased by the Company under the March 2020 Repurchase Plan. As of November 6, 2020, $441.5 million remained available for repurchase under the March 2020 Repurchase Plan.
During the three- months ended September 30, 2020, 1,779 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 $0.1 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 September 30, 2020.
15. STOCK-BASED COMPENSATION
The Company has two stock-based compensation plans under which shares were available for grant at September 30, 2020: (i) the Monster Beverage Corporation 2020 Omnibus Incentive Plan (the "2020 Omnibus Incentive Plan"), which includes the Monster Beverage Corporation Deferred Compensation Plan as a sub plan thereunder, and (ii) the Monster Beverage Corporation 2017 Compensation Plan for Non-Employee Directors, which includes the Monster Beverage Corporation Deferred Compensation Plan for Non-Employee Directors as a sub plan thereunder. The 2020 Omnibus Incentive Plan was approved by the Board of Directors on April 14, 2020 and approved by the stockholders of the Company at the annual meeting of the Company's stockholders held on June 3, 2020 (the "Effective Date"). The 2020 Omnibus Incentive Plan replaced the Monster Beverage Corporation 2011 Omnibus Incentive Plan (the "2011 Omnibus Incentive Plan").
The 2020 Omnibus Incentive Plan provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, and other share-based awards up to an aggregate of 46,169,367 shares of the Company's common stock, comprised of 32,000,000 new shares of common stock reserved under the 2020 Omnibus Incentive Plan and 14,169,367 shares of common stock that were available for grant under the 2011 Omnibus Incentive Plan as of December 31, 2019 and prior to the Effective Date. Shares authorized under the 2020 Omnibus Incentive Plan are reduced by one (1) share for options or stock appreciation rights granted under the 2020 Omnibus Incentive Plan and for any grants after December 31, 2019 under the 2011 Omnibus Incentive Plan, and by 2.6 shares for each share granted or issued with respect to a Full Value Award under either the 2020 Omnibus Incentive Plan or for any shares granted after December 31, 2019 under the 2011 Omnibus Incentive Plan. A "Full Value Award" is an award other than an incentive stock option, a non- qualified stock option, or a stock appreciation right, which is settled by the issuance of shares. Options granted under the 2020 Omnibus Incentive Plan may be incentive stock options under Section 422 of the Internal Revenue Code, as amended, or non-qualified stock options.
Shares previously granted under the 2011 Omnibus Incentive Plan after December 31, 2019 and prior to the Effective Date of the 2020 Omnibus Incentive Plan reduced the number of shares available for grant under the 2020 Omnibus Incentive Plan. As of September 30, 2020, 1,401,750 shares of the Company's common stock have been granted, net of cancellations, and 44,181,623 shares (as adjusted for Full Value Awards) of the Company's common stock remain available for grant under the 2020 Omnibus Incentive Plan.
The Compensation Committee of the Board of Directors (the "Compensation Committee") has sole and exclusive authority to grant stock awards to all employees who are not new hires and to all new hires who are subject to Section 16 of the Exchange Act. Each of the Compensation Committee and the Executive Committee of the Board of Directors (the "Executive Committee") independently has the authority to grant stock awards to new hires and employees receiving a promotion who are not Section 16 employees. Awards granted by the Executive Committee are not subject to approval or ratification by the Board of Directors or the Compensation Committee. Options granted under the 2020 Omnibus Incentive Plan generally vest over a three- to five-year period from the grant date and are generally exercisable up to 10 years after the grant date. Restricted stock units granted under the 2020 Omnibus Incentive Plan generally vest over a three- or five-year period from the grant date. Performance share units will generally vest based on the achievement of performance goals specified for the applicable award.
24
The Company recorded $19.5 million and $16.0 million of compensation expense relating to outstanding options, restricted stock units, performance share units and other share-based awards during the three- months ended September 30, 2020 and 2019, respectively. The Company recorded $53.0 million and $46.9 million of compensation expense relating to outstanding options, restricted stock units, performance share units and other share-based awards during the nine- months ended September 30, 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 September 30, 2020 and 2019 was $3.5 million and $0.5 million, respectively. The tax benefit for tax deductions from non-qualified stock option exercises, disqualifying dispositions of incentive stock options and vesting of restricted stock units and performance share units for the nine-months ended September 30, 2020 and 2019 was $9.2 million and $26.7 million, respectively.
Stock Options
Under the Company’s stock-based compensation plans, all stock options granted as of September 30, 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 September 30,
Nine-Months Ended September 30,
2020*
Dividend yield
0.0
Expected volatility
30.2
30.5
Risk-free interest rate
1.4
0.7
2.4
Expected term
5.8
years
6.0
*No options were granted during the three-months ended September 30, 2020.
Expected Volatility: The Company uses historical volatility as it provides a reasonable estimate of the expected volatility. Historical volatility is based on the most recent volatility of the stock price over a period of time equivalent to the expected term of the option.
Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. treasury zero-coupon yield curve in effect at the time of grant for the expected term of the option.
Expected Term: The Company’s expected term represents the weighted-average period that the Company’s stock options are expected to be outstanding. The expected term is based on the expected time to post-vesting exercise of options by employees. The Company uses historical exercise patterns of previously granted options to derive employee behavioral patterns used to forecast expected exercise patterns.
25
The following table summarizes the Company’s activities with respect to its stock option plans as follows:
Weighted-
Average
Remaining
Number of
Exercise
Contractual
Aggregate
Shares (in
Price Per
Term (In
Intrinsic
Options
thousands)
Share
years)
Outstanding at January 1, 2020
14,941
42.88
6.3
308,884
Granted 01/01/20 - 03/31/20
1,027
62.45
Granted 04/01/20 - 06/30/20
Granted 07/01/20 - 09/30/20
Exercised
(1,711)
38.30
Cancelled or forfeited
(53)
52.91
Outstanding at September 30, 2020
14,204
44.81
502,732
Vested and expected to vest in the future at September 30, 2020
13,594
44.23
5.9
488,969
Exercisable at September 30, 2020
8,174
36.97
4.7
353,333
No options were granted during the three-months ended September 30, 2020. The weighted-average grant-date fair value of options granted during the three-months ended September 30, 2019 was $18.32 per share. The weighted-average grant-date fair value of options granted during the nine-months ended September 30, 2020 and 2019 was $18.78 per share and $20.24 per share, respectively.
The total intrinsic value of options exercised during the three- months ended September 30, 2020 and 2019 was $22.5 million and $2.4 million, respectively. The total intrinsic value of options exercised during the nine-months ended September 30, 2020 and 2019 was $58.8 million and $213.8 million, respectively.
Cash received from option exercises under all plans for the three- months ended September 30, 2020 and 2019 was $21.7 million and $4.1 million, respectively. Cash received from option exercises under all plans for the nine-months ended September 30, 2020 and 2019 was $65.5 million and $85.2 million, respectively.
At September 30, 2020, there was $68.6 million of total unrecognized compensation expense related to non-vested options granted to employees under the Company’s stock-based compensation plans. That cost is expected to be recognized over a weighted-average period of 2.3 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.
26
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
71.72
71.76
Vested
(287)
55.65
Forfeited/cancelled
59.67
Non-vested at September 30, 2020
946
60.46
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 granted during the three-months ended September 30, 2020 and 2019 was $71.76 per share and $66.00 per share, respectively. No performance share units were granted during the three-months ended September 30, 2020 and 2019. The weighted-average grant-date fair value of restricted stock units and performance share units granted during the nine-months ended September 30, 2020 was $62.79 per share. The weighted-average grant-date fair value of restricted stock units granted during the nine-months ended September 30, 2019 was $59.79 per share. No performance share units were granted during the nine- months ended September 30, 2019.
As of September 30, 2020, 0.8 million of restricted stock units and performance share units are expected to vest over their respective terms.
At September 30, 2020, total unrecognized compensation expense relating to non-vested restricted stock units and performance share units was $38.1 million, which is expected to be recognized over a weighted-average period of 2.4 years.
Other Share-Based Awards
The Company has granted other share-based awards to certain employees that are payable in cash. These awards are classified as liabilities and are valued based on the fair value of the award at the grant date and are remeasured at each reporting date until settlement with compensation expense being recognized in proportion to the completed requisite service period up until date of settlement. At September 30, 2020, other share-based awards outstanding included grants that vest over three years payable in the first quarters of 2022 and 2023.
At September 30, 2020, there was $2.7 million of total unrecognized compensation expense related to nonvested other share-based awards granted to employees under the Company's stock-based compensation plans. That cost is expected to be recognized over a weighted-average period of 1.8 years.
27
16. INCOME TAXES
The following is a roll-forward of the Company’s total gross unrecognized tax benefits, not including interest and penalties, for the nine-months ended September 30, 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
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Company’s condensed consolidated financial statements. As of September 30, 2020, the Company had approximately $0.5 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
5,626
3,953
4,817
4,583
For the three- months ended September 30, 2020 and 2019, options and awards outstanding totaling 0.6 million shares and 4.7 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive. For the nine-months ended September 30, 2020 and 2019, options and awards outstanding totaling 4.2 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.
28
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.
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- and nine-months ended September 30, 2020 and 2019 are as follows:
Net sales:
Monster Energy® Drinks⁽¹⁾
1,163,419
1,061,383
3,183,559
74,325
198,429
5,861
Corporate and unallocated
Operating Income:
Monster Energy® Drinks⁽¹⁾ ⁽²⁾
502,392
433,848
1,366,920
1,187,652
43,875
35,107
118,287
130,762
2,368
1,005
4,780
(90,034)
(74,517)
(259,135)
(235,546)
Income before tax:
502,500
434,003
1,367,096
1,187,916
43,876
35,106
130,758
3,031
(94,711)
(71,550)
(264,802)
(226,976)
Depreciation and amortization:
8,713
9,319
27,687
29,449
227
1,990
3,932
5,925
1,136
1,162
3,495
3,475
2,741
2,050
7,794
6,172
12,817
14,521
42,908
45,021
Corporate and unallocated expenses for the three- months ended September 30, 2020 include $61.7 million of payroll costs, of which $19.2 million was attributable to stock-based compensation expenses (see Note 15 "Stock-Based Compensation"), as well as $16.7 million attributable to professional service expenses, including accounting and legal costs, and $11.6 million of other operating expenses. Corporate and unallocated expenses for the three-months ended September 30, 2019 include $50.1 million of payroll costs, of which $16.0 million was attributable to stock-based compensation expenses (see Note 15 "Stock-Based Compensation"), as well as $13.3 million attributable to professional service expenses, including accounting and legal costs, and $11.1 million of other operating expenses.
Corporate and unallocated expenses for the nine-months ended September 30, 2020 include $173.5 million of payroll costs, of which $52.7 million was attributable to stock-based compensation expenses (see Note 15 "Stock-Based Compensation"), as well as $50.1 million attributable to professional service expenses, including accounting and legal costs, and $35.5 million of other operating expenses. Corporate and unallocated expenses for the nine-months ended September 30, 2019 include $151.0 million of payroll costs, of which $46.9 million was attributable to stock-based compensation expenses (see Note 15 "Stock-Based Compensation"), as well as $49.2 million attributable to professional service expenses, including accounting and legal costs, and $35.3 million of other operating expenses.
Coca-Cola Consolidated, Inc. accounted for approximately 12% and 13% of the Company’s net sales for the three- months ended September 30, 2020 and 2019, respectively. Coca-Cola Consolidated, Inc. accounted for approximately 12% and 13% of the Company's net sales for the nine- months ended September 30, 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 September 30, 2020 and 2019, respectively. Reyes Coca-Cola Bottling, LLC accounted for approximately 11% and 12% of the Company's net sales for the nine-months ended September 30, 2020 and 2019 , respectively.
Coca-Cola European Partners accounted for approximately 11% and 10% of the Company’s net sales for the three- months ended September 30, 2020 and 2019, respectively. Coca-Cola European Partners accounted for approximately 10% of the Company's net sales for both the nine- months ended September 30, 2020 and 2019.
30
Net sales to customers outside the United States amounted to $444.5 million and $379.8 million for the three- months ended September 30, 2020 and 2019, respectively. Such sales were approximately 36% and 34% of net sales for the three- months ended September 30, 2020 and 2019, respectively. Net sales to customers outside the United States amounted to $1.13 billion and $1.01 billion for the nine-months ended September 30, 2020 and 2019, respectively. Such sales were approximately 33% and 32% of net sales for the nine-months ended September 30, 2020 and 2019, respectively.
Goodwill and other intangible assets for the Company’s reportable segments as of September 30, 2020 and December 31, 2019 are as follows:
Goodwill and other intangible assets:
1,404,754
1,384,940
975,392
984,393
11,034
14,415
2,391,180
2,383,748
19. RELATED PARTY TRANSACTIONS
TCCC controls approximately 19.3% 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 $15.7 million and $11.6 million for the three-months ended September 30, 2020 and 2019, respectively, and are included as a reduction to net sales. TCCC commissions, based on sales to the TCCC Subsidiaries and the TCCC Related Parties, were $37.7 million and $39.5 million for the nine-months ended September 30, 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 $5.5 million and $4.7 million for the three-months ended September 30, 2020 and 2019, respectively, and are included in operating expenses. TCCC commissions, based on sales to certain TCCC independent bottlers/distributors, were $15.2 million and $13.6 million for the nine-months ended September 30, 2020 and 2019, respectively, and are included in operating expenses.
Net sales to the TCCC Subsidiaries for the three-months ended September 30, 2020 and 2019 were $21.5 million and $21.0 million, respectively. Net sales to the TCCC Subsidiaries for the nine-months ended September 30, 2020 and 2019 were $55.2 million and $59.5 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 $6.8 million and $6.3 million for the three-months ended September 30, 2020 and 2019, respectively. Concentrate purchases from TCCC were $17.6 million and $20.2 million for the nine-months ended September 30, 2020 and 2019, respectively.
Certain TCCC Subsidiaries also contract manufacture certain of the Company’s energy drinks. Such contract manufacturing expenses were $5.1 million and $4.2 million for the three- months ended September 30, 2020 and 2019, respectively. Such contract manufacturing expenses were $11.3 million and $13.1 million for the nine-months ended September 30, 2020 and 2019, respectively.
Accounts receivable, accounts payable, accrued promotional allowances and accrued liabilities related to the TCCC Subsidiaries are as follows at:
47,552
21,670
(25,832)
(18,217)
(4,911)
(5,321)
(32,615)
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 September 30, 2020 and 2019 were $0.4 million and $0.5 million, respectively. Expenses incurred with such company in connection with promotional materials purchased during the nine-months ended September 30, 2020 and 2019 were $1.9 million and $1.1 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. During the three-months ended September 30, 2020, the Company recorded an equity loss of $0.04 million. During the nine-months ended September 30, 2020, the Company recorded an equity loss of $0.3 million. As of September 30, 2020, the Company’s equity investment is $1.6 million and is included in other assets (non-current) in the accompanying condensed consolidated balance sheet.
20. SUBSEQUENT EVENTS
In October 2020, the Company completed an intra-entity transfer of intangible assets between certain of the Company’s foreign subsidiaries to better align its international structure with its expanding operations. As a result, the Company’s fourth quarter 2020 provision for income taxes will be materially impacted. The transfer resulted in a step-up of the tax-deductible basis in the transferred assets, and created a temporary difference between the tax basis and book basis of such intangible assets. The Company will recognize deferred tax assets of approximately $165.0 million, with a corresponding reduction to the provision for income taxes during the fourth quarter of 2020 in its consolidated financial statements. The tax deductions for the amortization of the deferred tax assets will be recognized in the future and any amortization not deducted for tax purposes will be carried forward indefinitely. The tax impact on the foreign subsidiary transferor was not material.
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 taken or that may be taken in the future by governments, and consequently 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, has directly and indirectly impacted our business. 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.
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. Currently, certain of our offices have partially reopened in the U.S. and in certain countries, and generally, our field sales teams are working with our bottler/distributors and retailers subject to certain safety protocols. 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
Despite the ongoing impact of the COVID-19 pandemic, we achieved record third quarter net sales and the highest quarterly net sales in our history. While the performance in Europe, Middle East and Africa (“EMEA”) was solid in the third quarter, EMEA remained adversely affected by the COVID-19 pandemic.
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 food service on-premise consumption. Our sales in the 2020 second quarter were initially adversely affected as a result of a decrease in foot traffic in the convenience and gas channel (which is our largest channel) but improved sequentially from the latter half of the 2020 second quarter and throughout the 2020 third quarter. Our e-commerce, club store, mass merchandiser and grocery and related business continued to increase over the 2020 second and 2020 third quarters, while our food service on-premise business, which is a small channel for the Company, remained challenged. The duration of these trends and the magnitude of such impacts on future periods cannot be precisely estimated at this time, as they are affected by a number of factors (many of which are outside our control).
We have recently seen a resurgence of the COVID-19 pandemic in the Northern Hemisphere. As a result, a number of countries, particularly in EMEA, have reinstituted lockdowns and other restrictions, which could further impact customer demand.
A reduction in demand for our products or changes 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 significant raw material or finished product shortages in our supply chain and our supply chain remains intact. We are continually addressing our aluminum can requirements given our volume growth and the current supply constraints in the aluminum can industry. 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®
● Reign Total Body Fuel®
● Live+®
● Reign Inferno® Thermogenic Fuel
● Predator®
● Fury®
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 September 30, 2020, we continued to expand our existing energy drink portfolio by adding additional products to our portfolio in a number of countries and further developed our distribution markets. During the three-months ended September 30, 2020, we sold the following new products to our bottlers/distributors:
In the normal course of business, we discontinue certain products and/or product lines. Those products or product lines discontinued in the three-months ended September 30, 2020, either individually or in aggregate, did not have a material adverse impact on our financial position, results of operations or liquidity.
Our net sales of $1.25 billion for the three-months ended September 30, 2020 represented record sales for our third fiscal quarter. Net changes in foreign currency exchange rates had an unfavorable impact on net sales of approximately $12.5 million for the three- months ended September 30, 2020.
The vast majority of our net sales are derived from our Monster Energy(R) Drinks segment. Net sales of our Monster Energy® Drinks segment were $1.16 billion for the three-months ended September 30, 2020. Net sales of our Strategic Brands segment were $74.3 million for the three-months ended September 30, 2020. Our Monster Energy® Drinks segment represented 93.3% and 93.6% of our net sales for the three-months ended September 30, 2020 and 2019, respectively. Our Strategic Brands segment represented 6.0% and 5.9% of our net sales for the three-months ended September 30, 2020 and 2019, respectively. Our Other segment represented 0.7% and 0.5% of our net sales for the three-months ended September 30, 2020 and 2019, respectively.
Our growth strategy includes expanding our international business. Net sales to customers outside the United States were $444.5 million for the three-months ended September 30, 2020, an increase of approximately $64.7 million, or 17.0% higher than net sales to customers outside of the United States of $379.8 million for the three-months ended September 30, 2019. Such sales were approximately 36% and 34% of net sales for the three-months ended September 30, 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- and nine-months ended September 30, 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
56
55
58
International full service bottlers/distributors
37
Club stores and mass merchandisers
Retail grocery, specialty chains and wholesalers
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 adverse 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 September 30, 2020 and 2019, respectively. Coca-Cola Consolidated, Inc. accounted for approximately 12% and 13% of our net sales for the nine-months ended September 30, 2020 and 2019, respectively.
Reyes Coca-Cola Bottling, LLC accounted for approximately 11% and 12% of our net sales for the three-months ended September 30, 2020 and 2019, respectively. Reyes Coca-Cola Bottling, LLC accounted for approximately 11% and 12% of our net sales for the nine-months ended September 30, 2020 and 2019, respectively.
Coca-Cola European Partners accounted for approximately 11% and 10% of our net sales for the three-months ended September 30, 2020 and 2019, respectively. Coca-Cola European Partners accounted for approximately 10% of our net sales for both the nine-months ended September 30, 2020 and 2019.
Results of Operations
The following table sets forth key statistics for the three- and nine-months ended September 30, 2020 and 2019.
Percentage
(In thousands, except per share amounts)
Change
20 vs. 19
Net sales1
9.9
6.9
Cost of sales
10.7
7.3
Gross profit*1
9.4
6.6
Gross profit as a percentage of net sales
59.1
59.4
59.8
59.9
Operating expenses2
0.1
(2.4)
Operating expenses as a percentage of net sales
22.3
24.5
23.6
25.8
Operating income1,2
16.0
13.3
Operating income as a percentage of net sales
36.8
34.9
36.2
34.1
(246.4)
(162.2)
Income before provision for income taxes1,2
13.9
11.9
Provision for income taxes
6.8
18.9
Income taxes as a percentage of income before taxes
23.4
25.0
23.5
22.1
Net income1,2
16.3
10.0
Net income as a percentage of net sales
27.9
26.4
27.6
26.8
Net income per common share:
20.0
12.8
19.6
12.7
Case sales (in thousands) (in 192‑ounce case equivalents)
139,922
121,854
14.8
372,481
342,734
8.7
1Includes $10.5 million and $10.7 million for the three-months ended September 30, 2020 and 2019, respectively, related to the recognition of deferred revenue. Includes $31.6 million and $35.6 million for the nine- months ended September 30, 2020 and 2019, respectively, related to the recognition of deferred revenue.
2The three-months ended September 30, 2020 and 2019 includes no distributor termination costs. Includes $0.2 million and $11.0 million for the nine- months ended September 30, 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.
36
Results of Operations for the Three-Months Ended September 30, 2020 Compared to the Three-Months Ended September 30, 2019.
Net Sales. Net sales were $1.25 billion for the three-months ended September 30, 2020, an increase of approximately $112.8 million, or 9.9% higher than net sales of $1.13 billion for the three-months ended September 30, 2019. We do not believe that the COVID-19 pandemic had a material adverse impact on our net sales for the three-months ended September 30, 2020, other than in EMEA, where an adverse impact was experienced. Net changes in foreign currency exchange rates had an unfavorable impact on net sales of approximately $12.5 million for the three-months ended September 30, 2020.
Net sales for the Monster Energy® Drinks segment were $1.16 billion for the three-months ended September 30, 2020, an increase of approximately $102.0 million, or 9.6% higher than net sales of $1.06 billion for the three-months ended September 30, 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 and increased sales by volume of our Reign Total Body Fuel® high performance energy drinks, both as a result of increased consumer demand. Net changes in foreign currency exchange rates had an unfavorable impact on net sales for the Monster Energy® Drinks segment of approximately $11.6 million for the three-months ended September 30, 2020.
Net sales for the Strategic Brands segment were $74.3 million for the three-months ended September 30, 2020, an increase of approximately $8.0 million, or 12.0% higher than net sales of $66.3 million for the three-months ended September 30, 2019. Net sales for the Strategic Brands segment increased primarily due to increased worldwide sales by volume of our NOS®, Burn®, Predator® and Mother® brand energy drinks as a result of increased consumer demand, as well as sales of Fury® energy drinks introduced in certain countries in the 2020 second quarter. Net changes in foreign currency exchange rates had an unfavorable impact on net sales for the Strategic Brands segment of approximately $0.9 million for the three-months ended September 30, 2020.
Net sales for the Other segment were $8.6 million for the three-months ended September 30, 2020, an increase of approximately $2.8 million, or 47.1% higher than net sales of $5.9 million for the three-months ended September 30, 2019.
Case sales, in 192-ounce case equivalents, were 139.9 million cases for the three-months ended September 30, 2020, an increase of approximately 18.1 million cases or 14.8% higher than case sales of 121.9 million cases for the three-months ended September 30, 2019. The overall average net sales per case (excluding net sales of AFF Third-Party Products of $8.6 million and $5.9 million for the three-months ended September 30, 2020 and 2019, respectively, as these sales do not have unit case equivalents) decreased to $8.85 for the three-months ended September 30, 2020, which was 4.4% lower than the average net sales per case of $9.25 for the three-months ended September 30, 2019. The decrease in the average net sales per case was primarily the result of geographical sales mix, the increase in net sales of the Strategic Brands segment, which has a lower net sales price per case than the Monster Energy® Drinks segment, and an increase in promotional allowances as a percentage of net sales.
Gross Profit. Gross profit was $736.5 million for the three-months ended September 30, 2020, an increase of approximately $63.5 million, or 9.4% higher than the gross profit of $673.0 million for the three- months ended September 30, 2019. The increase in gross profit dollars was primarily the result of the $112.8 million increase in net sales for the three-months ended September 30, 2020.
Gross profit as a percentage of net sales decreased to 59.1% for the three-months ended September 30, 2020 from 59.4% for the three-months ended September 30, 2019. The decrease for the three-months ended September 30, 2020 was primarily the result of geographical sales mix and higher allowances as a percentage of gross sales, partially offset by favorable aluminum can pricing.
Operating Expenses. Total operating expenses were $277.9 million for the three-months ended September 30, 2020, an increase of approximately $0.4 million, or 0.1% higher than total operating expenses of $277.6 million for the three-months ended September 30, 2019. As a percentage of net sales, operating expenses for the three-months ended September 30, 2020 were 22.3% as compared to 24.5% for the three-months ended September 30, 2019, primarily due to decreased expenditures of $14.1 million for sponsorship and endorsements and decreased expenditures of $9.3 million for travel and entertainment, each largely as a consequence of the COVID-19 pandemic. The costs for certain postponed or rescheduled events have been, or may be, deferred to future periods. Due to the uncertainty surrounding the COVID-19 pandemic, we are unable to estimate in which future periods, if any, such deferred sponsorship and endorsement costs will be recognized. The decrease in operating expenses as a percentage of net sales was partially offset by increased payroll expenses of $14.5 million (of which $3.5 million was related to an increase in stock-based compensation), increased expenditures of $7.4 million for social media and digital marketing, and increased out-bound freight and warehouse costs of $6.0 million.
Operating Income. Operating income was $458.6 million for the three-months ended September 30, 2020, an increase of approximately $63.2 million, or 16.0% higher than operating income of $395.4 million for the three-months ended September 30, 2019. Operating income as a percentage of net sales increased to 36.8% for the three-months ended September 30, 2020 from 34.9% for the three-months ended September 30, 2019. Operating income was $96.6 million and $72.6 million for the three-months ended September 30, 2020 and 2019, respectively, for our operations in EMEA, Asia Pacific and South America.
Operating income for the Monster Energy® Drinks segment, exclusive of corporate and unallocated expenses, was $502.4 million for the three-months ended September 30, 2020, an increase of approximately $68.5 million, or 15.8% higher than operating income of $433.8 million for the three-months ended September 30, 2019. The increase in operating income for the Monster Energy® Drinks segment was primarily the result of the $102.0 million increase in net sales and the $12.5 million decrease in operating expenses for the three-months ended September 30, 2020.
Operating income for the Strategic Brands segment, exclusive of corporate and unallocated expenses, was $43.9 million for the three-months ended September 30, 2020, an increase of approximately $8.8 million, or 25.0% higher than operating income of $35.1 million for the three-months ended September 30, 2019. The increase in operating income for the Strategic Brands segment was primarily the result of the $8.0 million increase in net sales, offset by a decrease of $2.2 million in advertising costs and a $1.4 million decrease in sponsorship and endorsement costs.
Operating income for the Other segment, exclusive of corporate and unallocated expenses, was $2.4 million for the three-months ended September 30, 2020, an increase of approximately $1.4 million, or 135.5% higher than operating income of $1.0 million for the three-months ended September 30, 2019.
Interest and Other (Expense)/Income, net. Interest and other non-operating (expense)/ income, net, was ($4.6) million for the three-months ended September 30, 2020, as compared to interest and other non- operating (expense)/ income, net, of $3.1 million for the three-months ended September 30, 2019. Foreign currency transaction losses were $4.8 million and $2.8 million for the three-months ended September 30, 2020 and 2019, respectively. Interest income was $1.5 million and $6.1 million for the three-months ended September 30, 2020 and 2019, respectively.
Provision for Income Taxes. Provision for income taxes was $106.4 million for the three-months ended September 30, 2020, an increase of $6.7 million, or 6.8% higher than the provision for income taxes of $99.6 million for the three-months ended September 30, 2019. The effective combined federal, state and foreign tax rate decreased to 23.4% from 25.0% for the three-months ended September 30, 2020 and 2019, respectively. The decrease in the effective tax rate was primary attributable to lower income taxes in certain foreign jurisdictions as well as an increase in the equity compensation deduction.
Net Income. Net income was $347.7 million for the three-months ended September 30, 2020, an increase of $48.7 million, or 16.3% higher than net income of $298.9 million for the three-months ended September 30, 2019. The increase in net income was primarily due to the $63.5 million increase in gross profit for the three-months ended September 30, 2020.
Results of Operations for the Nine-Months Ended September 30, 2020 Compared to the Nine-Months Ended September 30, 2019.
Net Sales. Net sales were $3.40 billion for the nine-months ended September 30, 2020, an increase of approximately $218.7 million, or 6.9% higher than net sales of $3.18 billion for the nine-months ended September 30, 2019. The COVID-19 pandemic had an adverse impact on net sales for the nine-months ended September 30, 2020. Net changes in foreign currency exchange rates had an unfavorable impact on net sales of approximately $41.1 million for the nine-months ended September 30, 2020.
Net sales for the Monster Energy® Drinks segment were $3.18 billion for the nine-months ended September 30, 2020, an increase of approximately $232.7 million, or 7.9% higher than net sales of $2.95 billion for the nine-months ended September 30, 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 and increased sales by volume for our Reign Total Body Fuel® high performance energy drinks, both as a result of increased consumer demand . The COVID-19 pandemic had an adverse impact on net sales of the Monster Energy® Drinks segment for the nine-months ended September 30, 2020. Net changes in foreign currency exchange rates had an unfavorable impact on net sales for the Monster Energy® Drinks segment of approximately $38.3 million for the nine-months ended September 30, 2020.
38
Net sales for the Strategic Brands segment were $198.4 million for the nine-months ended September 30, 2020, a decrease of approximately $17.3 million, or 8.0% lower than net sales of $215.8 million for the nine-months ended September 30, 2019. The COVID-19 pandemic had a material adverse impact on net sales of the Strategic Brands segment for the nine-months ended September 30, 2020. The COVID-19 pandemic impact was more pronounced in the Strategic Brand segment, particularly in EMEA, as our largest revenue generating countries for this segment experienced extended lockdowns. Net changes in foreign currency exchange rates had an unfavorable impact on net sales for the Strategic Brands segment of approximately $2.8 million for the nine-months ended September 30, 2020.
Net sales for the Other segment were $20.4 million for the nine-months ended September 30, 2020, an increase of approximately $3.4 million, or 20.0% higher than net sales of $17.0 million for the nine-months ended September 30, 2019.
Case sales, in 192-ounce case equivalents, were 372.5 million cases for the nine-months ended September 30, 2020, an increase of approximately 29.7 million cases or 8.7% higher than case sales of 342.7 million cases for the nine-months ended September 30, 2019. The overall average net sales per case (excluding net sales of AFF Third-Party Products of $20.4 million and $17.0 million for the nine-months ended September 30, 2020 and 2019, respectively, as these sales do not have unit case equivalents) decreased to $9.08 for the nine-months ended September 30, 2020, as compared to net sales per case of $9.24 for the nine-months ended September 30, 2019.
Gross Profit. Gross profit was $2.03 billion for the nine-months ended September 30, 2020, an increase of approximately $125.4 million, or 6.6% higher than the gross profit of $1.91 billion for the nine- months ended September 30, 2019. The increase in gross profit dollars was primarily the result of the $232.7 million increase in net sales of our Monster Energy® Drinks segment for the nine-months ended September 30, 2020.
Gross profit as a percentage of net sales decreased marginally to 59.8% for the nine-months ended September 30, 2020 from 59.9% for the nine-months ended September 30, 2019.
Operating Expenses. Total operating expenses were $802.3 million for the nine-months ended September 30, 2020, a decrease of approximately $19.6 million, or 2.4% lower than total operating expenses of $821.9 million for the nine-months ended September 30, 2019. The decrease in operating expenses was primarily due to decreased expenditures of $38.3 million for sponsorship and endorsements and decreased expenditures of $19.6 million for travel and entertainment, each largely as a consequence of the COVID-19 pandemic, as well as decreased expenditures of $10.7 million related to the costs associated with distributor terminations. The costs for certain postponed or rescheduled events have been, or may be, deferred to future periods. Due to the uncertainty surrounding the COVID-19 pandemic, we are unable to estimate in what future periods, if any, such deferred sponsorship and endorsement costs will be recognized. The decrease in operating expenses was partially offset by increased payroll expenses of $31.1 million (of which $6.1 million was related to an increase in stock-based compensation), increased expenditures of $17.1 million for social media and digital marketing, and increased out-bound freight and warehouse costs of $10.2 million.
Operating Income. Operating income was $1.23 billion for the nine-months ended September 30, 2020, an increase of approximately $145.0 million, or 13.3% higher than operating income of $1.09 billion for the nine-months ended September 30, 2019. Operating income as a percentage of net sales increased to 36.2% for the nine-months ended September 30, 2020 from 34.1% for the nine-months ended September 30, 2019. Operating income was $229.4 million and $180.1 million for the nine-months ended September 30, 2020 and 2019, respectively, for our operations in EMEA, Asia Pacific and South America.
Operating income for the Monster Energy® Drinks segment, exclusive of corporate and unallocated expenses, was $1.37 billion for the nine-months ended September 30, 2020, an increase of approximately $179.3 million, or 15.1% higher than operating income of $1.19 billion for the nine-months ended September 30, 2019. The increase in operating income for the Monster Energy® Drinks segment was primarily the result of the $232.7 million increase in net sales of our Monster Energy® Drinks segment for the nine-months ended September 30, 2020.
Operating income for the Strategic Brands segment, exclusive of corporate and unallocated expenses, was $118.3 million for the nine-months ended September 30, 2020, a decrease of approximately $12.5 million, or 9.5% lower than operating income of $130.8 million for the nine-months ended September 30, 2019. The decrease in operating income for the nine-months ended September 30, 2020 was primarily the result of a decrease in net sales related to the COVID-19 pandemic.
Operating income for the Other segment, exclusive of corporate and unallocated expenses, was $4.8 million for the nine-months ended September 30, 2020, an increase of approximately $1.8 million, or 57.9% higher than operating income of $3.0 million for the nine-months ended September 30, 2019.
Interest and Other (Expense)/Income, net. Interest and other non-operating (expense)/income, net, was ($5.5) million for the nine-months ended September 30, 2020, as compared to interest and other non- operating (expense)/income, net, of $8.8 million for the nine-months ended September 30, 2019. Foreign currency transaction losses were $9.2 million and $3.9 million for the nine-months ended September 30, 2020 and 2019, respectively. Interest income was $6.9 million and $13.5 million for the nine-months ended September 30, 2020 and 2019, respectively.
Provision for Income Taxes. Provision for income taxes was $287.5 million for the nine-months ended September 30, 2020, an increase of $45.7 million, or 18.9% higher than the provision for income taxes of $241.8 million for the nine-months ended September 30, 2019. The effective combined federal, state and foreign tax rate increased to 23.5% from 22.1% for the nine-months ended September 30, 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 $937.9 million for the nine-months ended September 30, 2020, an increase of $85.0 million, or 10.0% higher than net income of $852.9 million for the nine-months ended September 30, 2019. The increase in net income was primarily due to the $125.4 million increase in gross profit and the $19.6 million decrease in operating expenses. The increase in net income was partially offset by an increase in the provision for income taxes of $45.7 million.
Non-GAAP Financial Measures
Three-Months Ended September 30, 2020 Compared to the Three-Months Ended September 30, 2019.
Gross Sales**. Gross sales were $1.46 billion for the three-months ended September 30, 2020, an increase of approximately $146.2 million, or 11.1% higher than gross sales of $1.32 billion for the three-months ended September 30, 2019. We do not believe that the COVID-19 pandemic had a material adverse impact on our gross sales for the three-months ended September 30, 2020, other than in EMEA, where an adverse impact was experienced. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales of approximately $11.9 million for the three-months ended September 30, 2020.
Gross sales for the Monster Energy® Drinks segment were $1.37 billion for the three-months ended September 30, 2020, an increase of approximately $131.9 million, or 10.7% higher than gross sales of $1.24 billion for the three-months ended September 30, 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 and increased sales by volume for our Reign Total Body Fuel® high performance energy drinks, both as a result of increased consumer demand. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales for the Monster Energy® Drinks segment of approximately $10.9 million for the three-months ended September 30, 2020.
Gross sales of our Strategic Brands segment were $88.2 million for the three-months ended September 30, 2020, an increase of $11.5 million, or 15.0% higher than gross sales of $76.7 million for the three-months ended September 30, 2019. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales in the Strategic Brands segment of approximately $1.0 million for the three-months ended September 30, 2020.
Gross sales of our Other segment were $8.6 million for the three-months ended September 30, 2020, an increase of $2.8 million, or 47.1% higher than gross sales of $5.9 million for the three-months ended September 30, 2019.
Promotional allowances, commissions and other expenses, as described in the footnote below, were $218.1 million for the three-months ended September 30, 2020, an increase of $33.4 million, or 18.1% higher than promotional allowances, commissions and other expenses of $184.7 million for the three-months ended September 30, 2019. Promotional allowances, commissions and other expenses as a percentage of gross sales increased to 14.9% from 14.0 % for the three-months ended September 30, 2020 and 2019, respectively.
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Nine-Months Ended September 30, 2020 Compared to the Nine-Months Ended September 30, 2019.
Gross Sales**. Gross sales were $3.97 billion for the nine-months ended September 30, 2020, an increase of approximately $279.6 million, or 7.6% higher than gross sales of $3.70 billion for the nine-months ended September 30, 2019. The COVID-19 pandemic had an adverse impact on gross sales for the nine- months ended September 30, 2020. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales of approximately $44.7 million for the nine-months ended September 30, 2020.
Gross sales for the Monster Energy® Drinks segment were $3.72 billion for the nine-months ended September 30, 2020, an increase of approximately $293.5 million, or 8.6% higher than gross sales of $3.43 billion for the nine-months ended September 30, 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. The COVID-19 pandemic had an adverse impact on gross sales of the Monster Energy® Drinks segment for the nine-months ended September 30, 2020. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales for the Monster Energy® Drinks segment of approximately $41.8 million for the nine-months ended September 30, 2020.
Gross sales of our Strategic Brands segment were $229.4 million for the nine-months ended September 30, 2020, a decrease of $17.2 million, or 7.0% lower than gross sales of $246.6 million for the nine-months ended September 30, 2019. The COVID-19 pandemic had a material adverse impact on gross sales of the Strategic Brands segment for the nine-months ended September 30, 2020. The COVID-19 pandemic impact was more pronounced in the Strategic Brands segment, particularly in EMEA, as our larger revenue generating countries for this segment experienced extended lockdowns. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales in the Strategic Brands segment of approximately $2.9 million for the nine-months ended September 30, 2020.
Gross sales of our Other segment were $20.4 million for the nine-months ended September 30, 2020, an increase of $3.4 million, or 20.0% higher than gross sales of $17.0 million for the nine-months ended September 30, 2019.
Promotional allowances, commissions and other expenses, as described in the footnote below, were $572.4 million for the nine-months ended September 30, 2020, an increase of $60.9 million, or 11.9% higher than promotional allowances, commissions and other expenses of $511.5 million for the nine-months ended September 30, 2019. Promotional allowances, commissions and other expenses as a percentage of gross sales increased to 14.4% from 13.8% for the nine-months ended September 30, 2020 and 2019, respectively.
**Gross Sales represents the recognition of deferred revenue and amounts invoiced to customers net of cash discounts and returns. 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, such as the timing of certain promotional programs. 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
1,464,426
1,318,267
11.1
3,974,763
3,695,128
7.6
Less: Promotional allowances, commissions and other expenses***
218,064
184,690
18.1
572,408
511,515
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***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 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 September 30, 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- and nine-months ended September 30, 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 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
(8,618)
(5,860)
(20,367)
(16,973)
Adjusted net sales¹
1,237,744
1,127,717
3,381,988
3,166,640
Case sales by segment:
117,805
103,987
317,103
286,284
22,117
17,867
55,378
56,450
Total case sales
Average net sales per case
8.85
9.25
9.08
9.24
1Excludes Other segment net sales of $8.6 million and $5.9 million for the three-months ended September 30, 2020 and 2019, respectively, comprised of net sales of AFF Third-Party Products to independent third-party customers, as these sales do not have unit case equivalents. Excludes Other segment net sales of $20.4 million and $17.0 million for the nine-months ended September 30, 2020 and 2019, respectively, comprised of net sales of AFF Third-Party Products to independent third-party customers, as these sales do not have unit case equivalents.
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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 nine-months ended September 30, 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 September 30, 2020, we had $1.07 billion in cash and cash equivalents, $599.3 million in short-term investments and $20.6 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. At this time, we no longer invest these amounts in municipal securities. 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 $200.0 million through September 30, 2021. However, future business opportunities may cause a change in this estimate.
Cash flows provided by operating activities. Cash provided by operating activities was $949.2 million for the nine-months ended September 30, 2020, as compared with cash provided by operating activities of $821.1 million for the nine-months ended September 30, 2019.
For the nine-months ended September 30, 2020, cash provided by operating activities was primarily attributable to net income earned of $937.9 million and adjustments for certain non-cash expenses, consisting of $53.0 million of stock-based compensation, $45.9 million of depreciation and amortization and $7.0 million of intangible asset impairment. For the nine-months ended September 30, 2020, cash provided by operating activities also increased due to a $53.5 million increase in accrued liabilities, a $39.5 million decrease in inventories, a $31.9 million increase in accrued promotional allowances, an $18.0 million increase in income taxes payable and an $11.5 million decrease in prepaid income taxes. For the nine-months ended September 30, 2020, cash used in operating activities was primarily attributable to a $201.7 million increase in accounts receivable, a $20.4 million increase in prepaid expenses and other assets, a $15.2 million decrease in deferred revenue, a $9.7 million decrease in accounts payable and a $1.2 million decrease in accrued compensation.
For the nine-months ended September 30, 2019, cash provided by operating activities was primarily attributable to net income earned of $852.9 million and adjustments for certain non-cash expenses, consisting of $47.8 million of depreciation and amortization and $46.9 million of stock-based compensation. For the nine-months ended September 30, 2019, cash provided by operating activities also increased due to a $69.5 million increase in accounts payable, a $55.8 million increase in accrued promotional allowances, a $10.3 million increase in income taxes payable, a $6.2 million decrease in prepaid income taxes and a $5.8 million decrease in distributor receivables. For the nine-months ended September 30, 2019, cash used in operating activities was primarily attributable to a $179.8 million increase in accounts receivable, a $44.9 million increase in inventories, a $19.6 million decrease in deferred revenue, a $16.1 million increase in prepaid expenses and other assets, a $9.6 million decrease in accrued liabilities and a $3.9 million decrease in accrued compensation.
Cash flows used in investing activities. Cash used in investing activities was $140.5 million for the nine-months ended September 30, 2020 as compared to cash used in investing activities of $328.2 million for the nine-months ended September 30, 2019.
For both the nine-months ended September 30, 2020 and 2019, cash provided by investing activities was primarily attributable to sales of available-for-sale investments. For both the nine-months ended September 30, 2020 and 2019, cash used in investing activities was primarily attributable to purchases of available-for-sale investments. For both the nine-months ended September 30, 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 $532.9 million for the nine-months ended September 30, 2020 as compared to cash used in financing activities of $405.3 million for the three-months ended September 30, 2019. The cash used in financing activities for both the nine-months ended September 30, 2020 and 2019 was primarily the result of the repurchases of our common stock. The cash provided by financing activities for both the nine-months ended September 30, 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 $1.07 billion of cash and cash equivalents held at September 30, 2020, $595.0 million was held by our foreign subsidiaries. No short-term or long-term investments were held by our foreign subsidiaries at September 30, 2020.
The following represents a summary of the Company’s contractual commitments and related scheduled maturities as of September 30, 2020:
Payments due by period (in thousands)
Less than
1‑3
3‑5
More than
Obligations
1 year
5 years
Contractual Obligations¹
142,165
108,430
32,819
916
3,561
5,429
3,592
11,963
Purchase Commitments²
62,211
230,142
175,423
38,248
4,508
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 September 30, 2020. It is expected that the amount of unrecognized tax benefits will not significantly change within the next 12 months. As of September 30, 2020, we had $0.5 million of accrued interest and penalties related to unrecognized tax benefits.
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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.
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:
45
46
47
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 uncertainty of estimates, forecasts and projections and may be better or worse than anticipated. Given these uncertainties, you should not rely on forward-looking statements. Forward-looking statements represent our estimates and assumptions only as of the date that they were made. We expressly disclaim any duty to provide updates to forward-looking statements, and the estimates and assumptions associated with them, after the date of this report, in order to reflect changes in circumstances or expectations or the occurrence of unanticipated events except to the extent required by applicable securities laws.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk during the three-months ended September 30, 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 September 30, 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 updated and supplemented in “Part II, Item 1A – Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and in "Part II, Item 1A - Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, and as further updated and 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 and continues to present 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 taken or that may be taken in the future 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:
50
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 and “Part II, Item 1A – Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and "Part II, Item 1A - Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, 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, the duration of various shelter-in-place orders and reopening plans across the globe, and actions taken, or that may be taken in the future, 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
During the three-months ended September 30, 2020, 1,779 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 $0.1 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 September 30, 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 September 30, 2020, no shares were purchased by the Company under the March 2020 Repurchase Plan. As of November 6, 2020, $441.5 million remained available for repurchase under the March 2020 Repurchase Plan.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.OTHER INFORMATION
ITEM 6.EXHIBITS
31.1*
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*
The following financial information from Monster Beverage Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, (ii) Condensed Consolidated Statements of Income for the three- and nine-months ended September 30, 2020 and 2019, (iii) Condensed Consolidated Statements of Comprehensive Income for the three- and nine-months ended September 30, 2020 and 2019, (iv) Condensed Consolidated Statements of Stockholders’ Equity for the three- and nine-months ended September 30, 2020 and 2019, (v) Condensed Consolidated Statements of Cash Flows for the nine- months ended September 30, 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 September 30, 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: November 6, 2020
/s/ RODNEY C. SACKS
Rodney C. Sacks
Chairman of the Board of Directors
and Chief Executive Officer