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MNST Monster Beverage

Filed: 7 Nov 19, 7:00pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2019

Commission File Number 001-18761

MONSTER BEVERAGE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

47-1809393

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

1 Monster Way

Corona, California 92879

(Address of principal executive offices) (Zip code)

(951) 739 - 6200

(Registrant’s telephone number, including area code)

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

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock

MNST

Nasdaq Global Select Market

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

Yes  X  No ___

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

Yes  X  No ___

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

Yes  No   X 

The registrant had 537,681,684 shares of common stock, par value $0.005 per share, outstanding as of October 30, 2019.

PART I – FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2019 AND DECEMBER 31, 2018

(In Thousands, Except Par Value) (Unaudited)

September 30, 

December 31, 

    

2019

    

2018

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$

717,617

$

637,513

Short-term investments

 

587,356

320,650

Accounts receivable, net

 

647,983

484,562

Inventories

 

317,745

277,705

Prepaid expenses and other current assets

 

58,390

44,909

Prepaid income taxes

 

31,669

38,831

Total current assets

 

2,360,760

1,804,170

INVESTMENTS

14,370

PROPERTY AND EQUIPMENT, net

 

251,760

243,051

DEFERRED INCOME TAXES, net

 

85,148

85,687

GOODWILL

 

1,331,643

1,331,643

OTHER INTANGIBLE ASSETS, net

 

1,047,473

1,045,878

OTHER ASSETS

 

46,212

16,462

Total Assets

$

5,137,366

$

4,526,891

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

Accounts payable

$

304,773

$

248,760

Accrued liabilities

 

112,318

112,507

Accrued promotional allowances

 

197,239

145,741

Deferred revenue

 

43,805

44,045

Accrued compensation

 

35,747

39,903

Income taxes payable

 

20,334

10,189

Total current liabilities

 

714,216

601,145

DEFERRED REVENUE

 

292,101

312,224

OTHER LIABILITIES

23,071

2,621

COMMITMENTS AND CONTINGENCIES (Note 12)

STOCKHOLDERS' EQUITY:

Common stock - $0.005 par value; 1,250,000 shares authorized; 636,235 shares issued and 540,591 shares outstanding as of September 30, 2019; 630,970 shares issued and 543,676 shares outstanding as of December 31, 2018

 

3,181

3,155

Additional paid-in capital

 

4,370,280

4,238,170

Retained earnings

 

4,767,526

3,914,645

Accumulated other comprehensive loss

 

(43,083)

(32,864)

Common stock in treasury, at cost; 95,644 shares and 87,294 shares as of September 30, 2019 and December 31, 2018, respectively

 

(4,989,926)

(4,512,205)

Total stockholders’ equity

 

4,107,978

3,610,901

Total Liabilities and Stockholders’ Equity

$

5,137,366

$

4,526,891

See accompanying notes to condensed consolidated financial statements.

3

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE- AND NINE-MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

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

Three-Months Ended

Nine-Months Ended

September 30, 

September 30, 

    

2019

    

2018

    

2019

    

2018

NET SALES

$

1,133,577

$

1,016,160

$

3,183,613

$

2,882,953

COST OF SALES

 

460,575

 

408,501

 

1,275,796

 

1,139,780

GROSS PROFIT

 

673,002

 

607,659

 

1,907,817

 

1,743,173

OPERATING EXPENSES

 

277,559

 

268,086

 

821,923

 

766,065

OPERATING INCOME

 

395,443

 

339,573

1,085,894

 

977,108

INTEREST and OTHER INCOME, net

 

3,121

 

2,988

 

8,835

 

5,269

INCOME BEFORE PROVISION FOR INCOME TAXES

 

398,564

 

342,561

1,094,729

 

982,377

PROVISION FOR INCOME TAXES

99,641

74,828

241,848

228,480

NET INCOME

$

298,923

$

267,733

$

852,881

$

753,897

NET INCOME PER COMMON SHARE:

Basic

$

0.55

$

0.48

$

1.57

$

1.35

Diluted

$

0.55

$

0.48

$

1.56

$

1.33

WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS:

Basic

 

544,469

 

552,694

 

543,804

 

559,472

Diluted

 

548,422

 

559,955

 

548,387

 

566,791

See accompanying notes to condensed consolidated financial statements.

4

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE- AND NINE-MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(In Thousands) (Unaudited)

    

Three-Months Ended

    

Nine-Months Ended

September 30, 

September 30, 

2019

    

2018

    

2019

    

2018

Net income, as reported

$

298,923

$

267,733

$

852,881

$

753,897

Other comprehensive loss:

Change in foreign currency translation adjustment

 

(14,359)

 

(4,463)

 

(10,586)

 

(13,728)

Available-for-sale investments:

Change in net unrealized gains

 

32

 

(118)

 

367

 

610

Reclassification adjustment for net gains included in net income

 

 

 

 

Net change in available-for-sale investments

 

32

 

(118)

 

367

 

610

Other comprehensive loss

 

(14,327)

 

(4,581)

 

(10,219)

 

(13,118)

Comprehensive income

$

284,596

$

263,152

$

842,662

$

740,779

See accompanying notes to condensed consolidated financial statements.

5

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 (In Thousands) (Unaudited)

Accumulated

Additional

Other

Total

Common stock

Paid-in

Retained

Comprehensive

Treasury stock

Stockholders'

    

Shares

    

Amount

    

 Capital

    

Earnings

    

Loss

    

Shares

    

Amount

    

Equity

Balance, December 31, 2018

 

630,970

$

3,155

$

4,238,170

$

3,914,645

$

(32,864)

 

(87,294)

$

(4,512,205)

$

3,610,901

���

Stock-based compensation

 

 

 

15,324

 

 

 

 

 

15,324

Exercise of stock options

 

3,871

 

19

 

35,144

 

 

 

 

 

35,163

Unrealized gain, net on available-for-sale securities

 

 

 

 

 

120

 

 

 

120

Repurchase of common stock

 

 

 

 

 

 

(4,000)

 

(222,792)

 

(222,792)

Foreign currency translation

 

 

 

 

 

(1,381)

 

 

 

(1,381)

Net income

 

 

 

 

261,485

 

 

 

 

261,485

Balance, March 31, 2019

 

634,841

$

3,174

$

4,288,638

$

4,176,130

$

(34,125)

 

(91,294)

$

(4,734,997)

$

3,698,820

Stock-based compensation

 

 

 

15,575

 

 

 

 

 

15,575

Exercise of stock options

 

1,288

 

6

 

45,964

 

 

 

 

 

45,970

Unrealized gain, net on available-for-sale securities

 

 

 

 

 

215

 

 

 

215

Repurchase of common stock

 

 

 

 

 

 

(10)

 

(621)

 

(621)

Foreign currency translation

 

 

 

 

 

5,154

 

 

 

5,154

Net income

 

 

 

 

292,473

 

 

 

 

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

Stock-based compensation

 

 

 

15,991

 

 

 

 

 

15,991

Exercise of stock options

 

106

 

1

 

4,112

 

 

 

 

 

4,113

Unrealized gain, net on available-for-sale securities

 

 

 

 

 

32

 

 

 

32

Repurchase of common stock

 

 

 

 

 

 

(4,340)

 

(254,308)

 

(254,308)

Foreign currency translation

 

 

 

 

 

(14,359)

 

 

 

(14,359)

Net income

 

 

 

 

298,923

 

 

 

 

298,923

Balance, September 30, 2019

 

636,235

$

3,181

$

4,370,280

$

4,767,526

$

(43,083)

 

(95,644)

$

(4,989,926)

$

4,107,978

6

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 (In Thousands) (Unaudited) (Continued)

Accumulated

Additional

Other

Total

Common stock

Paid-in

Retained

Comprehensive

Treasury stock

Stockholders'

    

Shares

    

Amount

    

 Capital

    

Earnings

    

Loss

    

Shares

    

Amount

    

Equity

Balance, December 31, 2017

 

629,255

$

3,146

$

4,150,628

$

2,928,226

$

(16,659)

 

(62,957)

$

(3,170,129)

$

3,895,212

Stock-based compensation

 

 

 

13,439

 

 

 

 

 

13,439

Exercise of stock options

 

669

 

4

 

6,498

 

 

 

 

 

6,502

���

Unrealized gain, net on available-for-sale securities

 

 

 

 

 

215

 

 

 

215

ASU No. 2016-16 adoption

 

 

 

 

(6,585)

 

 

 

 

(6,585)

Repurchase of common stock

 

 

 

 

 

 

(4,362)

 

(251,949)

 

(251,949)

Foreign currency translation

 

 

 

 

 

2,723

 

 

 

2,723

Net income

 

 

 

 

216,050

 

 

 

 

216,050

Balance, March 31, 2018

 

629,924

$

3,150

$

4,170,565

$

3,137,691

$

(13,721)

 

(67,319)

$

(3,422,078)

$

3,875,607

Stock-based compensation

 

 

 

14,906

 

 

 

 

 

14,906

Exercise of stock options

 

406

 

2

 

7,112

 

 

 

 

 

7,114

Unrealized gain, net on available-for-sale securities

 

 

 

 

 

513

 

 

 

513

Adjustment to excess tax from prior periods

 

 

 

2,093

 

 

 

 

 

2,093

Repurchase of common stock

 

 

 

 

 

 

(10,554)

 

(553,200)

 

(553,200)

Foreign currency translation

 

 

 

 

 

(11,988)

 

 

 

(11,988)

Net income

 

 

 

 

270,116

 

 

 

 

270,116

Balance, June 30, 2018

630,330

$

3,152

$

4,194,676

$

3,407,807

$

(25,196)

(77,873)

$

(3,975,278)

$

3,605,161

Stock-based compensation

 

 

 

14,091

 

 

 

 

 

14,091

Exercise of stock options

 

495

 

2

 

10,861

 

 

 

 

 

10,863

Unrealized gain, net on available-for-sale securities

 

 

 

 

 

(118)

 

 

 

(118)

Foreign currency translation

 

 

 

 

 

(4,463)

 

 

 

(4,463)

Net income

 

 

 

 

267,733

 

 

 

 

267,733

Balance, September 30, 2018

 

630,825

$

3,154

$

4,219,628

$

3,675,540

$

(29,777)

 

(77,873)

$

(3,975,278)

$

3,893,267

See accompanying notes to condensed consolidated financial statements.

7

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(In Thousands) (Unaudited)

Nine-Months Ended

September 30, 

    

2019

    

2018

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$

852,881

$

753,897

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

 

47,843

42,469

Gain on disposal of property and equipment

 

(7)

(634)

Stock-based compensation

 

46,890

42,436

Deferred income taxes

 

540

(76)

Effect on cash of changes in operating assets and liabilities:

Accounts receivable

 

(179,838)

(181,683)

Distributor receivables

 

5,813

7,803

Inventories

 

(44,947)

(10,338)

Prepaid expenses and other assets

 

(16,121)

(16,465)

Prepaid income taxes

 

6,174

96,462

Accounts payable

 

69,480

39,641

Accrued liabilities

 

(9,592)

16,516

Accrued promotional allowances

 

55,799

48,682

Accrued distributor terminations

 

6

703

Accrued compensation

 

(3,901)

(4,357)

Income taxes payable

 

10,311

(1,383)

Other liabilities

(631)

1,628

Deferred revenue

 

(19,631)

(13,941)

Net cash provided by operating activities

 

821,069

821,360

CASH FLOWS FROM INVESTING ACTIVITIES:

Sales of available-for-sale investments

 

558,128

927,410

Purchases of available-for-sale investments

 

(835,964)

(711,009)

Purchases of property and equipment

 

(44,392)

(49,862)

Proceeds from sale of property and equipment

 

810

4,009

Increase in intangibles

 

(5,478)

(6,275)

Increase in other assets

 

(1,289)

(10,125)

Net cash (used in) provided by investing activities

 

(328,185)

154,148

CASH FLOWS FROM FINANCING ACTIVITIES:

Principal payments on debt

 

(12,841)

(1,482)

Issuance of common stock

 

85,245

24,481

Purchases of common stock held in treasury

 

(477,721)

(805,149)

Net cash used in financing activities

 

(405,317)

(782,150)

Effect of exchange rate changes on cash and cash equivalents

 

(7,463)

(8,266)

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

80,104

185,092

CASH AND CASH EQUIVALENTS, beginning of period

 

637,513

528,622

CASH AND CASH EQUIVALENTS, end of period

$

717,617

$

713,714

SUPPLEMENTAL INFORMATION:

Cash paid during the period for:

Interest

$

306

$

44

Income taxes

$

226,883

$

134,377

See accompanying notes to condensed consolidated financial statements.

8

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(In Thousands) (Unaudited) (Continued)

SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS

Included in accrued liabilities as of September 30, 2019 and 2018 were $8.6 million and $10.9 million, respectively, related to additions to other intangible assets.

Included in accounts payable as of September 30, 2019 were available-for-sale short-term investment purchases of $3.0 million.

See accompanying notes to condensed consolidated financial statements.

9

Table of Contents

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

1.

BASIS OF PRESENTATION

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

The Company’s condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and Securities and Exchange Commission (“SEC”) rules and regulations applicable to interim financial reporting.  They do not include all the information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP.  The information set forth in these interim condensed consolidated financial statements for the three- and nine-months ended September 30, 2019 and 2018, respectively, is unaudited and reflects all adjustments, which include only normal recurring adjustments and which in the opinion of management are necessary to make the interim condensed consolidated financial statements not misleading.  Results of operations for periods covered by this report may not necessarily be indicative of results of operations for the full year.

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

2.

RECENT ACCOUNTING PRONOUNCEMENTS

Recently issued accounting pronouncements not yet adopted

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

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

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” ASU No. 2018-13 removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. ASU No. 2018-13 disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU No. 2018-13 is effective for the Company beginning on January 1, 2020, with early adoption permitted. Certain disclosures in the new guidance will need to be applied on a retrospective basis and others on a prospective basis. The Company is currently evaluating the impact of ASU No. 2018-13 on its financial position, results of operations and liquidity.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles and Other (Topic 350): Simplifying the Test for Goodwill Impairment", which eliminates the requirement to calculate the implied fair value of goodwill, but rather requires an entity to record an

10

Table of Contents

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

impairment charge based on the excess of a reporting unit's carrying value over its fair value. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of ASU No. 2017-04 on its financial position and results of operations.

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

Recently adopted accounting pronouncements

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

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. ASU No. 2016-02 requires the recognition of lease assets and lease liabilities on the balance sheet for leases classified as operating leases under previous guidance. The accounting for finance leases (capital leases) was substantially unchanged. The original guidance required application on a modified retrospective basis with adjustments to the earliest comparative period presented. In August 2018, the FASB issued ASU No. 2018-11, “Targeted Improvements to ASC 842,” which included an option to not restate comparative periods in transition and elect to use the effective date of ASU No. 2016-02 as the date of initial application, which the Company elected. As a result, the consolidated balance sheet prior to January 1, 2019 was not restated, and continues to be reported under previous guidance that did not require the recognition of operating lease liabilities and corresponding lease assets on the consolidated balance sheet. With the adoption of ASU No. 2016-02 on January 1, 2019, the Company recorded operating lease right-of-use assets of $26.3 million and operating lease liabilities of $22.6 million. The adoption of ASU No. 2016-02 had an immaterial impact on the Company’s condensed consolidated statement of income and condensed consolidated statement of cash flows for the nine-month period ended September 30, 2019. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to carry forward the historical lease classification, not reassess prior conclusions related to expired or existing contracts that are or that contain leases, and not reassess the accounting for initial direct costs. Additional information and disclosures required by ASU No. 2016-02 are contained in Note 4.

3.

REVENUE RECOGNITION

The Company has 3 operating and reportable segments, (i) Monster Energy® Drinks segment (“Monster Energy® Drinks”), which is primarily comprised of the Company’s Monster Energy® drinks and Reign Total Body FuelTM high performance energy drinks, (ii) Strategic Brands segment (“Strategic Brands”), which is comprised primarily of the various energy drink brands acquired from The Coca-Cola Company (“TCCC”) in 2015 as well as the Company’s affordable energy brands, and (iii) Other segment (“Other”), which is comprised of certain products sold by American Fruits and Flavors LLC (“AFF”), a wholly-owned subsidiary of the Company, to independent third-party customers (the “AFF Third-Party Products”).

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

The Company's Strategic Brands segment primarily generates net operating revenues by selling “concentrates” and/or “beverage bases” to authorized bottling and canning operations. Such bottlers generally combine the concentrates and/or beverage bases with sweeteners, water and other ingredients to produce ready-to-drink packaged energy drinks. The ready-to-drink packaged energy

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

drinks are then sold by such bottlers to other bottlers and full service distributors and to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, foodservice customers, drug stores and the military. To a lesser extent, the Strategic Brands segment generates net operating revenues by selling certain ready-to-drink packaged energy drinks to bottlers and full service beverage distributors.

The majority of the Company's revenue is recognized when it satisfies a single performance obligation by transferring control of its products to a customer. Control is generally transferred when the Company's products are either shipped or delivered based on the terms contained within the underlying contracts or agreements. Certain of the Company's bottlers/distributors may also perform a separate function as a co-packer on the Company's behalf. In such cases, control of the Company's products passes to such bottlers/distributors when they notify the Company that they have taken possession or transferred the relevant portion of the Company's finished goods. The Company's general payment terms are short-term in duration. The Company does not have significant financing components or payment terms. The Company did not have any material unsatisfied performance obligations as of September 30, 2019 or December 31, 2018.

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

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

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

discounts granted off list prices to support price promotions to end-consumers by retailers;
reimbursements given to the Company's bottlers/distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products;
the Company's agreed share of fees given to bottlers/distributors and/or directly to retailers for advertising, in-store marketing and promotional activities;
the Company's agreed share of slotting, shelf space allowances and other fees given directly to retailers;
incentives given to the Company's bottlers/distributors and/or retailers for achieving or exceeding certain predetermined sales goals;
discounted or free products;
contractual fees given to the Company's bottlers/distributors related to sales made directly by the Company to certain customers that fall within the bottlers’/distributors' sales territories; and
commissions paid to TCCC based on the Company’s sales to certain wholly-owned subsidiaries of TCCC (the “TCCC Subsidiaries”) and/or to certain companies accounted for by TCCC under the equity method (“the TCCC Related Parties”).

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

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

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

Disaggregation of Revenue

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

Three-Months Ended September 30, 2019

    

    

    

    

Latin

    

America

U.S. and

and

Net Sales

Canada

EMEA1

Asia Pacific

Caribbean

Total

Monster Energy® Drinks

$

737,457

$

178,569

$

97,153

$

48,205

$

1,061,384

Strategic Brands

43,205

16,673

6,243

212

66,333

Other

5,860

5,860

Total Net Sales

$

786,522

$

195,242

$

103,396

$

48,417

$

1,133,577

Three-Months Ended September 30, 2018

    

    

    

    

Latin

    

America

 

U.S. and

and

 

Net Sales

Canada

EMEA1

Asia Pacific

Caribbean

Total

Monster Energy® Drinks

$

710,172

$

127,286

$

63,758

$

33,930

$

935,146

Strategic Brands

 

47,645

 

18,287

 

8,231

 

278

 

74,441

Other

 

6,573

 

 

 

 

6,573

Total Net Sales

$

764,390

$

145,573

$

71,989

$

34,208

$

1,016,160

Nine-Months Ended September 30, 2019

    

    

    

    

Latin

    

America

 

U.S. and

and

 

Net Sales

Canada

EMEA1

Asia Pacific

Caribbean

Total

Monster Energy® Drinks

$

2,118,835

$

458,655

$

242,561

$

130,826

$

2,950,877

Strategic Brands

 

132,375

 

62,374

 

20,024

 

990

 

215,763

Other

 

16,973

 

 

 

 

16,973

Total Net Sales

$

2,268,183

$

521,029

$

262,585

$

131,816

$

3,183,613

Nine-Months Ended September 30, 2018

Latin

America

U.S. and

and

Net Sales

Canada

EMEA1

Asia Pacific

Caribbean

Total

Monster Energy® Drinks

    

$

1,994,950

    

$

376,823

    

$

171,796

    

$

101,520

    

$

2,645,089

Strategic Brands

 

137,502

 

60,567

 

20,148

 

1,794

 

220,011

Other

 

17,853

 

 

 

 

17,853

Total Net Sales

$

2,150,305

$

437,390

$

191,944

$

103,314

$

2,882,953

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

Contract Liabilities

Amounts received from certain bottlers/distributors at inception of their distribution contracts or at the inception of certain sales/marketing programs are accounted for as deferred revenue. As of September 30, 2019, the Company had $335.9 million of deferred revenue, which is included in current and long-term deferred revenue in the Company’s condensed consolidated balance sheet. As of December 31, 2018, the Company had $356.3 million of deferred revenue, which is included in current and long-term deferred revenue in the Company’s condensed consolidated balance sheet. During the three-months ended September 30, 2019 and 2018, $10.7 million and $11.1 million, respectively, of deferred revenue was recognized in net sales. During the nine-months ended September 30, 2019 and 2018, $35.6 million and $33.3 million, respectively, of deferred revenue was recognized in net sales. See Note 11.

4.

LEASES

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

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

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

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

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

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

The components of lease cost for the three- and nine-months ended September 30, 2019 was as follows:

Three-Months

Nine-Months

Ended September 30,

Ended September 30,

    

2019

    

2019

Operating leases:

Lease cost

$

1,223

$

3,548

Variable lease cost

 

168

 

503

Operating lease cost

 

1,391

 

4,051

Short term lease cost

 

993

 

2,552

Finance leases:

Amortization of ROU assets

 

172

 

346

Interest on finance lease liabilities

 

13

 

43

Finance lease cost

 

185

 

389

Total lease cost

$

2,569

$

6,992

Supplemental cash flow information for leases for the nine-months ended September 30, 2019 was as follows:

Cash paid for amounts included in the measurement of lease liabilities:

    

Operating cash flows from operating leases

$

3,026

Operating cash flows from finance leases

 

43

Financing cash flows from finance leases

 

1,497

ROU assets obtained in exchange for lease obligations:

Finance leases

 

2,499

Operating leases

 

27,965

ROU assets for operating and finance leases at September 30, 2019 were comprised of the following:

    

Real Estate

    

Equipment

    

Total

Operating leases

$

24,384

$

497

$

24,881

Finance leases

 

 

3,525

 

3,525

The weighted-average remaining lease term and weighted-average discount rate for operating and finance leases at September 30, 2019 was as follows:

    

Operating Leases

    

Finance Leases

 

Weighted-average remaining lease term (years)

 

10.4

 

0.8

Weighted-average discount rate

 

3.6

%  

3.2

%

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

The following table reconciles the undiscounted future lease payments for operating and finance leases to the operating and finance leases recorded in the condensed consolidated balance sheet at September 30, 2019:

Undiscounted Future Lease Payments

    

Operating Leases

    

Finance Leases

2019 (excluding the nine-months ended September 30, 2019)

$

1,014

$

678

2020

 

3,509

 

1,187

2021

 

2,888

 

2022

 

2,349

 

2023

 

1,894

 

2024 and thereafter

 

14,707

 

Total lease payments

 

26,361

 

1,865

Less interest

 

(4,666)

 

(23)

Total

$

21,695

$

1,842

Accrued liabilities

$

3,061

$

1,842

Other liabilities

 

18,634

 

As of September 30, 2019, the Company did not have any significant additional operating or finance leases that have not yet commenced.

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

Year Ending December 31:

    

  

2019

$

3,954

2020

 

2,949

2021

 

2,410

2022

 

2,114

2023

 

1,681

2024 and thereafter

 

14,860

$

27,968

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

5.

INVESTMENTS

The following table summarizes the Company’s investments at:

    

Continuous

    

Continuous

Gross

Gross

Unrealized

Unrealized

Unrealized

Unrealized

Loss Position

Loss Position

Amortized 

Holding

Holding

Fair

less than 12

greater than 12

September 30, 2019

    

Cost

    

Gains

    

Losses

    

Value

    

Months

    

Months

Available-for-sale

Short-term:

Commercial paper

$

81,869

$

$

$

81,869

$

$

Certificates of deposit

2,502

2,502

Municipal securities

 

138,072

 

151

 

9

 

138,214

 

9

 

U.S. government agency securities

 

41,186

 

7

 

37

 

41,156

 

37

 

U.S. treasuries

294,099

179

10

294,268

10

Variable rate demand notes

29,347

29,347

Long-term:

U.S. treasuries

11,174

7

4

11,177

4

Municipal securities

3,198

5

3,193

5

Total

$

601,447

$

344

$

65

$

601,726

$

65

$

    

Continuous

    

Continuous

Gross

Gross

Unrealized

Unrealized

Unrealized

Unrealized

Loss Position

Loss Position

Amortized 

Holding

Holding

Fair

less than 12

greater than 12

December 31, 2018

    

Cost

    

Gains

    

Losses

    

Value

    

Months

    

Months

Available-for-sale

Short-term:

Commercial paper

$

52,838

$

$

$

52,838

$

$

Certificates of deposit

14,075

14,075

Municipal securities

 

151,690

 

16

 

62

 

151,644

 

62

 

U.S. government agency securities

 

19,943

 

 

12

 

19,931

 

12

 

U.S. treasuries

78,189

32

78,157

32

Variable rate demand notes

4,005

4,005

Total

$

320,740

$

16

$

106

$

320,650

$

106

$

During the nine-months ended September 30, 2019 and 2018, realized gains or losses recognized on the sale of investments were not significant.

The Company’s investments at September 30, 2019 and December 31, 2018 in commercial paper, certificates of deposit, municipal securities, U.S. government agency securities, U.S. treasuries and/or variable rate demand notes (“VRDNs”) carried investment grade credit ratings. VRDNs are floating rate municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest. All of the put options are secured by a pledged liquidity source. While they are classified as marketable investment securities, the put option allows the VRDNs to be liquidated at par on a same day, or more generally, on a seven-day settlement basis.  

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

The following table summarizes the underlying contractual maturities of the Company’s investments at:

September 30, 2019

December 31, 2018

    

Amortized Cost

    

Fair Value

    

Amortized Cost

    

    Fair Value

Less than 1 year:

Commercial paper

$

81,869

$

81,869

$

52,838

$

52,838

Municipal securities

 

138,072

 

138,214

 

151,690

 

151,644

U.S. government agency securities

 

41,186

 

41,156

 

19,943

 

19,931

Certificates of deposit

 

2,502

2,502

14,075

14,075

U.S. treasuries

294,099

294,268

78,189

78,157

Due 1 - 10 years:

Municipal securities

3,198

3,193

U.S. treasuries

11,174

11,177

Variable rate demand notes

 

5,412

 

5,412

 

 

Due 11 - 20 years:

Variable rate demand notes

 

12,197

 

12,197

 

 

Due 21 - 30 years:

Variable rate demand notes

9,721

9,721

4,005

4,005

Due 31 - 40 years:

Variable rate demand notes

2,017

2,017

Total

$

601,447

$

601,726

$

320,740

$

320,650

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.

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

ASC 820 requires the use of observable market inputs (quoted market prices) when measuring fair value and requires a Level 1 quoted price to be used to measure fair value whenever possible.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

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:

September 30, 2019

    

Level 1

    

Level 2

    

Level 3

    

Total

Cash

$

557,925

$

$

$

557,925

Money market funds

 

69,362

 

 

 

69,362

Certificates of deposit

11,533

11,533

Commercial paper

 

 

95,972

 

 

95,972

Variable rate demand notes

29,347

29,347

Municipal securities

 

 

159,884

 

 

159,884

U.S. government agency securities

 

 

80,879

 

 

80,879

U.S. treasuries

314,441

314,441

Foreign currency derivatives

 

 

30

 

 

30

Total

$

627,287

$

692,086

$

$

1,319,373

Amounts included in:

Cash and cash equivalents

$

627,287

$

90,330

$

$

717,617

Short-term investments

 

 

587,356

 

 

587,356

Accounts receivable, net

 

 

168

 

 

168

Investments

14,370

14,370

Accrued liabilities

 

 

(138)

 

 

(138)

Total

$

627,287

$

692,086

$

$

1,319,373

December 31, 2018

    

Level 1

    

Level 2

    

Level 3

    

Total

Cash

$

393,936

$

$

$

393,936

Money market funds

 

191,358

 

 

 

191,358

Certificates of deposit

14,075

14,075

Commercial paper

 

 

60,422

 

 

60,422

Variable rate demand notes

 

 

4,005

 

 

4,005

Municipal securities

 

 

177,118

 

 

177,118

U.S. government agency securities

 

 

39,092

 

 

39,092

U.S. treasuries

78,157

78,157

Foreign currency derivatives

 

 

(492)

 

 

(492)

Total

$

585,294

$

372,377

$

$

957,671

Amounts included in:

Cash and cash equivalents

$

585,294

$

52,219

$

$

637,513

Short-term investments

 

 

320,650

 

 

320,650

Accounts receivable, net

 

 

43

 

 

43

Accrued liabilities

 

 

(535)

 

 

(535)

Total

$

585,294

$

372,377

$

$

957,671

All of the Company’s short-term and long-term investments are classified within Level 1 or Level 2 of the fair value hierarchy.  The Company’s valuation of its Level 1 investments, which include money market funds, is based on quoted market prices in active markets for identical securities. The Company’s valuation of its Level 2 investments, which include municipal securities, commercial paper, certificates of deposit, VRDNs, U.S. treasuries and U.S. government agency securities, is based on other observable inputs, specifically a market approach which utilizes valuation models, pricing systems, mathematical tools and other relevant information for the same or similar securities. The Company’s valuation of its Level 2 foreign currency exchange contracts is based on quoted market prices of the same or similar instruments, adjusted for counterparty risk. There were no transfers between Level 1 and Level 2 measurements during the nine-months ended September 30, 2019 or during the year-ended December 31, 2018, and there were no changes in the Company’s valuation techniques.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

7.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to foreign currency exchange rate risks related primarily to its foreign business operations. During the three- and nine-months ended September 30, 2019 and the year-ended December 31, 2018, the Company entered into forward currency exchange contracts with financial institutions to create an economic hedge to specifically manage a portion of the foreign exchange risk exposure associated with certain consolidated subsidiaries’ non-functional currency denominated assets and liabilities. All foreign currency exchange contracts of the Company that were outstanding as of September 30, 2019 have terms of one month or less. The Company does not enter into forward currency exchange contracts for speculation or trading purposes.

The Company has not designated its foreign currency exchange contracts as hedge transactions under ASC 815. Therefore, gains and losses on the Company’s foreign currency exchange contracts are recognized in interest and other income, net, in the condensed consolidated statements of income, and are largely offset by the changes in the fair value of the underlying economically hedged item.

The notional amount and fair value of all outstanding foreign currency derivative instruments in the condensed consolidated balance sheets consist of the following at:

September 30, 2019

Derivatives not designated as

 

hedging instruments under

    

Notional

    

Fair

    

 

ASC 815-20

Amount

Value

Balance Sheet Location

Assets:

Foreign currency exchange contracts:

Receive USD/pay GBP

$

35,513

$

86

Accounts receivable, net

Receive USD/pay AUD

9,625

29

 

Accounts receivable, net

Receive USD/pay COP

3,040

23

Accounts receivable, net

Receive USD/pay ZAR

2,748

19

Accounts receivable, net

Receive USD/pay NZD

2,581

11

Accounts receivable, net

Liabilities:

Foreign currency exchange contracts:

Receive EUR/pay USD

$

39,576

$

(136)

 

Accrued liabilities

Receive USD/pay SGD

1,156

(2)

 

Accrued liabilities

December 31, 2018

Derivatives not designated as

  hedging instruments under

    

Notional

    

Fair

    

ASC 815-20

Amount

Value

Balance Sheet Location

Assets:

Foreign currency exchange contracts:

Receive SGD/pay USD

$

8,341

$

30

 

Accounts receivable, net

Receive NOK/pay USD

 

902

 

13

 

Accounts receivable, net

Liabilities:

Foreign currency exchange contracts:

Receive USD/pay GBP

$

40,648

$

(323)

 

Accrued liabilities

Receive USD/pay AUD

 

15,124

 

(105)

 

Accrued liabilities

Receive USD/pay ZAR

 

8,618

 

(68)

 

Accrued liabilities

Receive USD/pay COP

 

2,931

 

(33)

 

Accrued liabilities

Receive USD/pay NZD

 

2,952

 

(4)

 

Accrued liabilities

Receive USD/pay EUR

 

6,894

 

(2)

 

Accrued liabilities

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MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

The net gains on derivative instruments in the condensed consolidated statements of income were as follows:

Amount of gain

recognized in income on

derivatives

Derivatives not designated as

Location of gain

Three-months ended

hedging instruments under

recognized in income on

September 30, 

September 30, 

ASC 815-20

    

derivatives

    

2019

    

2018

Foreign currency exchange contracts

 

Interest and other income, net

$

627

$

2,175

Amount of gain

recognized in income on

derivatives

Derivatives not designated as

Location of gain

Nine-months ended

hedging instruments under

recognized in income on

September 30, 

September 30, 

ASC 815-20

    

derivatives

    

2019

    

2018

Foreign currency exchange contracts

 

Interest and other income, net

$

475

$

7,909

8.

INVENTORIES

Inventories consist of the following at:

    

September 30, 

    

December 31, 

2019

2018

Raw materials

$

136,555

$

94,421

Finished goods

 

181,190

 

183,284

$

317,745

$

277,705

9.

PROPERTY AND EQUIPMENT, NET

Property and equipment consist of the following at:

    

September 30, 

    

December 31, 

2019

2018

Land

$

44,261

$

44,261

Leasehold improvements

 

8,487

 

5,909

Furniture and fixtures

 

7,649

 

6,932

Office and computer equipment

 

21,066

 

18,717

Computer software

 

4,252

 

3,278

Equipment

 

193,326

 

183,727

Buildings

 

126,052

 

115,242

Vehicles

 

40,610

 

39,026

 

445,703

 

417,092

Less: accumulated depreciation and amortization

 

(193,943)

 

(174,041)

$

251,760

$

243,051

Total depreciation and amortization expense recorded was $11.6 million and $11.3 million for the three-months ended September 30, 2019 and 2018, respectively. Total depreciation and amortization expense recorded was $36.3 million and $33.5 million for the nine-months ended September 30, 2019 and 2018, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

10.         GOODWILL AND OTHER INTANGIBLE ASSETS

The following is a roll-forward of goodwill for the nine-months ended September 30, 2019 and September 30, 2018 by reportable segment:

Monster

 

Energy®

Strategic

 

    

Drinks

    

Brands

    

Other

    

Total

Balance at December 31, 2018

$

693,644

$

637,999

$

$

1,331,643

Acquisitions

 

 

 

 

Balance at September 30, 2019

$

693,644

$

637,999

$

$

1,331,643

Monster

Energy®

Strategic

    

Drinks

    

Brands

    

Other

    

Total

Balance at December 31, 2017

$

693,644

$

637,999

$

$

1,331,643

Acquisitions

Balance at September 30, 2018

$

693,644

$

637,999

$

$

1,331,643

Intangible assets consist of the following at:

    

September 30, 

    

December 31, 

2019

2018

Amortizing intangibles

$

66,952

$

71,350

Accumulated amortization

 

(46,227)

 

(38,311)

 

20,725

 

33,039

Non-amortizing intangibles

 

1,026,748

 

1,012,839

$

1,047,473

$

1,045,878

Amortizing intangibles primarily consist of customer relationships. All amortizing intangibles have been assigned an estimated finite useful life and such intangibles are amortized on a straight-line basis over the number of years that approximate their respective useful lives, generally five to seven years. Total amortization expense recorded was $2.9 million and $3.0 million for the three-months ended September 30, 2019 and 2018, respectively. Total amortization expense recorded was $8.7 million and $9.0 million for the nine-months ended September 30, 2019 and 2018, respectively.

The following is the future estimated amortization expense related to amortizing intangibles as of September 30, 2019:

2019 (excluding the nine-months ended September 30, 2019)

    

$

2,887

2020

 

7,668

2021

 

4,424

2022

 

4,399

2023

 

1,106

2024 and thereafter

 

241

$

20,725

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 0 termination costs during the three-months ended September 30, 2019. The Company incurred termination costs of $14.1 million for the three-months ended September 30, 2018. The Company incurred termination costs of $11.0 million and $26.6 million for the nine-months ended September 30, 2019 and 2018, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

In the normal course of business, amounts received pursuant to new and/or amended distribution agreements entered into with certain distributors, relating to the costs associated with terminating agreements with the Company’s prior distributors, are accounted for as deferred revenue and are recognized as revenue ratably over the anticipated life of the respective distribution agreement, generally 20 years. Revenue recognized was $10.7 million and $11.1 million for the three-months ended September 30, 2019 and 2018, respectively. Revenue recognized was $35.6 million and $33.3 million for the nine-months ended September 30, 2019 and 2018, respectively.

12.         COMMITMENTS AND CONTINGENCIES

The Company had purchase commitments aggregating approximately $29.3 million at September 30, 2019, which represented commitments made by the Company and its subsidiaries to various suppliers of raw materials for the production of its products. These obligations vary in terms, but are generally satisfied within one year.

The Company had contractual obligations aggregating approximately $171.6 million at September 30, 2019, which related primarily to sponsorships and other marketing activities.

In February 2018, the working capital line limit for the Company's credit facility with HSBC Bank (China) Company Limited, Shanghai Branch, was increased from $9.0 million to $15.0 million. At September 30, 2019, the interest rate on borrowings under the line of credit was 5.5%. As of September 30, 2019, the Company had 0 amounts outstanding on this line of credit.

During the three-months ended September 30, 2019, the Company entered into an agreement to acquire a manufacturing plant and adjoining land in Athy, County Kildare, Ireland for a purchase price of $12.0 million, of which an initial $1.2 million was paid in October 2019.  The acquisition of the facility is expected to close in late December 2019.  The Company intends to utilize the facility to produce and supply ingredients for certain of its international markets.

In addition, during the three-months ended September 30, 2019, the Company entered into an agreement to purchase approximately 7.66 acres of land in San Fernando, California for a purchase price of $33.7 million.  The Company intends to construct a new production facility on such land in order to consolidate AFF’s operations into a single location.  The full purchase price was paid in October 2019.

Legal Proceedings

Litigation - The Company is currently a defendant in a number of personal injury lawsuits, claiming that the death or other serious injury of the plaintiffs was caused by consumption of Monster Energy® brand energy drinks. The plaintiffs in these lawsuits allege strict product liability, negligence, fraudulent concealment, breach of implied warranties and wrongful death. The Company believes that each complaint is without merit and plans a vigorous defense. The Company also believes that any damages, if awarded, would not have a material adverse effect on the Company’s financial position or results of operations.

Furthermore, from time to time in the normal course of business, the Company is named in other litigation, including consumer class actions, intellectual property litigation and claims from prior distributors. Although it is not possible to predict the ultimate outcome of such litigation, based on the facts known to the Company, management believes that such litigation in aggregate will likely not have a material adverse effect on the Company’s financial position or results of operations.

The Company evaluates, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of the liability that is accrued, if any, or in the amount of any related insurance reimbursements recorded. As of September 30, 2019, the Company’s condensed consolidated balance sheet included accrued loss contingencies of approximately $2.0 million.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

13.         ACCUMULATED OTHER COMPREHENSIVE LOSS

Changes in accumulated other comprehensive loss by component, after tax, for the nine-months ended September 30, 2019 and 2018 are as follows:

Unrealized

    

Currency

    

(Gains) Losses

    

Translation

on Available-for-

Losses

Sale Securities

Total

Balance at December 31, 2018

$

32,775

$

89

$

32,864

Other comprehensive income before reclassifications

 

10,586

(367)

10,219

Amounts reclassified from accumulated other comprehensive loss (income)

 

Net current-period other comprehensive (income) loss

 

10,586

(367)

10,219

Balance at September 30, 2019

$

43,361

$

(278)

$

43,083

Unrealized

    

Currency

(Gains) Losses

    

Translation

    

on Available-for-

    

Losses

Sale Securities

Total

Balance at December 31, 2017

$

15,818

$

841

$

16,659

Other comprehensive loss (income) before reclassifications

 

13,728

(610)

13,118

Amounts reclassified from accumulated other comprehensive loss (income)

 

Net current-period other comprehensive loss (income)

 

13,728

(610)

13,118

Balance at September 30, 2018

$

29,546

$

231

$

29,777

14.         TREASURY STOCK

On August 7, 2018, the Company's Board of Directors authorized a share repurchase program for the purchase of up to $500.0 million of the Company's outstanding common stock (the “August 2018 Repurchase Plan”). During the three-months ended September 30, 2019, the Company purchased 0.4 million shares of common stock at an average purchase price of $58.32 per share, for a total amount of $20.6 million (excluding broker commissions), which exhausted the availability under the August 2018 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying condensed consolidated balance sheet at September 30, 2019.

On February 26, 2019, the Company’s Board of Directors authorized a new share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock (the “February 2019 Repurchase Plan”). During the three-months ended September 30, 2019, the Company purchased 4.0 million shares of common stock at an average purchase price of $58.62 per share, for a total amount of $233.7 million (excluding broker commissions), under the February 2019 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying condensed consolidated balance sheet at September 30, 2019. As of November 6, 2019, $36.6 million remained available for repurchase under the February 2019 Repurchase Plan.

During the three-months ended September 30, 2019, 0 shares of common stock were purchased from employees in lieu of cash payments for options exercised or withholding taxes due.

15.         STOCK-BASED COMPENSATION

The Company has 2 stock-based compensation plans under which shares were available for grant at September 30, 2019: the Monster Beverage Corporation 2011 Omnibus Incentive Plan, including the Monster Beverage Corporation Deferred Compensation Plan as a sub plan thereunder, and the Monster Beverage Corporation 2017 Compensation Plan for Non-Employee Directors, including the Monster Beverage Corporation Deferred Compensation Plan for Non-Employee Directors as a sub plan thereunder.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

The Company recorded $16.0 million and $14.1 million of compensation expense relating to outstanding options and restricted stock units during the three-months ended September 30, 2019 and 2018, respectively. The Company recorded $46.9 million and $42.4 million of compensation expense relating to outstanding options and restricted stock units during the nine-months ended September 30, 2019 and 2018, respectively.

The tax benefit for tax deductions from non-qualified stock option exercises, disqualifying dispositions of incentive stock options and vesting of restricted stock units for the three-months ended September 30, 2019 and 2018 was $0.5 million and $3.1 million, respectively. The tax benefit for tax deductions from non-qualified stock option exercises, disqualifying dispositions of incentive stock options and vesting of restricted stock units for the nine-months ended September 30, 2019 and 2018 was $26.7 million and $7.7 million, respectively.  

Stock Options

Under the Company’s stock-based compensation plans, all stock options granted as of September 30, 2019 were granted at prices based on the fair value of the Company’s common stock on the date of grant. The Company records compensation expense for stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes-Merton option pricing formula with the assumptions included in the table below. The Company uses historical data to determine the exercise behavior, volatility and forfeiture rate of the options.

The following weighted-average assumptions were used to estimate the fair value of options granted during:

    

Three-Months Ended September 30,

Nine-Months Ended September 30,

    

2019

    

2018

    

2019

    

2018

Dividend yield

 

0

%

0

%

0

%

0

%

Expected volatility

 

30.2

%

34.5

%

30.2

%

34.9

%

Risk-free interest rate

 

1.4

%

2.9

%

2.4

%

2.8

%

Expected term

 

5.8

years

6.1

years

6.0

years

6.1

years

Expected Volatility: The Company uses historical volatility as it provides a reasonable estimate of the expected volatility. Historical volatility is based on the most recent volatility of the stock price over a period of time equivalent to the expected term of the option.

Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. treasury zero-coupon yield curve in effect at the time of grant for the expected term of the option.

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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

The following table summarizes the Company’s activities with respect to its stock option plans as follows:

Weighted-

 

Weighted-

Average

 

Average

Remaining

 

Number of

Exercise

Contractual

Shares (in

Price Per

Term (In

Aggregate

Options

    

thousands)

    

Share

    

years)

    

Intrinsic Value

Outstanding at January 1, 2019

 

18,890

$

34.61

 

5.8

$

303,627

Granted 01/01/19 - 03/31/19

 

1,570

$

59.52

Granted 04/01/19 - 06/30/19

$

Granted 07/01/19 - 09/30/19

52

$

58.54

Exercised

 

(4,999)

$

17.05

Cancelled or forfeited

 

(373)

$

50.42

Outstanding at September 30, 2019

 

15,140

$

42.69

 

6.5

$

237,041

Vested and expected to vest in the future at September 30, 2019

 

14,290

$

41.98

 

6.4

$

233,489

Exercisable at September 30, 2019

 

7,557

$

33.14

 

5.2

$

188,583

The weighted-average grant-date fair value of options granted during the three-months ended September 30, 2019 and 2018 was $18.32 per share and $22.80 per share, respectively. The weighted-average grant-date fair value of options granted during the nine-months ended September 30, 2019 and 2018 was $20.24 per share and $22.51 per share, respectively.

The total intrinsic value of options exercised during the three-months ended September 30, 2019 and 2018 was $2.4 million and $19.2 million, respectively. The total intrinsic value of options exercised during the nine-months ended September 30, 2019 and 2018 was $213.8 million and $52.1 million, respectively.

Cash received from option exercises under all plans for the three-months ended September 30, 2019 and 2018 was $4.1 million and $10.9 million, respectively. Cash received from option exercises under all plans for the nine-months ended September 30, 2019 and 2018 was $85.2 million and $24.5 million, respectively.

At September 30, 2019, there was $90.4 million of total unrecognized compensation expense related to non-vested options granted to employees under the Company’s stock-based payment plans. That cost is expected to be recognized over a weighted-average period of 2.5 years.

Restricted Stock Units

The cost of stock-based compensation for restricted stock units is measured based on the closing fair market value of the Company’s common stock at the date of grant. In the event that the Company has the option and intent to settle a restricted stock unit in cash, the award is classified as a liability and revalued at each balance sheet date.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

The following table summarizes the Company’s activities with respect to non-vested restricted stock units as follows:

    

    

    

Weighted

Number of

Average

Shares (in

Grant-Date

thousands)

Fair Value

Non-vested at January 1, 2019

 

529

$

51.55

Granted 01/01/19 - 03/31/19

 

548

$

59.66

Granted 04/01/19 - 06/30/19

18

$

63.48

Granted 07/01/19 - 09/30/19

1

$

66.00

Vested

 

(265)

$

50.10

Forfeited/cancelled

 

(6)

$

59.67

Non-vested at September 30, 2019

 

825

$

57.63

The weighted-average grant-date fair value of restricted stock units granted during the three-months ended September 30, 2019 and 2018 was $66.00 per share and $58.72 per share, respectively. The weighted-average grant-date fair value of restricted stock units granted during the nine-months ended September 30, 2019 and 2018 was $59.79 per share and $57.59 per share, respectively. As of September 30, 2019, 0.7 million of restricted stock units are expected to vest over their respective terms.

At September 30, 2019, total unrecognized compensation expense relating to non-vested restricted stock units was $33.4 million, which is expected to be recognized over a weighted-average period of 2.9 years.

16.         INCOME TAXES

The following is a roll-forward of the Company’s total gross unrecognized tax benefits, not including interest and penalties, for the nine-months ended September 30, 2019:

    

Gross Unrecognized Tax

Benefits

Balance at December 31, 2018

$

5,035

Additions for tax positions related to the current year

 

Additions for tax positions related to the prior years

 

1,171

Decreases related to settlement with taxing authority

 

Balance at September 30, 2019

$

6,206

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Company’s condensed consolidated financial statements. As of September 30, 2019, the Company had approximately $1.4 million in accrued interest and penalties related to unrecognized tax benefits. If the Company were to prevail on all uncertain tax positions, the resultant impact on the Company’s effective tax rate would not be significant. It is expected that any change in the amount of unrecognized tax benefits within the next 12 months will not be significant.

The Company is subject to U.S. federal income tax as well as to income tax in multiple state and foreign jurisdictions.

On October 18, 2016, the IRS began its examination of the Company’s U.S. federal income tax return for the year ended December 31, 2014. On March 27, 2017, the IRS began its examination of the Company’s U.S. federal income tax return for the year ended December 31, 2015.

The Company is in various stages of examination with certain states and certain foreign jurisdictions, including Revenue Commissioners, Her Majesty’s Revenue and Customs, among others. The Company’s 2014 through 2018 U.S. federal income tax returns are subject to examination by the IRS. The Company’s state income tax returns are subject to examination for the 2014 through 2018 tax years.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

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):

Three-Months Ended

Nine-Months Ended

September 30, 

September 30, 

    

2019

    

2018

    

2019

    

2018

Weighted-average shares outstanding:

Basic

 

544,469

 

552,694

 

543,804

 

559,472

Dilutive

 

3,953

 

7,261

 

4,583

 

7,319

Diluted

 

548,422

 

559,955

 

548,387

 

566,791

For the three-months ended September 30, 2019 and 2018, options and awards outstanding totaling 4.7 million shares and 3.2 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive. For the nine-months ended September 30, 2019 and 2018, options and awards outstanding totaling 4.3 million shares and 3.0 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.

18.          SEGMENT INFORMATION

The Company has 3 operating and reportable segments, (i) Monster Energy® Drinks segment, which is primarily comprised of the Company’s Monster Energy® drinks and Reign Total Body FuelTM high performance energy drinks, (ii) Strategic Brands segment, which is comprised primarily of the various energy drink brands acquired from TCCC in 2015 as well as the Company’s affordable energy brands, and (iii) Other segment, which is comprised of the AFF Third-Party Products.  

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

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

Generally, the Monster Energy® Drinks segment generates higher per case net operating revenues, but lower per case gross profit margin percentages than the Strategic Brands segment.

Corporate and unallocated amounts that do not relate to a reportable segment have been allocated to “Corporate & Unallocated.” No asset information, other than goodwill and other intangible assets, has been provided in the Company’s reportable segments, as management does not measure or allocate such assets on a segment basis.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

The net revenues derived from the Company’s reportable segments and other financial information related thereto for the three- and nine-months ended September 30, 2019 and 2018 are as follows:

Three-Months Ended

Nine-Months Ended

September 30, 

September 30, 

    

2019

    

2018

    

2019

    

2018

Net sales:

Monster Energy® Drinks(1)

$

1,061,383

$

935,146

$

2,950,877

$

2,645,089

Strategic Brands

 

66,333

 

74,441

 

215,763

 

220,011

Other

 

5,861

 

6,573

 

16,973

 

17,853

Corporate and unallocated

 

 

 

 

$

1,133,577

$

1,016,160

$

3,183,613

$

2,882,953

Three-Months Ended

Nine-Months Ended

September 30, 

September 30, 

    

2019

    

2018

    

2019

    

2018

Operating Income:

Monster Energy® Drinks(1) (2)

$

433,848

$

359,090

$

1,187,652

$

1,033,895

Strategic Brands

 

35,107

 

41,661

 

130,762

 

135,054

Other

 

1,005

 

1,742

 

3,026

 

4,539

Corporate and unallocated

 

(74,517)

 

(62,920)

 

(235,546)

 

(196,380)

$

395,443

$

339,573

$

1,085,894

$

977,108

Three-Months Ended

Nine-Months Ended

September 30, 

September 30, 

    

2019

    

2018

    

2019

    

2018

Income before tax:

Monster Energy® Drinks(1) (2)

$

434,003

$

359,216

$

1,187,916

$

1,034,521

Strategic Brands

 

35,106

 

41,659

 

130,758

 

135,075

Other

 

1,005

 

1,742

 

3,031

 

4,539

Corporate and unallocated

 

(71,550)

 

(60,056)

 

(226,976)

 

(191,758)

$

398,564

$

342,561

$

1,094,729

$

982,377

(1)Includes $10.7 million and $11.1 million for the three-months ended September 30, 2019 and 2018, respectively, related to the recognition of deferred revenue. Includes $35.6 million and $33.3 million for the nine-months ended September 30, 2019 and 2018, respectively, related to the recognition of deferred revenue.

(2)Includes $0.0 million and $14.1 million for the three-months ended September 30, 2019 and 2018, respectively, related to distributor termination costs. Includes $11.0 million and $26.6 million for the nine-months ended September 30, 2019 and 2018, respectively, related to distributor termination costs.

Three-Months Ended

Nine-Months Ended

September 30, 

September 30, 

    

2019

    

2018

    

2019

    

2018

Depreciation and amortization:

Monster Energy® Drinks

$

9,319

$

9,157

$

29,449

$

26,926

Strategic Brands

 

1,990

 

1,947

 

5,925

 

5,819

Other

 

1,162

 

1,167

 

3,475

 

3,493

Corporate and unallocated

 

2,050

 

2,014

 

6,172

 

6,231

$

14,521

$

14,285

$

45,021

$

42,469

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

expenses. Corporate and unallocated expenses for the three-months ended September 30, 2018 include $42.1 million of payroll costs, of which $14.0 million was attributable to stock-based compensation expenses (see Note 15, “Stock-Based Compensation”), as well as $12.3 million attributable to professional service expenses, including accounting and legal costs, and $8.5 million of other operating expenses.

Corporate and unallocated expenses for the nine-months ended September 30, 2019 include $151.0 million of payroll costs, of which $46.9 million was attributable to stock-based compensation expenses (see Note 15 “Stock-Based Compensation”), as well as $49.2 million attributable to professional service expenses, including accounting and legal costs, and $35.3 million of other operating expenses. Corporate and unallocated expenses for the nine-months ended September 30, 2018 include $129.9 million of payroll costs, of which $42.4 million was attributable to stock-based compensation expenses (see Note 15, “Stock-Based Compensation”), as well as $36.5 million attributable to professional service expenses, including accounting and legal costs, and $30.0 million of other operating expenses.

CCBCC Operations, LLC accounted for approximately 13% and 14% of the Company's net sales for the three-months ended September 30, 2019 and 2018, respectively. CCBCC Operations, LLC accounted for approximately 13% and 14% of the Company's net sales for the nine-months ended September 30, 2019 and 2018, respectively.

Reyes Coca-Cola Bottling accounted for approximately 12% and 13% of the Company's net sales for the three-months ended September 30, 2019 and 2018, respectively. Reyes Coca-Cola Bottling accounted for approximately 12% and 13% of the Company's net sales for the nine-months ended September 30, 2019 and 2018, respectively.

Coca-Cola European Partners accounted for approximately 10% and 9% of the Company's net sales for the three-months ended September 30, 2019 and 2018, respectively. Coca-Cola European Partners accounted for approximately 10% and 9% of the Company's net sales for the nine-months ended September 30, 2019 and 2018, respectively.

Net sales to customers outside the United States amounted to $379.8 million and $283.0 million for the three-months ended September 30, 2019 and 2018, respectively. Such sales were approximately 34% and 28% of net sales for the three-months ended September 30, 2019 and 2018, respectively. Net sales to customers outside the United States amounted to $1.01 billion and $818.8 million for the nine-months ended September 30, 2019 and 2018, respectively. Such sales were approximately 32% and 28% of net sales for the nine-months ended September 30, 2019 and 2018, respectively.

Goodwill and other intangible assets for the Company's reportable segments as of September 30, 2019 and December 31, 2018 are as follows:

September 30, 

December 31, 

    

2019

    

2018

Goodwill and other intangible assets:

Monster Energy® Drinks

$

1,377,824

$

1,368,620

Strategic Brands

 

985,742

 

989,944

Other

 

15,550

 

18,957

Corporate and unallocated

 

 

$

2,379,116

$

2,377,521

19.         RELATED PARTY TRANSACTIONS

TCCC controls approximately 18.9% of the voting interests of the Company. The TCCC Subsidiaries, the TCCC Related Parties and the TCCC independent bottlers, purchase and distribute the Company’s products in domestic and certain international markets. The Company also pays TCCC a commission based on certain sales within the TCCC distribution network.

TCCC commissions, based on sales to the TCCC Subsidiaries and the TCCC Related Parties, were $11.6 million and $13.7 million for the three-months ended September 30, 2019 and 2018, respectively, and are included as a reduction to net sales. TCCC

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Table of Contents

MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)

commissions, based on sales to the TCCC Subsidiaries and the TCCC Related Parties, were $39.5 million and $38.1 million for the nine-months ended September 30, 2019 and 2018, respectively, and are included as a reduction to net sales.

TCCC commissions, based on sales to TCCC independent bottlers/distributors, were $4.7 million and $4.3 million for the three-months ended September 30, 2019 and 2018, respectively, and are included in operating expenses. TCCC commissions, based on sales to TCCC independent bottlers/distributors, were $13.6 million and $11.8 million for the nine-months ended September 30, 2019 and 2018, respectively, and are included in operating expenses.

Net sales to the TCCC Subsidiaries for the three-months ended September 30, 2019 and 2018 were $21.0 million and $42.3 million, respectively. Net sales to the TCCC Subsidiaries for the nine-months ended September 30, 2019 and 2018 were $59.5 million and $117.0 million, respectively. As part of TCCC’s North America refranchising, the territories of certain TCCC Subsidiaries have been transitioned to certain independent TCCC bottlers/distributors and/or TCCC Related Parties. Accordingly, the Company’s net sales classified as sales to the TCCC Subsidiaries significantly decreased for the three- and nine-months ended September 30, 2019.

The Company also purchases concentrates from TCCC which are then sold to certain of the Company's bottlers/distributors. Concentrate purchases from TCCC were $6.3 million and $7.4 million for the three-months ended September 30, 2019 and 2018, respectively. Concentrate purchases from TCCC were $20.2 million and $21.6 million for the nine-months ended September 30, 2019 and 2018, respectively.

Certain TCCC Subsidiaries also contract manufacture certain of the Company’s energy drinks. Such contract manufacturing expenses were $4.2 million and $7.0 million for the three-months ended September 30, 2019 and 2018, respectively. Such contract manufacturing expenses were $13.1 million and $18.8 million for the nine-months ended September 30, 2019 and 2018, respectively.

Accounts receivable, accounts payable and accrued promotional allowances related to the TCCC Subsidiaries are as follows at:

September 30, 

December 31, 

    

2019

    

2018

Accounts receivable, net

$

35,520

$

25,312

Accounts payable

$

(25,601)

$

(54,430)

Accrued promotional allowances

$

(6,185)

$

(4,044)

NaN director of the Company and his family, and one director's family, are principal owners of a company that provides promotional materials to the Company.  Expenses incurred with such company in connection with promotional materials purchased during the three-months ended September 30, 2019 and 2018 were $0.5 million and $0.2 million, respectively. Expenses incurred with such company in connection with promotional materials purchased during the nine-months ended September 30, 2019 and 2018 were $1.1 million and $1.6 million, respectively.

In December 2018, the Company and a director of the Company entered into a 50-50 partnership that purchased land, and real property thereon, in Kona, Hawaii for the purpose of producing coffee products. The Company’s initial 50%  contribution of $1.9 million was accounted for as an equity investment and is included in other assets (non-current) in the accompanying condensed consolidated balance sheet at December 31, 2018.  During the three-months ended September 30, 2019, the Company made 0 additional capital contributions and recorded an equity loss of $0.02 million. During the nine-months ended September 30, 2019, the Company made an additional $0.05 million capital contribution and recorded an equity loss of $0.06 million. As of September 30, 2019, the Company’s equity investment is $1.9 million and is included in other assets (non-current) in the accompanying condensed consolidated balance sheet at September 30, 2019.

20.         SUBSEQUENT EVENTS

On November 6, 2019, the Company’s Board of Directors authorized a new share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock. As of November 6, 2019, $36.6 million remained available for repurchase under the February 2019 Repurchase Plan. The aggregate amount available to repurchase the Company’s common stock is currently $536.6 million.

31

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Business

When this report uses the words “the Company”, “we”, “us”, and “our”, these words refer to Monster Beverage Corporation and its subsidiaries, unless the context otherwise requires. Based in Corona, California, Monster Beverage Corporation is a holding company and conducts no operating business except through its consolidated subsidiaries. The Company’s subsidiaries primarily develop and market energy drinks.

Overview

We develop, market, sell and distribute energy drink beverages and concentrates for energy drink beverages, primarily under the following brand names:

    Monster Energy®

    NOS®

    Monster Energy Ultra®

    Full Throttle®

    Monster Rehab®

    Burn®

    Monster MAXX®

    Mother®

    Java Monster®

    Nalu®

    Muscle Monster®

    Ultra Energy®

    Espresso Monster®

    Play® and Power Play(stylized)®

    Punch Monster®

    Relentless®

    Juice Monster®

    BPM®

    Monster Hydro®

    BU®

    Monster® HydroSport

    Gladiator®

    Caffé Monster®

    Samurai®

    Predator®

    Live+TM

    Reign Total Body FuelTM

    Monster Dragon TeaTM

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

During the three-months ended September 30, 2019, we continued to expand our existing energy drink portfolio and further develop our distribution markets. During the three-months ended September 30, 2019, we introduced the following products:

BPM® Sour Twist
BU® Island Punch
Monster MAXX® Mango Matic
Monster MAXX® Rad Red
Monster MuleTM (U.S. national launch)
Reign Total Body FuelTM Orange Dreamsicle

In the normal course of business, we discontinue certain products and/or product lines. Those products or product lines discontinued in the three-months ended September 30, 2019, either individually or in aggregate, did not have a material adverse impact on our financial position, results of operations or liquidity.

Our net sales of $1.13 billion for the three-months ended September 30, 2019 represented record sales for our third fiscal quarter. Net sales for the three-months ended September 30, 2019 were positively impacted by approximately $31.6 million as a result

32

of a price increase effective from November 1, 2018 in the United States (“the U.S. Price Increase”) and effective from February 1, 2019 in Canada (the “Canada Price Increase”), on certain of our Monster Energy® brand energy drinks. Net changes in foreign currency exchange rates had an unfavorable impact on net sales of approximately $12.2 million for the three-months ended September 30, 2019.  Our comparative net sales of $1.02 billion for the three-months ended September 30, 2018 were positively impacted by advance purchases of approximately $16.0 million made by our customers in anticipation of the U.S. Price Increase.

The vast majority of our net sales are derived from our Monster Energy® Drinks segment. Net sales of our Monster Energy® Drinks segment were $1.06 billion for the three-months ended September 30, 2019.  Net sales of our Strategic Brands segment were $66.3 million for the three-months ended September 30, 2019. Our Monster Energy® Drinks segment represented 93.6% and 92.0% of our net sales for the three-months ended September 30, 2019 and 2018, respectively. Our Strategic Brands segment represented 5.9% and 7.3% of our net sales for the three-months ended September 30, 2019 and 2018, respectively. Our Other segment represented 0.5% and 0.7% of our net sales for the three-months ended September 30, 2019 and 2018, respectively.  

Our growth strategy includes expanding our international business. Net sales to customers outside the United States were $379.8 million for the three-months ended September 30, 2019, an increase of approximately $96.8 million, or 34.2% higher than net sales to customers outside of the United States of $283.0 million for the three-months ended September 30, 2018. Such sales were approximately 34% and 28% of net sales for the three-months ended September 30, 2019 and 2018, respectively.

Our customers are primarily full service beverage bottlers/distributors, retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, drug stores, foodservice customers and the military. Percentages of our gross sales to our various customer types for the three- and nine-months ended September 30, 2019 and 2018 are reflected below. Such information includes sales made by us directly to the customer types concerned, which include our full service beverage bottlers/distributors in the United States. Such full service beverage bottlers/distributors in turn sell certain of our products to some of the same customer types listed below. We limit our description of our customer types to include only our sales to our full service bottlers/distributors without reference to such bottlers’/distributors’ sales to their own customers.  

Three-Months Ended

 

Nine-Months Ended

 

September 30, 

 

September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

U.S. full service bottlers/distributors

 

56

%  

62

%  

58

%  

62

%

International full service bottlers/distributors

 

35

%  

30

%  

33

%  

30

%

Club stores and mass merchandisers

 

7

%  

6

%  

7

%  

6

%

Retail grocery, specialty chains and wholesalers

 

1

%  

1

%  

1

%  

1

%

Other

 

1

%  

1

%  

1

%  

1

%

Our customers include Coca-Cola Refreshments Canada Company (until September 27, 2018), Coca-Cola Canada Bottling Limited (from September 28, 2018), Coca-Cola Consolidated, Inc., Coca-Cola Bottling Company United, Inc., Reyes Coca-Cola Bottling, LLC, Great Lakes Coca-Cola Distribution, LLC, Coca-Cola Southwest Beverages LLC, The Coca-Cola Bottling Company of Northern New England, Inc., Swire Pacific Holdings, Inc. (USA), Liberty Coca-Cola Beverages, LLC, Coca-Cola European Partners, Coca-Cola Hellenic, Coca-Cola FEMSA, Coca-Cola Amatil, Swire Coca-Cola (China), COFCO Coca-Cola, Coca-Cola Beverages Africa, Coca-Cola İçecek and certain other TCCC network bottlers, Asahi Soft Drinks, Co., Ltd., Kalil Bottling Group (until March 5, 2019), Big Geyser, Inc. (until April 5, 2019), Wal-Mart, Inc. (including Sam’s Club) and Costco Wholesale Corporation.  A decision by any large customer to decrease amounts purchased from us or to cease carrying our products could have a material negative effect on our financial condition and consolidated results of operations.

Coca-Cola Consolidated, Inc. accounted for approximately 13% and 14% of our net sales for the three-months ended September 30, 2019 and 2018, respectively. Coca-Cola Consolidated, Inc. accounted for approximately 13% and 14% of our net sales for the nine-months ended September 30, 2019 and 2018, respectively.

Reyes Coca-Cola Bottling accounted for approximately 12% and 13% of our net sales for the three-months ended September 30, 2019 and 2018, respectively. Reyes Coca-Cola Bottling accounted for approximately 12% and 13% of our net sales for the nine-months ended September 30, 2019 and 2018, respectively.

33

Coca-Cola European Partners accounted for approximately 10% and 9% of our net sales for the three-months ended September 30, 2019 and 2018, respectively. Coca-Cola European Partners accounted for approximately 10% and 9% of our net sales for the nine-months ended September 30, 2019 and 2018, respectively.

Results of Operations

The following table sets forth key statistics for the three- and nine-months ended September 30, 2019 and 2018.

Three-Months Ended

Percentage

 

Nine-Months Ended

Percentage

 

(In thousands, except per share amounts)

September 30, 

Change

 

September 30, 

Change

 

    

2019

    

2018

    

19 vs. 18

    

2019

    

2018

    

19 vs. 18

 

Net sales1

$

1,133,577

$

1,016,160

 

11.6

%

$

3,183,613

$

2,882,953

 

10.4

%

Cost of sales

 

460,575

 

408,501

 

12.7

%

 

1,275,796

 

1,139,780

 

11.9

%

Gross profit*1

 

673,002

 

607,659

 

10.8

%

 

1,907,817

 

1,743,173

 

9.4

%

Gross profit as a percentage of net sales

 

59.4

%  

 

59.8

%  

  

 

59.9

%  

 

60.5

%  

  

Operating expenses2

 

277,559

 

268,086

 

3.5

%

 

821,923

 

766,065

 

7.3

%

Operating expenses as a percentage of net sales

 

24.5

%  

 

26.4

%  

  

 

25.8

%  

 

26.6

%  

  

Operating income1,2

 

395,443

 

339,573

 

16.5

%

 

1,085,894

 

977,108

 

11.1

%

Operating income as a percentage of net sales

 

34.9

%  

 

33.4

%  

  

 

34.1

%  

 

33.9

%  

  

Interest and other income, net

 

3,121

 

2,988

 

4.5

%

 

8,835

 

5,269

 

67.7

%

Income before provision for income taxes1,2

 

398,564

 

342,561

 

16.3

%

 

1,094,729

 

982,377

 

11.4

%

Provision for income taxes

 

99,641

 

74,828

 

33.2

%

 

241,848

 

228,480

 

5.9

%

Income taxes as a percentage of income before taxes

 

25.0

%  

 

21.8

%  

  

 

22.1

%  

 

23.3

%  

  

Net income1,2

$

298,923

$

267,733

 

11.6

%

$

852,881

$

753,897

 

13.1

%

Net income as a percentage of net sales

 

26.4

%  

 

26.3

%  

  

 

26.8

%  

 

26.2

%  

  

Net income per common share:

 

  

 

  

 

  

 

  

 

  

 

  

Basic

$

0.55

$

0.48

 

13.3

%

$

1.57

$

1.35

 

16.4

%

Diluted

$

0.55

$

0.48

 

14.0

%

$

1.56

$

1.33

 

16.9

%

Case sales (in thousands)

 

  

 

  

 

  

 

  

 

  

 

  

(in 192-ounce case equivalents)

 

121,854

 

111,038

 

9.7

%

 

342,734

 

313,410

 

9.4

%

¹Includes $10.7 million and $11.1 million for the three-months ended September 30, 2019 and 2018, respectively, related to the recognition of deferred revenue. Includes $35.6 million and $33.3 million for the nine-months ended September 30, 2019 and 2018, respectively, related to the recognition of deferred revenue.

2Includes $0.0 million and $14.1 million for the three-months ended September 30, 2019 and 2018, respectively, of distributor termination costs. Includes $11.0 million and $26.6 million for the nine-months ended September 30, 2019 and 2018, respectively, of distributor termination costs.

*Gross profit may not be comparable to that of other entities since some entities include all costs associated with their distribution process in cost of sales, whereas others exclude certain costs and instead include such costs within another line item such as operating expenses. We include out-bound freight and warehouse costs in operating expenses rather than in cost of sales.

Results of Operations for the Three-Months Ended September 30, 2019 Compared to the Three-Months Ended September 30, 2018.

Net Sales. Net sales were $1.13 billion for the three-months ended September 30, 2019, an increase of approximately $117.4 million, or 11.6% higher than net sales of $1.02 billion for the three-months ended September 30, 2018. Net sales for the three-months ended September 30, 2019 were positively impacted by approximately $31.6 million as a result of the U.S. Price Increase and the Canada Price Increase, on certain of our Monster Energy® brand energy drinks. The comparative net sales for the three-months ended September 30, 2018 were positively impacted by advance purchases made by our customers in anticipation of the U.S. Price Increase. We estimate net sales for the three-months ended September 30, 2018 were increased by approximately $16.0 million as a result of such advance purchases. Net changes in foreign currency exchange rates had an unfavorable impact on net sales of approximately $12.2 million for the three-months ended September 30, 2019.

Net sales for the Monster Energy® Drinks segment were $1.06 billion for the three-months ended September 30, 2019, an increase of approximately $126.2 million, or 13.5% higher than net sales of $935.1 million for the three-months ended September 30,

34

2018. Net sales for the Monster Energy® Drinks segment increased primarily due to (i) sales of our Reign Total Body FuelTM high performance energy drinks, introduced in the first quarter of 2019, (ii) the price increases described above and (iii) increased worldwide sales by volume of our Monster Energy® brand energy drinks as a result of increased consumer demand. Net changes in foreign currency exchange rates had an unfavorable impact on net sales for the Monster Energy® Drinks segment of approximately $10.8 million for the three-months ended September 30, 2019.

Net sales for the Strategic Brands segment were $66.3 million for the three-months ended September 30, 2019, a decrease of approximately $8.1 million, or 10.9% lower than net sales of $74.4 million for the three-months ended September 30, 2018. Net changes in foreign currency exchange rates had an unfavorable impact on net sales for the Strategic Brands segment of approximately $1.4 million for the three-months ended September 30, 2019.

Net sales for the Other segment were $5.9 million for the three-months ended September 30, 2019, a decrease of approximately $0.7 million, or 10.8% lower than net sales of $6.6 million for the three-months ended September 30, 2018.

Case sales, in 192-ounce case equivalents, were 121.9 million cases for the three-months ended September 30, 2019, an increase of approximately 10.8 million cases or 9.7% higher than case sales of 111.0 million cases for the three-months ended September 30, 2018. The overall average net sales per case (excluding net sales of AFF Third-Party Products of $5.9 million and $6.6 million for the three-months ended September 30, 2019 and 2018, respectively, as these sales do not have unit case equivalents) increased to $9.25 for the three-months ended September 30, 2019, which was 1.8% higher than the average net sales per case of $9.09 for the three-months ended September 30, 2018.  

Gross Profit.  Gross profit was $673.0 million for the three-months ended September 30, 2019, an increase of approximately $65.3 million, or 10.8% higher than the gross profit of $607.7 million for the three-months ended September 30, 2018. The increase in gross profit dollars was primarily the result of the $126.2 million increase in net sales of our Monster Energy® Drinks segment for the three-months ended September 30, 2019.

Gross profit as a percentage of net sales decreased to 59.4% for the three-months ended September 30, 2019 from 59.8% for the three-months ended September 30, 2018. The decrease for the three-months ended September 30, 2019 was primarily the result of geographical and product sales mix. Such decrease was partially offset by the sales price increases discussed above as well as reduced input costs.

Operating Expenses.  Total operating expenses were $277.6 million for the three-months ended September 30, 2019, an increase of approximately $9.5 million, or 3.5% higher than total operating expenses of $268.1 million for the three-months ended September 30, 2018. The increase in operating expenses was primarily due to increased payroll expenses of $10.4 million (of which $1.9 million was related to an increase in stock-based compensation), increased expenditures of $6.1 million for other marketing expenses and increased expenditures of $3.5 million for sponsorships and endorsements. The increase in operating expenses was partially offset by decreased expenditures of $14.1 million related to the costs associated with distributor terminations and decreased out-bound freight and warehouse costs of $4.7 million.  

Operating Income.  Operating income was $395.4 million for the three-months ended September 30, 2019, an increase of approximately $55.9 million, or 16.5% higher than operating income of $339.6 million for the three-months ended September 30, 2018. Operating income as a percentage of net sales increased to 34.9% for the three-months ended September 30, 2019 from 33.4% for the three-months ended September 30, 2018. Operating income was $72.6 million and $43.8 million for the three-months ended September 30, 2019 and 2018, respectively, in connection with our operations in Europe, Middle East and Africa (“EMEA”), Asia Pacific and South America.  

Operating income* for the Monster Energy® Drinks segment was $433.8 million for the three-months ended September 30, 2019, an increase of approximately $74.8 million, or 20.8% higher than operating income of $359.1 million for the three-months ended September 30, 2018. The increase in operating income for the Monster Energy® Drinks segment was primarily the result of the $126.2 million increase in net sales of our Monster Energy® Drinks segment for the three-months ended September 30, 2019.  

Operating income* for the Strategic Brands segment was $35.1 million for the three-months ended September 30, 2019, a decrease of approximately $6.6 million, or 15.7% lower than operating income of $41.7 million for the three-months ended September 30, 2018.

35

Operating income* for the Other segment was $1.0 million for the three-months ended September 30, 2019, a decrease of approximately $0.7 million, or 42.3% lower than operating income of $1.7 million for the three-months ended September 30, 2018.

*Exclusive of corporate and unallocated expenses.

Interest and Other Income, net.  Interest and other non-operating income, net, was $3.1 million for the three-months ended September 30, 2019, as compared to interest and other non-operating income, net, of $3.0 million for the three-months ended September 30, 2018. Foreign currency transaction losses were $2.8 million and $0.3 million for the three-months ended September 30, 2019 and 2018, respectively. Interest income was $6.1 million and $3.4 million for the three-months ended September 30, 2019 and 2018, respectively.

Provision for Income Taxes.  Provision for income taxes was $99.6 million for the three-months ended September 30, 2019, an increase of $24.8 million, or 33.2% higher than the provision for income taxes of $74.8 million for the three-months ended September 30, 2018. The effective combined federal, state and foreign tax rate increased to 25.0% from 21.8% for the three-months ended September 30, 2019 and 2018, respectively. The increase in the effective tax rate was primarily attributable to increased income taxes in certain foreign jurisdictions as well as a decrease in the equity compensation deduction.  In addition, the comparative effective tax rate for the three-months ended September 30, 2018 included a non-recurring tax benefit.

Net Income.  Net income was $298.9 million for the three-months ended September 30, 2019, an increase of $31.2 million, or 11.7% higher than net income of $267.7 million for the three-months ended September 30, 2018. The increase in net income was primarily due to the $65.3 million increase in gross profit. The increase in net income was partially offset by an increase in the provision for income taxes of $24.8 million and an increase in operating expenses of $9.5 million.

Results of Operations for the Nine-Months Ended September 30, 2019 Compared to the Nine-Months Ended September 30, 2018.

Net Sales. Net sales were $3.18 billion for the nine-months ended September 30, 2019, an increase of approximately $300.7 million, or 10.4% higher than net sales of $2.88 billion for the nine-months ended September 30, 2018. Net sales for the nine-months ended September 30, 2019 were positively impacted by approximately $89.2 million as a result of the U.S. Price Increase and the Canada Price Increase, on certain of our Monster Energy® brand energy drinks. Net changes in foreign currency exchange rates had an unfavorable impact on net sales of approximately $60.1 million for the nine-months ended September 30, 2019.

Net sales for the Monster Energy® Drinks segment were $2.95 billion for the nine-months ended September 30, 2019, an increase of approximately $305.8 million, or 11.6% higher than net sales of $2.65 billion for the nine-months ended September 30, 2018. Net sales for the Monster Energy® Drinks segment increased primarily due to (i) sales of our Reign Total Body FuelTM high performance energy drinks, introduced in the first quarter of 2019, (ii) the price increases described above, and (iii) increased worldwide sales by volume of our Monster Energy® brand energy drinks as a result of increased consumer demand. Net changes in foreign currency exchange rates had an unfavorable impact on net sales for the Monster Energy® Drinks segment of approximately $51.1 million for the nine-months ended September 30, 2019.

Net sales for the Strategic Brands segment were $215.8 million for the nine-months ended September 30, 2019, a decrease of approximately $4.2 million, or 1.9% lower than net sales of $220.0 million for the nine-months ended September 30, 2018. Net changes in foreign currency exchange rates had an unfavorable impact on net sales for the Strategic Brands segment of approximately $9.0 million for the nine-months ended September 30, 2019.

Net sales for the Other segment were $17.0 million for the nine-months ended September 30, 2019, a decrease of approximately $0.9 million, or 4.9% lower than net sales of $17.9 million for the nine-months ended September 30, 2018.

Case sales, in 192-ounce case equivalents, were 342.7 million cases for the nine-months ended September 30, 2019, an increase of approximately 29.3 million cases or 9.4% higher than case sales of 313.4 million cases for the nine-months ended September 30, 2018. The overall average net sales per case (excluding net sales of AFF Third-Party Products of $17.0 million and $17.9 million for the nine-months ended September 30, 2019 and 2018, respectively, as these sales do not have unit case equivalents) increased to $9.24 for the nine-months ended September 30, 2019, which was 1.1% higher than the average net sales per case of $9.14 for the nine-months ended September 30, 2018.  The increase in the average net sales per case was primarily attributable to a price increase effective from

36

November 1, 2018 in the United States and effective from February 1, 2019 in Canada, on certain of our Monster Energy® brand energy drinks.

Gross Profit.  Gross profit was $1.91 billion for the nine-months ended September 30, 2019, an increase of approximately $164.6 million, or 9.4% higher than the gross profit of $1.74 billion for the nine-months ended September 30, 2018. The increase in gross profit dollars was primarily the result of the $305.8 million increase in net sales of our Monster Energy® Drinks segment for the nine-months ended September 30, 2019.

Gross profit as a percentage of net sales decreased to 59.9% for the nine-months ended September 30, 2019 from 60.5% for the nine-months ended September 30, 2018. The decrease for the nine-months ended September 30, 2019 was primarily the result of geographical and product sales mix. Such decrease was partially offset by the sales price increases discussed above.

Operating Expenses.  Total operating expenses were $821.9 million for the nine-months ended September 30, 2019, an increase of approximately $55.9 million, or 7.3% higher than total operating expenses of $766.1 million for the nine-months ended September 30, 2018. The increase in operating expenses was primarily due to increased payroll expenses of $26.4 million (of which $4.5 million was related to an increase in stock-based compensation), increased expenditures of $13.0 million for professional service fees, including legal and accounting costs, increased expenditures of $10.4 million for sponsorships and endorsements, and increased expenditures of $10.8 million in other marketing expenses. The increase in operating expenses was partially offset by decreased expenditures of $15.6 million related to the costs associated with distributor terminations.

Operating Income.  Operating income was $1.09 billion for the nine-months ended September 30, 2019, an increase of approximately $108.8 million, or 11.1% higher than operating income of $977.1 million for the nine-months ended September 30, 2018. Operating income as a percentage of net sales increased to 34.1% for the nine-months ended September 30, 2019 from 33.9% for the nine-months ended September 30, 2018. Operating income was $180.1 million and $135.0 million for the nine-months ended September 30, 2019 and 2018, respectively, in connection with our operations in Europe, Middle East and Africa (“EMEA”), Asia Pacific and South America.  

Operating income* for the Monster Energy® Drinks segment was $1.19 billion for the nine-months ended September 30, 2019, an increase of approximately $153.8 million, or 14.9% higher than operating income of $1.03 billion for the nine-months ended September 30, 2018. The increase in operating income for the Monster Energy® Drinks segment was primarily the result of the $305.8 million increase in net sales of our Monster Energy® Drinks segment for the nine-months ended September 30, 2019.  

Operating income* for the Strategic Brands segment was $130.8 million for the nine-months ended September 30, 2019, a decrease of approximately $4.3 million, or 3.2% lower than operating income of $135.1 million for the nine-months ended September 30, 2018.

Operating income* for the Other segment was $3.0 million for the nine-months ended September 30, 2019, a decrease of approximately $1.5 million, or 33.3% lower than operating income of $4.5 million for the nine-months ended September 30, 2018.

*Exclusive of corporate and unallocated expenses.

Interest and Other Income, net.  Interest and other non-operating income, net, was $8.8 million for the nine-months ended September 30, 2019, as compared to interest and other non-operating income, net, of $5.3 million for the nine-months ended September 30, 2018. Foreign currency transaction losses were $3.9 million and $3.6 million for the nine-months ended September 30, 2019 and 2018, respectively. Interest income was $13.5 million and $9.1 million for the nine-months ended September 30, 2019 and 2018, respectively.

Provision for Income Taxes.  Provision for income taxes was $241.8 million for the nine-months ended September 30, 2019, an increase of $13.4 million, or 5.9% higher than the provision for income taxes of $228.5 million for the nine-months ended September 30, 2018. The effective combined federal, state and foreign tax rate decreased to 22.1% from 23.3% for the nine-months ended September 30, 2019 and 2018, respectively. The decrease in effective tax rate was primarily attributable to an increase in equity compensation deductions.  The decrease in the provision for income taxes was partially offset by increased income taxes in certain foreign jurisdictions.  In addition, the comparative effective tax rate for the nine-months ended September 30, 2018 included a non-recurring tax benefit.

37

Net Income.  Net income was $852.9 million for the nine-months ended September 30, 2019, an increase of $99.0 million, or 13.1% higher than net income of $753.9 million for the nine-months ended September 30, 2018. The increase in net income was primarily due to the $164.6 million increase in gross profit. The increase in net income was partially offset by the increase in operating expenses of $55.9 million and an increase in the provision for income taxes of $13.4 million.

Non-GAAP Financial Measures

Gross Sales**.  Gross sales were $1.32 billion for the three-months ended September 30, 2019, an increase of approximately $133.8 million, or 11.3% higher than gross sales of $1.18 billion for the three-months ended September 30, 2018. Gross sales for the three-months ended September 30, 2019 were positively impacted by approximately $31.6 million as a result of the U.S. Price Increase and the Canada Price Increase, on certain of our Monster Energy® brand energy drinks. The comparative gross sales for the three-months ended September 30, 2018 were positively impacted by advance purchases made by our customers in anticipation of the U.S. Price Increase. We estimate gross sales for the three-months ended September 30, 2018 were increased by approximately $18.0 million as a result of such advance purchases. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales of approximately $15.1 million for the three-months ended September 30, 2019.

Gross sales for the Monster Energy® Drinks segment were $1.24 billion for the three-months ended September 30, 2019, an increase of approximately $143.3 million, or 13.1% higher than gross sales of $1.09 billion for the three-months ended September 30, 2018. Gross sales for the Monster Energy® Drinks segment increased primarily due to (i) sales of our Reign Total Body FuelTM high performance energy drinks, introduced in the first quarter of 2019, (ii) the price increases described above and (iii) increased worldwide sales by volume of our Monster Energy® brand energy drinks as a result of increased consumer demand. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales for the Monster Energy® Drinks segment of approximately $13.7 million for the three-months ended September 30, 2019.

Gross sales of our Strategic Brands segment were $76.7 million for the three-months ended September 30, 2019, a decrease of $8.8 million, or 10.3% lower than gross sales of $85.5 million for the three-months ended September 30, 2018. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales in the Strategic Brands segment of approximately $1.4 million for the three-months ended September 30, 2019.

Gross sales of our Other segment were $5.9 million for the three-months ended September 30, 2019, a decrease of $0.7 million, or 10.8% lower than gross sales of $6.6 million for the three-months ended September 30, 2018.

Promotional allowances, commissions and other expenses, as described in the footnote below, were $184.7 million for the three-months ended September 30, 2019, an increase of $16.4 million, or 9.7% higher than promotional allowances, commissions and other expenses of $168.3 million for the three-months ended September 30, 2018. Promotional allowances, commissions and other expenses as a percentage of gross sales decreased to 14.0% from 14.2% for the three-months ended September 30, 2019 and 2018, respectively.

Gross Sales**.  Gross sales were $3.70 billion for the nine-months ended September 30, 2019, an increase of approximately $328.8 million, or 9.8% higher than gross sales of $3.37 billion for the nine-months ended September 30, 2018. Gross sales for the nine-months ended September 30, 2019 were positively impacted by approximately $89.2 million as a result of U.S. Price Increase and the Canada Price Increase, on certain of our Monster Energy® brand energy drinks. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales of approximately $71.7 million for the nine-months ended September 30, 2019.

Gross sales for the Monster Energy® Drinks segment were $3.43 billion for the nine-months ended September 30, 2019, an increase of approximately $336.8 million, or 10.9% higher than gross sales of $3.09 billion for the nine-months ended September 30, 2018. Gross sales for the Monster Energy® Drinks segment increased primarily due to (i) sales of our Reign Total Body FuelTM high performance energy drinks, introduced in the first quarter of 2019, (ii) the price increases described above, and (iii) increased sales by volume of our Monster Energy® brand energy drinks as a result of increased domestic and international consumer demand. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales for the Monster Energy® Drinks segment of approximately $62.7 million for the nine-months ended September 30, 2019.

Gross sales of our Strategic Brands segment were $246.6 million for the nine-months ended September 30, 2019, a decrease of $7.2 million, or 2.8% lower than gross sales of $253.8 million for the nine-months ended September 30, 2018. Net changes in foreign

38

currency exchange rates had an unfavorable impact on gross sales in the Strategic Brands segment of approximately $9.0 million for the nine-months ended September 30, 2019.

Gross sales of our Other segment were $17.0 million for the nine-months ended September 30, 2019, a decrease of $0.9 million, or 4.9% lower than gross sales of $17.9 million for the nine-months ended September 30, 2018.

Promotional allowances, commissions and other expenses, as described in the footnote below, were $511.5 million for the nine-months ended September 30, 2019, an increase of $28.1 million, or 5.8% higher than promotional allowances, commissions and other expenses of $483.4 million for the nine-months ended September 30, 2018. Promotional allowances, commissions and other expenses as a percentage of gross sales decreased to 13.8% from 14.4% for the nine-months ended September 30, 2019 and 2018, respectively.

**Gross sales are used internally by management as an indicator of and to monitor operating performance, including sales performance of particular products, salesperson performance, product growth or declines and overall Company performance. The use of gross sales allows evaluation of sales performance before the effect of any promotional items, which can mask certain performance issues. We therefore believe that the presentation of gross sales provides a useful measure of our operating performance. The use of gross sales is not a measure that is recognized under GAAP and should not be considered as an alternative to net sales, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of net sales. Additionally, gross sales may not be comparable to similarly titled measures used by other companies, as gross sales has been defined by our internal reporting practices. In addition, gross sales may not be realized in the form of cash receipts as promotional payments and allowances may be deducted from payments received from certain customers.

The following table reconciles the non-GAAP financial measure of gross sales with the most directly comparable GAAP financial measure of net sales:  

Three-Months Ended

Percentage

 

Nine-Months Ended

Percentage

 

September 30, 

Change

 

September 30, 

Change

 

(In thousands)

    

2019

    

2018

    

19 vs. 18

    

2019

    

2018

    

19 vs. 18

 

Gross sales, net of discounts and returns

$

1,318,267

$

1,184,444

 

11.3

%

$

3,695,128

$

3,366,334

 

9.8

%

Less: Promotional allowances, commissions and other expenses***

 

184,690

 

168,284

 

9.7

%

 

511,515

 

483,381

 

5.8

%

Net Sales

$

1,133,577

$

1,016,160

 

11.6

%

$

3,183,613

$

2,882,953

 

10.4

%

***Although the expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the presentation thereof does not conform to GAAP presentation requirements. Additionally, our definition of promotional and other allowances may not be comparable to similar items presented by other companies. Promotional and other allowances primarily include consideration given to our bottlers/distributors or retail customers including, but not limited to the following: (i) discounts granted off list prices to support price promotions to end-consumers by retailers; (ii) reimbursements given to our bottlers/distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products; (iii) our agreed share of fees given to bottlers/distributors and/or directly to retailers for advertising, in-store marketing and promotional activities; (iv) our agreed share of slotting, shelf space allowances and other fees given directly to retailers, club stores and/or wholesalers; (v) incentives given to our bottlers/distributors and/or retailers for achieving or exceeding certain predetermined sales goals; (vi) discounted or free products; (vii) contractual fees given to our bottlers/distributors related to sales made by us direct to certain customers that fall within the bottlers’/distributors’ sales territories; and (viii) certain commissions paid based on sales to our bottlers/distributors. The presentation of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and the spending levels incurred or correlated with such sales. Promotional and other allowances constitute a material portion of our marketing activities. Our promotional allowance programs with our numerous bottlers/distributors and/or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one week to one year. The primary drivers of our promotional and other allowance activities for the three- and nine-months ended September 30, 2019 and 2018 were (i) to increase sales volume and trial, (ii) to address market conditions, and (iii) to secure shelf and display space at retail.

Sales

The table below discloses selected quarterly data regarding sales for the three- and nine-months ended September 30, 2019 and 2018, respectively. Data from any one or more quarters or periods is not necessarily indicative of annual results or continuing trends.

Sales of beverages are expressed in unit case volume. A “unit case” means a unit of measurement equal to 192 U.S. fluid ounces of finished beverage (24 eight-ounce servings).  Unit case volume means the number of unit cases (or unit case equivalents) of finished products or concentrates as if converted into finished products sold by us.  

Our quarterly results of operations reflect seasonal trends that are primarily the result of increased demand in the warmer months of the year. It has been our experience that beverage sales tend to be lower during the first and fourth quarters of each calendar

39

year. However, our experience with our energy drink products suggests they may be less seasonal than the seasonality of traditional beverages. In addition, our continued growth internationally may further reduce the impact of seasonality on our business. Quarterly fluctuations may also be affected by other factors including the introduction of new products, the opening of new markets where temperature fluctuations are more pronounced, the addition of new bottlers, customers and distributors, changes in the sales mix of our products and changes in advertising and promotional expenses.  

Three-Months Ended

Nine-Months Ended

September 30, 

September 30, 

(In thousands, except average net sales per case)

    

2019

    

2018

    

2019

    

2018

Net sales

$

1,133,577

$

1,016,160

$

3,183,613

$

2,882,953

Less: AFF third-party sales

 

(5,860)

 

(6,573)

 

(16,973)

 

(17,853)

Adjusted net sales1

$

1,127,717

$

1,009,587

$

3,166,640

$

2,865,100

Case sales by segment:

 

  

 

  

 

  

 

  

Monster Energy® Drinks

 

103,987

 

91,806

 

286,284

 

257,746

Strategic Brands

 

17,867

 

19,232

 

56,450

 

55,664

Other

 

-

 

-

 

-

 

-

Total case sales

 

121,854

 

111,038

 

342,734

 

313,410

Average net sales per case

$

9.25

$

9.09

$

9.24

$

9.14

1Excludes Other segment net sales of $5.9 million and $6.6 million for the three-months ended September 30, 2019 and 2018, respectively, comprised of net sales of AFF Third-Party Products to independent third-party customers, as these sales do not have unit case equivalents. Excludes Other segment net sales of $17.0 million and $17.9 million for the nine-months ended September 30, 2019 and 2018, respectively, comprised of net sales of AFF Third-Party Products to independent third-party customers, as these sales do not have unit case equivalents.

See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Our Business” for additional information related to the increase in sales.

Liquidity and Capital Resources

Cash flows provided by operating activities.  Cash provided by operating activities was $821.1 million for the nine-months ended September 30, 2019, as compared with cash provided by operating activities of $821.4 million for the nine-months ended September 30, 2018.  

For the nine-months ended September 30, 2019, cash provided by operating activities was primarily attributable to net income earned of $852.9 million and adjustments for certain non-cash expenses, consisting of $47.8 million of depreciation and amortization and $46.9 million of stock-based compensation. For the nine-months ended September 30, 2019, cash provided by operating activities also increased due to a $69.5 million increase in accounts payable, a $55.8 million increase in accrued promotional allowances, a $10.3 million increase in income taxes payable, a $6.2 million decrease in prepaid income taxes and a $5.8 million decrease in distributor receivables. For the nine-months ended September 30, 2019, cash used in operating activities was primarily attributable to a $179.8 million increase in accounts receivable, a $44.9 million increase in inventories, a $19.6 million decrease in deferred revenue, a $16.1 million increase in prepaid expenses and other assets, a $9.6 million decrease in accrued liabilities and a $3.9 million decrease in accrued compensation.

For the nine-months ended September 30, 2018, cash provided by operating activities was primarily attributable to net income earned of $753.9 million and adjustments for certain non-cash expenses, consisting of $42.4 million of stock-based compensation and $42.5 million of depreciation and other amortization. For the nine-months ended September 30, 2018, cash provided by operating activities also increased due to a $96.5 million decrease in prepaid income taxes, a $48.7 million increase in accrued promotional allowances, a $39.6 million increase in accounts payable, a $16.5 million increase in accrued liabilities, a $7.8 million decrease in distributor receivables and a $1.6 million increase in other liabilities. For the nine-months ended September 30, 2018, cash used in operating activities was primarily attributable to a $181.7 million increase in accounts receivable, a $16.5 million increase in prepaid

40

expenses and other assets, a $13.9 million decrease in deferred revenue, a $10.3 million increase in inventories, a $4.4 million decrease in accrued compensation and a $1.4 million decrease in income taxes payable.

Cash flows (used in) provided by investing activities. Cash used in investing activities was $328.2 million for the nine-months ended September 30, 2019 as compared to cash provided by investing activities of $154.1 million for the nine-months ended September 30, 2018.

For both the nine-months ended September 30, 2019 and 2018, cash provided by investing activities was primarily attributable to sales of available-for-sale investments. For both the nine-months ended September 30, 2019 and 2018, cash used in investing activities was primarily attributable to purchases of available-for-sale investments. For both the nine-months ended September 30, 2019 and 2018, cash used in investing activities also included the acquisitions of fixed assets consisting of vans and promotional vehicles, coolers and other equipment to support our marketing and promotional activities, production equipment, furniture and fixtures, office and computer equipment, computer software, equipment used for sales and administrative activities, certain leasehold improvements, as well as acquisitions of and/or improvements to real property. We expect to continue to use a portion of our cash in excess of our requirements for operations for purchasing short-term and long-term investments, leasehold improvements, the acquisition of capital equipment (specifically, vans, trucks and promotional vehicles, coolers, other promotional equipment, merchandise displays, warehousing racks as well as items of production equipment required to produce certain of our existing and/or new products) to develop our brand in international markets and for other corporate purposes. From time to time, we may also use cash to purchase additional real property related to our beverage business and/or acquire compatible businesses.

Cash flows used in financing activities.  Cash used in financing activities was $405.3 million for the nine-months ended September 30, 2019 as compared to cash used in financing activities of $782.2 million for the nine-months ended September 30, 2018. The cash used in financing activities for both the nine-months ended September 30, 2019 and 2018 was primarily the result of the repurchases of our common stock. The cash provided by financing activities for both the nine-months ended September 30, 2019, and 2018 was primarily attributable to the issuance of our common stock under our stock-based compensation plans.

Purchases of inventories, increases in accounts receivable and other assets, acquisition of property and equipment (including real property, personal property and coolers), leasehold improvements, advances for or the purchase of equipment for our bottlers, acquisition and maintenance of trademarks, payments of accounts payable, income taxes payable and purchases of our common stock are expected to remain our principal recurring use of cash.

Cash and cash equivalents, short-term and long-term investments.  At September 30, 2019, we had $717.6 million in cash and cash equivalents, $587.4 million in short-term investments and $14.4 million in long-term investments. We have historically invested these amounts in U.S. treasuries, U.S. government agency securities and municipal securities, commercial paper, certificates of deposit, variable rate demand notes and money market funds meeting certain criteria. We maintain our investments for cash management purposes and not for purposes of speculation. Our risk management policies emphasize credit quality (primarily based on short-term ratings by nationally recognized statistical organizations) in selecting and maintaining our investments. We regularly assess market risk of our investments and believe our current policies and investment practices adequately limit those risks. However, certain of these investments are subject to general credit, liquidity, market and interest rate risks. These market risks associated with our investment portfolio may have an adverse effect on our future results of operations, liquidity and financial condition.

Of our $717.6 million of cash and cash equivalents held at September 30, 2019, $420.8 million was held by our foreign subsidiaries. No short-term or long-term investments were held by our foreign subsidiaries at September 30, 2019.

We believe that cash available from operations, including our cash resources and access to credit, will be sufficient for our working capital needs, including purchase commitments for raw materials and inventory, increases in accounts receivable, payments of tax liabilities, expansion and development needs, purchases of capital assets, purchases of equipment, purchases of real property and purchases of shares of our common stock, through at least the next 12 months. Based on our current plans, at this time we estimate that capital expenditures are likely to be less than $150.0 million through September 30, 2020. However, future business opportunities may cause a change in this estimate.    

The following represents a summary of the Company’s contractual commitments and related scheduled maturities as of September 30, 2019:

41

Payments due by period (in thousands)

    

    

Less than

    

1-3

    

3-5

    

More than

Obligations

Total

1 year

years

years

5 years

Contractual Obligations1

$

171,556

$

97,659

$

67,097

$

6,800

$

-

Finance Leases

 

1,865

 

1,865

 

-

 

-

 

-

Operating Leases

 

26,361

 

3,771

 

5,476

 

3,648

 

13,466

Purchase Commitments2

 

29,258

 

29,258

 

-

 

-

 

-

$

229,040

$

132,553

$

72,573

$

10,448

$

13,466

1Contractual obligations include our obligations related to sponsorships and other commitments.

2Purchase commitments include obligations made by us and our subsidiaries to various suppliers for raw materials used in the production of our products. These obligations vary in terms, but are generally satisfied within one year.

In addition, approximately $6.2 million of unrecognized tax benefits have been recorded as liabilities as of September 30, 2019. It is expected that the amount of unrecognized tax benefits will not significantly change within the next 12 months. As of September 30, 2019, we had $1.4 million of accrued interest and penalties related to unrecognized tax benefits.

Critical Accounting Policies

There have been no material changes to our critical accounting policies from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (“Form 10-K”).

Recent Accounting Pronouncements

The information required by this Item is incorporated herein by reference to the Notes to Condensed Consolidated Financial Statements - Note 2. Recent Accounting Pronouncements, in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Inflation

We believe inflation did not have a significant impact on our results of operations for the periods presented.

Forward-Looking Statements

Certain statements made in this report may constitute forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) (the “Exchange Act”) regarding the expectations of management with respect to revenues, profitability, adequacy of funds from operations and our existing credit facility, among other things. All statements containing a projection of revenues, income (loss), earnings (loss) per share, capital expenditures, dividends, capital structure or other financial items, a statement of management’s plans and objectives for future operations, or a statement of future economic performance contained in management’s discussion and analysis of financial condition and results of operations, including statements related to new products, volume growth and statements encompassing general optimism about future operating results and non-historical information, are forward-looking statements within the meaning of the Exchange Act. Without limiting the foregoing, the words “believes,” “thinks,” “anticipates,” “plans,” “expects,” and similar expressions are intended to identify forward-looking statements.

Management cautions that these statements are qualified by their terms and/or important factors, many of which are outside our control, and involve a number of risks, uncertainties and other factors, that could cause actual results and events to differ materially from the statements made including, but not limited to, the following:

We have extensive commercial arrangements with TCCC and, as a result, our future performance is substantially dependent on the success of our relationship with TCCC;
The impact of TCCC’s bottlers/distributors distributing Coca-Cola brand energy drinks;
The effect of TCCC being one of our significant shareholders and the potential divergence of TCCC’s interests from those of our other shareholders;

42

The effect of TCCC’s refranchising initiative to transition from a TCCC owned system to an independent bottling system, including our ability to maintain relationships with TCCC system bottlers/distributors and manage their ongoing commitment to focus on our products;
The possible slowing of and/or decline in the sales growth rates of the domestic and international energy drink categories and/or the U.S. convenience store market generally;
Disruption in distribution or sales and/or decline in sales due to the termination and/or appointment of existing and/or new domestic and/or international distributors;
Lack of anticipated demand for our products in domestic and/or international markets;
Fluctuations in the inventory levels of our bottlers/distributors, planned or otherwise, and the resultant impact on our revenues;
Unfavorable regulations, including taxation requirements, age restrictions imposed on the sale, purchase, or consumption of our products, marketing restrictions, product registration requirements, tariffs, trade restrictions, container size limitations and/or ingredient restrictions;
The effect of inquiries from, and/or actions by, state attorneys general, the Federal Trade Commission (the “FTC”), the Food and Drug Administration (the “FDA”), municipalities, city attorneys, other government agencies, quasi-government agencies, government officials (including members of U.S. Congress) and/or analogous central and local agencies and other authorities in the foreign countries in which our products are manufactured and/or distributed, into the advertising, marketing, promotion, ingredients, sale and/or consumption of our energy drink products, including voluntary and/or required changes to our business practices;
Our ability to comply with regulations and evolving industry standards regarding consumer privacy and data use and security, including with respect to the General Data Protection Regulation approved by the European Union;
Our ability to achieve profitability from certain of our operations outside the United States;
Our ability to manage legal and regulatory requirements in foreign jurisdictions, potential difficulties in staffing and managing foreign operations and potentially higher incidence of fraud or corruption and credit risk of foreign customers and/or distributors;
Our ability to produce our products in international markets in which they are sold, thereby reducing freight costs and/or product damages;
Our ability to absorb, reduce, or pass on to our bottlers/distributors increases in freight costs;
Our ability to effectively manage our inventories and/or our accounts receivables;
Our foreign currency exchange rate risk with respect to our sales, expenses, profits, assets and liabilities denominated in currencies other than the U.S. dollar, which will continue to increase as foreign sales increase;
The impact of Brexit on our business in the United Kingdom and in Continental Europe;
Changes in accounting standards may affect our reported profitability;
Implications of the Tax Reform Act;
Any proceedings which may be brought against us by the Securities and Exchange Commission (the “SEC”), the FDA, the FTC or other governmental agencies or bodies;
The outcome and/or possibility of future shareholder derivative actions or shareholder securities litigation that may be filed against us and/or against certain of our officers and directors, and the possibility of other private shareholder litigation;
The outcome of product liability or consumer fraud litigation and/or class action litigation (or its analog in foreign jurisdictions) regarding the safety of our products and/or the ingredients in and/or claims made in connection with our products and/or alleging false advertising, marketing and/or promotion, and the possibility of future product liability and/or class action lawsuits;
The outcome of any other litigation;
Unfavorable resolution of tax matters;
Uncertainty and volatility in the domestic and global economies, including risk of counterparty default or failure;
Our ability to address any significant deficiencies or material weakness in our internal controls over financial reporting;
Our ability to continue to generate sufficient cash flows to support our expansion plans and general operating activities;
Decreased demand for our products resulting from changes in consumer preferences, obesity and other perceived health concerns, including concerns relating to certain ingredients in our products or packaging, product safety concerns and/or from decreased consumer discretionary spending power;
Adverse publicity surrounding obesity and health concerns related to our products, water usage, environmental impact, human rights and labor and workplace laws;
Changes in demand that are weather related and/or for other reasons, including changes in product category consumption;

43

Changes in cost and availability of certain key ingredients, as well as disruptions to the supply chain, as a result of climate change and extreme weather conditions;
The impact on our business of competitive products and pricing pressures and our ability to gain or maintain our share of sales in the marketplace as a result of actions by competitors, including unsubstantiated and/or misleading claims, false advertising claims and tortious interference, as well as competitors selling misbranded products;
The impact on our business of trademark and trade dress infringement proceedings brought against us relating to our Reign Total Body FuelTM high performance energy drinks;
Our ability to introduce new products;
Our ability to implement and/or maintain price increases;
An inability to achieve volume growth through product and packaging initiatives;
Our ability to sustain the current level of sales and/or achieve growth for our Monster Energy® brand energy drinks and/or our other products, including the Strategic Brands acquired from TCCC;
The impact of criticism of our energy drink products and/or the energy drink market generally and/or legislation enacted (whether as a result of such criticism or otherwise) that restricts the marketing or sale of energy drinks (including prohibiting the sale of energy drinks at certain establishments or pursuant to certain governmental programs), limits caffeine content in beverages, requires certain product labeling disclosures and/or warnings, imposes excise and/or sales taxes, limits product sizes and/or imposes age restrictions for the sale of energy drinks;
Our ability to comply with and/or resulting lower consumer demand for energy drinks due to proposed and/or future U.S. federal, state and local laws and regulations and/or proposed or existing laws and regulations in certain foreign jurisdictions and/or any changes therein, including changes in taxation requirements (including tax rate changes, new tax laws, new and/or increased excise, sales and/or other taxes on our products and revised tax law interpretations) and environmental laws, as well as the Federal Food, Drug, and Cosmetic Act and regulations or rules made thereunder or in connection therewith by the FDA, as well as changes in any other food, drug or similar laws in the United States and internationally, especially those changes that may restrict the sale of energy drinks (including prohibiting the sale of energy drinks at certain establishments or pursuant to certain governmental programs), limit caffeine content in beverages, require certain product labeling disclosures and/or warnings, impose excise taxes, impose sugar taxes, limit product sizes, or impose age restrictions for the sale of energy drinks, as well as laws and regulations or rules made or enforced by the Bureau of Alcohol, Tobacco, Firearms and Explosives and/or the FTC or their foreign counterparts;
Our ability to satisfy all criteria set forth in any model energy drink guidelines, including, without limitation, those adopted by the American Beverage Association, of which the Company is a member, and/or any international beverage association and the impact on the Company of such guidelines;
Disruptions in the timely import or export of our products and/or ingredients due to port strikes and related labor issues;
The effect of unfavorable or adverse public relations, press, articles, comments and/or media attention;
Changes in the cost, quality and availability of containers, packaging materials, aluminum, the Midwest and other premiums, raw materials and other ingredients and juice concentrates, and our ability to obtain and/or maintain favorable supply arrangements and relationships and procure timely and/or sufficient production of all or any of our products to meet customer demand;
Any shortages that may be experienced in the procurement of containers and/or other raw materials including, without limitation, aluminum cans generally, PET containers used for our Monster Hydro® energy drinks and 24-ounce aluminum cap cans;
The impact on our cost of sales of corporate activity among the limited number of suppliers from whom we purchase certain raw materials;
Our ability to pass on to our customers all or a portion of any increases in the costs of raw materials, ingredients, commodities and/or other cost inputs affecting our business;
Our ability to achieve both internal domestic and international forecasts, which may be based on projected volumes and sales of many product types and/or new products, certain of which are more profitable than others; there can be no assurance that we will achieve projected levels of sales as well as forecasted product and/or geographic mixes;
Our ability to penetrate new domestic and/or international markets and/or gain approval or mitigate the delay in securing approval for the sale of our products in various countries;
Economic or political instability in one or more of our international markets;
The effectiveness of sales and/or marketing efforts by us and/or by the full service bottlers/distributors of our products, most of whom distribute products that may be regarded as competitive with our products;

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Unilateral decisions by full service bottlers/distributors, convenience chains, grocery chains, mass merchandisers, specialty chain stores, club stores and other customers to discontinue carrying all or any of our products that they are carrying at any time, restrict the range of our products they carry and/or devote less resources to the sale of our products;
The effects of retailer consolidation on our business;
The costs and/or effectiveness, now or in the future, of our advertising, marketing and promotional strategies;
The success of our sports marketing endeavors both domestically and internationally;
Unforeseen economic and political changes and local or international catastrophic events;
Possible recalls of our products and/or defective production;
Our ability to make suitable arrangements and/or procure sufficient capacity for the co-packing of any of our products both domestically and internationally, the timely replacement of discontinued co-packing arrangements and/or limitations on co-packing availability, including for retort production;
Our ability to make suitable arrangements for the timely procurement of non-defective raw materials;
Our inability to protect and/or the loss of our intellectual property rights and/or our inability to use our trademarks, trade names or designs and/or trade dress in certain countries;
Volatility of stock prices which may restrict stock sales, stock purchases or other opportunities as well as negatively impact the motivation of equity award grantees;
Provisions in our organizational documents and/or control by insiders which may prevent changes in control even if such changes would be beneficial to other stockholders;
The failure of our bottlers and/or contract packers to manufacture our products on a timely basis or at all;
Exposure to significant liabilities due to litigation, legal or regulatory proceedings;
Any disruption in and/or lack of effectiveness of our information technology systems, including a breach of cyber security, that disrupts our business or negatively impacts customer relationships; and
Recruitment and retention of senior management, other key employees and our employee base in general.

The foregoing list of important factors and other risks detailed from time to time in our reports filed with the SEC is not exhaustive.  See the section entitled “Risk Factors” in our Form 10-K for a more complete discussion of these risks and uncertainties and for other risks and uncertainties. Those factors and the other risk factors described therein are not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements.  Other unknown or unpredictable factors also could harm our results. Consequently, our actual results could be materially different from the results described or anticipated by our forward-looking statements, due to the inherent uncertainty of estimates, forecasts and projections and may be better or worse than anticipated. Given these uncertainties, you should not rely on forward-looking statements. Forward-looking statements represent our estimates and assumptions only as of the date that they were made. We expressly disclaim any duty to provide updates to forward-looking statements, and the estimates and assumptions associated with them, after the date of this report, in order to reflect changes in circumstances or expectations or the occurrence of unanticipated events except to the extent required by applicable securities laws.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our market risk during the three-months ended September 30, 2019 compared with the disclosures in Part II, Item 7A of our Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures – Under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Exchange Act) as of the end of the period covered by this report. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are adequate and effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in rules and forms of the SEC and (2) accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosures.

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Changes in Internal Control Over Financial Reporting – There were no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  

PART II - OTHER INFORMATION

ITEM 1.        LEGAL PROCEEDINGS

The information required by this Item is incorporated herein by reference to the Notes to Condensed Consolidated Financial Statements - Note 12. Commitments and Contingencies: Legal Proceedings in Part I, Item 1, of this Quarterly Report on Form 10-Q.

ITEM 1A.     RISK FACTORS

Our risk factors are discussed in our Form 10-K.  There have been no material changes with respect to the risk factors disclosed in our Form 10-K.

ITEM 2.        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On August 7, 2018, the Company’s Board of Directors authorized a share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock (the “August 2018 Repurchase Plan”). During the three-months ended September 30, 2019, the Company purchased 0.4 million shares of common stock at an average purchase price of $58.32 per share, for a total amount of $20.6 million (excluding broker commissions), which exhausted the availability under the August 2018 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying condensed consolidated balance sheet at September 30, 2019.

On February 26, 2019, the Company’s Board of Directors authorized a new share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock (the “February 2019 Repurchase Plan”). During the three-months ended September 30, 2019, the Company purchased 4.0 million shares of common stock at an average purchase price of $58.62 per share, for a total amount of $233.7 million (excluding broker commissions), under the February 2019 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying condensed consolidated balance sheet at September 30, 2019. As of November 6, 2019, $36.6 million remained available for repurchase under the February 2019 Repurchase Plan.

On November 6, 2019, the Company’s Board of Directors authorized a new share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock and, accordingly, the aggregate amount available to repurchase the Company’s common stock is currently $536.6 million.

The following tabular summary reflects the Company’s repurchase activity during the quarter ended September 30, 2019:

    

    

    

    

Maximum Number (or

Approximate Dollar

Total Number of

Value) of Shares that

Shares Purchased

May Yet Be Purchased

Total Number

as Part of Publicly

Under the Plans or

of Shares

Average Price

Announced Plans

Programs (In

Period

Purchased

per Share¹

or Programs

thousands)²

Jul 1 – Jul 31, 2019

 

$

 

$

520,610

Aug 1 – Aug 31, 2019

 

78,699

$

55.56

 

78,699

$

516,236

Sep 1 - Sep 30, 2019

4,261,205

$

58.65

 

4,261,205

$

266,237

¹Excluding broker commissions paid.

²Net of broker commissions paid.

During the three-months ended September 30, 2019, no shares of common stock were purchased from employees in lieu of cash payments for options exercised or withholding taxes due.

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ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.OTHER INFORMATION

None.

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ITEM 6.EXHIBITS

31.1*

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*

Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101*

The following financial information from Monster Beverage Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018, (ii) Condensed Consolidated Statements of Income for the three- and nine-months ended September 30, 2019 and 2018, (iii) Condensed Consolidated Statements of Comprehensive Income for the three- and nine-months ended September 30, 2019 and 2018, (iv) Condensed Consolidated Statements of Stockholders’ Equity for the nine-months ended September 30, 2019 and 2018, (v) Condensed Consolidated Statements of Cash Flows for the nine-months ended September 30, 2019 and 2018, and (vi) the Notes to Condensed Consolidated Financial Statements.

104*

The cover page from Monster Beverage Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in iXBRL (Inline eXtensible Business Reporting Language) and contained in Exhibit 101.

*   Filed herewith

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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.

MONSTER BEVERAGE CORPORATION

Registrant

Date: November 7, 2019

/s/ RODNEY C. SACKS

Rodney C. Sacks

Chairman of the Board of Directors

and Chief Executive Officer

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