Monster Beverage Corp
ITEM 1. 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 as well as Mutant® Super Soda drinks.
Stock Split
On October 14, 2016, we announced a three-for-one stock split of the Company’s common stock (“the Stock Split”), to be effected in the form of a 200% stock dividend. The common stock dividend was issued on November 9, 2016 and the Company’s common stock began trading at the split adjusted price on November 10, 2016. Accordingly, all per share amounts, average common stock outstanding, common stock outstanding, common stock repurchased and equity based compensation presented in this Form 10-K have been adjusted retroactively, where applicable, to reflect the stock split.
Stock Repurchases
On April 28, 2016, our Board of Directors authorized us to commence a “modified Dutch auction” tender offer to repurchase up to $2.0 billion of our outstanding shares of common stock (the “Auction Stock Repurchase Tender”). The Auction Stock Repurchase Tender was authorized under our existing share repurchase authority and was funded with cash on hand. We commenced this tender offer in May 2016. On June 15, 2016, we accepted for payment an aggregate of 38.5 million shares of common stock at a purchase price of $52.00 per share, for a total amount of $2.0 billion (excluding commissions), which exhausted the availability under all previously authorized share repurchase plans. Such shares of common stock are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2016.
On August 2, 2016, our Board of Directors authorized a new share repurchase program for the repurchase of up to $250.0 million of our outstanding shares of common stock (the “August 2016 Repurchase Plan”). During the year ended December 31, 2016, we purchased 5.8 million shares of common stock at an average purchase price of $43.40 per share, for a total amount of $249.9 million (excluding broker commissions), which exhausted the availability under the August 2016 Repurchase Plan. Such shares of common stock are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2016.
On February 28, 2017, our Board of Directors authorized a new share repurchase program for the purchase of up to $500.0 million of our outstanding shares of common stock (the “February 2017 Repurchase Plan”). No shares have been repurchased pursuant to the February 2017 Repurchase Plan.
Acquisitions and Divestitures
On April 1, 2016, we completed our acquisition of flavor supplier and long-time business partner American Fruits & Flavors (“AFF”), in an asset acquisition that brought our primary flavor supplier in-house, secured the intellectual property of our most important flavors in perpetuity and further enhanced our flavor development and global flavor footprint capabilities (the “AFF Transaction”). Pursuant to the terms of the AFF Transaction, we purchased AFF for $688.5 million in cash after adjustments. We accounted for the AFF Transaction in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 “Business Combinations”. (See Note 2 “Acquisitions and Divestitures” in the notes to the consolidated financial statements).
On June 12, 2015, we completed the transactions contemplated by the definitive agreements entered into with The Coca-Cola Company (“TCCC”) on August 14, 2014, which provided for a long-term strategic relationship in the global energy drink category (the “TCCC Transaction”). (See Note 2 “Acquisitions and Divestitures” in the notes to the consolidated financial statements).
Reportable Segments
We have three operating and reportable segments, (i) Monster Energy® Drinks segment (“Monster Energy® Drinks”), which is comprised of our Monster Energy® drinks as well as Mutant® Super Soda drinks, (ii) Strategic Brands segment (“Strategic Brands”), which include the various energy drink brands acquired from TCCC as a result of the TCCC Transaction and (iii) Other segment (“Other”), the principal products of which include the non-energy brands disposed of as a result of the TCCC Transaction, as well as certain products acquired as part of the AFF Transaction that are sold to independent third-parties (the “AFF Third-Party Products”). Corporate and unallocated amounts that do not relate to a reportable segment specifically have been allocated to “Corporate and Unallocated.” Our Monster Energy® Drinks segment represented 90.5%, 92.5% and 93.9% of our consolidated net sales for the years ended December 31, 2016, 2015 and 2014, respectively. Our Strategic Brands segment represented 8.9% and 5.3% of our consolidated net sales for the years ended December 31, 2016 and 2015 (effectively from June 13, 2015). Our Other segment represented 0.6%, 2.2% and 6.1% of our consolidated net sales for the years ended December 31, 2016, 2015 and 2014, respectively.
Our Monster Energy® Drinks segment generates net operating revenues by selling ready-to-drink packaged drinks primarily to bottlers and full service beverage distributors. In some cases, we sell directly to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, food service customers and the military.
Our 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 to other bottlers, full service distributors, wholesalers, or retailers directly, including, retail grocery and specialty chains, club stores, mass merchandisers, convenience chains, food service customers, drug stores and the military. To a lesser extent, our Strategic Brands segment generates net operating revenues by selling 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 margins, than the Strategic Brands segment.
For financial information about our reporting segments and geographic areas, refer to Note 18 of Notes to the Consolidated Financial Statements set forth in “Part II, Item 8 - Financial Statements and Supplementary Data” of this report, incorporated herein by reference. For certain risks with respect to our energy drinks see “Part I,
ITEM 1A. RISK FACTORS
In addition to the other information in this report, you should carefully consider the following risks. If any of the following risks actually occur, our business, financial condition and/or operating results could be materially adversely affected. The risk factors summarized below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition and/or operating results.
Following the TCCC Transaction, the Company and TCCC have extensive commercial arrangements and, as a result, the Company’s future performance is substantially dependent on the success of its relationship with TCCC.
In connection with the TCCC Transaction and the accompanying amended distribution coordination agreements entered into with TCCC, we have transitioned third parties’ rights to distribute the Company’s products in most territories in the U.S. to members of TCCC’s distribution network, which consists of owned or controlled bottlers/distributors and independent bottlers/distributors. In addition, TCCC has become our preferred distribution partner globally with members of TCCC’s network distributing our products internationally in countries throughout, but not limited to, Africa, Asia, Central and South America, Europe, Mexico and the Middle East. As we continue our international expansion, TCCC’s distribution network will continue its role as our preferred distribution partner globally. As a result, we will be reducing our distributor diversification and will be substantially dependent on TCCC’s domestic and international distribution platforms.
Also in connection with the TCCC Transaction, TCCC made a substantial equity investment in the Company and has agreed, subject to certain exceptions, not to compete in the energy drink category. While we believe that this will incentivize TCCC to take steps to assure that our products receive the appropriate attention in the TCCC distribution system, there can be no assurance of this as TCCC is a much larger company with many strategic priorities. In addition, TCCC does not control all members of its distribution system, many of which are independent companies that make their own business decisions that may not always align with TCCC’s interests. Moreover, it is also possible that we may fail to recognize the expected benefits of the new distribution arrangements regardless of TCCC’s priorities or the priorities of the members of TCCC’s distribution system. In any such case, our operating results could suffer and the value of the Company’s common shares could be adversely affected.
Following the TCCC Transaction, the Company no longer competes with TCCC in the non-energy drink category. As a result, we now derive virtually all of our revenues from energy drinks, and competitive pressure in the energy drink category could adversely affect our business and operating results.
Under the terms of the TCCC Transaction, we have agreed, subject to certain exceptions, not to compete with TCCC in the non-energy drink category. As a result, our focus is in the energy drink category, and our business has become more vulnerable to adverse changes impacting the energy drink category and business, which could adversely impact our business and the trading price of our common stock.
Following the TCCC Transaction, virtually all of our sales are derived from our energy drinks, including, in particular, our Monster Energy® brand energy drinks. Our Monster Energy® brand energy drinks represented 90.1% of net sales for the year ended December 31, 2016. Any decrease in the sales of our Monster Energy® brand and other energy drinks could significantly adversely affect our future revenues and net income. Historically, we have experienced substantial competition from new entrants in the energy drink category as well as from the energy shot category. Domestically, our energy drinks compete directly with Red Bull, Rockstar, No Fear, Amp, Adrenaline Rush, Venom, VPX Redline, Xenergy, MiO Energy, Rip It, Starbucks Double Shot, Starbucks Double Shot Energy Plus Coffee, Rockstar Roasted, 5-Hour Energy Shots, Stacker 2, VPX Redline Energy Shots and many other brands.
In addition, certain large companies, such as PepsiCo, market and/or distribute products in that market segment, such as Pepsi Max, Mountain Dew, Mountain Dew MDX and Mountain Dew Kickstart. Internationally, our energy drinks compete with Red Bull, Rockstar, V-Energy, Lucozade, Adrenaline Rush and numerous local and private-label brands that usually differ from country to country, such as Hell, Shock, Tiger, Boost, Speed, TNT, Shark, Hot 6, Shark Energy, Dragon, Score, Sting, Battery, Bullit, Flash Up, Black, Non-Stop, Bomba, Semtex, Vive 100, Dark Dog, Speed, Guaraná, M-150, Lipovitan, Bacchus, Bolt, Mr. Big and a host of other international brands. Our Java Monster® product line competes directly with Starbucks Frappuccino, Starbucks Double Shot, Starbucks Double Shot Energy Plus Coffee and other Starbucks coffee drinks, Rockstar Roasted, Seattle’s Best and illy issimo coffee drinks. Our Muscle Monster® product line competes directly with Muscle Milk, Core Power, ABB Pure Pro and Gatorade Recover Protein Shake. In addition, our Mutant® Super Soda product line competes directly with Mountain Dew, Mountain Dew MDX and Mountain Dew Kickstart. Competitive pressures in the energy drink category could impact our revenues, cause price erosion and/or lower market share, any of which could have a material adverse effect on our business and results of operations.
Following the TCCC Transaction, in certain markets the Company owns multiple potentially competing brands in the energy drink category.
As a result of the TCCC Transaction, we have acquired additional brands in the energy drink category in certain markets. These brands comprise the Strategic Brands segment which represents 8.9% of consolidated net sales for the year ended December 31, 2016. Although we continue to integrate these brands with our broader energy drink portfolio, we may encounter difficulties managing different and potentially competing brands in such shared markets, which could adversely impact our business and the trading price of our common stock.
TCCC is a significant shareholder of the Company and may have interests that are different from the Company’s other shareholders (including current shareholders of the Company).
As of February 10, 2017, TCCC owned common shares of the Company representing approximately 18.0% of the total number of the Company’s outstanding common shares. TCCC also nominated two directors to the Company’s board of directors. The number of directors that TCCC is entitled to nominate is subject to reduction in certain circumstances.
TCCC’s ownership could also have an effect on the Company’s ability to engage in a change in control transaction. TCCC is obligated for a period of time to vote all of its common shares of the Company in excess of 20% of the outstanding common shares in the same proportion as all common shares not owned by TCCC with respect to a proposal for a change of control. However, if TCCC were to oppose such a change-in-control transaction, a bidder would be required to secure the support of holders of 62.5% of the Company’s common shares not owned by TCCC (assuming that TCCC increased its ownership to 20% of the Company’s common shares) to achieve a vote of a majority of the Company’s outstanding shares for a change-in-control transaction. In addition, TCCC would have a bidding advantage if the Company’s board of directors were to seek to sell the Company in the future because TCCC would not need to pay a control premium on the shares it owns at such time. TCCC and the Company would also be permitted to terminate TCCC’s distribution coordination agreements with the Company after a change in control of the Company. In such event, TCCC would receive a termination fee if TCCC terminated the distribution coordination agreements following a change in control of the Company involving certain TCCC competitors, or if the Company terminated following a change in control of the Company involving any third-party.
The interests of TCCC may be different from or conflict with the interests of the Company’s other shareholders and, as a result, TCCC’s influence may result in the delay or prevention of potential actions or transactions, including a potential change of management or control of the Company, even if such action or transaction may be beneficial to the Company’s other shareholders. Moreover, TCCC’s ownership of a significant amount of the Company’s outstanding common shares could result in downward pressure on the trading price of the Company’s common shares if TCCC were to sell a large portion of its shares (when permitted to sell) or as a result of the perception that such a sale might occur.
Changes in government regulation, or failure to comply with existing regulations, could adversely affect our business, financial condition and results of operations.
Legislation has been proposed and/or adopted at the U.S. federal, state and/or municipal level and proposed and/or adopted in certain foreign jurisdictions to 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, limit product size or impose age restrictions for the sale of energy drinks. For a discussion of certain of such legislation, see “Part I, Item 1 - Business - Government Regulation.” Furthermore, additional legislation may be introduced in the United States and other countries at the federal, state, local and municipal level in respect of each of the foregoing subject areas. Public health officials and health advocates are increasingly focused on the public health consequences associated with obesity, especially as it affects children, and are seeking legislative change to reduce the consumption of sweetened beverages. There also has been an increased focus on caffeine content in beverages. To the extent any such legislation is enacted in one or more jurisdictions where a significant amount of our products are sold individually or in the aggregate, it could result in a reduction in demand for, or availability of, our energy drinks, and adversely affect our business, financial condition and results of operations.
The production, distribution and sale in the United States of many of our products are also currently subject to various federal and state regulations, including, but not limited to: the FD&C Act, as amended by the Dietary Supplement Health and Education Act of 1994; the Occupational Safety and Health Act; various environmental statutes; California Proposition 65; and various other federal, state and local statutes and regulations applicable to the production, transportation, sale, safety, advertising, labeling and ingredients of such products. Outside the United States, the production, distribution and sale of many of our products are also subject to numerous statutes and regulations. If a regulatory authority finds that a current or future product or production run is not in compliance with any of these regulations, we may be fined, or such products may have to be recalled, reformulated and/or have the packaging changed, which could adversely affect our business, financial condition and results of operations.
We cannot predict the effect of inquiries from and/or actions by attorneys general, other government agencies and/or quasi-government agencies into the production, advertising, marketing, promotion, ingredients, usage and/or sale of our energy drink products.
We are subject to the risks of investigations and/or enforcement actions by state attorneys general and/or other government and/or quasi-governmental agencies relating to the advertising, marketing, promotion, ingredients, usage and/or sale of our energy drinks. In July 2012, we received a subpoena from a state attorney general in connection with an investigation relating to the advertising, marketing, promotion, ingredients, usage and sale of our Monster Energy® brand energy drinks. We cannot predict the outcome of this inquiry and what, if any, effect it may have on our business, financial condition or results of operations. If an inquiry by a state attorney general or other government or quasi-government agency finds that our products and/or the advertising, marketing, promotion, ingredients, usage and/or sale of such products are not in compliance with applicable laws or regulations, we may become subject to fines, product reformulations, container changes, changes in the usage or sale of our energy drink products and/or changes in our advertising, marketing and promotion practices, each of which could have an adverse effect on our business, financial condition or results of operations.
From time to time, government and/or quasi-governmental agencies may investigate the safety of caffeine and energy drinks. For instance, in January 2013, the FDA announced that it would be investigating the safety of caffeine in food products, particularly its effects on children and adolescents.
Also in January 2013, we received a letter from Representative Edward J. Markey, Senator Richard J. Durbin and Senator Richard Blumenthal requesting information from us to enable them to better understand a number of issues relating, in part, to an investigation they said had been launched by the FDA examining energy drinks and potential health risks, particularly for groups of vulnerable individuals, including young people and those with pre-existing cardiac conditions. We provided a response to their letter. The Congressmen issued a report and recommendations in April 2013, most of which we had already implemented. The Congressmen released a follow-up report in January 2015, recommending, inter alia, that the energy drink industry not market to consumers under the age of 18 and not market their products for hydration, and that the FDA develop and release definitions and guidance for this market sector. In addition, other organizations, such as the European Food Safety Authority, have also published reports, studies, articles and opinions on caffeine and energy drinks.
Litigation regarding our products, and related unfavorable media attention, could expose us to significant liabilities and reduce demand for our products.
We have been named as a defendant in product liability lawsuits which allege that consumption of our products has been responsible for wrongful deaths and/or injuries. We do not believe that our products are responsible for such wrongful deaths and/or injuries, and intend to vigorously defend any such lawsuits. We believe that each of these lawsuits is without merit and would not have a material adverse effect on our financial position or results of operations in the event any damages were to be awarded.
In July 2012, the Company received a subpoena from the Attorney General for the State of New York in connection with its investigation concerning the Company’s advertising, marketing, promotion, ingredients, usage and sale of its Monster Energy® brand energy drinks. Production of documents pursuant to that subpoena was completed in approximately May 2014.
On August 6, 2014, the Attorney General for the State of New York issued a second subpoena seeking additional documents and the deposition of a Company employee. On September 8, 2014, the Company moved to quash the second subpoena in the Supreme Court, New York County. The motion was fully briefed and was argued on March 17, 2015. On January 13, 2017, the Court issued an opinion in which it agreed with certain Company arguments regarding the scope of the subpoena and the Attorney General’s investigation, but denied the motion to quash and granted the Attorney General’s cross-motion to compel compliance. It is unknown what, if any, action the state Attorney General may take against the Company, the relief which may be sought in the event of any such proceeding or whether such proceeding could have a material adverse effect on the Company’s business, financial condition or results of operations.
Several other lawsuits have been filed against us claiming that certain statements made in our advertisements and/or on the labels of our products were false and/or misleading in nature and/or that our products are not safe. Putative class action lawsuits have also recently been filed against certain of our competitors asserting that certain claims in their advertisements amount to false advertising. We do not believe any statements made by us in our promotional materials or set forth on our product labels are false or misleading or that our products are in any way unsafe and intend to vigorously defend these lawsuits.
Any of the foregoing matters or other product-related litigation, the threat thereof, or unfavorable media attention arising from pending or threatened product-related litigation could consume significant financial and managerial resources and result in decreased demand for our products, significant monetary awards against us and injury to our reputation.
Criticism of our energy drink products and/or criticism or a negative perception of energy drinks generally, could adversely affect us.
An unfavorable report on the health effects of caffeine, or criticism or negative publicity regarding the caffeine content and/or any other ingredients in our products or energy drinks generally, could have an adverse effect on our business, financial condition and results of operations. Articles critical of the caffeine content and/or other ingredients in energy drinks and/or articles indicating certain health risks of energy drinks have been published in recent years. We believe the overall growth of the energy drink market in the U.S. may have been negatively impacted by the ongoing negative publicity and comments that continue to appear in the media questioning the safety of energy drinks, and suggesting limitations on their ingredients (including caffeine), and/or the levels thereof, and/or imposing minimum age restrictions for consumers. If reports, studies or articles critical of caffeine and/or energy drinks continue to be published or are published in the future, they could adversely affect the demand for our products.
Increased competition could hurt our business.
The beverage industry is highly competitive. The principal areas of competition are pricing, packaging, development of new products, flavors, product positioning as well as promotion and marketing strategies. Our products compete with a wide range of drinks produced by a relatively large number of manufacturers, some of which have substantially greater financial, marketing and distribution resources than we do.
Important factors affecting our ability to compete successfully include the taste and flavor of our products, trade and consumer promotions, rapid and effective development of new and unique cutting edge products, attractive and different packaging, branded product advertising and pricing. Our products compete with all liquid refreshments and in some cases with products of much larger and substantially better financed competitors, including the products of numerous nationally and internationally known producers such as TCCC, PepsiCo, Red Bull Gmbh and the DPS Group. We also compete with companies that are smaller or primarily national or local in operations. Our products also compete with private-label brands such as those carried by grocery store chains, convenience store chains and club stores.
Due to competition in the beverage industry, there can be no assurance that we will not encounter difficulties in maintaining our current revenues, market share or position in the beverage industry. If our revenues decline, our business, financial condition and results of operations could be adversely affected.
Our inability to innovate successfully and to provide new cutting edge products could adversely affect our business and financial results.
Our ability to compete in the highly competitive beverage industry and to achieve our business growth objectives depends, in part, on our ability to develop new flavors, products and packaging. The success of our innovation, in turn, depends on our ability to identify consumer trends and cater to consumer preferences. If we are not successful in our innovation activities, our business, financial condition and results of operation could be adversely affected.
Uncertainty in the financial markets and other adverse changes in general economic or political conditions in any of the major countries in which we do business could adversely affect our industry, business and results of operations.
Global economic uncertainties affect businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business activities. There can be no assurance that economic improvements will occur, or that they would be sustainable, or that they would enhance conditions in markets relevant to us. In addition, we cannot predict the duration and severity of disruptions in any of our markets or the impact they may have on our customers or business, as our expansion outside of the United States has increased our exposure to any developments or crisis in African, Asian, European and other international markets. If economic conditions deteriorate, our industry, business and results of operations could be materially and adversely affected.
Changes in consumer preferences may reduce demand for some of our products.
The beverage industry is subject to changing consumer preferences and shifts in consumer preferences may adversely affect us. There is increasing awareness of and concern for the health consequences of obesity. This may reduce demand for our non-diet beverages, which could reduce our revenues and adversely affect our results of operations. Recently, concerns have emerged regarding diet sodas and in particular, aspartame, which is contained in certain of our Strategic Brands energy drinks.
Consumers are seeking greater variety in their beverages. Our future success will depend, in part, upon our continued ability to develop and introduce different and innovative beverages that appeal to consumers. In order to retain and expand our market share, we must continue to develop and introduce different and innovative beverages and be competitive in the areas of taste, quality and price, although there can be no assurance of our ability to do so. There is no assurance that consumers will continue to purchase our products in the future. Product lifecycles for some beverage brands, products and/or packages may be limited to a few years before consumers’ preferences change. The beverages we currently market are in varying stages of their product lifecycles, and there can be no assurance that such beverages will become or remain profitable for us. We may be unable to achieve volume growth through product and packaging initiatives. We may also be unable to penetrate new markets. If our revenues decline, our business, financial condition and results of operations could be adversely affected.
Our continued expansion outside of the United States exposes us to uncertain conditions and other risks in international markets.
We have continued expanding our operations internationally into a variety of new markets, including launches in China and various African and Middle Eastern countries. Our gross sales to customers outside of the United States were approximately 25%, 23% and 23% of consolidated gross sales for the years ended December 31, 2016, 2015 and 2014, respectively. As our growth strategy includes further expanding our international business, if we are unable to continue to expand distribution of our products outside the United States, our growth rate could be adversely affected. In many international markets, we have limited operating experience and in some areas we have no operating experience. It is costly to establish, develop and maintain international operations and develop and promote our brands in international markets. Our percentage gross profit margins in many international markets are expected to be less than the comparable percentage gross profit margins obtained in the United States. We face and will continue to face substantial risks associated with having foreign operations, including: economic and/or political instability in our international markets; restrictions on or costs relating to the repatriation of foreign profits to the United States, including possible taxes and/or withholding obligations on any repatriations; and tariffs and/or trade restrictions. These risks could have a significant impact on our ability to sell our products on a competitive basis in international markets and could have a material adverse effect on our business, financial condition and results of operations. Also, our operations outside of the United States are subject to risks relating to appropriate compliance with legal and regulatory requirements in local jurisdictions, potential difficulties in staffing and managing local operations, higher product damages, particularly when products are shipped long distances, potentially higher incidence of fraud and/or corruption, credit risk of local customers and distributors and potentially adverse tax consequences.
Global or regional catastrophic events could impact our operations and affect our ability to grow our business.
Because of our increasingly global presence, our business could be affected by unstable political conditions, civil unrest, large-scale terrorist acts, especially those directed against the United States or other major industrialized countries where our products are distributed, the outbreak or escalation of armed hostilities, major natural disasters or widespread outbreaks of infectious diseases. Such events could impact the production and/or distribution of our products. In addition, such events could disrupt global or regional economic activity, which could affect consumer purchasing power, thereby reducing demand for our products. If we are unable to grow our business internationally as a result of these factors, our growth rate could decline.
Fluctuations in foreign currency exchange rates may adversely affect our operating results.
We are exposed to foreign currency exchange rate risk with respect to our sales, expenses, profits, assets and liabilities denominated in currencies other than the U.S. dollar. We may enter 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. We have not used instruments to hedge against all foreign currency risks and are therefore not protected against all foreign currency fluctuations. As a result, our reported earnings may be affected by changes in foreign currency exchange rates. Moreover, any favorable impacts to profit margins or financial results from fluctuations in foreign currency exchange rates are likely to be unsustainable over time. Foreign currency transaction losses were $9.7 million and $5.5 million for the years ended December 31, 2016 and 2015, respectively.
We rely on bottlers and other contract packers to manufacture our products. If we are unable to maintain good relationships with our bottlers and contract packers and/or their ability to manufacture our products becomes constrained or unavailable to us, our business could suffer.
Our acquisition of AFF brought our primary flavor supplier in-house for the majority of our Monster Energy® brand energy drinks. We also procure flavors from other flavor suppliers. We outsource manufacturing of our finished goods to bottlers and other contract packers. As a result, in the event of a disruption and/or delay, we may be unable to procure alternative packing facilities at commercially reasonable rates and/or within a reasonably short time period. In addition, there are limited alternative packing facilities in our domestic and international markets with adequate capacity and/or suitable equipment for many of our products, including our Monster Energy® brand energy drinks, our Muscle Monster® product line, our Java Monster® product line and certain of our other products. For example, sales of our Java Monster® and Muscle Monster® product lines have been impacted by production capacity constraints resulting from production and maintenance issues with certain of our co-packers. While we believe a short-term disruption or delay in production would not significantly affect our revenue, a lengthy disruption or delay in the production of any of such products could significantly adversely affect our revenues from such products because alternative co-packing facilities in the United States and abroad with adequate long-term capacity may not be available for such products either at commercially reasonable rates and/or costs and/or within a reasonably short time period, if at all.
We rely on bottlers and distributors to distribute our products. If we are unable to maintain good relationships with our existing bottlers and distributors and/or secure such bottlers and distributors, our business could suffer.
Many of our bottlers/distributors are affiliated with and manufacture and/or distribute other soda, carbonated and non-carbonated brands and other beverage products (both alcoholic and non-alcoholic). In many cases, such products compete directly with our products.
Unilateral decisions could be taken by our bottlers/distributors, convenience and gas chains, grocery chains, specialty chain stores, club stores and other customers, to discontinue carrying certain or all of our products that they are carrying at any time, which could cause our business to suffer.
The TCCC North American Bottlers, Coca-Cola European Partners, Coca-Cola Hellenic and Coca-Cola FEMSA are our primary domestic and international distributors of our products. As a result, if we are unable to maintain good relationships with the TCCC North American Bottlers, Coca-Cola European Partners, Coca-Cola Hellenic and/or Coca-Cola FEMSA, or if the TCCC North American Bottlers, Coca-Cola European Partners, Coca-Cola Hellenic and/or Coca-Cola FEMSA do not effectively focus on marketing, promoting, selling and distributing our products, sales of our products could be adversely affected.
TCCC, through the TCCC Subsidiaries, accounted for approximately 41%, 43% and 29% of our net sales for the years ended December 31, 2016, 2015 and 2014, respectively. A decision by the TCCC Subsidiaries, Coca-Cola European Refreshments, Coca-Cola Hellenic, Coca-Cola FEMSA, Wal-Mart, Inc. (including Sam’s Club), or any other large customer to decrease the amount purchased from us or to cease carrying our products could have a material adverse effect on our financial condition and consolidated results of operations.
The marketing efforts of our distributors are important for our success. If our brands prove to be less attractive to our existing bottlers and distributors, if we fail to attract additional bottlers and distributors, and/or our bottlers and/or distributors do not market, promote and distribute our products effectively, our business, financial condition and results of operations could be adversely affected.
Increases in costs and/or shortages of raw materials and/or ingredients and/or fuel and/or costs of co-packing could harm our business.
The principal raw materials used by us are aluminum cans, sleek aluminum cans, aluminum Cap Cans, aluminum cans with re-sealable ends, PET plastic bottles, flavors, juice concentrates, glucose, sugar, sucralose, milk, cream, protein, dietary ingredients and other packaging materials, the costs and availability of which are subject to fluctuations. In addition, certain of our co-packing arrangements allow such co-packers to increase their charges based on certain of their own cost increases. We are uncertain whether the prices of any of the above or any other raw materials or ingredients, certain of which have recently risen, will continue to rise or may rise in the future. We are unsure whether we will be able to pass any of such increases on to our customers. We generally do not use hedging agreements or alternative instruments to manage the risks associated with securing sufficient ingredients or raw materials, although we do, from time to time, enter into purchase agreements for a significant portion of our annual anticipated requirements for certain raw materials such as aluminum cans, apple juice, glucose, sugar and sucralose.
In addition, some of these raw materials, including certain sizes of cans, are available from a limited number of suppliers.
Our failure to accurately estimate demand for our products could adversely affect our business and financial results.
We may not correctly estimate demand for our existing products and/or new products. Our ability to estimate demand for our products is imprecise, particularly with regard to new products, and may be less precise during periods of rapid growth, particularly in new markets. If we materially underestimate demand for our products or are unable to secure sufficient ingredients or raw materials including, but not limited to, aluminum cans, aluminum Cap Cans, sleek aluminum cans, aluminum cans with re-sealable ends, PET plastic bottles, glass bottles, labels, sucralose, flavors, dietary ingredients, juice concentrates, certain sweeteners, coffee, tea, protein and packaging materials or experience difficulties with our co-packing arrangements, including production shortages or quality issues, we might not be able to satisfy demand on a short-term basis. Moreover, industry-wide shortages of certain juice concentrates, dietary ingredients and sweeteners have been and could, from time to time in the future, be experienced, resulting in production fluctuations and/or shortages. We generally do not use hedging agreements or alternative instruments to manage this risk. Such shortages could interfere with and/or delay production of certain of our products and could have a material adverse effect on our business and financial results.
If we do not maintain sufficient inventory levels, if we are unable to deliver our products to our customers in sufficient quantities, and/or if our customers’ or retailers’ inventory levels are too high, our operating results could be adversely affected.
If we do not accurately anticipate the future demand for a particular product or the time it will take to obtain new inventory, our inventory levels may be inadequate and our results of operations may be negatively impacted. If we fail to meet our shipping schedules, we could damage our relationships
with distributors and/or retailers, increase our distribution costs and/or cause sales opportunities to be delayed or lost. In order to be able to deliver our products on a timely basis, we need to maintain adequate inventory levels of the desired products. If the inventory of our products held by our distributors and/or retailers is too high, they will not place orders for additional products, which could unfavorably impact our future sales and adversely affect our operating results.
The costs of packaging supplies are subject to price increases from time to time, and we may be unable to pass all or some of such increased costs on to our customers.
Many of our packaging supply contracts allow our suppliers to alter the costs they charge us for packaging supplies based on changes in the costs of the underlying commodities that are used to produce those packaging supplies, such as aluminum for cans and pulp and paper for cartons and/or trays. These changes in the prices we pay for our packaging supplies occur at certain predetermined times that vary by product and supplier. In some cases, we are able to fix the prices of certain packaging supplies and/or commodities for a reasonable period. In other cases, we bear the risk of increases in the costs of these packaging supplies, including the underlying costs of the commodities that comprise these packaging supplies. We do not use derivative instruments to manage this risk. If the costs of these packaging supplies increase, we may be unable to pass these costs along to our customers through corresponding adjustments to the prices we charge, which could have a material adverse effect on our results of operations.
Our intellectual property rights are critical to our success, and the loss of such rights could materially adversely affect our business.
We own numerous trademarks that are very important to our business. We also own the copyright in, and to, a portion of the content on the packaging of our products. We regard our trademarks, copyrights, and similar intellectual property as critical to our success and attempt to protect such intellectual property through registration and enforcement actions. However, there can be no assurance that other parties will not infringe or misappropriate our trademarks, copyrights and similar proprietary rights. If we lose some or all of our intellectual property rights, our business may be materially adversely affected.
If we are unable to maintain our brand image or product quality, our business may suffer.
Our success depends on our ability to build and maintain the brand image for our existing products, new products and brand extensions. There can be no assurance that our advertising, marketing and promotional programs will have the desired impact on our products’ brand image and on consumer preference and demand. Product quality and/or ingredient content issues, efficacy or lack thereof, (real or imagined), or allegations of product contamination, even if false or unfounded, could tarnish the image of the affected brands and may cause consumers to choose other products. Furthermore, our brand image or perceived product quality could be adversely affected by litigation, unfavorable reports in the media (internet or elsewhere), studies in general and regulatory or other governmental inquiries, (in each case whether involving our products or those of our competitors) and proposed or new legislation affecting our industry.
If we encounter product recalls, our business may suffer and we may incur material losses.
We may be required from time to time to recall products entirely or from specific co-packers, markets or batches if such products become contaminated, damaged, mislabeled or otherwise materially non-compliant with applicable regulatory requirements. Material product recalls could adversely affect our profitability and our brand image. We do not maintain recall insurance.
If we are not able to retain the full-time services of senior management there may be an adverse effect on our operations and/or our operating performance until we find suitable replacements.
Our business is dependent, to a large extent, upon the services of our senior management. We do not maintain key person life insurance on any members of our senior management. The loss of services of either Mr. Sacks, Chairman and Chief Executive Officer, Mr. Schlosberg, President and Chief Financial Officer, or any other key members of our senior management could adversely affect our business until suitable replacements can be found. There may be a limited number of personnel with the requisite skills to serve in these positions, and we may be unable to locate or employ such qualified personnel on acceptable terms.
Climate change may negatively affect our business.
There is concern that a gradual increase in global average temperatures could cause significant changes in weather patterns around the globe and an increase in the frequency and severity of natural disasters. While warmer weather has historically been associated with increased sales of our products, changing weather patterns could result in decreased agricultural productivity in certain regions, which may limit availability and/or increase the cost of certain key ingredients, juice concentrates and dietary ingredients used in our products. Increased frequency or duration of extreme weather conditions could also impair production capabilities, disrupt our supply chain (including, without limitation, the availability of, and/or result in higher prices for, juice concentrates, natural flavors and dietary ingredients) and/or impact demand for our products. In addition, public expectations for reductions in greenhouse gas emissions could result in increased energy, transportation and raw material costs, and may require us to make additional investments in facilities and equipment. As a result, the effects of climate change could have a long-term adverse impact on our business and results of operations. Sales of our products may also be influenced to some extent by weather conditions in the markets in which we operate. Weather conditions may influence consumer demand for certain of our beverages, which could have an adverse effect on our results of operations.
Potential changes in accounting standards or practices and/or taxation may adversely affect our financial results.
We cannot predict the impact that future changes in accounting standards or practices may have on our financial results. New accounting standards could be issued that change the way we record revenues, expenses, assets and liabilities. These changes in accounting standards could adversely affect our reported earnings. Increases in direct and indirect income tax rates could affect after-tax income. Equally, increases in indirect taxes (including environmental taxes pertaining to the disposal of beverage containers and/or indirect taxes on beverages generally or energy drinks in particular) could affect our products’ affordability and reduce our sales.
Fluctuations in our effective tax rate could adversely affect our financial condition and results of operations.
We are subject to income taxes in both the U.S. and certain foreign jurisdictions. Therefore, we may be subjected to audits for multiple tax years in various jurisdictions at once. At any given time, events may occur which change our expectation about how the audit will be resolved and thus, there could be variability in our quarterly and/or annual tax rates because these events may change our plans for uncertain tax positions.
Future tax legislation, particularly within the U.S., may affect our effective tax rate. The current U.S. administration has indicated that tax reform is among its top priorities and the U.S. Congress is currently reviewing and/or may in the future review tax legislation proposals. We do not know how such legislation, if enacted, will affect our business.
Volatility of stock price may restrict sale opportunities.
Our stock price is affected by a number of factors, including stockholder expectations, financial results, the introduction of new products by us and our competitors, general economic and market conditions, estimates and projections by the investment community and public comments by other parties as well as many other factors including litigation, many of which are beyond our control. We do not provide guidance on our future performance, including, but not limited to, our revenues, margins, product mix, operating expenses or net income. We may be unable to achieve analysts’ net revenue and/or earnings forecasts, which are based on their own projected revenues, sales volumes and sales mix of many product types and/or new products, certain of which are more profitable than others, as well as their own estimates of gross margin and operating expenses. There can be no assurance that we will achieve any such projected levels or mixes of product sales, revenues, gross margins, operating profits and/or net income. As a result, our stock price is subject to significant volatility, and stockholders may
not be able to sell our stock at attractive prices. In addition, periods of volatility in the market price of our stock could result in the initiation of securities class action litigation against us. During the fiscal year ended December 31, 2016, our stock price high was $55.50 and our stock price low was $37.69.
Provisions in our organizational documents and control by insiders may prevent changes in control even if such changes would be beneficial to other stockholders.
Our organizational documents may limit changes in control. Furthermore, as of February 10, 2017, Mr. Sacks and Mr. Schlosberg together may be deemed to beneficially own and/or exercise voting control over approximately 9.1% of our outstanding common stock. As of February 10, 2017, TCCC owned approximately 18.0% of our common stock. Consequently, Mr. Sacks, Mr. Schlosberg and TCCC could exercise significant control over matters submitted to a vote of our stockholders, including electing directors, amending organizational documents and disapproving extraordinary transactions such as a takeover attempt, even though such actions may be favorable to the other common stockholders.
Our cash flow may not be sufficient to fund our long-term goals.
Although we currently have sufficient cash to support our planned operating activities in the current year, we may be unable to generate sufficient cash flow to support our capital expenditure plans and general operating activities in the future. In addition, the terms and/or availability of our credit facility and/or the activities of our debtors and/or creditors could affect the financing of our future growth.
Our investments in marketable securities are subject to risks which may cause losses and affect the liquidity of these investments.
At December 31, 2016, we had $377.6 million in cash and cash equivalents, $220.6 million in short-term investments and $2.4 million of long-term investments. We have historically invested these amounts in U.S. Treasury bills, certificates of deposit, commercial paper, government agencies and municipal securities (which may have an auction reset feature), variable rate demand notes and money market funds meeting certain criteria. Certain of these investments are subject to general credit, liquidity, market and interest rate risks. These risks associated with our investment portfolio may have an adverse effect on our future results of operations, liquidity and financial condition.
We may be required to record a significant charge to earnings if our goodwill or intangible assets become impaired.
Under GAAP, we are required to review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our intangible assets may not be recoverable include, declining or slower than anticipated growth rates for certain of our existing products, a decline in stock price and market capitalization, and slower growth rates in our industry.
We may be required to record a significant charge to earnings in our financial statements during the period in which we determine that our intangible assets have been impaired. Any such charge would adversely impact our results of operations. As of December 31, 2016, our goodwill totaled approximately $1,331.6 million and our intangible assets totaled approximately $1,032.6 million.
If we fail to maintain effective disclosure controls and procedures and internal control over financial reporting on a consolidated basis, our stock price and investor confidence in the Company could be materially and adversely affected.
We are required to maintain both disclosure controls,and procedures and internal control over financial reporting that are effective for the purposes described in “Part II, Item 9A - Controls and Procedures.” If we fail to do so, our business, results of operations, financial condition and/or the value of our stock could be materially harmed.
Litigation, legal proceedings, government and regulatory inquiries and/or proceedings could expose us to significant liabilities and thus negatively affect our financial results.
We are a party, from time to time, to various litigation claims and legal proceedings, government and regulatory inquiries and/or proceedings, including, but not limited to, intellectual property, fraud, unfair business practices, false advertising, product liability, breach of contract claims, securities actions and shareholder derivative actions. Material legal proceedings are described more fully in, “Part I, Item 3 - Legal Proceedings” and in “Part II, Item 8, Note 11” to our consolidated financial statements contained in this Form 10-K.
Defending these proceedings can result in significant ongoing expenditures and the diversion of our management’s time and attention from the operation of our business, which could have a negative effect on our business operations. Our failure to successfully defend or settle any litigation or legal proceedings could result in liabilities that, to the extent not covered by our insurance, could have a material adverse effect on our financial condition, revenue and profitability, and could cause the market value of our common stock to decline.
We must continually maintain, protect and/or upgrade our information technology systems.
Information technology helps us operate efficiently, interface with customers, maintain financial accuracy and efficiency and accurately produce our financial statements. If we do not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, business disruptions, and/or the loss of and/or damage to intellectual property through security breaches, including cybersecurity attacks. Cybersecurity attacks are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, an inability to process customer orders and/or lost customer orders, unauthorized release of confidential or otherwise protected information and corruption of data. We believe that we have adopted appropriate measures including a cybersecurity risk assessment to mitigate potential risks to our technology and our operations from these information technology-related disruptions. However, given the unpredictability of the timing, nature and scope of such disruptions, we could potentially be subject to operational interruption, damage to our brand image and private data exposure. Moreover, if our data management systems, including our SAP enterprise resource planning system, do not effectively collect, store, process and report relevant data for the operation of our business (whether due to equipment malfunction or constraints, software deficiencies, cybersecurity attack and/or human error), our ability to effectively plan, forecast and execute our business plan and comply with applicable laws and regulations will be impaired, perhaps materially. Any such impairment could materially and adversely affect our financial condition, results of operations, cash flows and the timeliness with which we report our internal and external operating results.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our owned corporate headquarters are located at 1 Monster Way, Corona, California 92879, and consists of an approximately 141,000 square-foot, free-standing, six-story building. As a result of our sustainability efforts, we continue to pursue ENERGY STAR certification for our corporate headquarters.
In November 2016, we acquired an approximately 75,426 square foot, free-standing, three-story office building, including the real property thereunder and improvements thereon, located in Corona, CA adjacent to our current corporate headquarters, for a purchase price of approximately $12.6 million. We intend to complete any necessary improvements and occupy the building as an extension of our existing corporate headquarters at some time in the future.
In September 2016, we completed the acquisition of approximately 49 acres of land, located in Rialto, CA, for a purchase price of approximately $39.1 million. We have begun construction of an approximately 1,000,000 square-foot warehouse, which we hope to have LEED certified, to replace our current leased warehouse and distribution facilities located in Corona, CA. We have entered into an approximately $36.8 million guaranteed maximum price construction contract for the construction of the building, of which $33.7 million remained outstanding as of December 31, 2016.
In addition, we lease many smaller office and/or warehouse spaces, both domestically and in certain international locations.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named a defendant in numerous 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.
State Attorney General Inquiry - In July 2012, the Company received a subpoena from the Attorney General for the State of New York in connection with its investigation concerning the Company’s advertising, marketing, promotion, ingredients, usage and sale of its Monster Energy® brand energy drinks. Production of documents pursuant to that subpoena was completed in approximately May 2014.
On August 6, 2014, the Attorney General for the State of New York issued a second subpoena seeking additional documents and the deposition of a Company employee. On September 8, 2014, the Company moved to quash the second subpoena in the Supreme Court, New York County. The motion was fully briefed and was argued on March 17, 2015. On January 13, 2017, the Court issued an opinion in which it agreed with certain Company arguments regarding the scope of the subpoena and the Attorney General’s investigation, but denied the motion to quash and granted the Attorney General’s cross-motion to compel compliance. It is unknown what, if any, action the state Attorney General may take against the Company, the relief which may be sought in the event of any such proceeding or whether such proceeding could have a material adverse effect on the Company’s business, financial condition or results of operations.
San Francisco City Attorney Litigation - On October 31, 2012, the Company received a written request for information from the City Attorney for the City and County of San Francisco concerning the Company’s advertising and marketing of its Monster Energy® brand energy drinks and specifically
concerning the safety of its products for consumption by adolescents. In a letter dated March 29, 2013, the San Francisco City Attorney threatened to bring suit against the Company if it did not agree to take the following five steps immediately: (i) “Reformulate its products to lower the caffeine content to safe levels”; (ii) “Provide adequate warning labels”; (iii) “Cease promoting over-consumption in marketing”; (iv) “Cease use of alcohol and drug references in marketing” and (v) “Cease targeting minors.”
On May 6, 2013, the San Francisco City Attorney filed a complaint for declaratory and injunctive relief, civil penalties and restitution for alleged violation of California’s Unfair Competition Law, Business & Professions Code sections 17200, et seq. (“UCL”), styled People Of The State Of California ex rel. Dennis Herrera, San Francisco City Attorney v. Monster Beverage Corporation, in San Francisco Superior Court. The City Attorney alleged that the Company (1) mislabeled its products as a dietary supplement, in violation of California’s Sherman Food, Drug, and Cosmetic Law, California Health & Safety Code section 109875, et seq.; (2) is selling an “adulterated” product because caffeine is not generally recognized as safe due to the alleged lack of scientific consensus concerning the safety of the levels of caffeine in the Company’s products; and (3) is engaged in unfair and misleading business practices because its marketing (a) does not disclose the health risks that energy drinks pose for children and teens, (b) fails to warn against and promotes unsafe consumption, (c) implicitly promotes mixing of energy drinks with alcohol or drugs and (d) is deceptive because it includes unsubstantiated claims about the purported special benefits of its “killer” ingredients and “energy blend.” The City Attorney sought a declaration that the Company has engaged in unfair and unlawful business acts and practices in violation of the UCL, an injunction from performing or proposing to perform any acts in violation of the UCL, restitution and civil penalties.
On September 5, 2014, the City Attorney filed a second amended complaint, adding Monster Energy Company as a defendant. The Company and Monster Energy Company filed answers to the second amended complaint on October 4, 2014 and November 10, 2014, respectively.
The City Attorney and the Company settled the action in January 2017, on terms acceptable to the Company. The settlement does not include any penalty or fine under the UCL; any finding or admission of liability or wrongdoing; or any change to the formulation of Monster Energy® drinks or to whom the drinks may be sold. In consideration for a release of claims and dismissal of the action with prejudice, the Company agreed to maintain various current marketing and labeling practices for its energy drink products through December 31, 2018.
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 the 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 December 31, 2016, the Company’s consolidated balance sheet includes accrued loss contingencies of approximately $2.8 million.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Principal Market
The Company’s common stock began trading in the over-the-counter market on November 8, 1990 and was subsequently quoted on the Nasdaq Capital Market under the symbol “HANS”. On July 5, 2007, the Company’s common stock began trading on the Nasdaq Global Select Market under the same symbol, “HANS”. On January 5, 2012, stockholders of the Company approved the Company’s name change from Hansen Natural Corporation to Monster Beverage Corporation. In addition, on January 9, 2012, the Company’s common stock began trading under the symbol “MNST”. As of February 10, 2017, there were 566,619,343 shares of the Company’s common stock outstanding held by approximately 223 holders of record. The holders of record do not include those stockholders whose shares are held of record by banks, brokers and other financial institutions.
Stock Price and Dividend Information
On October 14, 2016, the Company announced a three-for-one stock split of the Company’s common stock to be effected in the form of a 200% stock dividend. The common stock dividend was issued on November 9, 2016 and the Company’s common stock began trading at the split adjusted price on November 10, 2016. (See Note 1 - “Organization and Summary of Significant Accounting Policies” for additional information”).
The following table sets forth high and low per share sales price of our common stock for the periods indicated:
Year Ended December 31, 2016
High
Low
First Quarter
$
49.79
$
37.69
Second Quarter
$
53.62
$
40.30
Third Quarter
$
55.50
$
47.44
Fourth Quarter
$
50.63
$
40.64
Year Ended December 31, 2015
High
Low
First Quarter
$
47.97
$
35.59
Second Quarter
$
48.23
$
41.39
Third Quarter
$
51.94
$
38.54
Fourth Quarter
$
53.50
$
42.45
The per share sales prices of our common stock set forth above represent bid quotations between dealers, do not include retail markups, mark-downs or commissions and bid quotations may not necessarily represent actual transactions and “real time” sale prices. The source of the bid information is the NASDAQ Stock Market, Inc.
We have not paid cash dividends to our stockholders since our inception and do not anticipate paying cash dividends in the foreseeable future.
On April 28, 2016, our Board of Directors authorized the Company to commence the Auction Stock Repurchase Tender to repurchase up to $2.0 billion of its outstanding shares of common stock. The Auction Stock Repurchase Tender was authorized under the Company’s existing share repurchase authority and was funded with cash on hand. We commenced this tender offer in May 2016. On June 15, 2016, we accepted for payment an aggregate of 38.5 million shares of common stock at a purchase price of $52.00 per share, for a total amount of $2.0 billion (excluding commissions), which exhausted the availability under all previously authorized share repurchase plans. Such shares of common stock are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2016. We incurred $1.6 million in stock repurchase expenses for the year ended December 31, 2016 related to the Auction Stock Repurchase Tender.
On August 2, 2016, our Board of Directors authorized a new share repurchase program for the repurchase of up to $250.0 million of the Company’s outstanding shares of common stock (the “August 2016 Repurchase Plan”). During the year ended December 31, 2016, we purchased 5.8 million shares of common stock at an average purchase price of $43.40 per share, for a total amount of $249.9 million (excluding broker commissions), which exhausted the availability under the August 2016 Repurchase Plan. Such shares of common stock are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2016.
During the year ended December 31, 2016, 56,820 shares of common stock were purchased from employees in lieu of cash payments for options exercised or withholding taxes due for a total amount of $2.6 million. While such purchases are considered common stock repurchases, they are not counted as purchases against our authorized share repurchase programs. Such shares are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2016.
The following tabular summary reflects the Company’s repurchase activity during the quarter ended December 31, 2016:
Period
Total Number
of Shares
Purchased
Average Price
per Share¹
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares that
May Yet Be Purchased
Under the Plans or
Programs (In
thousands)²
Oct 1 - Oct 31, 2016
385,401
$ 47.61
385,401
$
231,650
Nov 1 - Nov 30, 2016
4,653,071
$ 42.98
4,653,071
$
31,597
Dec 1 - Dec 31, 2016
720,620
$ 43.83
720,620
$
-
¹Excluding broker commissions paid.
²Net of broker commissions paid.
Equity Compensation Plan Information
The following table sets forth information as of December 31, 2016 with respect to shares of our common stock that may be issued under our equity compensation plans.
Plan category
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
column (a))
(c)
Equity compensation plans approved by stockholders
23,199,548
$23.55
23,633,600
Equity compensation plans not approved by stockholders
-
-
-
Total
23,199,548
$23.55
25,633,600
Performance Graph
The following graph shows a five-year comparison of cumulative total returns:1
1Annual return assumes reinvestment of dividends. Cumulative total return assumes an initial investment of $100 on December 31, 2011. The Company’s current self-selected peer group is comprised of TCCC, DPS Group, National Beverage Corporation, Jones Soda Company and Cott Corporation.
ITEM 6. SELECTED FINANCIAL DATA
The consolidated statements of operations data set forth below with respect to each of the fiscal years ended December 31, 2014 through 2016 and the balance sheet data as of December 31, 2016 and 2015, are derived from our audited consolidated financial statements included herein, and should be read in conjunction with those financial statements and notes thereto, and with Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Part II,
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided as a supplement to - and should be read in conjunction with - our financial statements and the accompanying notes (“Notes”) included in Part II, Item 8 of this Form 10-K. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements. See “Forward-Looking Statements” and “Part I. Item 1A - Risk Factors.”
This overview provides our perspective on the individual sections of MD&A. MD&A includes the following sections:
· Our Business - a general description of our business, the value drivers of our business, and opportunities and risks facing our Company, stock repurchases, acquisitions and divestitures;
· Results of Operations - an analysis of our consolidated results of operations for the three years presented in our financial statements;
· Sales - details of our sales measured on a quarterly basis in both dollars and cases;
· Inflation - information about the impact that inflation may or may not have on our results;
· Liquidity and Capital Resources - an analysis of our cash flows, sources and uses of cash and contractual obligations;
· Accounting Policies and Pronouncements - a discussion of accounting policies that require critical judgments and estimates including newly issued accounting pronouncements;
· Forward-Looking Statements - cautionary information about forward-looking statements and a description of certain risks and uncertainties that could cause our actual results to differ materially from the Company’s historical results or our current expectations or projections; and
· Market Risks - information about market risks and risk management. (See “Forward-Looking Statements” and “Part II,
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business our financial position is routinely subject to a variety of risks. The principal market risks (i.e., the risk of loss arising from adverse changes in market rates and prices) to which we are exposed are fluctuations in commodity and other input prices affecting the costs of our raw materials (including, but not limited to, increases in the costs of juice concentrates, increases in the price of aluminum for cans, as well as sugar and other sweeteners, glucose, sucrose, milk, cream and protein, all of which are used in some or many of our products), fluctuations in energy and fuel prices, and limited availability of certain raw materials. We generally do not use hedging agreements or alternative instruments to manage the risks associated with securing sufficient ingredients or raw materials. We are also subject to market risks with respect to the cost of commodities and other inputs because our ability to recover increased costs through higher pricing is limited by the competitive environment in which we operate.
We do not use derivative financial instruments to protect ourselves from fluctuations in interest rates and do not hedge against fluctuations in commodity prices.
Our gross sales to customers outside of the United States were approximately 25% and 23% of consolidated gross sales for the years ended December 31, 2016 and 2015, respectively. Our growth strategy includes expanding our international business. As a result, we are subject to risks from changes in foreign currency exchange rates. During the year ended December 31, 2016, we 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 entered into by us as of December 31, 2016 have terms of one month or less. We do not enter into forward currency exchange contracts for speculation or trading purposes.
We have not designated our foreign currency exchange contracts as hedge transactions under FASB ASC 815. Therefore, gains and losses on our foreign currency exchange contracts are recognized in other expense, net, in the consolidated statements of income, and are largely offset by the changes in the fair value of the underlying economically hedged item. We do not consider the potential loss resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates as of December 31, 2016 to be significant.
As of December 31, 2016, we had $377.6 million in cash and cash equivalents and $222.9 million in short-term and long-term investments including U.S. treasuries, certificates of deposit and municipal securities which may have an auction reset feature. Certain of these investments are subject to general credit, liquidity, market and interest rate risks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be furnished in response to this ITEM 8 follows the signature page and Index to Exhibits hereto at pages 70 through 106.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 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 our principal executive and principal financial officers as appropriate to allow timely decisions regarding required disclosures.
Management’s Report on Internal Control Over Financial Reporting - Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016, based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our management’s evaluation under the framework in Internal Control - Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2016.
Our internal control over financial reporting as of December 31, 2016, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their attestation report, which is included herein.
Changes in Internal Control Over Financial Reporting - There were no changes in the Company’s internal controls over financial reporting during the quarter ended December 31, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Monster Beverage Corporation
Corona, California
We have audited the internal control over financial reporting of Monster Beverage Corporation and subsidiaries (the “Company”) as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2016 of the Company and our report dated March 1, 2017 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 1, 2017
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item regarding our directors is included under the caption “Proposal One - Election of Directors” in our Proxy Statement for our 2017 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2016 (the “2017 Proxy Statement”) and is incorporated herein by reference.
Information concerning compliance with Section 16(a) of the Exchange Act is included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our 2017 Proxy Statement and is incorporated herein by reference.
Information concerning the Audit Committee and the Audit Committee Financial expert is reported under the caption “Audit Committee; Report of the Audit Committee; Duties and Responsibilities” in our 2017 Proxy Statement and is incorporated herein by reference.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all our directors, officers (including our principal executive officer, principal financial officer, principal accounting officer and controllers) and employees and is available at http://investors.monsterbevcorp.com/governance.cfm. The Code of Business Conduct and Ethics and any amendment thereto, as well as any waivers that are required to be disclosed by the rules of the SEC or NASDAQ, may be obtained at no cost to you by writing or telephoning us at the following address or telephone number:
Monster Beverage Corporation
1 Monster Way
Corona, CA 92879
(951) 739-6200
(800) 426-7367
ITEM 11. EXECUTIVE COMPENSATION
Information concerning the compensation of our directors and executive officers and Compensation Committee Interlocks and Insider Participation is reported under the captions “Compensation Discussion and Analysis,” and “Compensation Committee,” respectively, in our 2017 Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The disclosure set forth in Item 5, “Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities”, of this report is incorporated herein.
Information concerning the beneficial ownership of the Company’s Common Stock of (a) those persons known to the Company to be the beneficial owners of more than 5% of the Company’s common stock; (b) each of the Company’s directors and nominees for director; and (c) the Company’s executive officers and all of the Company’s current directors and executive officers as a group is reported under the caption “Principal Stockholders and Security Ownership of Management” in our 2017 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information concerning certain relationships and related transactions is reported under the caption “Certain Relationships and Related Transactions and Director Independence” in our 2017 Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning our accountant fees and our Audit Committee’s pre-approval of audit and permissible non-audit services of independent auditors is reported under the captions “Principal Accounting Firm Fees” and “Pre-Approval of Audit and Non-Audit Services,” respectively, in our 2017 Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
The following documents are filed as a part of this Form 10-K:
Report of Independent Registered Public Accounting Firm
Financial Statements:
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Valuation and Qualifying Accounts for the years ended December 31, 2016, 2015 and 2014
Exhibits:
The Exhibits listed in the Index of Exhibits, which appears immediately following the signature page and is incorporated herein by reference, as filed
as part of this Form 10-K.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MONSTER BEVERAGE CORPORATION
/s/ RODNEY C. SACKS
Rodney C. Sacks
Date: March 1, 2017
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature
Title
Date
/s/ RODNEY C. SACKS
Chairman of the Board of
March 1, 2017
Rodney C. Sacks
Directors and Chief Executive
Officer (principal executive officer)
/s/ HILTON H. SCHLOSBERG
Vice Chairman of the Board of
March 1, 2017
Hilton H. Schlosberg
Directors, President, Chief
Operating Officer, Chief
Financial Officer and Secretary
(principal financial officer,
controller and principal
accounting officer)
/s/ NORMAN C. EPSTEIN
Director
March 1, 2017
Norman C. Epstein
/s/ MARK J. HALL
Director
March 1, 2017
Mark J. Hall
/s/ GARY P. FAYARD
Director
March 1, 2017
Gary P. Fayard
/s/ BENJAMIN M. POLK
Director
March 1, 2017
Benjamin M. Polk
/s/ SYDNEY SELATI
Director
March 1, 2017
Sydney Selati
/s/ HAROLD C. TABER, JR.
Director
March 1, 2017
Harold C. Taber, Jr.
/s/ MARK S. VIDERGAUZ
Director
March 1, 2017
Mark S. Vidergauz
/s/ KATHY N WALLER
Director
March 1, 2017
Kathy N. Waller
INDEX TO EXHIBITS
The following designated exhibits, as indicated below, are either filed or furnished, as applicable herewith or have heretofore been filed or furnished with the Securities and Exchange Commission under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, as indicated by footnote.
2.1
Transaction Agreement, dated as of August 14, 2014, by and among Monster Beverage Corporation, New Laser Corporation, New Laser Merger Corp, The Coca-Cola Company and European Refreshments (incorporated by reference to Exhibit 2.1 to our Form 8-K dated August 18, 2014).
2.2
Asset Transfer Agreement, dated as of August 14, 2014, by and among Monster Beverage Corporation, New Laser Corporation and The Coca-Cola Company Refreshments (incorporated by reference to Exhibit 2.2 to our Form 8-K dated August 18, 2014).
3.1
Certificate of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to our Form 10-K dated November 7, 2016).
3.2
Second Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to our Form 8-K dated June 18, 2015).
10.1
Amended and Restated Distribution Coordination Agreement, dated as of June 12, 2015, between Monster Energy Company and The Coca-Cola Company (incorporated by reference to Exhibit 10.1 to our 10-Q dated August 10, 2015).
10.2
Amended and Restated International Distribution Coordination Agreement, dated as of June 12, 2015, between Monster Energy Ltd. and Monster Energy Company and The Coca-Cola Company (incorporated by reference to Exhibit 10.2 to our 10-Q dated August 10, 2015).
10.3+
Form of Amendment to Stock Option Agreement (relating to the amendment of certain stock option agreements between Hansen Natural Corporation and its executive officers and directors) (incorporated by reference to Exhibit 10.1 to our Form 8-K dated January 8, 2007).
10.4
Form of Indemnification Agreement (to be provided by Hansen Natural Corporation to its directors) (incorporated by reference to Exhibit 10.1 to our Form 8-K dated November 14, 2005).
10.5+
Hansen Natural Corporation 2001 Amended and Restated Stock Option Plan (incorporated by reference to Exhibit A to our Proxy Statement dated September 25, 2007).
10.6+
Stock Option Agreement between Hansen Natural Corporation and Rodney C. Sacks (made as of June 2, 2008) (incorporated by reference to Exhibit 10.44 to our Form 10-K dated March 1, 2010).
10.7+
Amendment to Stock Option Agreement between Hansen Natural Corporation and Rodney C. Sacks (made as of August 2, 2008) (incorporated by reference to Exhibit 10.44A to our Form 10-K dated March 1, 2010).
10.8+
Stock Option Agreement between Hansen Natural Corporation and Hilton H. Schlosberg (made as of June 2, 2008) (incorporated by reference to Exhibit 10.45 to our Form 10-K dated March 1, 2010).
10.9+
Amendment to Stock Option Agreement between Hansen Natural Corporation and Hilton H. Schlosberg (made as of August 2, 2008) (incorporated by reference to Exhibit 10.45A to our Form 10-K dated March 1, 2010).
10.10+
2009 Hansen Natural Corporation Stock Incentive Plan for Non-Employee Directors (incorporated by reference to Exhibit A to our Proxy Statement dated April 24, 2009).
10.11+
Stock Option Agreement between Hansen Natural Corporation and Rodney C. Sacks (made as of December 1, 2009) (incorporated by reference to Exhibit 10.51 to our Form 10-K dated March 1, 2010).
10.12+
Stock Option Agreement between Hansen Natural Corporation and Hilton H. Schlosberg (made as of December 1, 2009) (incorporated by reference to exhibit 10.52 to our Form 10-K dated March 1, 2010).
10.13+
Stock Option Agreement between Hansen Natural Corporation and Mark J. Hall (made as of December 1, 2009) (incorporated by reference to Exhibit 10.53 to our Form 10-K dated March 1, 2010).
10.14+
Stock Option Agreement between Hansen Natural Corporation and Mark J. Hall (made as of December 1, 2010) (incorporated by reference to Exhibit 10.54 to our Form 10-K dated March 1, 2011).
10.15+
Form of Restricted Stock Unit Agreement pursuant to the 2009 Hansen Natural Corporation Stock Incentive Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.1 to our Form 10-K dated August 5, 2016).
10.16+
Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.1 to our Form 10-Q dated August 9, 2011).
10.17+
Monster Beverage Corporation 2011 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to our Form 8-K dated May 24, 2011).
10.18+
Agreement between the Company and Mark Hall, dated March 12, 2015 (incorporated by reference to Exhibit 10.1 to our Form 10-Q dated May 11, 2015).
10.19+
Employment Agreement between Monster Beverage Corporation and Rodney C. Sacks (incorporated by reference to Exhibit 10.1 to our Form 8-K dated March 19, 2014).
10.20+
Employment Agreement between Monster Beverage Corporation and Hilton H. Schlosberg (incorporated by reference to Exhibit 10.2 to our Form 8-K dated March 19, 2014).
10.21+
Monster Beverage Corporation Deferred Compensation Plan (incorporated by reference to Exhibit 4.1 to our Form S-8 dated December 27, 2016).
21*
Subsidiaries
23*
Consent of Independent Registered Public Accounting Firm
31.1*
Certification by CEO pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
31.2*
Certification by CFO pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
32.1*
Certification by CEO 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 CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
101*
The following materials from Monster Beverage Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 are furnished herewith, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of December 31, 2016 and 2015, (ii) the Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014, (iii) the Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016, 2015 and 2014, (iv) Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014, and (vi) the Notes to Consolidated Financial Statements.
* Filed herewith.
+ Management contract or compensatory plans or arrangements.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
Financial Statement Schedule - Valuation and Qualifying Accounts for the years ended December 31, 2016, 2015 and 2014
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Monster Beverage Corporation
Corona, California
We have audited the accompanying consolidated balance sheets of Monster Beverage Corporation and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Monster Beverage Corporation and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2017, expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 1, 2017
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2016 AND 2015 (In Thousands, Except Par Value)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
377,582
$
2,175,417
Short-term investments
220,554
744,610
Accounts receivable, net
448,051
352,955
TCCC Transaction receivable
125,000
125,000
Inventories
161,971
156,121
Prepaid expenses and other current assets
32,562
26,967
Prepaid income taxes
66,550
18,462
Total current assets
1,432,270
3,599,532
INVESTMENTS
2,394
15,348
PROPERTY AND EQUIPMENT, net
173,343
97,354
DEFERRED INCOME TAXES
159,556
140,468
GOODWILL
1,331,643
1,279,715
OTHER INTANGIBLE ASSETS, net
1,032,635
427,986
OTHER ASSETS
21,630
10,874
Total Assets
$
4,153,471
$
5,571,277
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
$
193,270
$
144,763
Accrued liabilities
79,526
81,786
Accrued promotional allowances
110,237
115,530
Accrued distributor terminations
8,184
11,018
Deferred revenue
41,672
32,271
Accrued compensation
30,043
22,159
Income taxes payable
7,657
2,750
Total current liabilities
470,589
410,277
DEFERRED REVENUE
353,173
351,590
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS’ EQUITY¹:
Common stock - $0.005 par value; 1,250,000 shares authorized; 623,201 shares issued and 566,566 shares outstanding as of December 31, 2016; 621,057 shares issued and 608,700 shares outstanding as of December 31, 2015
3,116
3,105
Additional paid-in capital
4,051,245
3,989,787
Retained earnings
2,107,548
1,394,863
Accumulated other comprehensive loss
(23,249)
(21,878)
Common stock in treasury, at cost; 56,635 shares and 12,357 shares as of December 31, 2016 and 2015, respectively
(2,808,951)
(556,467)
Total stockholders’ equity
3,329,709
4,809,410
Total Liabilities and Stockholders’ Equity
$
4,153,471
$
5,571,277
¹ Stock Split - On October 14, 2016, the Company announced a three-for-one stock split of its common stock to be effected in the form of a 200% stock dividend. The stock dividend was issued on November 9, 2016. The accompanying consolidated financial statements and notes thereto have been updated to reflect the stock split. See Note 1 for additional information.
See accompanying notes to consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
(In Thousands, Except Per Share Amounts)
NET SALES
$
3,049,393
$
2,722,564
$
2,464,867
COST OF SALES
1,107,393
1,090,263
1,125,057
GROSS PROFIT
1,942,000
1,632,301
1,339,810
OPERATING EXPENSES
856,662
900,118
592,305
GAIN ON SALE OF MONSTER NON-ENERGY (NOTE 2)
-
161,470
-
OPERATING INCOME
1,085,338
893,653
747,505
OTHER EXPENSE, NET
5,653
2,105
1,717
INCOME BEFORE PROVISION FOR INCOME TAXES
1,079,685
891,548
745,788
PROVISION FOR INCOME TAXES
367,000
344,815
262,603
NET INCOME
$
712,685
$
546,733
$
483,185
NET INCOME PER COMMON SHARE¹:
Basic
$
1.21
$
0.97
$
0.96
Diluted
$
1.19
$
0.95
$
0.92
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS¹:
Basic
587,874
566,448
501,771
Diluted
599,819
577,758
522,855
¹ Stock Split - On October 14, 2016, the Company announced a three-for-one stock split of its common stock to be effected in the form of a 200% stock dividend. The stock dividend was issued on November 9, 2016. The accompanying consolidated financial statements and notes thereto have been updated to reflect the stock split. See Note 1 for additional information.
See accompanying notes to consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014 (In Thousands)
Net income, as reported
$
712,685
$
546,733
$
483,185
Other comprehensive (loss) income:
Change in foreign currency translation adjustment, net of tax
(1,178)
(10,425)
(10,220)
Available-for-sale investments:
Change in net unrealized losses
(193)
-
-
Reclassification adjustment for net gains included in net income
-
-
-
Net change in available-for-sale investments
(193)
-
-
Other comprehensive (loss) income
(1,371)
(10,425)
(10,220)
Comprehensive income
$
711,314
$
536,308
$
472,965
See accompanying notes to consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014 (In Thousands)
Accumulated
Additional
Other
Total
Common stock
Paid-in
Retained
Comprehensive
Treasury stock
Stockholders’
Shares1
Amount
Capital
Earnings
Loss
Shares1
Amount
Equity
Balance, January 1, 2014
618,042
$
3,090
$
366,009
$
1,847,325
$
(1,233)
(117,576)
$
(1,222,912)
$
992,279
Stock-based compensation
-
-
28,989
-
-
-
-
28,989
Exercise of stock options
2,970
17,153
-
-
-
-
17,168
Excess tax benefits from share based payment arrangements
-
-
11,924
-
-
-
-
11,924
Repurchase of common stock
-
-
-
-
-
(270)
(8,175)
(8,175)
Foreign currency translation
-
-
-
-
(10,220)
-
-
(10,220)
Net income
-
-
-
483,185
-
-
-
483,185
Balance, December 31, 2014
621,012
$
3,105
$
424,075
$
2,330,510
$
(11,453)
(117,846)
$
(1,231,087)
$
1,515,150
Stock-based compensation
-
-
32,719
-
-
-
-
32,719
Exercise of stock options
22,275
49,217
-
-
-
-
49,328
Issuance of common stock
102,123
3,168,624
-
-
-
-
3,169,135
Excess tax benefits from share based payment arrangements
-
-
314,737
-
-
-
-
314,737
Repurchase of common stock
-
-
-
-
-
(18,864)
(807,967)
(807,967)
Cancellation of treasury stock
(124,353)
(622)
(1,482,380)
-
124,353
1,482,587
-
Foreign currency translation
-
-
-
-
(10,425)
-
-
(10,425)
Net income
-
-
-
546,733
-
-
-
546,733
Balance, December 31, 2015
621,057
$
3,105
$
3,989,787
$
1,394,863
$
(21,878)
(12,357)
$
(556,467)
$
4,809,410
Stock-based compensation
-
-
45,848
-
-
-
-
45,848
Exercise of stock options
2,144
16,441
-
-
-
-
16,452
Unrealized loss on available-for- sale securities
-
-
-
-
(193)
-
-
(193)
Excess tax benefits from share based payment arrangements
-
-
(831)
-
-
-
-
(831)
Repurchase of common stock
-
-
-
-
-
(44,278)
(2,252,484)
(2,252,484)
Foreign currency translation
-
-
-
-
(1,178)
-
-
(1,178)
Net income
-
-
-
712,685
-
-
-
712,685
Balance, December 31, 2016
623,201
$
3,116
$
4,051,245
$
2,107,548
$
(23,249)
(56,635)
$
(2,808,951)
$
3,329,709
¹ Stock Split - On October 14, 2016, the Company announced a three-for-one stock split of its common stock to be effected in the form of a 200% stock dividend. The stock dividend was issued on November 9, 2016. The accompanying consolidated financial statements and notes thereto have been updated to reflect the stock split. See Note 1 for additional information.
See accompanying notes to consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014 (In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$
712,685
$
546,733
$
483,185
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization
40,845
30,860
25,651
(Gain) loss on disposal of property and equipment
(204)
(408)
Gain on sale of Monster Non-Energy
-
(161,470)
-
Stock-based compensation
45,848
32,719
28,552
Loss on put option
-
Gain on investments, net
-
(250)
(801)
Deferred income taxes
(19,092)
(181,582)
(9,846)
Effect on cash of changes in operating assets and liabilities,
net of acquisitions and divestitures:
Accounts receivable
(86,382)
(77,331)
(14,290)
Distributor receivables
(19,981)
4,580
Inventories
20,875
(7,068)
42,763
Prepaid expenses and other current assets
(6,682)
(9,713)
Prepaid income taxes
(48,023)
(11,009)
Accounts payable
45,340
20,864
11,282
Accrued liabilities
(2,852)
43,312
3,019
Accrued promotional allowances
(3,939)
7,009
20,530
Accrued distributor terminations
(3,328)
11,196
(2,338)
Accrued compensation
8,051
4,507
3,394
Income taxes payable
4,375
311,534
8,438
Deferred revenue
13,819
(38,631)
(8,107)
Net cash provided by operating activities
701,355
522,723
597,491
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of held-to-maturity investments
868,304
2,089,788
710,294
Sales of available-for-sale investments
120,987
4,001
-
Sales of trading investments
-
4,160
13,075
Proceeds from the transfer of distribution rights to TCCC
-
179,658
-
Proceeds from the sale of Monster Non-Energy
-
198,008
-
Purchase of AFF assets, net
(688,485)
-
-
Proceeds from sale of property and equipment
Purchases of held-to-maturity investments
(152,050)
(2,033,584)
(1,130,601)
Purchases of available-for-sale investments
(300,426)
-
(4,001)
Purchases of property and equipment
(99,819)
(35,605)
(27,952)
Additions to intangibles
(5,518)
(6,888)
(3,411)
Decrease (increase) in other assets
(398)
1,230
Net cash (used in) provided by investing activities
(256,193)
400,066
(440,403)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt
(2,359)
(1,083)
(1,619)
Issuance of common stock
16,405
1,696,661
17,168
Purchases of common stock held in treasury
(2,252,437)
(807,967)
(8,175)
Net cash (used in) provided by financing activities
(2,238,391)
887,611
7,374
Effect of exchange rate changes on cash and cash equivalents
(4,606)
(5,306)
(5,488)
NET (DECREASE) INCRESE IN CASH AND CASH EQUIVALENTS
(1,797,835)
1,805,094
158,974
CASH AND CASH EQUIVALENTS, beginning of year
2,175,417
370,323
211,349
CASH AND CASH EQUIVALENTS, end of year
$
377,582
$
2,175,417
$
370,323
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Interest
$
$
$
Income taxes
$
431,273
$
224,928
$
267,251
See accompanying notes to consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS:
During the years ended December 31, 2016, 2015 and 2014, the Company entered into capital leases of $2.6 million, $1.5 million and $0.8 million, respectively, for the acquisition of promotional vehicles.
Accounts payable included equipment purchased of $4.7 million, $0.6 million and $0.7 million as of December 31, 2016, 2015 and 2014, respectively.
Accrued liabilities included additions to intangibles of $3.8 million, $2.2 million and $2.2 million as of December 31, 2016, 2015 and 2014, respectively.
During the year ended December 31, 2015, the Company issued 35.4 million shares of the Company’s common stock in exchange for KO Energy.
During the year ended December 31, 2015, in connection with the TCCC Transaction (as defined in Note 2), $125.0 million relating to the transfer of certain distribution rights was deposited into escrow pending certain transition milestones.
During the year ended December 31, 2015, the Company cancelled 124.5 million shares of treasury stock. Amounts previously recorded as treasury stock were netted against common stock and retained earnings.
See accompanying notes to consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Monster Beverage Corporation (the “Company”) was incorporated in the state of Delaware. The Company is a holding company and has no operating business except through its consolidated subsidiaries.
Stock Split - On October 14, 2016, the Company announced a three-for-one stock split of the Company’s common stock to be effected in the form of a 200% stock dividend. The common stock dividend was issued on November 9, 2016 and the Company’s common stock began trading at the split adjusted price on November 10, 2016. Accordingly, all per share amounts, average common stock outstanding, common stocks outstanding, common stock repurchased and equity based compensation presented in the consolidated financial statements and notes have been adjusted retroactively, where applicable, to reflect the stock split. Stockholders’ equity has been retroactively adjusted, where applicable, to give effect to the stock split for all periods presented by reclassifying the par value of the additional shares issued in connection with the stock split to Common Stock from Retained Earnings and Additional Paid-in Capital.
Nature of Operations - The Company develops, markets, sells and distributes energy drink beverages, sodas and/or concentrates for energy drink beverages, primarily under the following brand names: Monster Energy®, Monster Rehab®, Monster Energy Extra Strength Nitrous Technology®, Java Monster®, Muscle Monster®, Mega Monster Energy®, Punch Monster®, Juice Monster®, M3®, Ubermonster®, BU®, Mutant® Super Soda, Nalu®, NOS®, Full Throttle®, Burn®, Mother®, Ultra®, Play® and Power Play®, Gladiator®, Relentless®, Samurai® and BPM®. Through June 12, 2015, the Company also developed, marketed, sold and distributed “alternative” beverage category beverages under the following brand names: Peace Tea®, Hansen’s®, Hansen’s Natural Cane Soda®, Junior Juice®, Blue Sky® and Hubert’s®. These brands were transferred to The Coca-Cola Company (“TCCC”) as part of the TCCC Transaction (as defined and described in Note 2 below).
Basis of Presentation - The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its consolidated subsidiaries.
Principles of Consolidation - The Company consolidates all entities that it controls by ownership of a majority voting interest. All intercompany balances and transactions have been eliminated in consolidation.
Adjustment - Subsequent to the issuance of the Company’s consolidated financial statements on Form 10-Q for the quarterly period ended June 30, 2016, management concluded that its presentation of prepaid income taxes and income taxes payable should be adjusted to conform to its filed 2015 United States (“U.S”) Federal income tax return. As a result, deferred income taxes increased by $120.8 million, prepaid income taxes decreased by $16.9 million and income taxes payable decreased by $103.9 million, respectively, in the comparable consolidated statement of cash flows for the year ended December 31, 2015. The adjustment had no impact on total net cash provided by operating activities.
Business Combinations - Business acquisitions are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 “Business Combinations”. FASB ASC 805 requires the reporting entity to identify the acquirer, determine the acquisition date, recognize and measure the identifiable tangible and intangible assets acquired, the liabilities assumed and any non-controlling interest in the acquired entity, and recognize and measure goodwill or a gain from the purchase. The acquiree’s results are included in the Company’s consolidated
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
financial statements from the date of acquisition. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill. Adjustments to fair value assessments are recorded to goodwill over the measurement period (not longer than twelve months). The acquisition method also requires that acquisition-related transaction and post-acquisition restructuring costs be charged to expense and requires the Company to recognize and measure certain assets and liabilities including those arising from contingencies and contingent consideration in a business combination.
Cash and Cash Equivalents - The Company considers all highly liquid investments with an original maturity of three months or less from date of purchase to be cash equivalents. Throughout the year, the Company has had amounts on deposit at financial institutions that exceed the federally insured limits. The Company has not experienced any loss as a result of these deposits and does not expect to incur any losses in the future.
Investments - The Company’s investments in debt securities are classified as either held-to-maturity, available-for-sale or trading, in accordance with FASB ASC 320. Held-to-maturity securities are those securities that the Company has the positive intent and ability to hold until maturity. Trading securities are those securities that the Company intends to sell in the near term. All other securities not included in the held-to-maturity or trading category are classified as available-for-sale. Held-to-maturity securities are recorded at amortized cost which approximates fair market value. Trading securities are carried at fair value with unrealized gains and losses charged to earnings. Available-for-sale securities are carried at fair value with unrealized gains and losses recorded within accumulated other comprehensive loss as a separate component of stockholders’ equity. FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available (see Note 4). Under FASB ASC 320-10-35, a security is considered to be other-than-temporarily impaired if the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference being defined as the “Credit Loss”) or if the fair value of the security is less than the security’s amortized cost basis and the investor intends, or will be required, to sell the security before recovery of the security’s amortized cost basis. If an other-than-temporary impairment exists, the charge to earnings is limited to the amount of Credit Loss if the investor does not intend to sell the security, and will not be required to sell the security, before recovery of the security’s amortized cost basis. Any remaining difference between fair value and amortized cost is recognized in other comprehensive loss, net of applicable taxes. The Company evaluates whether the decline in fair value of its investments is other-than-temporary at each quarter-end. This evaluation consists of a review by management, and includes market pricing information and maturity dates for the securities held, market and economic trends in the industry and information on the issuer’s financial condition and, if applicable, information on the guarantors’ financial condition. Factors considered in determining whether a loss is temporary include the length of time and extent to which the investment’s fair value has been less than its cost basis, the financial condition and near-term prospects of the issuer and guarantors, including any specific events which may influence the operations of the issuer and our intent and ability to retain the investment for a reasonable period of time sufficient to allow for any anticipated recovery of fair value.
Accounts Receivable - The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s recent loss history and an overall
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
assessment of past due trade accounts receivable outstanding. In accordance with FASB ASC 210-20-45, in its consolidated balance sheets, the Company has presented accounts receivable, net of promotional allowances, only for those customers that it allows net settlement. All other accounts receivable and related promotional allowances are shown on a gross basis.
Inventories - Inventories are valued at the lower of first-in, first-out, cost or market value (net realizable value).
Property and Equipment - Property and equipment are stated at cost. Depreciation of furniture and fixtures, office and computer equipment, computer software, equipment, and vehicles is based on their estimated useful lives (three to ten years) and is calculated using the straight-line method. Amortization of leasehold improvements is based on the lesser of their estimated useful lives or the terms of the related leases and is calculated using the straight-line method. Normal repairs and maintenance costs are expensed as incurred. Expenditures that materially increase values or extend useful lives are capitalized. The related costs and accumulated depreciation of disposed assets are eliminated and any resulting gain or loss on disposition is included in net income.
Goodwill - The Company records goodwill when the consideration paid for an acquisition exceeds the fair value of net tangible and intangible assets acquired, including related tax effects. Goodwill is not amortized; instead goodwill is tested for impairment on an annual basis, or more frequently if the Company believes indicators of impairment exist. The Company first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. If the Company determines that the fair value is less than the carrying value, the Company will use a two-step process to determine the amount of goodwill impairment. The first step requires comparing the fair value of the reporting unit to its net book value, including goodwill. A potential impairment exists if the fair value of the reporting unit is lower than its net book value. The second step of the process, performed only if a potential impairment exists, involves determining the difference between the fair value of the reporting unit’s net assets, other than goodwill, and the fair value of the reporting unit. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. For the fiscal years ended December 31, 2016, 2015 and 2014 there were no impairments recorded.
Other Intangibles - Other Intangibles are comprised primarily of trademarks that represent the Company’s exclusive ownership of the Monster Energy®, ®, Monster Rehab®, Java Monster®, Unleash the Beast®, Monster Energy Extra Strength Nitrous Technology®, Muscle Monster®, Mega Monster Energy®, Punch Monster®, Juice Monster®, M3®, Ubermonster®, BU®, Nalu®, NOS®, Full Throttle®, Burn®, Mother®, Ultra®, Play® and Power Play®, Gladiator®, Relentless®, Samurai® and BPM® trademarks, all used in connection with the manufacture, sale and distribution of beverages. The Company also owns in its own right a number of other trademarks in the United States, as well as in a number of countries around the world. In accordance with FASB ASC 350, intangible assets with indefinite lives are not amortized but instead are measured for impairment at least annually, or when events indicate that an impairment exists. The Company calculates impairment as the excess of the carrying value of its indefinite-lived assets over their estimated fair value. If the carrying value exceeds the estimate of fair value a write-down is recorded. The Company amortizes its trademarks with finite useful lives over their respective useful lives. For the fiscal years ended December 31, 2016, 2015 and 2014 there were no impairments recorded.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Long-Lived Assets - Management regularly reviews property and equipment and other long-lived assets, including certain definite-lived intangible assets, for possible impairment. This review occurs annually, or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If there is indication of impairment, management then prepares an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. The fair value is estimated using the present value of the future cash flows discounted at a rate commensurate with management’s estimates of the business risks. Preparation of estimated expected future cash flows is inherently subjective and is based on management’s best estimate of assumptions concerning expected future conditions. For the fiscal years ended December 31, 2016, 2015 and 2014, there were no impairment indicators identified. Long-lived assets held for sale are recorded at the lower of their carrying amount or fair value less cost to sell.
Foreign Currency Translation and Transactions - The accounts of the Company’s foreign subsidiaries are translated in accordance with FASB ASC 830. Foreign currency transaction gains and losses are recognized in other expense, net, at the time they occur. Net foreign currency exchange gains or losses resulting from the translation of assets and liabilities of foreign subsidiaries whose functional currency is not the U.S. dollar are recorded as a part of accumulated other comprehensive loss in stockholders’ equity. Unrealized foreign currency exchange gains and losses on certain intercompany transactions that are of a long-term investment nature (i.e., settlement is not planned or anticipated in the foreseeable future) are also recorded in accumulated other comprehensive loss in stockholders’ equity. During the years ended December 31, 2016, 2015 and 2014, the Company entered into forward currency exchange contracts with financial institutions to create an economic hedge to specifically manage a portion of the foreign exchange risk exposure associated with certain consolidated subsidiaries non-functional currency denominated assets and liabilities. All foreign currency exchange contracts outstanding as of December 31, 2016 have terms of one month or less. We do 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 FASB ASC 815. Therefore, gains and losses on the Company’s foreign currency exchange contracts are recognized in other expense, net, in the consolidated statements of income, and are largely offset by the changes in the fair value of the underlying economically hedged item. For the years ended December 31, 2016, 2015 and 2014, aggregate foreign currency transaction losses, including the gains or losses on forward currency exchange contracts, amounted to $9.7 million, $5.5 million and $3.4 million, respectively, and have been recorded in other expense, net in the accompanying consolidated statements of income.
Revenue Recognition - The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured.
Generally, ownership of and title to the Company’s finished products passes to customers upon delivery of the products to customers. Certain of the Company’s distributors may also perform a separate function as a co-packer on the Company’s behalf. In such cases, ownership of and title to the Company’s products that are co-packed on the Company’s behalf by those co-packers who are also distributors, passes to such distributors when the Company is notified by them that they have taken transfer or possession of the relevant portion of the Company’s finished goods.
Revenue for the Strategic Brands segment is generally recognized when title to the concentrate is transferred to the customer. In particular, title to the concentrate usually passes upon shipment to the customers’ locations, as determined by the specific sales terms of the transactions.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Net sales have been determined after deduction of promotional and other allowances in accordance with FASB ASC 605-50. The Company’s promotional and other allowances are calculated based on various programs with its distributors and retail customers, and accruals are established during the year for the 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 expense 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 agreement, generally 20 years.
Management believes that adequate provision has been made for cash discounts, returns and spoilage based on the Company’s historical experience.
Cost of Sales - Cost of sales consists of the costs of concentrates and/or beverage bases, the costs of raw materials utilized in the manufacture of products, co-packing fees, repacking fees, in-bound freight charges, as well as certain internal transfer costs, warehouse expenses incurred prior to the manufacture of the Company’s finished products and certain quality control costs. Raw materials account for the largest portion of the cost of sales. Raw materials include cans, bottles, other containers, flavors, ingredients and packaging materials.
Operating Expenses - Operating expenses include selling expenses such as distribution expenses to transport products to customers and warehousing expenses after manufacture, as well as expenses for advertising, sampling and in-store demonstration costs, costs for merchandise displays, point-of-sale materials and premium items, sponsorship expenses, other marketing expenses and design expenses. Operating expenses also include such costs as payroll costs, travel costs, professional service fees including legal fees, termination payments made to certain of the Company’s prior distributors, depreciation and other general and administrative costs.
Freight-Out Costs - For the years ended December 31, 2016, 2015 and 2014, freight-out costs amounted to $83.6 million, $87.0 million and $92.7 million, respectively, and have been recorded in operating expenses in the accompanying consolidated statements of income.
Advertising and Promotional Expenses - The Company accounts for advertising production costs by expensing such production costs the first time the related advertising takes place. A significant amount of the Company’s promotional expenses result from payments under endorsement and sponsorship contracts. Accounting for endorsement and sponsorship payments is based upon specific contract provisions. Generally, endorsement and sponsorship payments are expensed on a straight-line basis over the term of the contract after giving recognition to periodic performance compliance provisions of the contracts. Advertising and promotional expenses, including, but not limited to, production costs amounted to $270.6 million, $209.7 million and $171.5 million for the years ended December 31, 2016, 2015 and 2014, respectively. Advertising and promotional expenses are included in operating expenses in the accompanying consolidated statements of income.
Income Taxes - The Company utilizes the liability method of accounting for income taxes as set forth in FASB ASC 740. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. In determining the need for valuation allowances the Company considers projected future taxable income and the availability of tax planning strategies. If in the future the Company determines that it would not be able to realize its recorded deferred tax assets, an increase in the valuation allowance would be recorded, decreasing earnings in the period in which such determination is made.
The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon the Company’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements.
Stock-Based Compensation - The Company accounts for stock-based compensation under the provisions of FASB ASC 718. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes-Merton option pricing formula. The Company records compensation expense for non-employee stock options based on the estimated fair value of the options as of the earlier of (1) the date at which a commitment for performance by the non-employee to earn the stock option is reached or (2) the date at which the non-employee’s performance is complete, using the Black-Scholes-Merton option pricing formula. Stock-based compensation cost for restricted stock awards and restricted stock units is measured based on the closing fair market value of the Company’s common stock at the date of grant. In the event that the Company has the option and intent to settle a restricted stock unit in cash, the award is classified as a liability and revalued at each balance sheet date. (See Note 14).
Net Income Per Common Share - In accordance with FASB ASC 260, net income per common share, on a basic and diluted basis, is presented for all periods. Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during each period. Diluted net income per share is computed by dividing net income by the weighted average number of common and dilutive common equivalent shares outstanding. The calculation of common equivalent shares assumes the exercise of dilutive stock options, net of assumed treasury share repurchases at average market prices, as applicable.
Concentration of Risk - Certain of the Company’s products utilize components (raw materials and/or co-packing services) from a limited number of sources. A disruption in the supply of such components could significantly affect the Company’s revenues from those products, as alternative sources of such components may not be available at commercially reasonable rates or within a reasonably short time period. The Company continues to endeavor to secure the availability of alternative sources for such components and minimize the risk of any disruption in production.
TCCC, through certain wholly-owned subsidiaries (the “TCCC Subsidiaries”), accounted for approximately 41%, 43% and 29% of the Company’s net sales for the years ended December 31, 2016, 2015 and 2014, respectively.
Credit Risk - The Company sells its products nationally and internationally, primarily to full service beverage distributors, retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains and food service customers. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for estimated credit losses, and historically, such losses have been within management’s expectations.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Fair Value of Financial Instruments - The carrying value of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to the relatively short maturity of the respective instruments.
Use of Estimates - The preparation of the consolidated financial statements in conformity with GAAP 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 period. Actual results could differ from those estimates.
Recent Accounting Pronouncements - In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This amendment is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of ASU No. 2017-01 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 require an entity to record an impairment charge based on the excess of a reporting unit’s carrying value over its fair value. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of ASU No. 2017-04 on its financial position, results of operations and liquidity.
In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory”, in an effort to improve the accounting for the income tax consequences of intra-equity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. FASB ASU No. 2016-16 establishes the requirement that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU No. 2016-16 is effective for financial statements issued for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Earlier application is permitted as of the beginning of an interim or annual reporting period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of ASU No. 2016-16 on its financial position, results of operations and liquidity.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230)”. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company is currently evaluating the impact of ASU No. 2016-15 on its financial position, results of operations and liquidity.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
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. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently evaluating the impact of ASU No. 2016-13 on its financial position, results of operations and liquidity.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, which changes how companies account for certain aspects of share-based payments to employees. The new guidance identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur and certain classifications on the statement of cash flows. The update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods, with early application permitted. The Company early adopted the standards update, effective January 1, 2016, electing (i) retrospective adjustment in the statement of cash flows and (ii) continued recognition of stock compensation based on estimated forfeitures. For the year ended December 31, 2015 and 2014, net cash provided by operating activities increased and net cash provided by financing activities decreased by $314.8 million and $11.9 million, respectively, as a result of such retrospective adjustment. For the year ended December 31, 2016, the Company recorded $20.8 million of excess tax benefits in net income that previously would have been recorded in additional paid-in-capital. The adoption of ASU No. 2016-09 did not have a material impact on the Company’s financial position, results of operations or liquidity.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. This update is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This update is effective for annual and interim reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of ASU No. 2016-02 on its financial position, results of operations and liquidity.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which supersedes previous revenue recognition guidance. ASU No. 2014-09 requires that a company recognize revenue at an amount that reflects the consideration to which the company expects to be entitled in exchange for transferring goods or services to a customer. In applying the new guidance, a company will (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the contract’s performance obligations; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU No. 2014-09 was to be effective for reporting periods beginning after December 15, 2016. However, on July 9, 2015, the FASB voted to approve a one-year deferral of the effective date. This new guidance is effective for the Company beginning January 1, 2018 and can be adopted using either a full retrospective or modified approach. The Company is currently evaluating the impact of ASU No. 2014-09 on its financial position, results of operations and liquidity.
2. ACQUISITIONS AND DIVESTITURES
American Fruits & Flavors
On April 1, 2016, the Company completed its acquisition of flavor supplier and long-time business partner American Fruits & Flavors (“AFF”), in an asset acquisition that brought the Company’s primary flavor supplier in-house, secured the intellectual property of the Company’s most important flavors in perpetuity and further enhanced its flavor development and global flavor footprint capabilities (the “AFF Transaction”). Pursuant to the terms of the AFF Transaction, the Company purchased AFF for $688.5 million in cash after adjustments.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
The Company accounted for the AFF Transaction in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 “Business Combinations”.
The following table summarizes the final fair value allocations of the AFF Transaction consideration:
Identifiable
Assets Acquired
and Liabilities
Assumed
Consideration
Transferred
Intangibles - flavor formulas (non-amortizing)¹
$
570,000
$
-
Intangibles - flavor formulas (amortizing)
-
Intangibles - customer relationships (amortizing)
30,100
-
Intangibles - trademarks (amortizing)
-
Intangibles - other (amortizing)
-
Working capital (excluding inventory)
1,861
-
Inventory
27,600
-
Property and equipment, net
1,175
-
Favorable leases
4,480
-
Goodwill
51,928
-
Cash
-
688,485
Total
$
688,485
$
688,485
1Represents proprietary formulas for the Company’s principal products.
During the fourth quarter of 2016, the Company identified a measurement period adjustment to the Company’s previous purchase accounting estimates for the AFF Transaction. The adjustments to the estimated values previously disclosed, resulted from the completed assessment of a certain flavor formula. As a result, Intangibles - flavor formulas (non-amortizing) decreased and Goodwill increased by $48.0 million, respectively, from amounts previously reported.
The Company determined the estimated fair values as follows:
· Flavor formulas (non-amortizing) - multi-period excess earnings method
· Flavor formulas (amortizing) - replacement cost method
· Customer relationships - multi-period excess earnings method
· Trademarks - relief-from-royalty method
· Inventory - comparative sales method and replacement cost method
· Property and equipment, net - replacement cost method
· Favorable leases - discounted cash flow method
The final book value of the working capital (excluding inventory) approximates fair value.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
The Company has determined goodwill in accordance with FASB ASC 805-30-30-1, “Business Combinations”, which requires the recognition of goodwill for the excess of the aggregate consideration over the net amounts of identifiable assets acquired and liabilities assumed as of the acquisition date.
For tax purposes, the AFF Transaction was recorded as an asset purchase. As such, the Company received a step-up in tax basis of the AFF assets, net, equal to the purchase price.
In accordance with Regulation S-X, pro forma unaudited financial information for the AFF Transaction has not been provided as the impact of the transaction on the Company’s financial position, results of operations and liquidity was not material.
The Coca-Cola Company
On June 12, 2015, the Company completed the transactions contemplated by the definitive agreements entered into with The Coca-Cola Company (“TCCC”) on August 14, 2014 (the “TCCC Transaction”), which provided for a long-term strategic relationship in the global energy drink category.
In consequence of the TCCC Transaction, (1) the Company issued to TCCC 102,121,602 newly issued Company common shares representing approximately 16.7% of the total number of outstanding Company common shares (after giving effect to such issuance) at such time and TCCC appointed two individuals to the Company’s Board of Directors, (2) TCCC transferred all of its rights in and to TCCC’s worldwide energy drink business (“KO Energy”) to the Company, (3) the Company transferred all of its rights in and to its non-energy drink business (“Monster Non-Energy”) to TCCC, (4) the Company and TCCC amended the distribution coordination agreements previously existing between them to govern the transition of third parties’ rights to distribute the Company’s energy products in most territories in the U.S. to members of TCCC’s distribution network, which consists of owned or controlled bottlers/distributors and independent bottling/distribution partners, and (5) TCCC and one of its subsidiaries made an aggregate net cash payment to the Company of $2.15 billion, $125.0 million of which was held in escrow, as described below, pursuant to an escrow agreement (the “Escrow Agreement”) through June 17, 2016, subject to release upon the achievement of certain milestones relating to the transition of distribution rights to TCCC’s distribution network.
Under the terms of the Escrow Agreement and the transition payment agreement entered into in connection therewith, if the distribution rights in the U.S. transitioned to TCCC’s distribution network represented case sales in excess of the following percentages of a target case sale amount agreed to by the parties, amounts in the escrow fund in excess of the applicable amounts below would be released to the Company:
Percentage Transitioned
Escrow Release
40%
Amounts in excess of $375 million
50%
Amounts in excess of $312.5 million
60%
Amounts in excess of $250 million
70%
Amounts in excess of $187.5 million
80%
Amounts in excess of $125 million
90%
Amounts in excess of $62.5 million
95%
All remaining amounts
As of December 31, 2016, distribution rights in the U.S. representing approximately 89% of the target case sales had been transitioned to TCCC’s distribution network. As a result, on the one-year anniversary of the closing of the TCCC Transaction, the then-remaining escrow amount of $125 million was released to TCCC. During January 2017, an additional 5% of the target case sales were transitioned
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
to TCCC’s distribution network, resulting in a $62.5 million payment from TCCC to the Company. TCCC will pay directly to the Company the remaining $62.5 million described above dependent upon future target case sale transitions. The Company expects to transition sufficient additional distribution rights to receive the remaining amounts.
The following unaudited pro forma combined financial information is presented as if the TCCC Transaction had closed on January 1, 2014:
Year Ended December 31, 2015
Pro Forma Adjustments
Monster
Beverage
Corporation
as reported¹
KO Energy²
Disposal of
Monster Non-
Energy³
Other
Pro Forma
Combined
Net sales
$ 2,722,564
$ 138,127
$ (60,778)
$ 8,887
$ 2,808,800
Net income
546,733
100,575
(101,618)
(30,390)
515,300
Year Ended December 31, 2014
Pro Forma Adjustments
Monster
Beverage
Corporation
as reported
KO Energy
Disposal of
Monster Non-Energy
Other
Pro Forma
Combined
Net sales
$ 2,464,867
$ 342,432
$ (150,374)
$ 19,900
$ 2,676,825
Net income
483,185
218,456
(4,647)
(95,306)
601,688
¹Includes net sales of $143.3 million and net income of $55.2 million (tax affected) related to the acquired KO Energy assets since the date of acquisition, June 12, 2015.
²Includes results through June 12, 2015, the date the TCCC Transaction was finalized. Net income for KO Energy includes only net revenues and direct operating expenses, rather than full “carve-out” financial statements, because such financial information would not be meaningful given that it is not possible to provide a meaningful allocation of business unit and corporate costs, interest or tax in respect of KO Energy.
³Includes results through June 12, 2015. Net income includes gain recognized on the sale of Monster Non-Energy of $161.5 million.
4The $100.6 million and $218.5 million of net income for KO Energy for the years ended December 31, 2015 and 2014, respectively, are presented before tax. The associated estimated provision for income taxes is included in the “Other” category.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Pro-Forma Adjustments - Other include the following:
Year Ended
December 31,
2015¹
Year Ended
December 31,
Net sales:
Amortization of deferred revenue
$
8,887
$
19,900
Net income:
Amortization of deferred revenue
$
8,887
$
19,900
To record sales commissions
(15,470)
(38,352)
To record amortization of definite lived KO Energy intangibles
(3,126)
(7,000)
To eliminate TCCC Transaction expenses
15,495
4,824
Estimated provision for income taxes on pro forma adjustments
2,545
9,428
Estimated provision for income taxes on KO Energy income
(38,721)
(84,106)
Total
$
(30,390)
$
(95,306)
¹Includes amortization of deferred revenue, sales commissions and amortization of intangibles through June 12, 2015, the date the TCCC Transaction was consummated.
For purposes of the unaudited pro forma financial information, a combined U.S. Federal and state statutory tax rate of 38.5% has been used. This rate does not reflect the Company’s expected effective tax rate, which includes other tax charges and benefits, and does not take into account any historical or possible future tax events that may impact the combined company.
The unaudited pro forma financial information is presented for information purposes only and is not intended to represent or be indicative of the combined results of operations that the Company would have reported had the TCCC Transaction been completed as of the date and for the periods presented, and should not be taken as representative of the Company’s consolidated results of operations following the completion of the TCCC Transaction. In addition, the unaudited pro forma financial information is not intended to project the future financial results of operations of the combined company. The unaudited pro forma combined financial information does not reflect any cost savings, operational synergies or revenue enhancements that the combined company may achieve as a result of the TCCC Transaction, or the costs to combine the operations or costs necessary to achieve cost savings, operating synergies and revenue enhancements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
3. INVESTMENTS
The following table summarizes the Company’s investments at:
December 31, 2016
Amortized Cost
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
Fair
Value
Continuous
Unrealized
Loss Position
less than 12
Months
Continuous
Unrealized
Loss Position
greater than 12
Months
Available-for-sale
Short-term:
Commercial paper
$
40,382
$
-
$
-
$
40,382
$
-
$
-
Municipal securities
140,379
-
140,198
-
U.S. government agency securities
26,057
-
26,051
-
Variable rate demand notes
13,923
-
-
13,923
-
-
Long-term:
Municipal securities
2,403
-
2,394
-
Total
$
223,144
$
-
$
$
222,948
$
$
-
December 31, 2015
Amortized Cost
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
Fair
Value
Continuous
Unrealized
Loss Position
less than 12
Months
Continuous
Unrealized
Loss Position
greater than 12
Months
Held-to-Maturity
Short-term:
Commercial paper
$
3,978
$
-
$
-
$
3,978
$
-
$
-
Municipal securities
709,207
709,078
-
U.S. government agency securities
23,369
-
23,311
-
U.S. Treasuries
8,056
-
8,043
-
Long-term:
Municipal securities
11,071
-
11,063
-
U.S. government agency securities
4,277
-
4,252
-
Total
$
759,958
$
$
$
759,725
$
$
-
During the years ended December 31, 2016 and 2015, realized gains or losses recognized on the sale of investments were not significant. During June 2016, the Company sold a large portion of its held-to-maturity investments prior to maturity in order to fund a portion of a common stock repurchase (see Note 13). As a result, the Company’s remaining held-to-maturity investments of $43.7 million were transferred to available-for-sale effective June 15, 2016.
The Company’s investments at December 31, 2016 and 2015 in commercial paper, 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.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
The following table summarizes the underlying contractual maturities of the Company’s investments at:
December 31, 2016
December 31, 2015
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Less than 1 year:
Commercial paper
$
40,382
$
40,382
$
3,978
$
3,978
Municipal securities
140,379
140,198
709,207
709,078
U.S. government agency securities
26,057
26,051
23,369
23,311
U.S. Treasuries
-
-
8,056
8,043
Due 1 -10 years:
Municipal securities
2,403
2,394
11,071
11,063
U.S. government agency securities
-
-
4,277
4,252
Variable rate demand notes
3,917
3,917
-
-
Due 11 - 20 years:
Variable rate demand notes
6,003
6,003
-
-
Due 21 - 30 years:
Variable rate demand notes
4,003
4,003
-
-
Total
$
223,144
$
222,948
$
759,958
$
759,725
The Company recognized a net gain through earnings on its trading securities as follows for the years ended:
Gain (loss) on transfer from available-for-sale to trading
$
-
$
-
$
-
Gain on trading securities sold
-
(Loss) gain on trading securities held
-
-
(177)
Gain on trading securites
$
-
$
$
4. FAIR VALUE OF CERTAIN FINANCIAL ASSETS AND LIABILITIES
FASB ASC 820 provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The three levels of inputs required by the standard that the Company uses to measure fair value are summarized below.
· Level 1: Quoted prices in active markets for identical assets or liabilities.
· Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.
· Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
FASB ASC 820 requires the use of observable market inputs (quoted market prices) when measuring fair value and requires a Level 1 quoted price to be used to measure fair value whenever possible.
The following tables present the Company’s financial assets that are recorded at fair value on a recurring basis, segregated among the appropriate levels within the fair value hierarchy at:
December 31, 2016
Level 1
Level 2
Level 3
Total
Cash
$
278,972
$
-
$
-
$
278,972
Money market funds
76,112
-
-
76,112
Commercial paper
-
47,855
-
47,855
Variable rate demand notes
-
13,923
-
13,923
Municipal securities
-
157,617
-
157,617
U.S. government agency securities
-
26,051
-
26,051
Foreign currency derivatives
-
(528
)
-
(528
)
Total
$
355,084
$
244,918
$
-
$
600,002
Amounts included in:
Cash and cash equivalents
$
355,084
$
22,498
$
-
$
377,582
Short-term investments
-
220,554
-
220,554
Accounts receivable, net
-
-
Investments
-
2,394
-
2,394
Accrued liabilities
-
(764
)
-
(764
)
Total
$
355,084
$
244,918
$
-
$
600,002
December 31, 2015
Level 1
Level 2
Level 3
Total
Cash
$
255,723
$
-
$
-
$
255,723
Money market funds
664,005
-
-
664,005
Certificates of deposit
-
85,007
-
85,007
Commercial paper
-
430,605
-
430,605
U.S. Treasuries
-
260,035
-
260,035
Municipal securities
-
731,744
-
731,744
U.S. government agency securities
-
508,256
-
508,256
Foreign currency derivatives
-
(217
)
-
(217
)
Total
$
919,728
$
2,015,430
$
-
$
2,935,158
Amounts included in:
Cash and cash equivalents
$
919,728
$
1,255,689
$
-
$
2,175,417
Short-term investments
-
744,610
-
744,610
Accounts receivable, net
-
-
Investments
-
15,348
-
15,348
Accrued liabilities
-
(588
)
-
(588
)
Total
$
919,728
$
2,015,430
$
-
$
2,935,158
All of the Company’s short-term investments are classified within Level 1 or Level 2 of the fair value hierarchy. The Company’s valuation of its Level 1 investments, which include money market funds, is based on quoted market prices in active markets for identical securities. The Company’s valuation of its Level 2 investments, which include municipal securities, commercial paper, U.S. Treasuries, certificates of deposit, VRDNs and U.S. government agency securities, is based on other observable inputs, specifically a market approach which utilizes valuation models, pricing systems,
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
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 years ended December 31, 2016 and 2015, and there were no changes in the Company’s valuation techniques.
5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to foreign currency exchange rate risks related primarily to its foreign business operations. During the years ended December 31, 2016 and 2015, respectively, 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 entered into by the Company that were outstanding as of December 31, 2016 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 FASB ASC 815. Therefore, gains and losses on the Company’s foreign currency exchange contracts are recognized in other expense, net, in the 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 consolidated balance sheets consist of the following at:
December 31, 2016
Derivatives not designated as
hedging instruments under
FASB ASC 815-20
Notional
Amount
Fair
Value
Balance Sheet Location
Assets:
Foreign currency exchange contracts:
Receive CAD/pay USD
$
22,314
$
Accounts receivable, net
Receive SGD/pay USD
7,915
Accounts receivable, net
Receive NOK/pay USD
2,138
Accounts receivable, net
Receive USD/pay CLP
4,094
Accounts receivable, net
Receive USD/pay COP
2,330
Accounts receivable, net
Liabilities:
Foreign currency exchange contracts:
Receive USD/pay GBP
$
7,718
$
(57)
Accrued liabilities
Receive USD/pay EUR
29,621
(325)
Accrued liabilities
Receive USD/pay AUD
15,135
(74)
Accrued liabilities
Receive USD/pay ZAR
20,405
(296)
Accrued liabilities
Receive USD/pay MXN
25,864
(4)
Accrued liabilities
Receive USD/pay BRL
3,138
(3)
Accrued liabilities
Receive USD/pay NZD
2,076
(5)
Accrued liabilities
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
December 31, 2015
Derivatives not designated as
hedging instruments under
FASB ASC 815-20
Notional
Amount
Fair
Value
Balance Sheet Location
Assets:
Foreign currency exchange contracts:
Receive USD/pay GBP
$
18,146
$
Accounts receivable, net
Receive USD/pay ZAR
17,411
Accounts receivable, net
Receive USD/pay RUB
2,173
Accounts receivable, net
Receive USD/pay BRL
2,478
Accounts receivable, net
Receive USD/pay COP
1,351
Accounts receivable, net
Liabilities:
Foreign currency exchange contracts:
Receive EUR/pay USD
$
39,578
$
(429)
Accrued liabilities
Receive USD/pay AUD
14,040
(82)
Accrued liabilities
Receive USD/pay CAD
2,804
(15)
Accrued liabilities
Receive USD/pay JPY
2,495
(2)
Accrued liabilities
Receive USD/pay MXN
8,122
(15)
Accrued liabilities
Receive SGD/pay USD
3,837
(30)
Accrued liabilities
Receive USD/pay NZD
1,978
(3)
Accrued liabilities
Receive USD/pay CLP
3,519
(12)
Accrued liabilities
The net gain on derivative instruments in the consolidated statements of income were as follows:
Amount of gain
recognized in income on
derivatives
Year ended
Derivatives not designated as
hedging instruments under
FASB ASC 815-20
Location of gain
recognized in income on
derivatives
December 31,
December 31,
Foreign currency exchange contracts
Other expense, net
$
1,819
$
2,503
6. INVENTORIES
Inventories consist of the following at December 31:
Raw materials
$
58,658
$
52,043
Finished goods
103,313
104,078
$
161,971
$
156,121
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
7. PROPERTY AND EQUIPMENT, Net
Property and equipment consist of the following at December 31:
Land
$
46,596
$
6,792
Leasehold improvements
2,687
2,804
Furniture and fixtures
3,635
3,551
Office and computer equipment
11,701
11,080
Computer software
3,274
2,530
Equipment
114,230
93,465
Building
69,547
39,848
Vehicles
31,582
29,804
283,252
189,874
Less: accumulated depreciation and amortization
(109,909
)
(92,520
)
$
173,343
$
97,354
Total depreciation and amortization expense recorded was $30.2 million, $27.0 million and $25.3 million for the years ended December 31, 2016, 2015 and 2014, respectively.
8. GOODWILL AND OTHER INTANGIBLES ASSETS
The following is a roll-forward of goodwill for the year ended December 31, 2016 by reportable segment:
Monster
Energy®
Drinks
Strategic
Brands
Other
Total
Balance at December 31, 2015
$
641,716
$
637,999
$
-
$
1,279,715
Acquisitions
51,928
-
-
51,928
Balance at December 31, 2016
$
693,644
$
637,999
$
-
$
1,331,643
Intangible assets consist of the following at:
December 31,
December 31,
Amortizing intangibles
$
71,290
$
35,263
Accumulated amortization
(14,535
)
(3,899
)
56,755
31,364
Non-amortizing intangibles
975,880
396,622
$
1,032,635
$
427,986
During the fourth quarter of 2016, the Company finalized its goodwill allocation by reporting unit in connection with the final AFF Transaction purchase price allocation.
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 $10.6 million, $3.9 million and $0.4 million for the years ended December 31, 2016, 2015 and 2014, respectively.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
The following is the future estimated amortization expense related to amortizing intangibles as of December 31, 2016:
Year Ending December 31:
$
11,845
11,845
11,845
7,963
4,721
2022 and thereafter
8,536
56,755
At December 31, 2016, non-amortizing intangibles primarily consist of indefinite-lived tradenames.
9. DISTRIBUTION AGREEMENTS
In accordance with FASB ASC No. 420 “Exit or Disposal Cost Obligations”, the Company expenses distributor termination costs in the period in which the written notification of termination occurs. As a result, the Company incurred termination costs of $79.8 million, $224.0 million and ($0.2) million for the years ended December 31, 2016, 2015 and 2014, respectively. Such termination costs have been expensed in full and are included in operating expenses for the years ended December 31, 2016, 2015 and 2014, respectively.
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 $26.1 million, $50.5 million and $7.8 million for the years ended December 31, 2016, 2015 and 2014, respectively. Included in the $26.1 million of revenue recognized for the year ended December 31, 2016 was $5.7 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors who were sent notices of termination during the year ended December 31, 2016. Included in the $50.5 million of revenue recognized for the year ended December 31, 2015 was $39.8 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors who were sent notices of termination during the year ended December 31, 2015. There was no acceleration of deferred revenue in the year ended December 31, 2014.
10. DEBT
The Company entered into a credit facility with Comerica Bank (“Comerica”) consisting of a revolving line of credit, which was amended in April 2015, under which the Company may borrow up to $10.0 million of non-collateralized debt. The revolving line of credit is effective through June 1, 2017. Interest on borrowings under the line of credit is based on Comerica’s base (prime) rate minus 1% to 1.5%, or London Interbank Offered Rates plus an additional percentage of 1.25% to 1.75%, depending upon certain financial ratios maintained by the Company. The Company had no outstanding borrowings on this line of credit at December 31, 2016. Under this revolving line of credit, the Company may also issue standby Letters of Credit with an aggregate amount of up to $4.0 million. The fee on the standby Letters of Credit ranges from 1.00% to 1.50% depending upon certain financial ratios maintained by the Company. The Company had no outstanding standby Letters of Credit at December 31, 2016.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
In December 2016, the Company entered into a credit facility with HSBC Bank (China) Company Limited, Shanghai Branch consisting of a working capital line of credit under which the Company may borrow up to $4.0 million of non-collateralized debt. Interest on borrowings under the line of credit is based on the People’s Bank of China benchmark lending rates multiplied by 1.05. The Company had no outstanding borrowings on this line of credit at December 31, 2016.
The Company’s debt of $1.1 million and $0.8 million at December 31, 2016 and 2015, respectively, consisted of capital leases, collateralized by vehicles, payable over 12 months in monthly installments at various effective interest rates, with final payments ending on or before December 31, 2016.
At December 31, 2016 and 2015, the assets acquired under capital leases had a net book value of $4.5 million and $3.6 million, net of accumulated depreciation of $4.5 million and $4.4 million, respectively.
Interest expense for capital lease obligations amounted to $0.07 million, $0.03 million and $0.03 million for the years ended December 31, 2016, 2015 and 2014, respectively.
11. COMMITMENTS AND CONTINGENCIES
The Company is obligated under various non-cancellable lease agreements providing for office space, warehouse space, and automobiles that expire at various dates through the year 2031.
Rent expense under operating leases was $9.9 million, $10.7 million and $6.8 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Future minimum rental payments at December 31, 2016 under the operating leases referred to above are as follows:
Year Ending December 31:
$
5,677
1,777
1,231
1,093
2022 and thereafter
8,012
$
18,782
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Contractual obligations - The Company has the following contractual obligations related primarily to sponsorships and other commitments as of December 31, 2016:
Year Ending December 31:
$
91,003
49,133
8,257
8,130
6,750
2022 and thereafter
-
$
163,273
Purchase Commitments - The Company has purchase commitments aggregating approximately $47.0 million at December 31, 2016, which represent 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 purchases various raw material items, including, but not limited to, flavors, ingredients, dietary ingredients, containers, milk, glucose, sucralose, cream and protein, from a limited number of resources. An interruption in supply from any of such resources could result in the Company’s inability to produce certain products for limited or possibly extended periods of time. The aggregate value of purchases from suppliers of such limited resources described above for the years ended December 31, 2016, 2015 and 2014 was $205.9 million, $332.0 million and $292.8 million, respectively.
In September 2016, the Company completed its acquisition of approximately 49 acres of land, located in Rialto, CA, for a purchase price of approximately $39.1 million. The Company has begun construction of an approximately 1,000,000 square-foot building, which it hopes to have LEED certified, to replace its current leased warehouse and distribution facilities located in Corona, CA. The Company has entered into an approximately $36.8 million guaranteed maximum price construction contract for the construction of the building of which $33.7 million remained outstanding as of December 31, 2016.
Guarantees - The Company from time to time enters into certain types of contracts that contingently require the Company to indemnify parties against third-party claims. These contracts primarily relate to: (i) certain agreements with the Company’s officers, directors and employees under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship, (ii) certain distribution or purchase agreements under which the Company may have to indemnify the Company’s customers from any claim, liability or loss arising out of any actual or alleged injury or damages suffered in connection with the consumption or purchase of the Company’s products or the use of Company trademarks, and (iii) certain real estate leases, under which the Company may be required to indemnify property owners for liabilities and other claims arising from the Company’s use of the applicable premises. The terms of such obligations vary and typically, a maximum obligation is not explicitly stated. Generally, the Company believes that its insurance coverage is adequate to cover any resulting liabilities or claims.
Litigation - The Company has been named a defendant in numerous 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.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
State Attorney General Inquiry - In July 2012, the Company received a subpoena from the Attorney General for the State of New York in connection with its investigation concerning the Company’s advertising, marketing, promotion, ingredients, usage and sale of its Monster Energy® brand energy drinks. Production of documents pursuant to that subpoena was completed in approximately May 2014.
On August 6, 2014, the Attorney General for the State of New York issued a second subpoena seeking additional documents and the deposition of a Company employee. On September 8, 2014, the Company moved to quash the second subpoena in the Supreme Court, New York County. The motion was fully briefed and was argued on March 17, 2015. On January 13, 2017, the Court issued an opinion in which it agreed with certain Company arguments regarding the scope of the subpoena and the Attorney General’s investigation, but denied the motion to quash and granted the Attorney General’s cross-motion to compel compliance. It is unknown what, if any, action the state Attorney General may take against the Company, the relief which may be sought in the event of any such proceeding or whether such proceeding could have a material adverse effect on the Company’s business, financial condition or results of operations.
San Francisco City Attorney Litigation - On October 31, 2012, the Company received a written request for information from the City Attorney for the City and County of San Francisco concerning the Company’s advertising and marketing of its Monster Energy® brand energy drinks and specifically concerning the safety of its products for consumption by adolescents. In a letter dated March 29, 2013, the San Francisco City Attorney threatened to bring suit against the Company if it did not agree to take the following five steps immediately: (i) “Reformulate its products to lower the caffeine content to safe levels”; (ii) “Provide adequate warning labels”; (iii) “Cease promoting over-consumption in marketing”; (iv) “Cease use of alcohol and drug references in marketing” and (v) “Cease targeting minors.”
On May 6, 2013, the San Francisco City Attorney filed a complaint for declaratory and injunctive relief, civil penalties and restitution for alleged violation of California’s Unfair Competition Law, Business & Professions Code sections 17200, et seq. (“UCL”), styled People Of The State Of California ex rel. Dennis Herrera, San Francisco City Attorney v. Monster Beverage Corporation, in San Francisco Superior Court. The City Attorney alleged that the Company (1) mislabeled its products as a dietary supplement, in violation of California’s Sherman Food, Drug, and Cosmetic Law, California Health & Safety Code section 109875, et seq.; (2) is selling an “adulterated” product because caffeine is not generally recognized as safe due to the alleged lack of scientific consensus concerning the safety of the levels of caffeine in the Company’s products; and (3) is engaged in unfair and misleading business practices because its marketing (a) does not disclose the health risks that energy drinks pose for children and teens, (b) fails to warn against and promotes unsafe consumption, (c) implicitly promotes mixing of energy drinks with alcohol or drugs and (d) is deceptive because it includes unsubstantiated claims about the purported special benefits of its “killer” ingredients and “energy blend.” The City Attorney sought a declaration that the Company has engaged in unfair and unlawful business acts and practices in violation of the UCL, an injunction from performing or proposing to perform any acts in violation of the UCL, restitution and civil penalties.
On September 5, 2014, the City Attorney filed a second amended complaint, adding Monster Energy Company as a defendant. The Company and Monster Energy Company filed answers to the second amended complaint on October 4, 2014 and November 10, 2014, respectively.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
The City Attorney and the Company settled the action in January 2017, on terms acceptable to the Company. The settlement does not include any penalty or fine under the UCL; any finding or admission of liability or wrongdoing; or any change to the formulation of Monster Energy® drinks or to whom the drinks may be sold. In consideration for a release of claims and dismissal of the action with prejudice, the Company agreed to maintain various current marketing and labeling practices for its energy drink products through December 31, 2018.
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 the 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 December 31, 2016, the Company’s consolidated balance sheet includes accrued loss contingencies of approximately $2.8 million.
12. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss are as follows at December 31:
Accumulated net unrealized loss on available-for-sale securities
$
$
-
Foreign currency translation adjustments, net of tax
23,056
21,878
Total accumulated other comprehensive loss
$
23,249
$
21,878
13. TREASURY STOCK PURCHASE
On April 28, 2016, the Company’s Board of Directors authorized the Company to commence a “modified Dutch auction” tender offer to repurchase up to $2.0 billion of its outstanding shares of common stock. The repurchase was authorized under the Company’s existing share repurchase authority and was funded with cash on hand. The Company commenced this tender offer in May 2016. On June 15, 2016, the Company accepted for payment an aggregate of 38.5 million shares of common stock at a purchase price of $52.00 per share, for a total amount of $2.0 billion (excluding commissions), which exhausted the availability under all previously authorized share repurchase plans. Such shares of common stock are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2016.
On August 2, 2016, the Company’s Board of Directors authorized a new share repurchase program for the repurchase of up to $250.0 million of the Company’s outstanding shares of common stock (the “August 2016 Repurchase Plan”). During the year ended December 31, 2016, the Company purchased 5.8 million shares of common stock at an average purchase price of $43.40 per share, for a total amount of $249.9 million (excluding broker commissions), which exhausted the availability under the August 2016 Repurchase Plan. Such shares of common stock are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2016.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
During the year ended December 31, 2016, 56,820 shares of common stock were purchased from employees in lieu of cash payments for options exercised or withholding taxes due for a total amount of $2.6 million. While such purchases are considered common stock repurchases, they are not counted as purchases against the Company’s authorized share repurchase programs. Such shares are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2016.
14. STOCK-BASED COMPENSATION
The Company has two stock-based compensation plans under which shares were available for grant at December 31, 2016: the Monster Beverage Corporation 2011 Omnibus Incentive Plan (the “2011 Omnibus Incentive Plan”), including the Monster Beverage Deferred Compensation Plan (the “Deferred Compensation Plan”) as a sub plan thereunder, and the 2009 Monster Beverage Corporation Stock Incentive Plan for Non-Employee Directors (the “2009 Directors Plan”).
The 2011 Omnibus Incentive Plan permits the granting of options, stock appreciation rights, restricted stock, restricted stock units, performance awards and other stock-based awards up to an aggregate of 43,500,000 shares of the common stock of the Company to employees or consultants of the Company and its subsidiaries. Shares authorized under the 2011 Omnibus Incentive Plan are reduced by 2.16 shares for each share granted or issued with respect to a Full Value Award. A Full Value Award is an award other than an incentive stock option, a non-qualified stock option, or a stock appreciation right, which is settled by the issuance of shares. Options granted under the 2011 Omnibus Incentive Plan may be incentive stock options under Section 422 of the Internal Revenue Code, as amended, or non-qualified stock options. The Compensation Committee of the Board of Directors (the “Compensation Committee”) has sole and exclusive authority to grant stock awards to all employees who are not new hires and to all new hires who are subject to Section 16 of the Exchange Act. The Compensation Committee and the Executive Committee of the Board of Directors (the “Executive Committee”) each independently has the authority to grant stock awards to new hires who are not Section 16 employees. Awards granted by the Executive Committee are not subject to approval or ratification by the Board or the Compensation Committee. Options granted under the 2011 Omnibus Incentive Plan generally vest over a five-year period from the grant date and are generally exercisable up to 10 years after the grant date. As of December 31, 2016, 18,799,813 shares of the Company’s common stock have been granted, net of cancellations, and 21,120,151 shares (as adjusted for Full Value Awards) of the Company’s common stock remain available for grant under the 2011 Omnibus Incentive Plan.
In 2016, the Company adopted the Deferred Compensation Plan (as a sub plan to the 2011 Omnibus Incentive Plan), pursuant to which eligible employees may elect to defer cash and/or equity based compensation and to receive the deferred amounts, together with an investment return (positive or negative), either at a pre-determined time in the future or upon termination of their employment with the Company or its subsidiaries or affiliates that are participating employers under the Deferred Compensation Plan, as provided under the Deferred Compensation Plan and in relevant deferral elections. Deferrals under the Deferred Compensation Plan are unfunded and unsecured. As of December 31, 2016, there were no deferrals under the Deferred Compensation Plan. As of February 10, 2017, deferrals under the Deferred Compensation Plan are solely comprised of cash compensation and equity compensation coming due after March, 2018 and are not material in the aggregate.
The 2009 Directors Plan permits the granting of options, stock appreciation rights (each, a “SAR”), and other stock-based awards to purchase up to an aggregate of 4,800,000 shares of common stock of the Company to non-employee directors of the Company. The 2009 Directors Plan is administered by the Board of Directors. Each award granted under the 2009 Directors Plan will be evidenced by a written agreement and will contain the terms and conditions that the Board of Directors deems appropriate. The Board of Directors may grant such awards on the last business day prior to the
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
date of the annual meeting of stockholders. Any award granted under the 2009 Directors Plan will vest, with respect to 100% of such award, on the last business day prior to the date of the annual meeting, in the calendar year following the calendar year in which such award is granted. The Board of Directors may determine the exercise price per share of the Company’s common stock under each option, but such price may not be less than 100% of the closing price of the Company’s common stock on the date an option is granted. Option grants may be made under the 2009 Directors Plan for 10 years from June 4, 2009. The Board of Directors may also grant SARs, independently, or in connection with an option grant. The Board of Directors may determine the exercise price per share of the Company’s common stock under each SAR, but such price may not be less than the greater of (i) the fair market value of a share on the date the SAR is granted and (ii) the price of the related option, if the SAR is granted in connection with an option grant. Additionally, the Board of Directors may grant other stock-based awards, which include awards of shares of the Company’s common stock, restricted shares of the Company’s common stock, and awards that are valued based on the fair market value of shares of the Company’s common stock. SARs and other stock-based awards are subject to the general provisions of the 2009 Directors Plan. The Board of Directors may amend or terminate the 2009 Directors Plan at any time. As of December 31, 2016, 286,551 shares of the Company’s common stock had been granted under the 2009 Directors Plan, and 4,513,449 shares of the Company’s common stock remained available for grant.
The Company recorded $45.8 million, $32.7 million and $28.6 million of compensation expense relating to stock options, restricted stock awards, SARs and restricted stock units during the years ended December 31, 2016, 2015 and 2014, respectively.
The excess tax benefit realized for tax deductions from non-qualified stock option exercises, disqualifying dispositions of incentive stock options, vesting of restricted stock units and restricted stock awards for the years ended December 31, 2016, 2015 and 2014 was $20.8 million, $314.7 million and $11.9 million, respectively. As a result of the Company’s early adoption of ASU No. 2016-09 effective January 1, 2016, the Company recorded excess tax benefits of $20.8 million in net income for the year ended December 31, 2016. The excess tax benefits for the years ended December 31, 2015 and 2014 of $314.7 million and $11.9 million, respectively, were recorded in additional paid-in-capital.
Stock Options
Under the Company’s stock-based compensation plans, all stock options granted as of December 31, 2016 were granted at prices based on the fair value of the Company’s common stock on the date of grant. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes-Merton option pricing formula with the assumptions included in the table below. The Company records compensation expense for non-employee stock options based on the estimated fair value of the options as of the earlier of (1) the date at which a commitment for performance by the non-employee to earn the stock option is reached or (2) the date at which the non-employee’s performance is complete, using the Black-Scholes-Merton option pricing formula with the assumptions included in the table below. The Company uses historical data to determine the exercise behavior, volatility and forfeiture rate of the options.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
The following weighted-average assumptions were used to estimate the fair value of options granted during:
Dividend yield
0.0 %
0.0 %
0.0 %
Expected volatility
36.2 %
37.1 %
41.4 %
Risk-free interest rate
1.57 %
1.57 %
1.55 %
Expected term
6.3 Years
5.8 Years
5.8 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 expected time to post-vesting exercise of options by employees. The Company uses historical exercise patterns of previously granted options to derive employee behavioral patterns used to forecast expected exercise patterns.
The following table summarizes the Company’s activities with respect to its stock option plans as follows:
Options
Number of
Shares (In
thousands)
Weighted-
Average
Exercise
Price Per
Share
Weighted-
Average
Remaining
Contractual
Term (In
years)
Aggregate
Intrinsic Value
Outstanding at January 1, 2016
19,770
$
16.95
5.6
$
646,497
Granted 01/01/16 - 03/31/16
2,883
$
44.02
Granted 04/01/16 - 06/30/16
$
46.18
Granted 07/01/16 - 09/30/16
$
52.60
Granted 10/01/16 - 12/31/16
1,510
$
43.87
Exercised
(1,887)
$
8.72
Cancelled or forfeited
(332)
$
33.65
Outstanding at December 31, 2016
22,643
$
23.55
5.8
$
474,739
Vested and expected to vest in the
future at December 31, 2016
21,269
$
22.40
5.6
$
470,017
Exercisable at December 31, 2016
12,231
$
11.26
3.6
$
404,982
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
The following table summarizes information about stock options outstanding and exercisable at December 31, 2016:
Options Outstanding
Options Exercisable
Range of Exercise
Prices ($)
Number
Outstanding (In
Thousands)
Weighted
Average
Remaining
Contractual
Term (Years)
Weighted
Average
Exercise
Price ($)
Number
Exercisable
(In
Thousands)
Weighted
Average
Exercise
Price ($)
$4.51
-
$4.51
1.9
$4.51
$4.51
$5.29
-
$5.29
3,945
1.4
$5.29
3,945
$5.29
$5.61
-
$5.61
2.1
$5.61
$5.61
$5.94
-
$5.94
3,427
2.9
$5.94
3,427
$5.94
$6.02
-
$15.71
2,286
4.9
$12.57
1,440
$10.73
$15.88
-
$22.26
2,268
6.2
$18.60
1,666
$18.43
$23.00
-
$36.05
2,289
7.2
$23.83
1,075
$23.45
$37.10
-
$43.64
2,218
9.2
$41.64
$37.42
$43.99
-
$43.99
2,774
9.1
$43.99
-
$0.00
$44.73
-
$53.24
3,329
8.5
$45.53
$45.15
22,643
5.8
$23.55
12,231
$11.26
The weighted-average grant-date fair value of options granted during the years ended December 31, 2016, 2015 and 2014 was $16.90 per share, $16.73 per share and $10.50 per share, respectively. The total intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014 was $70.6 million, $870.1 million and $47.1 million, respectively.
Cash received from option exercises under all plans for the years ended December 31, 2016, 2015 and 2014 was approximately $16.4 million, $49.2 million and $17.2 million, respectively.
At December 31, 2016, there was $99.6 million of total unrecognized compensation expense related to non-vested options granted to employees under the Company’s share-based payment plans. That cost is expected to be recognized over a weighted-average period of 3.1 years.
Restricted Stock Awards and Restricted Stock Units
Stock-based compensation cost for restricted stock awards and restricted stock units is measured based on the closing fair market value of the Company’s common stock at the date of grant. In the event that the Company has the option and intent to settle a restricted stock unit in cash, the award is classified as a liability and revalued at each balance sheet date. Total cash paid to settle restricted stock unit liabilities and the increase in the liabilities for future cash settlements during the years ended December 31, 2016 and 2015 were not material.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
The following table summarizes the Company’s activities with respect to non-vested restricted stock units as follows:
Number of
Shares (in
thousands)
Weighted
Average
Grant-Date
Fair Value
Non-vested at January 1, 2016
$
33.19
Granted 01/01/16- 03/31/16
$
43.99
Granted 04/01/16- 06/30/16
$
49.65
Granted 07/01/16- 09/30/16
-
$
-
Granted 10/01/16- 12/31/16
-
$
-
Vested
(256)
$
31.50
Forfeited/cancelled
(5)
$
19.42
Non-vested at December 31, 2016
$
39.95
The weighted-average grant-date fair value of restricted stock units and restricted stock awards granted during the years ended December 31, 2016, 2015 and 2014 was $44.71, $45.50 and $28.13 per share, respectively. As of December 31, 2016, 0.5 million of restricted stock units are expected to vest.
At December 31, 2016, total unrecognized compensation expense relating to non-vested restricted stock awards and non-vested restricted stock units was $13.9 million, which is expected to be recognized over a weighted-average period of 1.6 years.
Employee and Non-Employee Share-Based Compensation Expense
The table below shows the amounts recognized in the consolidated financial statements for the twelve-months ended December 31, 2016, 2015 and 2014 for share-based compensation related to employees and non-employees. Employee and non-employee share-based compensation expense of $45.8 million for the year ended December 31, 2016 is comprised of $8.0 million that relates to incentive stock options and $37.8 million that relates to non-qualified stock options and restricted units and awards. Employee and non-employee share-based compensation expense of $32.7 million for the year ended December 31, 2015 is comprised of $6.2 million that relates to incentive stock options and $26.5 million that relates to non-qualified stock options and restricted units and awards. Employee and non-employee share-based compensation expense of $28.6 million for the year ended December 31, 2014 is comprised of $4.8 million that relates to incentive stock options and $23.8 million that relates to non-qualified stock options and restricted units and awards.
Operating expenses
$
45,848
$
32,719
$
28,552
Total employee and non-employee share-based compensation expense included in income, before income tax
45,848
32,719
28,552
Less: Amount of income tax benefit recognized in earnings
(34,909)
(9,058)
(2,932)
Amount charged against net income
$
10,939
$
23,661
$
25,620
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
15. INCOME TAXES
The domestic and foreign components of the Company’s income before provision for income taxes are as follows:
Year Ended December 31,
Domestic*
$
1,029,763
$
859,039
$
711,917
Foreign*
49,922
32,509
33,871
Income before provision for income taxes
$
1,079,685
$
891,548
$
745,788
*After intercompany royalties, management fees and interest charges from the Company’s domestic to foreign entities of $25.6 million, $29.4 million and $34.9 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Components of the provision for income taxes are as follows:
Year Ended December 31,
Current:
Federal
$
212,283
$
548,018
$
228,348
State
35,756
88,671
36,633
Foreign
17,171
10,634
7,467
265,210
647,323
272,448
Deferred:
Federal
87,360
(255,422)
(8,473)
State
15,254
(40,446)
(442)
Foreign
(9,709)
(5,420)
3,476
92,905
(301,288)
(5,439)
Valuation allowance
8,885
(1,220)
(4,406)
$
367,000
$
344,815
$
262,603
The differences in the total provision for income taxes that would result from applying the 35% federal statutory rate to income before provision for income taxes and the reported provision for income taxes are as follows:
Year Ended December 31,
U.S. Federal tax expense at statutory rates
$
377,599
$
312,042
$
261,025
State income taxes, net of federal tax benefit
33,148
31,046
23,859
Permanent differences
5,285
2,107
Stock Based Compensation
(13,654)
3,203
2,709
Domestic production deduction
(21,447)
-
(20,607)
Other
(8,765)
(127)
(1,267)
Foreign rate differential
(9,720)
(5,414)
(817)
Valuation allowance
8,885
(1,220)
(4,406)
$
367,000
$
344,815
$
262,603
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Major components of the Company’s deferred tax assets (liabilities) at December 31 are as follows:
Deferred Tax Assets:
Reserve for sales returns
$
$
Reserve for doubtful accounts
Reserve for inventory obsolescence
1,126
Reserve for marketing development fund
8,065
10,118
Capitalization of inventory costs
2,714
1,927
State franchise tax - current
18,016
15,143
Accrued compensation
1,212
1,584
Accrued other liabilities
1,967
1,565
Deferred revenue
145,319
152,777
Stock-based compensation
31,873
24,488
Securities impairment
Foreign net operating loss carryforward
29,894
26,624
Prepaid supplies
8,022
6,065
Termination payments
98,244
81,896
Capital loss carryforward
Elimination Company Profit
2,843
-
Gain on intercompany transfer
7,274
7,809
Total gross deferred tax assets
$
356,198
$
332,041
Deferred Tax Liabilities:
Amortization of trademarks
$
(18,663)
$
(12,078)
Intangibles
(131,264)
(134,021)
State franchise tax - deferred
(12,946)
(18,359)
Other deferred tax liabilities
(957)
(2,381)
Depreciation
(6,736)
(7,543)
Total gross deferred tax liabilities
(170,566)
(174,382)
Valuation Allowance
(26,076)
(17,191)
Net deferred tax assets
$
159,556
$
140,468
During the years ended December 31, 2016, 2015 and 2014, the Company established full valuation allowances against certain deferred tax assets, resulting from cumulative net operating losses incurred by certain foreign subsidiaries of the Company. The effect of the valuation allowances and the subsequent related impact on the Company’s overall tax rate was to increase (decrease) the Company’s provision for income taxes by $8.9 million, ($0.5) million and ($4.4) million for the years ended December 31, 2016, 2015 and 2014, respectively. At December 31, 2016, the Company had net operating loss carryforwards of approximately $127.3 million. Of this amount, $105.3 million may be carried forward indefinitely. The remaining $22.0 million of net operating loss carryforwards will begin to expire in 2017.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
The following is a roll-forward of the Company’s total gross unrecognized tax benefits, not including interest and penalties, for the years ended December 31, 2016, 2015 and 2014:
Gross Unrealized Tax
Benefits
Balance at January 1, 2014
$
Additions for tax positions related to the current year
-
Additions for tax positions related to the prior year
-
Decreases for tax positions related to prior years
-
Balance at December 31, 2014
$
Additions for tax positions related to the current year
-
Additions for tax positions related to the prior year
-
Decreases for tax positions related to prior years
(464)
Balance at December 31, 2015
$
Additions for tax positions related to the current year
-
Additions for tax positions related to the prior year
-
Decreases for tax positions related to prior years
(462)
Balance at December 31, 2016
$
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Company’s consolidated financial statements. As of December 31, 2016, the Company had accrued approximately $0.1 million in interest and penalties related to unrecognized tax benefits. If the Company were to prevail on all uncertain tax positions it would not have a significant impact on the Company’s effective tax rate.
It is expected that the amount of unrecognized tax benefit change 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.
In October 2016, the Internal Revenue Service (the “IRS”) began its examination of the Company’s U.S. federal income tax returns for the year ended December 31, 2014. In August 2015, the IRS began its examination of the Company’s U.S. federal income tax returns for the years ended December 31, 2012 and 2013.
The Company is in various stages of examination with certain states and certain foreign jurisdictions. The 2012, 2013, 2014 and 2015 U.S. federal income tax returns are subject to examination by the IRS. State income tax returns are subject to examination for the 2012 through 2015 tax years.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
16. EARNINGS PER SHARE
A reconciliation of the weighted average shares used in the basic and diluted earnings per common share computations for the years ended December 31, 2016, 2015 and 2014 is presented below (in thousands):
Weighted-average shares outstanding:
Basic
587,874
566,448
501,771
Dilutive securities
11,945
11,310
21,084
Diluted
599,819
577,758
522,855
For the years ended December 31, 2016, 2015 and 2014, options and awards outstanding totaling 5.7 million shares, 3.0 million shares and 2.1 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.
17. EMPLOYEE BENEFIT PLAN
Employees of the Company may participate in the Monster Beverage Corporation 401(k) Plan, a defined contribution plan, which qualifies under Section 401(k) of the Internal Revenue Code. Participating employees may contribute up to 15% of their pretax salary up to statutory limits. The Company contributes 50% of the employee contribution, up to 6% of each employee’s earnings, which vest 25% each year for four years after the first anniversary date. Matching contributions were $2.0 million, $0.7 million and $0.6 million for the years ended December 31, 2016, 2015 and 2014, respectively.
18. SEGMENT INFORMATION
During the second quarter of 2016, the Company renamed and revised its reportable segments to reflect management’s current view of the business and to align its external financial reporting with its operating and internal financial model. Historical segment information has been revised to reflect the effect of this change.
The Company has three operating and reportable segments, (i) Monster Energy® Drinks segment (“Monster Energy® Drinks”), which is comprised of the Company’s Monster Energy® drinks (previously the Finished Products segment) as well as Mutant® Super Soda drinks, (ii) Strategic Brands segment (“Strategic Brands”), which include the various energy drink brands acquired from TCCC as a result of the TCCC Transaction (previously the Concentrate segment) and (iii) Other segment (“Other”), the principal products of which include the non-energy brands disposed of as a result of the TCCC Transaction as well as certain products acquired as part of the AFF Transaction that are sold to independent third-parties.
The Company’s Monster Energy® Drinks segment 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, food service 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
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
sold to other bottlers, full service distributors or retailers, including, retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, food service customers, drug stores and the military. To a lesser extent, the Company’s Strategic Brands segment generates net operating revenues by selling 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 margins 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 for in the Company’s reportable segments as management does not measure or allocate such assets on a segment basis.
The net revenues derived from the Company’s reportable segments and other financial information related thereto for the years ended December 31, 2016, 2015 and 2014 are as follows:
Net sales:
Monster Energy® Drinks(1)
$
2,759,862
$
2,518,505
$
2,314,492
Strategic Brands
272,520
143,282
-
Other
17,011
60,777
150,375
Corporate and unallocated
-
-
-
$
3,049,393
$
2,722,564
$
2,464,867
Operating Income:
Monster Energy® Drinks(1) (2)
$
1,148,427
$
836,053
$
904,224
Strategic Brands
163,121
89,841
-
Other(3)
2,295
165,233
7,560
Corporate and unallocated
(228,505)
(197,474)
(164,279)
$
1,085,338
$
893,653
$
747,505
Income before tax:
Monster Energy® Drinks(1) (2)
$
1,148,640
$
836,429
$
904,888
Strategic Brands
163,084
89,825
-
Other(3)
2,295
165,233
7,557
Corporate and unallocated
(234,334)
(199,939)
(166,657)
$
1,079,685
$
891,548
$
745,788
(1) Includes $40.3 million, $62.8 million and $15.0 million for the years ended December 31, 2016, 2015 and 2014, respectively, related to the recognition of deferred revenue.
(2) Includes $79.8 million, $224.0 million and ($0.2) million for the years ended December 31, 2016, 2015 and 2014, respectively, related to distributor termination costs.
(3) Includes $161.5 million gain on the sale of Monster Non-Energy for the year ended December 31, 2015.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Depreciation and amortization
Monster Energy® Drinks
$
24,048
$
21,464
$
19,572
Stategic Brands
7,113
3,868
-
Other
3,457
Corporate and unallocated
6,227
5,297
5,548
$
40,845
$
30,860
$
25,651
Corporate and unallocated expenses were $228.5 million for the year ended December 31, 2016 and included $128.0 million of payroll costs, of which $45.8 million was attributable to stock-based compensation expense (see Note 14, “Stock-Based Compensation”), $66.3 million of professional service expenses, including accounting and legal costs, $6.0 million of insurance costs and $28.2 million of other operating expenses. Corporate and unallocated expenses were $197.5 million for the year ended December 31, 2015 and included $109.8 million of payroll costs, of which $32.7 million was attributable to stock-based compensation expense (see Note 14, “Stock-Based Compensation”), $60.8 million of professional service expenses, including accounting and legal costs, $7.0 million of insurance costs and $19.9 million of other operating expenses. Corporate and unallocated expenses were $164.3 million for the year ended December 31, 2014 and included $86.2 million of payroll costs, of which $28.6 million was attributable to stock-based compensation expense (see Note 14, “Stock-Based Compensation”), $43.8 million of professional service expenses, including accounting and legal costs, $7.4 million of insurance costs and $26.9 million of other operating expenses.
TCCC, through the TCCC Subsidiaries, accounted for approximately 41%, 43% and 29% of the Company’s net sales for the years ended December 31, 2016, 2015 and 2014, respectively.
Net sales to customers outside the United States amounted to $733.7 million, $580.3 million and $534.2 million for the years ended December 31, 2016, 2015 and 2014, respectively. Such sales were approximately 24%, 21% and 22% of net sales for the years ended December 31, 2016, 2015 and 2014, respectively.
Goodwill and other intangible assets for the Company’s reportable segments as of December 31, 2016 and 2015 are as follows:
Goodwill and other intangible assets:
Monster Energy® Drinks
$
1,334,494
$
699,346
Strategic Brands
1,001,749
1,008,355
Other
28,035
-
Corporate and unallocated
-
-
$
2,364,278
$
1,707,701
19. RELATED PARTY TRANSACTIONS
As a result of the TCCC Transaction, TCCC controls more than 10% of the voting interests of the Company. TCCC, through the TCCC Subsidiaries and through certain of its affiliated companies (the “TCCC Affiliates”) purchases and distributes certain of the Company’s products both domestically and in certain international territories. The Company also pays TCCC a commission based on certain sales within the TCCC distribution network.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
TCCC commissions, calculated on sales to the TCCC Affiliates for the years ended December 31, 2016, 2015 and 2014, were $28.2 million, $18.0 million and $1.0 million, respectively.
TCCC commissions, calculated on sales to the TCCC Subsidiaries, are accounted for as a reduction to revenue and are reported in net sales to the TCCC Subsidiaries.
Net sales to the TCCC Subsidiaries for the years ended December 31, 2016, 2015 and 2014 were $1,259.7 million, $1,151.7 million and $717.6 million, respectively.
The Company also purchases concentrates from TCCC which are then sold to both the TCCC Affiliates and the TCCC Subsidiaries. Concentrate purchases from TCCC were $26.2 million and $16.0 million for the years ended December 31, 2016 and 2015, respectively.
Certain TCCC Subsidiaries also contract manufacture certain of the Company’s Monster Energy® brand energy drinks as well as Mutant® Super Soda drinks. Contract manufacturing expenses were $9.6 million, $6.9 million and $6.6 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Accounts receivable, accounts payable and accrued promotional allowances related to the TCCC Subsidiaries are as follows at:
December 31,
December 31,
Accounts receivable, net
$
151,756
$
172,201
Accounts payable
$
(41,210)
$
(58,579)
Accrued promotional allowances
$
(27,056)
$
(27,544)
Two directors and officers of the Company and their families are principal owners of a company that provides promotional materials to the Company. Expenses incurred with such company in connection with promotional materials purchased during the years ended December 31, 2016, 2015 and 2014 were $1.5 million, $1.9 million and $0.6 million, respectively.
20. SUBSEQUENT EVENTS
On February 28, 2017, our Board of Directors authorized a new share repurchase program for the purchase of up to $500.0 million of our outstanding common stock (the “February 2017 Repurchase Plan”). No shares have been repurchased pursuant to the February 2017 Repurchase Plan.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
21. QUARTERLY FINANCIAL DATA (Unaudited)
Net Income per Common
Share
Net Sales
Gross Profit
Net Income
Basic
Diluted
Quarter ended:
March 31, 2016
$
680,186
$
423,098
$
163,877
$
0.27
$
0.26
June 30, 2016
827,488
517,814
184,219
$
0.31
$
0.30
September 30, 2016
787,954
502,975
191,643
$
0.34
$
0.33
December 31, 2016
753,765
498,113
172,946
$
0.30
$
0.30
$
3,049,393
$
1,942,000
$
712,685
Quarter ended:
March 31, 2015
$
626,791
$
368,957
$
4,414
$
0.01
$
0.01
June 30, 2015
693,722
394,508
229,004
$
0.43
$
0.42
September 30, 2015
756,619
465,476
174,574
$
0.28
$
0.28
December 31, 2015
645,432
403,360
138,741
$
0.23
$
0.22
$
2,722,564
$
1,632,301
$
546,733
Certain of the figures reported above may differ from previously reported figures for individual quarters due to rounding.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014 (Dollars in Thousands)
Description
Balance at
beginning
of period
Charged to
cost and
expenses
Deductions
Balance at
end of
period
Allowance for doubtful accounts, sales returns and cash discounts:
$
1,248
$
7,389
$
(7,516)
$
1,121
$
1,704
$
8,407
$
(8,863)
$
1,248
$
2,926
$
2,652
$
(3,874)
$
1,704
Allowance on Deferred Tax Assets and Unrecognized Tax Benefits:
$
17,846
$
8,240
$
-
$
26,086
$
19,786
$
(1,940)
$
-
$
17,846
$
24,130
$
(4,344)
$
-
$
19,786