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.
Overview
We develop, market, sell and distribute energy drink beverages and concentrates for energy drink beverages, primarily under the following brand names:
● Monster Energy®
● Monster Energy Ultra®
● Monster Rehab®
● Monster MAXX®
● Java Monster®
● Muscle Monster®
● Espresso Monster®
● Punch Monster®
● Juice Monster®
● Monster Hydro® Energy Water
● Monster Hydro® Super Sport
● Monster HydroSport Super Fuel®
● Monster Super Fuel®
● Monster Dragon Tea®
● Reign Total Body Fuel®
● Reign Inferno® Thermogenic Fuel
● NOS®
● Full Throttle®
● Burn®
● Mother®
● Nalu®
● Ultra Energy®
● Play® and Power Play® (stylized)
● Relentless®
● BPM®
● BU®
● Gladiator®
● Samurai®
● Live+®
● Predator®
● Fury®
Industry Overview
The “alternative” beverage category combines non-carbonated, ready-to-drink iced teas, lemonades, juice cocktails, single-serve juices and fruit beverages, ready-to-drink dairy and coffee drinks, energy drinks, sports drinks and single-serve still waters (flavored, unflavored and enhanced) with “new age” beverages, including sodas that are considered natural, sparkling juices and flavored sparkling beverages. According to Beverage Marketing Corporation, domestic U.S. wholesale sales in 2020 for the “alternative” beverage category of the market are estimated at approximately $60.5 billion, representing an increase of approximately 1.8% over estimated domestic U.S. wholesale sales in 2019 of approximately $59.5 billion.
Reportable Segments
We have three operating and reportable segments, (i) Monster Energy® Drinks segment (“Monster Energy® Drinks”), which is primarily comprised of our Monster Energy® drinks and Reign Total Body Fuel® high performance energy drinks, (ii) Strategic Brands segment (“Strategic Brands”), which is primarily comprised of the various energy drink brands acquired from The Coca-Cola Company (“TCCC”) in 2015 as well as our affordable energy brands, and (iii) Other segment (“Other”), which is comprised of certain products sold by American Fruits and Flavors, LLC, a wholly-owned subsidiary, to independent third-party customers (the “AFF Third-Party Products”).
Our Monster Energy® Drinks segment primarily generates net operating revenues by selling ready-to-drink packaged energy 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, drug stores, foodservice customers, value stores, e-commerce retailers 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 or retailers, including, retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, foodservice customers, drug stores, value stores, e-commerce retailers and the military. To a lesser extent, our Strategic Brands segment generates net operating revenues by selling certain ready-to-drink packaged energy drinks to bottlers and full service beverage distributors.
Generally, the Monster Energy® Drinks segment generates higher per case net operating revenues, but lower per case gross profit margin percentages than the Strategic Brands segment.
For certain risks with respect to our energy drinks see “Part I,
ITEM 1A. RISK FACTORS
In addition to the other information in this Annual Report on Form 10-K, including Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes, you should carefully consider the following risks. If any of the following risks actually occur or continue to occur, our business, reputation, financial condition and/or operating results could be materially adversely affected. The risk factors summarized below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, reputation, financial condition and/or operating results.
Risk Factors Summary
The following is a summary of the principal risks that could materially adversely affect our business, reputation, financial condition and/or operating results. You should read this summary together with the more detailed description of each risk contained below.
Operational and Industry Risks
● The COVID-19 pandemic has had, and we expect will continue to have, certain impacts on our business and operations. Such impacts may have a material adverse or other effect on our business and results of operations.
● 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.
● Provisions in our organizational documents and control by insiders may prevent changes in control even if such changes would be beneficial to other stockholders.
● 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.
● 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.
● We 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.
● Criticism of our energy drink products and/or criticism or a negative perception of energy drinks generally, could adversely affect us.
● Increased competition in the beverage industry and changing retail landscape could hurt our business.
● Our inability to innovate successfully and to provide new cutting edge products could adversely affect our business and financial results.
● Changes in consumer product and shopping preferences may reduce demand for some of our products.
● Our continued expansion outside of the United States exposes us to uncertain conditions and other risks in international markets.
● If we are not able to pass on increases in the costs of raw materials, including aluminum cans and/or ingredients and/or fuel and/or costs of co-packing, such inability could harm our business and result in a higher cost base. Shortages of raw materials including aluminum cans and/or ingredients and/or fuel and/or costs of co-packing could have a material adverse effect on our business and results of operations.
● Our failure to accurately estimate demand for our products or maintain sufficient inventory levels could adversely affect our business and financial 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.
● Global or regional catastrophic events could impact our operations and affect our ability to grow our business.
● Climate change and natural disasters may negatively affect our business.
● 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.
● Negative publicity (whether or not warranted) could damage our brand image and corporate reputation, and may cause our business to suffer.
Government Regulation and Litigation Risks
● Changes in government regulation, or failure to comply with existing regulations, could adversely affect our business, financial condition and results of operations.
● We cannot predict the effect of possible inquiries from and/or actions by attorneys general, other government agencies and/or quasi-government agencies into the production, advertising, marketing, promotion, labeling, ingredients, usage and/or sale of our energy drink products.
● Litigation regarding our products, and related unfavorable media attention, could expose us to significant liabilities and reduce demand for our products, thus negatively affecting our financial results.
● If we encounter material product recalls, our business may suffer material losses and such recalls could damage our brand image and corporate reputation, also potentially resulting in material losses.
Intellectual Property, Information Technology and Data Privacy Risks
● Our intellectual property rights are critical to our success, and the loss of such rights could materially adversely affect our business.
● We must continually maintain, protect and/or upgrade our information technology systems, including protecting us from internal and external cybersecurity threats.
● If we fail to comply with data privacy and personal data protection laws, we could be subject to adverse publicity, government enforcement actions and/or private litigation, which may negatively impact our business and operating results.
Financial Risks
● Fluctuations in our effective tax rate could adversely affect our financial condition and results of operations.
● We may be required in the future to record a significant charge to earnings if our goodwill or intangible assets become impaired.
● Fluctuations in foreign currency exchange rates may adversely affect our operating results.
● Potential changes in accounting standards or practices and/or taxation may adversely affect our financial results.
● 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.
● 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.
● Default by or failure of one or more of our counterparty financial institutions could cause us to incur significant losses.
● Volatility of stock price may restrict sale opportunities.
● Our investments are subject to risks which may cause losses and affect the liquidity of these investments.
Operational and Industry Risks
The COVID-19 pandemic has had, and we expect will continue to have, certain impacts on our business and operations, and such impacts may have a material adverse or other effect on our business and results of operations.
The current COVID-19 pandemic has presented and continues to present a substantial public health and economic challenge around the world and is affecting our employees, communities and business operations, as well as the global economy and financial markets. The human and economic consequences of the COVID-19 pandemic as well as the measures taken or that may be taken in the future by governments, businesses (including the Company and our suppliers, bottlers/distributors, co-packers and other service providers) and the public at large to limit the COVID-19 pandemic, have and will directly and indirectly impact our business and results of operations, including, without limitation, the following:
● We have experienced decreases in sales of our products in many of our markets around the world that have been affected by the COVID-19 pandemic, predominately during the early part of the 2020 second quarter. While some of the restrictions imposed as a result of the initial COVID-19 outbreak have been lifted or eased in many jurisdictions as the rates of COVID-19 infections have decreased or stabilized, resurgence of the COVID-19 pandemic in some markets has slowed or reversed the reopening process, and markets are moving through varying stages of restrictions and re-opening at different times. However, we have recently seen a resurgence of the COVID-19 pandemic in the Northern Hemisphere while cases in the Southern Hemisphere continue to rise. As a result, a number of countries, particularly in EMEA, have reinstituted lockdowns and other restrictions, which could further impact customer demand. If the COVID-19 pandemic and related unfavorable economic conditions continue to intensify, the negative impact on our sales, including our new product innovation launches, could be prolonged and may become more severe.
● Deteriorating economic conditions and continued financial uncertainties in many of our major markets due to the COVID-19 pandemic, such as increased and prolonged unemployment, decreases in per capita income and the level of disposable income, declines in consumer confidence, or economic slowdowns or recessions, could affect consumer purchasing power and consumers’ ability to purchase our products, thereby reducing demand for our products. In addition, public concern among consumers regarding the risk of contracting COVID-19 may also reduce demand for our products.
● The closures of, and continued restrictions on, on-premise retailers and other establishments that sell our products as a result of the COVID-19 pandemic have adversely impacted and may continue to adversely impact our sales and results of operations.
● Our advertising, marketing, promotional, sponsorship and endorsement activities have been, and will continue to be, disrupted by reduced opportunities for such activities due to measures taken to limit the spread of the COVID-19 pandemic and the cancellations of or reduced capacity at sporting events, concerts and other events may result in decreased demand for our products. Our product sampling programs, which are part of our strategy to develop brand awareness, have been, and will continue to be, disrupted by the COVID-19 pandemic. If we are unable to successfully adapt to the changing landscape of advertising, marketing, promotional, sponsorship and endorsement opportunities created by the COVID-19 pandemic, our sales, market share, volume growth and overall financial results could be negatively affected.
● Our innovation activities, including our ability to introduce new products in certain markets, have been delayed and/or adversely impacted by the COVID-19 pandemic. If such innovation activities are disrupted and we continue to delay the launch of new products and/or we are unable to secure sufficient distribution levels for such new products, our business and results of operations could be adversely affected.
● Some of our suppliers, bottlers/distributors and co-packers may experience plant closures, production slowdowns and disruptions in operations as a result of the impact of the COVID-19 pandemic. This could result in a disruption to our operations.
● We may experience delays in receiving certain raw materials as a result of shipping delays due to, among other things, additional safety requirements imposed by port authorities, closures of, or congestion at ports, reduced availability of commercial transportation, border restrictions and capacity constraints.
● Due to increased demand in at home beverage consumption, aluminum cans remain in tight supply, which could adversely impact or limit our sales and/or results of operations.
● We rely on relationships with third parties for cloud data storage and other information technology services for certain functions or for services in support of our operations. These third parties are subject to risks and uncertainties related to the COVID-19 pandemic, which may interfere with their ability to fulfill their respective commitments and responsibilities to us in a timely manner and in accordance with the agreed-upon terms.
● As a result of the COVID-19 pandemic, including related governmental measures, restrictions, directives and guidance, we have required most of our office-based employees to work remotely. We may experience reductions in productivity and disruptions to our business routines while our remote work policy remains in place. If our employees working remotely do not maintain appropriate measures to mitigate potential risks to our technology and operations from information technology-related disruptions, we may face cybersecurity threats. Employees of our third-party service providers who are working remotely, with whom we may share data, are subject to similar cybersecurity risks.
● Governmental authorities at the U.S. federal, state and/or municipal level and in certain foreign jurisdictions may increase or impose new income taxes, indirect taxes or other taxes or revise interpretations of existing tax rules and regulations as a means of financing the costs of stimulus or may take other measures to protect populations and economies from the impact of the COVID-19 pandemic. Increases in direct and indirect tax rates could affect our net income, and increases in consumer taxes could affect our products’ affordability and reduce our sales.
● We may be required to record significant impairment charges with respect to goodwill or intangible assets whose fair values may be negatively affected by the effects of the COVID-19 pandemic.
● The continued financial impact of the COVID-19 pandemic may cause one or more of the financial institutions we do business with to fail or default in their obligations to us or to become insolvent or file for bankruptcy, which could cause us to incur significant losses and negatively impact our results of operations and financial condition.
● Actions we have taken or may take, or decisions we have made or may make, as a consequence of the COVID-19 pandemic may result in negative publicity and the Company becoming a party to litigation claims and/or legal proceedings, which could consume significant financial and managerial resources, result in decreased demand for our products and injury to our reputation.
● The resumption of normal business operations after the disruptions caused by the COVID-19 pandemic may be delayed or constrained by the COVID-19 pandemic’s lingering effects on our suppliers, bottlers/distributors, co-packers, contractors, business partners and/or other service providers.
Any of the negative impacts of the COVID-19 pandemic, including those described above, alone or in combination with others, may have a material adverse effect on our business, reputation, operating results and/or financial condition. Any of these negative impacts, alone or in combination with others, could exacerbate many of the risk factors discussed herein, any of which could materially affect our business, reputation, operating results and/or financial condition.
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.
We have transitioned all third parties’ rights to distribute the Company’s products in the U.S. to members of TCCC’s distribution network, which largely consists of independent bottlers/distributors. In addition, except for a handful of countries, TCCC is our preferred distribution partner globally, with members of TCCC’s network distributing our products internationally, including in Africa, Asia, Canada, Central and South America, Europe, Mexico and the Middle East. As we progress our international expansion, we expect TCCC’s distribution network to continue as our preferred distribution partner globally. As a result, we have reduced our distributor diversification and are now dependent on TCCC’s domestic and international distribution platforms.
TCCC has a substantial equity investment in the Company. The Company, TCCC and certain affiliates are parties to various agreements in which TCCC and certain affiliates have agreed, subject to certain exceptions, not to compete in the energy drink category in certain territories prior to the termination of the applicable distribution coordination agreement with TCCC. The Company’s distribution agreements with TCCC distributors also provide, subject to certain exceptions, that the applicable distributor will not distribute competitive energy drink products.
While we believe that these agreements incentivize TCCC to take steps to ensure that our products receive the appropriate attention in the TCCC distribution system, disagreements as to the interpretation of the provisions in such agreements have arisen and may arise in the future. 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.
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 19, 2021, Mr. Sacks and Mr. Schlosberg together may be deemed to beneficially own and/or exercise voting control over approximately 10% of our outstanding common stock. As of February 19, 2021, TCCC owned approximately 19% of our common stock. TCCC has also nominated one director to the Company’s board of directors. 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.
In particular, TCCC’s ownership could 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 stockholders and, as a result, TCCC’s influence may result in the delay or prevention of potential actions or transactions. 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 or as a result of the perception that such a sale might occur.
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 in 2016 brought our primary flavor supplier in-house for the majority of our Monster Energy® brand energy drinks. However, we also procure flavors from other independent flavor suppliers. We do not operate our own manufacturing facilities for finished goods, but instead 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. For example, in recent years, sales of our Java Monster® and Muscle Monster® product lines were adversely impacted by production capacity constraints resulting from production and maintenance issues with certain of our co-packers. While this disruption in production did not significantly affect our revenues, a lengthy disruption or delay in the production of any of our 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. In addition, recently there has been a consolidation of co-packers. If we are unable to maintain good relationships with our largest co-packers, or if our costs of co-packing increase, our business, financial condition and results of operations could be adversely affected.
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 carbonated, non-carbonated and other beverage products (both alcoholic and non-alcoholic). In many cases, such products compete directly with our products.
Unilateral decisions by bottlers/distributors, buying groups, convenience chains, grocery chains, mass merchandisers, specialty chain stores, club stores, e-commerce retailers, e-commerce websites and other customers to discontinue carrying all or any of our products that they are carrying at any time, restrict the range of our products they carry, impose restrictions or limitations on the sale of our products and/or devote less resources to the sale of our products could cause our business to suffer. In addition, possible trading disputes between our bottler/distributors and their customers or buying groups may result in the delisting of certain of the Company’s products, temporarily or otherwise. Bottler/distributor consolidation may also have an impact on our business.
The TCCC North American Bottlers, Coca-Cola European Partners, Coca-Cola Hellenic, Coca-Cola FEMSA, Coca-Cola Amatil, Swire Coca-Cola (China), COFCO Coca-Cola, Coca-Cola Beverages Africa and Coca-Cola İçecek are our primary domestic and international distributors of our products. As a result, if we are unable to maintain good relationships with these distributors, or they do not effectively focus on marketing, promoting, selling and distributing our products, sales of our products could be adversely affected. As TCCC markets Coca-Cola Energy in additional territories, we may encounter difficulties in maintaining distributor attention, market share or position in the energy drink category in such territories, and bottlers/distributors may reduce the number of our SKUs they carry or impose limitations on distributing new product SKUs, which could adversely affect our business and operating results.
A decision by our primary domestic and international distributors 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/distributors do not market, promote and distribute our products effectively, our business, financial condition and results of operations could be adversely affected.
Disruption in distribution channels and/or a decline in sales due to the termination and/or insolvency of existing or new bottlers/distributors may adversely affect our business and operating results.
We 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.
Our focus is in the energy drink category, and our business is 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.
Virtually all of our sales are derived from our energy drinks, including our Monster Energy® brand energy drinks, our Reign Total Body Fuel® energy drinks and our Strategic Brands energy drinks (including our affordable brand energy drinks, principally Predator®). 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. For a discussion of such competition, see “Part I, Item 1 - Business - Competition.”
The increasing number of competitive products and limited amount of shelf space, including in beverage coolers, in retail stores may adversely impact our ability to gain or maintain our share of sales in the marketplace. In addition, certain actions of our competitors, including unsubstantiated and/or misleading claims, false advertising claims and tortious interference in our business, as well as competitors selling misbranded products, could impact our sales. 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.
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, other ingredients in energy drinks or energy drinks generally, or criticism or negative publicity regarding the caffeine content and/or any other ingredients in our products or energy drinks generally, including product safety concerns, 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. In early 2018, certain retailers in the United Kingdom announced the introduction of voluntary retailer measures to prevent the sale of energy drinks to individuals under the age of 16. If reports, studies or articles critical of caffeine and/or energy drinks continue to be published or are published in the future, or additional voluntary measures are taken, they could adversely affect the demand for our products. Our ability to satisfy all criteria set forth in any model energy drink guidelines, including, without limitation, those adopted by the American Beverage Association, of which we are a member, and/or any international beverage associations and the impact of our failure to satisfy such guidelines on our business, financial condition and results of operations.
Increased competition in the beverage industry and changing retail landscape 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 efficacy, 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. The success of our sports marketing, social media and other general marketing endeavors may impact our business, financial condition and results of operation. 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 KDP. 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.
The rapid growth in sales through e-commerce retailers, e-commerce websites, mobile commerce applications and subscription services, and closures of physical retail operations, particularly during, and potentially following, the COVID-19 pandemic, may result in a shift away from physical retail operations to digital channels and a reduction in impulse purchases. As we build our e-commerce capabilities, we may not be able to develop and maintain successful relationships with existing and new e-commerce retailers without experiencing a deterioration of our relationships with key customers operating physical retail channels. If we are unable to profitably expand our own e-commerce capabilities and/or if e-commerce retailers take significant market share away from traditional retailers our business may be adversely affected. Further, the ability of consumers to compare prices on a real-time basis using digital technology puts additional pressure on us to maintain competitive prices. Sales in gas chains may also be affected by improvements in fuel efficiency and increased consumer preferences for electric or alternative fuel-powered vehicles, which may result in fewer trips by consumers to gas stations and a corresponding reduction in purchases by consumers in convenience gas retailers. If we are unable to successfully adapt to the rapidly changing retail landscape, our share of sales, volume growth and overall financial results could be negatively affected.
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.
Changes in consumer product and shopping 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 health, wellness and nutrition considerations, including concerns regarding caloric intake associated with sugar-sweetened beverages and the perceived undesirability of artificial ingredients. Some consumer advocacy groups and others have expressed concerns regarding certain ingredients in diet sodas, which are contained in certain of our energy drinks. There are also changes in demand for different packages, sizes and configurations. This may reduce demand for our beverages, which could reduce our revenues and adversely affect our results of operations.
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 efficacy, 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. Additionally, as shopping patterns are being affected by the digital evolution, with customers embracing shopping by way of mobile device applications, e-commerce retailers and e-commerce websites or platforms, we may be unable to address or anticipate changes in consumer shopping preferences or engage with our customers on their preferred platforms. 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. Our net sales to customers outside of the United States were approximately 33%, 32% and 29% of consolidated net sales for the years ended December 31, 2020, 2019 and 2018, 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 international markets 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; fluctuations in foreign currency exchange rates; 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.
If we are not able to pass on increases in the costs of raw materials, including aluminum cans and/or ingredients and/or fuel and/or costs of co-packing, such inability could harm our business and result in a higher cost base. Shortages of raw materials including aluminum cans and/or ingredients and/or fuel and/or costs of co-packing could have a material adverse effect on our business and results of operations.
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, caps, flavors, juice concentrates, glucose, sugar, sucralose, milk, cream, protein, coffee, tea, cocoa, supplement ingredients and other packaging materials, the costs and availability of which are subject to fluctuations. For certain flavors purchased from third-party suppliers and used in a limited number of our Monster Energy® brand energy drinks and/or our Strategic Brands energy drinks, these third-party flavor suppliers own the proprietary rights to certain of their flavor formulas. We do not have possession of the list of such flavor ingredients or formulas used in the production of certain of our products and certain of our blended concentrates, and we may be unable to obtain comparable flavors or concentrates from alternative suppliers on short notice. Our third-party flavor suppliers generally do not make such flavors and/or blended concentrates available to other third-party customers. We have identified alternative suppliers for certain of the ingredients contained in many of our beverages. However, industry-wide shortages of certain flavors, fruits and fruit juices, coffee, tea, cocoa, dairy-based products, packaging materials (including aluminum cans) supplement ingredients and sweeteners have been, and could from time to time in the future be, encountered, which could interfere with and/or delay production of certain of our products. In addition, certain of our co-packing arrangements allow such co-packers to increase their fees 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. Although we generally do not use hedging agreements or alternative instruments to manage the risks associated with securing sufficient ingredients or raw materials, from time to time, we, through our aluminum can suppliers, enter into purchase agreements for the purchase of aluminum, as well as enter into purchase agreements for portions of our annual anticipated requirements for certain of our other raw materials such as glucose, sugar and sucralose. In 2018, the United States imposed tariffs on steel and aluminum as well as on goods imported from China and certain other countries. Additional tariffs imposed by the United States on a broader range of imports, or further trade measures taken by China or other countries, could result in an increase in supply chain costs.
Our failure to accurately estimate demand for our products or maintain sufficient inventory levels 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, including 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, caps, labels, sucralose, flavors, supplement ingredients, juice concentrates, certain sweeteners, coffee, tea, cocoa, 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, supplement ingredients and sweeteners have been and could, from time to time in the future, be experienced, resulting in production fluctuations and/or product 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 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, PET plastic for bottles 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.
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, protests and demonstrations, 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 and extreme weather conditions, such as hurricanes, wildfires, tornados, earthquakes or floods, or widespread outbreaks of infectious diseases (such as the COVID-19 pandemic). Such catastrophic events could impact our operations and our supply chain, including the production and/or distribution of our products. Materials and/or personnel may need to mobilize to other locations. Our headquarters and a large part of our operations are located in California, a state at greater risk of earthquakes and wildfires. Some of the raw materials we use, including certain sizes of cans, are available from limited suppliers, and a regional catastrophic event impacting such suppliers could adversely impact our operations. In addition, such events could disrupt global or regional economic activity, which could affect consumer purchasing power and consumers’ ability to purchase our products, thereby reducing demand for our products. If our operations are disrupted or we are unable to grow our business as a result of these factors, our growth rate could decline and our business, financial condition and results of operations could be adversely affected.
Climate change and natural disasters may affect our business.
There is concern that a gradual increase in global average temperatures due to increased carbon dioxide and other greenhouse gases in the atmosphere could cause significant changes in weather patterns around the globe and an increase in the frequency and severity of natural disasters. Changing weather patterns could result in decreased agricultural productivity in certain regions, and/or outbreaks of diseases or other health issues, which may limit availability and/or increase the cost of certain key ingredients, juice concentrates, supplements and other ingredients used in our products and could impact the food security of communities around the world. Increased frequency or duration of extreme weather conditions could also impair production capabilities, disrupt our supply chain and/or impact demand for our products.
Natural disasters and extreme weather conditions, such as hurricanes, wildfires, earthquakes or floods, and outbreaks of diseases (such as the COVID-19 pandemic) or other health issues may affect our operations and the operation of our supply chain, impact the operations of our bottlers/distributors and unfavorably impact our consumers’ ability to purchase our products. The predicted effects of climate change may also result in challenges regarding availability and quality of water, or less favorable pricing for water, which could adversely impact our business and results of operations. 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. Changes in applicable laws, regulations, standards or practices related to greenhouse gas emissions, packaging and water scarcity, as well as initiatives by advocacy groups in favor of certain climate change-related laws, regulations, standards or practices, may result in increased compliance costs, capital expenditures and other financial obligations, which could affect our business, financial condition 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. We, our bottlers and our contract packers, use a number of key ingredients in the manufacture of our beverage products that are derived from agricultural commodities such as sugar, coffee, tea and cocoa. Increased demand for food products and decreased agricultural productivity in certain regions of the world as a result of changing weather patterns and other factors may limit the availability or increase the cost of such agricultural commodities and could impact the food security of communities around the world. Weather conditions may influence consumer demand for certain of our beverages, which could have an effect on our operations, either positively or negatively.
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 Rodney Sacks, Chairman and Co-Chief Executive Officer, Hilton Schlosberg, Vice Chairman, and Co-Chief Executive 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.
Negative publicity (whether or not warranted) could damage our brand image and corporate reputation, and may cause our business to suffer.
Our success depends on our ability to build and maintain the brand image for our existing products, new products and brand extensions and maintain our corporate reputation. There can be no assurance that our advertising, marketing and promotional programs and our commitment to product safety and quality, human rights and environmental sustainability will have the desired impact on our products’ brand image and on consumer preferences and demand. Claims regarding product safety, quality and/or ingredient content issues, efficacy or lack thereof (real or imagined), our culture and our workforce, our environmental impact and the sustainability of our operations, or allegations of product contamination, even if false or unfounded, could tarnish the image of our brands and may cause consumers to choose other products. Consumer demand for our products could diminish significantly if we, our employees, bottlers/distributors, suppliers or business partners fail to preserve the quality of our products, act or are perceived to act in an unethical, illegal, discriminatory, unequal or socially irresponsible manner, including with respect to the sourcing, content or sale of our products, service and treatment of our customers, or the use of customer data. 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. Negative postings or comments on social media or networking websites about the Company or any one of our brands, even if inaccurate or malicious, could generate adverse publicity that could damage the reputation of our brands or the Company. Business incidents, whether isolated or recurring and whether originating from us, our bottlers/distributors, suppliers or business partners, that erode consumer trust can significantly reduce brand value or potentially trigger boycotts of our products and can have a negative impact on consumer demand for our products as well as our reputation and financial results. The impact of such incidents may be exacerbated if they receive considerable publicity, including rapidly through social or digital media (including for malicious reasons) or result in litigation.
In addition, from time to time, there are public policy endeavors that are either directly related to our products and packaging or to our business. These public policy debates can occasionally be the subject of backlash from advocacy groups that have a differing point of view and could result in adverse media and consumer reaction, including product boycotts. Similarly, our sponsorship relationships could subject us to negative publicity as a result of actual or alleged misconduct by individuals or entities associated with organizations we sponsor or support. Likewise, campaigns by activists connecting us, or our supply chain, with human and workplace rights, environmental or animal rights issues could adversely impact our corporate image and reputation. We have made a number of commitments to respect human rights, including the policies and initiatives described in our California Transparency in Supply Chains Act & United Kingdom Modern Slavery Act statement. Allegations, even if untrue, that we are not respecting the human rights found in the United Nations Universal Declaration of Human Rights; actual or perceived failure by our suppliers or other business partners to comply with applicable labor and workplace rights laws, including child labor laws, or their actual or perceived abuse or misuse of migrant workers; adverse publicity surrounding obesity and health concerns related to our products, water usage, our environmental impact and the sustainability of our operations, labor relations, our culture and our workforce or the like could negatively affect our Company’s overall reputation and brand image, which in turn could have a negative impact on our products’ acceptance by consumers.
Government Regulation and Litigation Risks
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 the content of caffeine and other ingredients 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, municipal and supranational level in respect of each of the foregoing subject areas. For instance, on January 1, 2020, a reform to a Mexican excise tax went into effect that expanded the definition of an “energy drink” subject to this tax to include products with any amount of caffeine (the prior version of the tax required a threshold of 20 milligrams of caffeine per 100 millimeters for the tax to be applicable) and “taurine or glucuronolactone or thiamine and/or any other substance that produces similar stimulating effects.” 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 increased focus on caffeine content in beverages, and we are seeing some attention to other ingredients in energy drinks. 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; the Occupational Safety and Health Act; various environmental statutes; data privacy laws; California Proposition 65; and various other federal, state and local statutes and regulations applicable to the production, transportation, sale, safety, advertising, labeling, packaging 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, its label, or a production run is not in compliance with any of these regulations, we may be fined, or the products in question may have to be recalled, removed from the market, 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 possible inquiries from and/or actions by attorneys general, other government agencies and/or quasi-government agencies into the production, advertising, marketing, promotion, labeling, 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, and we are a party, from time to time, to various government and regulatory inquiries and/or proceedings. 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.
In addition, from time to time, government and/or quasi-governmental agencies may investigate the safety of caffeine and other ingredients in energy drinks. 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.
Litigation regarding our products, and related unfavorable media attention, could expose us to significant liabilities and reduce demand for our products, thus negatively affecting our financial results.
We have been and are a party, from time to time, to various litigation claims and legal proceedings, including, but not limited to, intellectual property, fraud, unfair business practices, false advertising, product liability, breach of contract claims, claims from prior distributors, labor and employment matters, personal injury matters, consumer class actions, securities actions and shareholder derivative actions.
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 or otherwise not in compliance with food standards under local law, and/or that our products are not safe. Putative class action lawsuits have also 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 noncompliant with local law, or that our products are in any way unsafe and we vigorously defend such lawsuits.
Any of the foregoing matters or other 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, an injunction barring the sale of any of our products and injury to our reputation. 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.
If we encounter material product recalls, our business may suffer material losses and such recalls could damage our brand image and corporate reputation, also potentially resulting in material losses.
We may be required from time to time to recall products entirely or from specific co-packers, markets, retailers or batches if such products become contaminated, damaged, mislabeled, defective or otherwise materially non-compliant with applicable regulatory requirements. A material product recall could adversely affect our profitability and our brand image and corporate reputation. We do not maintain recall insurance.
Intellectual Property, Information Technology and Data Privacy Risks
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. The Company currently has several proceedings ongoing with VPX to adjudicate claims, including claims for false advertising and trademark infringement and trade dress infringement, brought by the Company against VPX and by VPX against the Company. Certain proceedings could result in an injunction barring us from selling certain of our products and/or require changes to be made to our current trade dress. If we lose some or all of our intellectual property rights, or an injunction prevents us from selling any of our products, our business may be materially adversely affected. We also have been, and may in the future be, unable to use our trademarks, trade names or designs and/or trade dress in certain countries, which may impact sales of the affected brands and require increased expenditures, which could have an adverse effect on our business, financial condition or results of operations.
We must continually maintain, protect and/or upgrade our information technology systems, including protecting us from internal and external cybersecurity threats.
Information technology enables us to operate efficiently, interface with customers, maintain financial accuracy and efficiency and accurately produce our financial statements. If we do not appropriately 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 internal and external cybersecurity threats. Cybersecurity attacks are evolving and include, but are not limited to, malicious software (malware, ransomware and viruses), phishing and social engineering, attempts to gain unauthorized access to networks, computer systems and data, malicious or negligent actions of employees (including misuse of information they are entitled to access) and other forms of electronic security breaches that could lead to disruptions in business 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 rely on relationships with third parties, including suppliers, distributors, bottlers, contract packers, contractors, cloud data storage and other information technology service providers and other external business partners, for certain functions or for services in support of our operations. These third-party service providers and partners, with whom we may share data, are subject to similar risks as we are relating to cybersecurity, privacy violations, business interruption, and systems, as well as employee failures. While we have procedures in place for selecting and managing our relationships with third-party service providers and other business partners, we do not have control over their business operations or governance and compliance systems, practices and procedures, which increases our financial, legal, reputational and operational risk. These third parties may experience cybersecurity incidents that may involve data we share with them or rely on them to provide to us, and the need to coordinate with such third-parties, including with respect to timely notification and access to personnel and information concerning an incident, may complicate our efforts to resolve any issues that arise.
We believe that we have adopted appropriate measures including ongoing cybersecurity risk assessments 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.
If we fail to comply with data privacy and personal data protection laws, we could be subject to adverse publicity, government enforcement actions and/or private litigation, which may negatively impact our business and operating results.
We receive, process, transmit and store information relating to certain identified or identifiable individuals (“personal data”), including current and former employees, in the ordinary course of business. As a result, we are subject to various U.S. federal and state and foreign laws and regulations relating to personal data. These laws are subject to change, and new personal data legislation may be enacted in other jurisdictions at any time. In the European Union, the General Data Protection Regulation (“GDPR”) became effective in May 2018 for all member states. The GDPR includes operational requirements for companies receiving or processing personal data of residents of the European Union different from those that were previously in place and also includes significant penalties for noncompliance. Additionally, the California Consumer Privacy Act of 2018 (“CCPA”), which was enacted in June 2018 and came into effect on January 1, 2020, provides a new private right of action and statutory damages for certain data breaches and imposes operational requirements on companies that process personal data of California residents, including making new disclosures to consumers about data collection, processing and sharing practices and allowing consumers to opt out of certain data sharing with third parties.
Changes introduced by the GDPR and the CCPA, as well as other changes to existing personal data protection laws and the introduction of such laws in other jurisdictions, subject the Company to, among other things, additional costs and expenses and may require costly changes to our business practices and security systems, policies, procedures and practices. There can be no assurances that our security controls over personal data, training of personnel on data privacy and data security, vendor management processes, and the policies, procedures and practices we implement will prevent the improper processing or breaches of personal data. Data breaches or improper processing, or breaches of personal data in violation of the GDPR, the CCPA and/or of other personal data protection or privacy laws and regulations, could harm our reputation, cause loss of consumer confidence, subject us to government enforcement actions (including fines), or result in private litigation against us, which may result in potential loss of revenue, increased costs, liability for monetary damages or fines and/or criminal prosecution, thereby negatively impacting our business and operating results.
Financial Risks
Fluctuations in our effective tax rate could adversely affect our financial condition and results of operations.
We are subject to income and other taxes in both the U.S. and certain foreign jurisdictions. Therefore, we are subject to audits for multiple tax years in various jurisdictions at once.
We are in various stages of examination with certain states and certain foreign jurisdictions including the United Kingdom and Ireland. Our 2017 through 2019 U.S. federal income tax returns are subject to examination by the IRS. Our state income tax returns are subject to examination for the 2016 through 2019 tax years.
At any given time, events may occur which change our expectation about how any such tax audits will be resolved and thus, there could be significant variability in our quarterly and/or annual tax rates, because these events may change our plans for uncertain tax positions.
Changes in U.S. tax laws as a result of any legislation proposed by the new U.S. Presidential Administration or U.S. Congress, which may include efforts to change or repeal the 2017 Tax Cuts and Jobs Act and the federal corporate income tax rate reduction, could adversely affect our provision for income taxes, resulting in an adverse impact on our financial condition or results of operations. In addition, changes in the manner in which U.S. multinational corporations are taxed on foreign earnings, including changes in how existing tax laws are interpreted or enforced, could adversely affect our financial condition or results of operations. For example, the Organization for Economic Cooperation and Development (“OECD”) has recommended changes to numerous long-standing international tax principles through its base erosion and profit shifting (“BEPS”) project. These changes, to the extent adopted, may increase tax uncertainty, result in higher compliance costs and adversely affect our provision for income taxes, results of operations and/or cash flow. In connection with the OECD’s BEPS project, companies are required to disclose more information to tax authorities on operations around the world, which may lead to greater audit scrutiny of profits earned in various countries. Economic and political pressures to increase tax revenues in jurisdictions in which we operate, or the adoption of new or reformed tax legislation or regulation, may make resolving tax disputes more difficult and the final resolution of tax audits and any related litigation could differ from our historical provisions and accruals, resulting in an adverse impact on our financial condition or results of operations.
We may be required in the future to record a significant charge to earnings if our goodwill or intangible assets become impaired.
Under United States Generally Accepted Accounting Principles (“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 in the future to record a significant charge to earnings 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, 2020, our goodwill totaled approximately $1.33 billion and other intangible assets totaled approximately $1.06 billion.
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 $11.2 million, $4.1 million and $4.0 million for the years ended December 31, 2020, 2019 and 2018, respectively.
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.
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 as well as internal control over financial reporting that are effective for the purposes described in “Part II, Item 9A - Controls and Procedures.” If we fail to maintain such controls and procedures, our business, results of operations, financial condition and/or the value of our stock could be materially harmed.
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, including foreign currency exchange rates, 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 crises in African, Asian, European and other international markets. Unfavorable economic conditions and financial uncertainties in our major international markets and unstable political conditions, including civil unrest and governmental changes, in certain of our other international markets could undermine global consumer confidence and reduce consumers’ purchasing power, thereby reducing demand for our products. Included in the foregoing are long-term uncertainties surrounding the United Kingdom’s withdrawal from the European Union on January 31, 2020 (commonly referred to as “Brexit”) and any resulting increases in tariffs, importation restrictions, out of stocks, volatility in currency exchange rates, including the valuation of the euro and the British pound in particular, changes in the laws and regulations applied in the United Kingdom or impacts on economic and market conditions in the United Kingdom, the European Union and its member states and elsewhere.
Default by or failure of one or more of our counterparty financial institutions could cause us to incur significant losses.
As part of any hedging activities that we may conduct, we may enter into transactions involving derivative financial instruments, including forward contracts, commodity futures contracts, option contracts, collars and swaps, with various financial institutions. We also have significant amounts of cash, cash equivalents and other investments on deposit or in accounts with banks or other financial institutions both in the United States and abroad, exposing us to risk of default by or failure of such counterparty financial institutions. This risk of counterparty default or failure is greater during periods of economic downturn or uncertainty in financial markets. If one of our counterparties became insolvent or filed for bankruptcy, our ability to recover losses incurred due to the default or to retrieve assets deposited or held in accounts with such counterparty may be limited by the counterparty’s liquidity or applicable laws governing insolvency and bankruptcy proceedings. Default by or failure of one or more of our counterparties could cause us to incur significant losses and negatively impact our results of operations and financial condition.
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 mix 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, 2020, the high of our stock price was $91.68 and the low was $50.06.
Our investments are subject to risks which may cause losses and affect the liquidity of these investments.
At December 31, 2020, we had $1.18 billion in cash and cash equivalents and $925.6 million in short-term and long-term investments, including certificates of deposit, commercial paper, U.S. government agency securities, U.S. treasuries, and to a lesser extent, municipal securities. 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our principal properties include our corporate headquarters as well as our Southern California warehouse and distribution center.
Our owned corporate facilities located in Corona, California, consist of (i) an approximately 141,000 square-foot, free-standing, six-story building (ENERGY STAR certified), (ii) an approximately 147,625 square-foot three-story parking structure and storage facility, which houses our approximately 14,000 square-foot quality control laboratory, (iii) an approximately 75,426 square foot, free-standing, three-story building (pursuing ENERGY STAR certification), (iv) an approximately 20,661 square-foot, free-standing, single-story building and (v) an approximately 49,617 square-foot, free-standing, two-story building.
Our owned Southern California warehouse and distribution center is located in Rialto, California, consisting of an approximately 1,000,000 square-foot building which is LEED certified.
During 2020, we purchased a three-story office building located in Uxbridge, United Kingdom.
During 2019, we acquired a manufacturing plant and adjoining land in Athy, County Kildare, Ireland. We intend to utilize the facility to produce and supply ingredients for certain of our international markets.
During 2019, we purchased approximately 7.66 acres of land in San Fernando, California. We are in the process of constructing a new production facility in order to consolidate AFF’s operations into a single location.
In addition, we lease many smaller office and/or warehouse spaces, both domestically and in certain international locations.
ITEM 3. LEGAL PROCEEDINGS
From time to time in the normal course of business, the Company is named in litigation, including labor and employment matters, personal injury matters, consumer class actions, intellectual property matters and claims from prior distributors. Although it is not possible to predict the ultimate outcome of such litigation, based on the facts known to the Company, management believes that such litigation in aggregate will likely not have a material adverse effect on the Company’s financial position or results of operations.
On September 18, 2020, a derivative complaint was filed on purported behalf of the Company in the United States District Court for the Central District of California. The action is styled Falat v. Sacks, et al., 8:20-cv-01782, and asserts claims against certain officers, current and former directors, and employees of the Company, including Rodney C. Sacks, Hilton H. Schlosberg, Guy P. Carling, Thomas J. Kelly, Emelie C. Tirre, Mark J. Hall, Kathleen E. Ciaramello, Gary P. Fayard, Jeanne P. Jackson, Steven G. Pizula, Benjamin M. Polk, Sydney Selati and Mark S. Vidergauz (collectively, the “Individual Defendants”). The Company is named as a nominal defendant.
The derivative complaint alleges, among other things, that the Individual Defendants breached their fiduciary duties to the Company by allowing others to cause, or themselves causing, the Company to hide discrimination and failing to ensure sufficient diversity, including by permitting conduct to occur that was inconsistent with statements made in the Company’s policies and disclosures, and failing to ensure the Company’s compliance with laws regarding diversity and anti-discrimination. The complaint also asserts claims for abuse of control, unjust enrichment and violation of Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The complaint seeks from the Individual Defendants an unspecified amount of damages, restitution, punitive damages and costs to be paid to the Company, and seeks to require the Company to adopt corporate governance reforms, and other equitable relief.
On January 15, 2021, the Company filed a motion to dismiss the action because the plaintiff failed to make a demand on the Company as required by Federal Rule of Civil Procedure 23.1 or to show that demand would have been futile. The Individual Defendants also filed a motion to dismiss the complaint for failure to state a claim against the Individual Defendants, among other reasons. Those motions are scheduled for hearing in the 2021 second quarter. While the Company continues to evaluate these claims, management believes that such litigation will likely not have a material adverse effect on the Company’s financial position or results of operations.
The Company evaluates, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of the liability that is accrued, if any, and any related insurance reimbursements. As of December 31, 2020, the Company’s consolidated balance sheet included accrued loss contingencies of approximately $18.4 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 trades on the Nasdaq Global Select Market under the symbol, “MNST”. As of February 19, 2021, there were 528,137,036 shares of the Company’s common stock outstanding held by approximately 188 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
We have not paid cash dividends to our stockholders since our inception and do not anticipate paying cash dividends in the foreseeable future.
On February 26, 2019, the Company’s Board of Directors authorized a share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock (the “February 2019 Repurchase Plan”). During the year ended December 31, 2020, the Company purchased 0.6 million shares of common stock at an average purchase price of $58.16 per share, for a total amount of $36.6 million (excluding broker commissions), which exhausted the availability under the February 2019 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2020.
On November 6, 2019, the Company’s Board of Directors authorized a new share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock (the “November 2019 Repurchase Plan”). During the year ended December 31, 2020, the Company purchased 9.1 million shares of common stock at an average purchase price of $54.86 per share, for a total amount of $499.9 million (excluding broker commissions), which exhausted the availability under the November 2019 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2020.
On March 13, 2020, the Company’s Board of Directors authorized a new share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock (the “March 2020 Repurchase Plan”). During the year ended December 31, 2020, the Company purchased 1.0 million shares of common stock at an average purchase price of $55.85 per share, for a total amount of $58.5 million (excluding broker commissions), under the March 2020 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2020. As of March 1, 2021, $441.5 million remained available for repurchase under the March 2020 Repurchase Plan.
During the year ended December 31, 2020, 0.02 million 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 $1.0 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, 2020.
No shares were repurchased during the quarter ended December 31, 2020.
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, 2015. The Company’s self-selected peer group is comprised of TCCC, Dr. Pepper Snapple Group, Inc. (through July 9, 2018), Keurig Dr. Pepper Inc. (after July 10, 2018), National Beverage Corporation, Jones Soda Company and PepsiCo, Inc.
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, 2018 through 2020 and the balance sheet data as of December 31, 2020 and 2019, 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:
● The COVID-19 Pandemic - a discussion of the impact of the COVID-19 pandemic on our business employees and operations;
● 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 cans, as well as sugar, sucralose and other sweeteners, glucose, sucrose, milk, cream, protein, coffee and tea, all of which are used in some or many of our products), fluctuations in energy and fuel prices, and limited availability of aluminum cans and certain other 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 generally do not hedge against fluctuations in commodity prices.
Our net sales to customers outside of the United States were approximately 33% and 32% of consolidated net sales for the years ended December 31, 2020 and 2019, 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, 2020, 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, 2020 have terms of three months 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 income, 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, 2020 to be significant.
As of December 31, 2020, we had $1.18 billion in cash and cash equivalents and $925.6 million in short-term and long-term investments including certificates of deposit, commercial paper, U.S. government agency securities, U.S. treasuries, and to a lesser extent, municipal securities. 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 79 through 126.
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 Co-Chief Executive Officers 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 Co-Chief Executive Officers 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 Co-Chief Executive Officers and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2020, 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, 2020.
Our internal control over financial reporting as of December 31, 2020, 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, 2020, 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
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Monster Beverage Corporation and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control -Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2020, of the Company and our report dated March 1, 2021, expressed an unqualified opinion on those financial statements.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness 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.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 1, 2021
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 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2020 (the “2021 Proxy Statement”) and is incorporated herein by reference.
Information concerning compliance with Section 16(a) of the Exchange Act is included under the caption “Delinquent Section 16(a) Reports” in our 2021 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 2021 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 officers, principal financial officer, principal accounting officer and controllers) and employees. 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 http://investors.monsterbevcorp.com/corporate-governance or 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 2021 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 2021 Proxy Statement and is incorporated herein by reference.
Information concerning shares of the Company’s Common Stock authorized for issuance under the Company’s equity compensation plans is reported under the caption “Employee Equity Compensation Plan Information” in our 2021 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 2021 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 2021 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, 2020 and 2019
Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Valuation and Qualifying Accounts for the years ended December 31, 2020, 2019 and 2018
Exhibits:
The Exhibits listed in the Index of Exhibits, which appears immediately preceding the signature page and is incorporated herein by reference, as filed as part of this Form 10-K.
ITEM 16. FORM 10-K SUMMARY
None
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).
2.1.1
Amendment to Transaction Agreement, dated as of March 16, 2018, 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 March 20, 2018).
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 (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-Q dated November 7, 2016).
3.2
Second Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.2 to our Form 8-K dated April 16, 2018).
4.1
Description of Common Stock (incorporated by reference to Exhibit 4.1 to our Form 10-K dated February 28, 2020).
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 Form 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 Form 10-Q dated August 10, 2015).
10.3
Form of Indemnification Agreement (to be provided by Monster Beverage Corporation to its directors and officers) (incorporated by reference to Exhibit 10.1 to our Form 8-K dated June 11, 2019).
10.4+*
Form of Restricted Stock Unit Agreement for grants under the Monster Beverage Corporation 2017 Compensation Plan for Non-Employee Directors.
10.5+
Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.1 to our Form 10-Q dated August 9, 2011).
10.6+
Monster Beverage Corporation 2011 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to our Form 8-K dated May 24, 2011).
10.7+
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).
10.8+
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).
10.9+
Form of Stock Option Agreement for grants under the Monster Beverage Corporation 2011 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.10 to our Form 10-K dated March 1, 2018).
10.10+
Form of Stock Option Agreement of Co-Chief Executive Officers for grants under the Monster Beverage Corporation 2011 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.11 to our Form 10-K dated March 1, 2018).
10.11+
Form of 2020 Annual Incentive Award Agreement for grants under the Monster Beverage Corporation 2011 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to our Form 10-Q dated May 11, 2020).
10.12+
Form of Performance Share Unit Award Agreement for grants under the Monster Beverage Corporation 2011 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.2 to our Form 10-Q dated May 11, 2020).
10.13+*
Form of Restricted Stock Unit Agreement for grants under the Monster Beverage Corporation 2011 Omnibus Incentive Plan.
10.14+*
Form of Restricted Stock Unit Agreement of Co-Chief Executive Officers for grants under the Monster Beverage Corporation 2011 Omnibus Incentive Plan.
10.15+
Monster Beverage Corporation 2020 Omnibus Incentive Plan (incorporated by reference to Appendix A to our Definitive Proxy Statement on Schedule 14A, filed April 21, 2020).
10.16+
Monster Beverage Corporation 2017 Compensation Plan for Non-Employee Directors (incorporated by reference to Exhibit 4.1 to our Form S-8 dated June 21, 2017).
10.17+
Monster Beverage Corporation Deferred Compensation Plan for Non-Employee Directors (incorporated by reference to Exhibit 4.2 to our Form S-8 dated June 21, 2017).
10.18+
Amended and Restated Monster Beverage Corporation Deferred Compensation Plan (incorporated by reference to Exhibit 10.14 to our Form 10-K dated March 1, 2018).
21*
Subsidiaries
23*
Consent of Independent Registered Public Accounting Firm
31.1*
Certification by Co-Chief Executive Officer 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 Co-Chief Executive Officer 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
31.3*
Certification by Chief Financial Officer 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 Co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
Certification by Co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.3*
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*
The following materials from Monster Beverage Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 are furnished herewith, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2020 and 2019, (ii) Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018, (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018, (iv) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020, 2019 and 2018, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018, and (vi) Notes to Consolidated Financial Statements.
104*
The cover page from Monster Beverage Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, formatted in iXBRL (Inline eXtensible Business Reporting Language) and contained in Exhibit 101.
*
Filed herewith.
+
Management contract or compensatory plans or arrangements.
SIGNATURES
Pursuant to the requirements of 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, 2021
Chairman of the Board of
Directors and Co-Chief
Executive Officer
/s/ HILTON H. SCHLOSBERG
Hilton H. Schlosberg
Date: March 1, 2021
Vice Chairman of the Board of
Directors and Co-Chief
Executive Officer
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, 2021
Rodney C. Sacks
Directors and Co-Chief Executive
Officer (principal executive officer)
/s/ HILTON H. SCHLOSBERG
Vice Chairman of the Board of Directors
March 1, 2021
Hilton H. Schlosberg
and Co-Chief Executive Officer (principal
executive officer)
/s/ THOMAS J. KELLY
Chief Financial Officer (principal financial
March 1, 2021
Thomas J. Kelly
officer, principal accounting officer)
/s/ JAMES L. DINKINS
Director
March 1, 2021
James L. Dinkins
/s/ GARY P. FAYARD
Director
March 1, 2021
Gary P. Fayard
/s/ MARK J. HALL
Director
March 1, 2021
Mark J. Hall
/s/ JEANNE P. JACKSON
Director
March 1, 2021
Jeanne P. Jackson
/s/ STEVEN G. PIZULA
Director
March 1, 2021
Steven G. Pizula
/s/ BENJAMIN M. POLK
Director
March 1, 2021
Benjamin M. Polk
/s/ SYDNEY SELATI
Director
March 1, 2021
Sydney Selati
/s/ MARK S. VIDERGAUZ
Director
March 1, 2021
Mark S. Vidergauz
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, 2020 and 2019
Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
Financial Statement Schedule - Valuation and Qualifying Accounts for the years ended December 31, 2020, 2019 and 2018
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Monster Beverage Corporation
Corona, California
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Monster Beverage Corporation and subsidiaries (the “Company”) as of December 31, 2020 and 2019, 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, 2020, and the related notes and the schedule listed in the Index at Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on 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, 2021, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the Audit Committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Accrued Promotional Allowances - Refer to Note 2 to the financial statements
Critical Audit Matter Description
The Company’s promotional and other allowances are calculated based on various programs with its bottlers/distributors and retail customers, and accruals are established during the year for its 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. Promotional and other allowances primarily include consideration given to bottlers/distributors or retail customers, including, but not limited to, the following: (i) discounts granted off list prices to support price promotions to end consumers by retailers; (ii) reimbursements given to bottlers/distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances, and other fees for both new and existing products; (iii) agreed share of fees given to bottlers/distributors and/or directly to retailers for advertising, in-store marketing, and promotional activities; (iv) agreed share of slotting, shelf space allowances, and other fees given directly to retailers, club stores and/or wholesalers; (v) incentives given to bottlers/distributors and/or retailers for achieving or exceeding certain predetermined sales goals; (vi) discounted or free products; (vii) contractual fees given to bottlers/distributors related to sales made by the Company directly to certain customers that fall within the bottlers’/distributors’ sales territories; and (viii) certain commissions paid based on sales to bottlers/distributors. The length of promotional programs can vary from as little as one day, for one-time events, to as long as one year based on the agreed-upon terms. The nature of such programs is determined on a per retail customer basis, and in certain instances, the same program is set for multiple retail customers. The promotional expenditures are recorded as a reduction to net sales in the period the underlying sale occurs. Total promotional expenditures included as a reduction to net sales were $772.2 million for the year ended December 31, 2020, and accrued promotional allowances were $186.7 million as of December 31, 2020.
We identified accrued promotional allowances as a critical audit matter because of the extent and subjective nature of management judgment required with respect to estimating consumer participation and/or distributor and retail customer performance levels and future promotional claims.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures over accrued promotional allowances, with respect to management’s judgment regarding levels of consumer participation and/or distributor and retail customer performance levels and future promotional claims, included the following, among others:
● We tested the effectiveness of controls over accrued promotional allowances, including those controls pertaining to management’s estimation of future promotional claims.
● We selected a sample of accrued promotional allowances recorded for specific distributors and retail customers and sent confirmation requests of the accrual recorded and key terms of the agreement directly to the distributor or retail customer. We compared the confirmation response to the accrued amount recorded by the Company. In instances of nonreplies to our confirmation request from the distributor or retail customer, we performed alternative procedures as follows: (1) developing an expectation of the accrual using current-year claim and payment data, and/or (2) vouching known claim submissions, unpaid as of period-end, to underlying supporting documentation.
● We tested the promotional expenditure amount recorded as a reduction to net sales and assessed the reasonableness of management’s estimate by developing an expectation of the amount, based on historical promotional expenditure amounts recorded as a percentage of sales, and compared our expectation to the recorded promotional expenditure amount.
● We performed inquiries with the Company’s sales and marketing personnel to corroborate our understanding of new and existing promotional programs that may alter the relationship between gross billings and promotional allowances, as such programs are considered by management when estimating future promotional claims.
● We evaluated management’s ability to estimate promotional allowances by comparing the actual promotional allowances subsequently paid to the original estimates of management.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 1, 2021
We have served as the Company’s auditor since 1991.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2020 AND 2019 (In Thousands, Except Par Value)
December 31,
December 31,
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
1,180,413
$
797,957
Short-term investments
881,354
533,063
Accounts receivable, net
666,012
540,330
Inventories
333,085
360,731
Prepaid expenses and other current assets
55,358
54,868
Prepaid income taxes
24,733
29,360
Total current assets
3,140,955
2,316,309
INVESTMENTS
44,291
12,905
PROPERTY AND EQUIPMENT, net
314,656
298,640
DEFERRED INCOME TAXES
241,650
84,777
GOODWILL
1,331,643
1,331,643
OTHER INTANGIBLE ASSETS, net
1,059,046
1,052,105
OTHER ASSETS
70,475
53,973
Total Assets
$
6,202,716
$
5,150,352
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
$
296,800
$
274,045
Accrued liabilities
142,653
114,075
Accrued promotional allowances
186,658
166,761
Deferred revenue
45,429
44,237
Accrued compensation
55,015
47,262
Income taxes payable
23,433
14,717
Total current liabilities
749,988
661,097
DEFERRED REVENUE
264,436
287,469
OTHER LIABILITIES
27,432
30,505
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS’ EQUITY:
Common stock - $0.005 par value; 1,250,000 shares authorized; 638,662 shares issued and 528,097 shares outstanding as of December 31, 2020; 636,460 shares issued and 536,698 shares outstanding as of December 31, 2019
3,193
3,182
Additional paid-in capital
4,537,982
4,397,511
Retained earnings
6,432,074
5,022,480
Accumulated other comprehensive income (loss)
3,034
(32,387)
Common stock in treasury, at cost; 110,565 and 99,762 shares as of December 31, 2020 and December 31, 2019, respectively
(5,815,423)
(5,219,505)
Total stockholders’ equity
5,160,860
4,171,281
Total Liabilities and Stockholders’ Equity
$
6,202,716
$
5,150,352
See accompanying notes to consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
(In Thousands, Except Per Share Amounts)
NET SALES
$
4,598,638
$
4,200,819
$
3,807,183
COST OF SALES
1,874,758
1,682,234
1,511,808
GROSS PROFIT
2,723,880
2,518,585
2,295,375
OPERATING EXPENSES
1,090,727
1,115,646
1,011,756
OPERATING INCOME
1,633,153
1,402,939
1,283,619
OTHER (EXPENSE) INCOME, NET
(6,996)
13,023
9,653
INCOME BEFORE PROVISION FOR INCOME TAXES
1,626,157
1,415,962
1,293,272
PROVISION FOR INCOME TAXES
216,563
308,127
300,268
NET INCOME
$
1,409,594
$
1,107,835
$
993,004
NET INCOME PER COMMON SHARE:
Basic
$
2.66
$
2.04
$
1.78
Diluted
$
2.64
$
2.03
$
1.76
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS:
Basic
529,639
542,191
557,166
Diluted
534,807
546,608
564,254
See accompanying notes to consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018 (In Thousands)
Net income, as reported
$
1,409,594
$
1,107,835
$
993,004
Other comprehensive income (loss):
Change in foreign currency translation adjustment, net of tax
35,531
(16,957)
Available-for-sale investments:
Change in net unrealized gains (losses)
(110)
Reclassification adjustment for net gains included in net income
-
-
-
Net change in available-for-sale investments
(110)
Other comprehensive income (loss)
35,421
(16,205)
Comprehensive income
$
1,445,015
$
1,108,312
$
976,799
See accompanying notes to consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018 (In Thousands)
Accumulated
Other
Total
Common stock
Additional
Retained
Comprehensive
Treasury stock
Stockholders’
Shares
Amount
Paid-in Capital
Earnings
Loss
Shares
Amount
Equity
Balance, January 1, 2018
629,255
$
3,146
$
4,150,628
$
2,928,226
$
(16,659)
(62,957)
$
(3,170,129)
$
3,895,212
Stock-based compensation
-
-
57,111
-
-
-
-
57,111
Exercise of stock options
1,715
27,843
-
-
-
-
27,852
Unrealized gain on available-for-sale securities
-
-
-
-
-
-
Adjustment to excess tax benefits from prior periods
-
-
2,588
-
-
-
-
2,588
ASU No. 2016-16 adoption
-
-
-
(6,585)
-
-
-
(6,585)
Repurchase of common stock
-
-
-
-
-
(24,337)
(1,342,076)
(1,342,076)
Foreign currency translation
-
-
-
-
(16,957)
-
-
(16,957)
Net income
-
-
-
993,004
-
-
-
993,004
Balance, December 31, 2018
630,970
$
3,155
$
4,238,170
$
3,914,645
$
(32,864)
(87,294)
$
(4,512,205)
$
3,610,901
Stock-based compensation
-
-
63,356
-
-
-
-
63,356
Exercise of stock options
5,490
92,336
-
-
-
-
92,363
Unrealized gain on available-for-sale securities
-
-
-
-
-
-
Adjustment to excess tax benefits from prior periods
-
-
3,649
-
-
-
-
3,649
Repurchase of common stock
-
-
-
-
-
(12,468)
(707,300)
(707,300)
Foreign currency translation
-
-
-
-
-
-
Net income
-
-
-
1,107,835
-
-
-
1,107,835
Balance, December 31, 2019
636,460
$
3,182
$
4,397,511
$
5,022,480
$
(32,387)
(99,762)
$
(5,219,505)
$
4,171,281
Stock-based compensation
-
-
67,546
-
-
-
-
67,546
Exercise of stock options
2,202
72,925
-
-
-
-
72,936
Unrealized loss on available-for-sale securities
-
-
-
-
(110)
-
-
(110)
Repurchase of common stock
-
-
-
-
-
(10,803)
(595,918)
(595,918)
Foreign currency translation
-
-
-
-
35,531
-
-
35,531
Net income
-
-
-
1,409,594
-
-
-
1,409,594
Balance, December 31, 2020
638,662
$
3,193
$
4,537,982
$
6,432,074
$
3,034
(110,565)
$
(5,815,423)
$
5,160,860
See accompanying notes to consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018 (In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$
1,409,594
$
1,107,835
$
993,004
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
60,973
64,814
56,979
Gain on disposal of property and equipment
(350)
(252)
(783)
Loss on impairment of intangibles
8,700
Stock-based compensation
70,289
63,356
57,111
Deferred income taxes
(156,873)
1,263
(510)
Effect on cash of changes in operating assets and liabilities:
Accounts receivable
(120,058)
(66,411)
(48,370)
Distributor receivables
6,470
9,958
Inventories
30,304
(85,222)
(26,146)
Prepaid expenses and other assets
1,024
(13,774)
(6,682)
Prepaid income taxes
5,516
9,481
98,716
Accounts payable
18,696
28,832
9,852
Accrued liabilities
26,392
(14,297)
18,145
Accrued promotional allowances
13,762
21,943
11,719
Accrued distributor terminations
(279)
(91)
Accrued compensation
7,501
7,228
5,477
Income taxes payable
10,422
8,105
1,943
Other liabilities
(356)
(1,030)
1,526
Deferred revenue
(21,480)
(24,858)
(19,967)
Net cash provided by operating activities
1,364,163
1,113,762
1,161,881
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of available-for-sale investments
920,196
851,436
1,181,484
Proceeds from sale of property and equipment
1,239
4,295
Purchases of available-for-sale investments
(1,299,981)
(1,067,736)
(826,084)
Purchases of property and equipment
(48,722)
(101,661)
(61,941)
Additions to intangibles
(18,550)
(8,737)
(12,984)
Increase in other assets
(26,423)
(1,265)
(11,814)
Net cash (used in) provided by investing activities
(472,487)
(326,724)
272,956
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt
(3,086)
(13,569)
(1,886)
Issuance of common stock
72,936
92,363
27,851
Purchases of common stock held in treasury
(595,918)
(707,300)
(1,342,076)
Net cash used in financing activities
(526,068)
(628,506)
(1,316,111)
Effect of exchange rate changes on cash and cash equivalents
16,848
1,912
(9,835)
NET INCREASE IN CASH AND CASH EQUIVALENTS
382,456
160,444
108,891
CASH AND CASH EQUIVALENTS, beginning of year
797,957
637,513
528,622
CASH AND CASH EQUIVALENTS, end of year
$
1,180,413
$
797,957
$
637,513
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Interest
$
$
$
Income taxes
$
355,509
$
293,810
$
200,767
See accompanying notes to consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS:
Accrued liabilities included additions to intangibles of $9.8 million, $12.8 million and $10.8 million as of December 31, 2020, 2019 and 2018, respectively.
Accounts payable included purchases of available-for-sale short-term investments of $8.7 million as of December 31, 2019. No amounts were included as of December 31, 2020 and December 31, 2018.
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.
Nature of Operations - The Company develops, markets, sells and distributes energy drink beverages and concentrates for energy drink beverages, primarily under the following brand names: Monster Energy®, Monster Energy Ultra®, Monster Rehab®, Monster MAXX®, Java Monster®, Muscle Monster®, Espresso Monster®, Punch Monster®, Juice Monster®, Monster Hydro®, Monster HydroSport Super Fuel®, Monster Super Fuel®, Predator®, Fury®, Reign Total Body Fuel®, Reign Inferno® Thermogenic Fuel, Monster Dragon Tea®, NOS®, Full Throttle®, Burn®, Mother®, Nalu®, Ultra Energy®, Play® and Power Play® (stylized), Relentless®, BPM®, BU®, Gladiator®, Samurai® and Live+®.
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.
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 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 income (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. Under FASB ASC 326-30-35, a security is considered to be impaired if the fair value of the security is less than its amortized
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
cost basis. Where the decline in fair value below the amortized cost basis has resulted from a credit loss, the Company will record an impairment relating to credit losses through an allowance for credit losses. The allowance is limited by the amount that the fair value is less than the amortized cost basis. Impairment that has not been recorded through an allowance for credit losses is recorded through other comprehensive income (loss), net of applicable taxes. The Company evaluates whether the decline in fair value of its investments has resulted from credit loss or other factors 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 an impairment has resulted from credit loss or other factors 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 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 reasonably determines that it is more-likely-than-not that the fair value is less than the carrying value, the Company performs its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The Company will recognize an impairment for the amount by which the carrying amount exceeds a reporting unit’s fair value. For the years ended December 31, 2020, 2019 and 2018 there were no impairments recorded and there are no accumulated impairment balances.
Other Intangibles - Other Intangibles are comprised primarily of trademarks that represent the Company’s exclusive ownership of the Monster Energy®, ®, Monster Energy Ultra®, Monster Dragon Tea®, Unleash the Beast!®,
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Monster Rehab®, Monster MAXX®, Java Monster®, Muscle Monster®, Espresso Monster®, Punch Monster®, Juice Monster®, Monster Hydro®, Monster HydroSport Super Fuel®, Monster Super Fuel®, Reign Total Body Fuel®, Reign Inferno®, Predator®, Fury®, NOS®, Full Throttle®, Burn®, Mother®, Nalu®, Ultra Energy®, Play® and Power Play® (stylized), Relentless®, BPM®, BU®, Gladiator® and Samurai® trademarks, all used in connection with the manufacture, sale and distribution of beverages. The Company also owns a number of other trademarks, flavors and formulas 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 year ended December 31, 2020, an impairment charge of $8.7 million was recorded to intangibles. For the years ended December 31, 2019 and 2018 no impairments were recorded.
Leases - See Note 3.
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 years ended December 31, 2020, 2019 and 2018, 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 income (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 income (loss) in stockholders’ equity. During the years ended December 31, 2020, 2019 and 2018, the Company entered into forward currency exchange contracts with financial institutions to create an economic hedge to specifically manage a portion of the foreign exchange risk exposure associated with certain consolidated subsidiaries non-functional currency denominated assets and liabilities. All foreign currency exchange contracts outstanding as of December 31, 2020 have terms of three months 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 income, 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, 2020, 2019 and 2018, aggregate foreign currency transaction losses, including the gains or losses on forward currency exchange contracts, amounted to $11.2 million, $4.1 million and
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
$4.0 million, respectively, and have been recorded in other income, net, in the accompanying consolidated statements of income.
Revenue Recognition - See Note 2.
Cost of Sales - Cost of sales consists of the costs of flavors, concentrates, supplement ingredients and/or beverage bases, the costs of raw materials utilized in the manufacture of beverages, co-packing fees, repacking fees, in-bound freight charges, as well as internal transfer costs, warehouse expenses incurred prior to the manufacture of the Company’s finished products and certain quality control costs. In addition, the Company includes in costs of sales certain costs such as depreciation, amortization and payroll costs that relate to the direct manufacture by the Company of certain flavors and concentrates. Raw materials account for the largest portion of 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, 2020, 2019 and 2018, freight-out costs amounted to $134.1 million, $122.5 million and $128.5 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 the periodic performance compliance provisions of the contracts. Advertising and promotional expenses, including, but not limited to, production costs amounted to $345.7 million, $391.6 million and $353.9 million for the years ended December 31, 2020, 2019 and 2018, 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 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
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
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 units and performance share units is measured based on the closing fair market value of the Company’s common stock at the date of grant. In the event that the Company has the option and intent to settle a restricted stock unit or performance share unit in cash, the award is classified as a liability and revalued at each balance sheet date. See Note 15.
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.
The Coca-Cola Company (“TCCC”), through certain wholly-owned subsidiaries (the “TCCC Subsidiaries”), accounted for approximately 2%, 2% and 3% of the Company’s net sales for the years ended December 31, 2020, 2019 and 2018, respectively.
Coca-Cola Consolidated, Inc. accounted for approximately 12%, 13% and 13% of the Company’s net sales for the years ended December 31, 2020, 2019 and 2018, respectively.
Reyes Coca-Cola Bottling, LLC accounted for approximately 11%, 11% and 12% of the Company’s net sales for the years ended December 31, 2020, 2019 and 2018, respectively.
Coca-Cola European Partners accounted for approximately 10%of the Company’s net sales for the years ended December 31, 2020, 2019 and 2018.
Credit Risk - The Company sells its products nationally and internationally, primarily to bottlers and full service beverage distributors, retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, drug stores, foodservice customers, value stores, e-commerce retailers and the military. The Company 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 December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, “Simplifying the Accounting for Income Taxes”, as part of its simplification initiative to reduce the cost and complexity in accounting for income taxes. ASU No. 2019-12 removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU No. 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The guidance was effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The adoption of ASU No. 2019-12 did not have a material impact on the Company’s financial position, results of operations and liquidity.
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.” ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract, with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU No. 2018-15 was effective for the Company on a prospective or retrospective basis beginning on January 1, 2020. The adoption of ASU No. 2018-15 did not have a material impact on the Company’s financial position, results of operations and liquidity.
In August 2018, the FASB issued ASU No. 2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General (Topic 715): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans.” ASU No. 2018-14 removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and requires certain additional disclosures. ASU No. 2018-14 was effective for the Company on a retrospective basis beginning in the year ending December 31, 2020. The adoption of ASU No. 2018-14 did not have a material impact on the Company’s disclosures, financial position, results of operations and liquidity.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” ASU No. 2018-13 removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. ASU No. 2018-13 disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU No. 2018-13 was effective for the Company beginning on January 1, 2020. The adoption of ASU No. 2018-13 did not have a material impact on the Company’s disclosures, 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 January 2017, the FASB issued ASU No. 2017-04, “Intangibles and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which eliminates the requirement to calculate the implied fair value of goodwill, but rather requires an entity to record an impairment charge based on the excess of a reporting unit’s carrying value over its fair value. This amendment was effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of ASU No. 2017-04 did not have a material impact on the Company’s financial position, results of operations and liquidity.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The accounting standard changes the methodology for measuring credit losses on financial instruments and the timing when such losses are recorded. ASU No. 2016-13 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. The adoption of ASU No. 2016-13 did not have a material impact on the Company’s disclosures, financial position, results of operations and liquidity.
2. REVENUE RECOGNITION
Revenues are accounted for in accordance with ASC 606 “Revenue from Contracts with Consumers”. The Company has three operating and reportable segments: (i) Monster Energy® Drinks segment (“Monster Energy® Drinks”), which is primarily comprised of the Company’s Monster Energy® drinks and Reign Total Body Fuel® high performance energy drinks, (ii) Strategic Brands segment (“Strategic Brands”), which is primarily comprised of the various energy drink brands acquired from TCCC in 2015 as well as the Company’s affordable energy brands, and (iii) Other segment (“Other”), which is comprised of certain products sold by American Fruits and Flavors, LLC, a wholly-owned subsidiary of the Company, to independent third-party customers (the “AFF Third-Party Products”).
The Company’s Monster Energy® Drinks segment generates net operating revenues by selling ready-to-drink packaged energy drinks primarily to bottlers and full service beverage bottlers/distributors (“bottlers/distributors”). In some cases, the Company sells directly to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, drug stores, foodservice customers, value stores, e-commerce retailers and the military.
The Company’s Strategic Brands segment primarily generates net operating revenues by selling “concentrates” and/or “beverage bases” to authorized bottling and canning operations. Such bottlers generally combine the concentrates and/or beverage bases with sweeteners, water and other ingredients to produce ready-to-drink packaged energy drinks. The ready-to-drink packaged energy drinks are then sold by such bottlers to other bottlers/distributors and to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, foodservice customers, drug stores, value stores, e-commerce retailers and the military. To a lesser extent, the Strategic Brands segment generates net operating revenues by selling certain ready-to-drink packaged energy drinks to bottlers/distributors.
The majority of the Company’s revenue is recognized when it satisfies a single performance obligation by transferring control of its products to a customer. Control is generally transferred when the Company’s products are either shipped or delivered based on the terms contained within the underlying contracts or agreements. Certain of the Company’s bottlers/distributors may also perform a separate function as a co-packer on the Company’s behalf. In such cases, control of the Company’s products passes to such bottlers/distributors when they notify the Company that they have taken possession or transferred the relevant portion of the Company’s finished goods. The Company’s general payment terms are short-term in duration. The Company does not have significant financing components or payment terms. The Company did not have any material unsatisfied performance obligations as of December 31, 2020 and December 31, 2019.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
The Company excludes from revenues all taxes assessed by a governmental authority that are imposed on the sale of its products and collected from customers.
Distribution expenses to transport the Company’s products, where applicable, and warehousing expense after manufacture are accounted for within operating expenses.
Promotional and other allowances (variable consideration) recorded as a reduction to net sales, primarily include consideration given to the Company’s bottlers/distributors or retail customers including, but not limited to the following:
● discounts granted off list prices to support price promotions to end-consumers by retailers;
● reimbursements given to the Company’s bottlers/distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products;
● the Company’s agreed share of fees given to bottlers/distributors and/or directly to retailers for advertising, in-store marketing and promotional activities;
● the Company’s agreed share of slotting, shelf space allowances and other fees given directly to retailers, club stores and/or wholesalers;
● incentives given to the Company’s bottlers/distributors and/or retailers for achieving or exceeding certain predetermined sales goals;
● discounted or free products;
● contractual fees given to the Company’s bottlers/distributors related to sales made directly by the Company to certain customers that fall within the bottlers’/distributors’ sales territories; and
● commissions to TCCC based on the Company’s sales to certain wholly-owned subsidiaries of TCCC (the “TCCC Subsidiaries”) and/or to certain companies accounted for under the equity method by TCCC (the “TCCC Related Parties”).
The Company’s promotional allowance programs with its bottlers/distributors and/or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, typically ranging from one week to one year. The Company’s promotional and other allowances are calculated based on various programs with bottlers/distributors and retail customers, and accruals are established at the time of initial product sale for the Company’s anticipated liabilities. These accruals are based on agreed upon terms as well as the Company’s historical experience with similar programs and require management’s judgment with respect to estimating consumer participation and/or bottler/distributor and retail customer performance levels. Differences between such estimated expenses and actual expenses for promotional and other allowance costs have historically been insignificant and are recognized in earnings in the period such differences are determined.
Amounts received pursuant to new and/or amended distribution agreements entered into with certain bottlers/distributors relating to the costs associated with terminating the Company’s prior distributors, are accounted for as revenue ratably over the anticipated life of the respective distribution agreements, generally over 20 years.
The Company also enters into license agreements that generate revenues associated with third-party sales of non-beverage products bearing the Company’s trademarks including, but not limited to, clothing, hats, t-shirts, jackets, helmets and automotive wheels.
Management believes that adequate provision has been made for cash discounts, returns and spoilage based on the Company’s historical experience.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Disaggregation of Revenue
The following table disaggregates the Company’s revenue by geographical markets and reportable segments:
Year Ended December 31, 2020
Latin
America
U.S. and
and
Net Sales
Canada
EMEA2
Asia Pacific
Caribbean
Total
Monster Energy® Drinks
$
3,020,667
$
675,045
$
400,317
$
209,217
$
4,305,246
Strategic Brands
166,861
70,782
23,475
5,236
266,354
Other
27,038
-
-
-
27,038
Total Net Sales
$
3,214,566
$
745,827
$
423,792
$
214,453
$
4,598,638
Year Ended December 31, 2019
Latin
America
U.S. and
and
Net Sales
Canada
EMEA2
Asia Pacific
Caribbean
Total
Monster Energy® Drinks
$
2,799,701
$
599,706
$
326,684
$
177,938
$
3,904,029
Strategic Brands
173,968
74,803
25,060
1,094
274,925
Other
21,865
-
-
-
21,865
Total Net Sales
$
2,995,534
$
674,509
$
351,744
$
179,032
$
4,200,819
Year Ended December 31, 2018
Latin
America
U.S. and
and
Net Sales
Canada
EMEA2
Asia Pacific
Caribbean
Total
Monster Energy® Drinks
$
2,627,000
$
500,826
$
225,172
$
145,429
$
3,498,427
Strategic Brands
179,677
77,841
26,254
2,064
285,836
Other
22,920
-
-
-
22,920
Total Net Sales
$
2,829,597
$
578,667
$
251,426
$
147,493
$
3,807,183
2Europe, Middle East and Africa (“EMEA”)
Contract Liabilities
Amounts received from certain bottlers/distributors at inception of their distribution contracts or at the inception of certain sales/marketing programs are accounted for as deferred revenue. As of December 31, 2020 and 2019, the Company had $309.9 million and $331.7 million of deferred revenue, respectively, which is included in current and long-term deferred revenue in the Company’s consolidated balance sheet. During the years ended December 31, 2020, 2019 and 2018, $42.1 million, $46.3 million and $44.3 million, respectively, of deferred revenue, was recognized in net sales. See Note 10.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
3. LEASES
The Company leases identified assets comprising real estate and equipment. Real estate leases consist primarily of office and warehouse space and equipment leases consist of vehicles and warehouse equipment. At the inception of a contract, the Company assesses whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether the Company obtains the right to substantially all the economic benefit from the use of the asset throughout the term, and (3) whether the Company has the right to direct the use of the asset. At inception of a lease, the Company allocates the consideration in the contract to each lease and non-lease component based on the component’s relative stand-alone price to determine the lease payments. Lease and non-lease components are accounted for separately.
Leases are classified as either finance leases or operating leases based on criteria in ASC 842, “Leases”. The Company’s operating leases are comprised of real estate and warehouse equipment, and the Company’s finance leases are comprised of vehicles.
Right-of-use (“ROU”) assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As the Company’s leases generally do not provide an implicit rate, the Company uses its incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. ROU assets also include any lease payments made and exclude lease incentives. Lease terms include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
Certain of the Company’s real estate leases contain variable lease payments, including payments based on an index or rate. Variable lease payments based on an index or rate are initially measured using the index or rate in effect at the lease commencement date. Additional payments based on the change in an index or rate, or payments based on a change in the Company’s portion of real estate taxes and insurance, are recorded as a period expense when incurred.
Lease expense for operating leases, consisting of lease payments, is recognized on a straight-line basis over the lease term and is included in operating expenses in the consolidated statement of income. Lease expense for finance leases consists of the amortization of the ROU asset on a straight-line basis over the asset’s estimated useful life and is included in operating expenses in the consolidated statement of income. Interest expense on finance leases is calculated using the amortized cost basis and is included in other (expense) income, net in the consolidated statement of income.
The Company’s leases have remaining lease terms of less than one year to 13 years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within one year. The Company has elected not to recognize ROU assets and lease liabilities for short-term operating leases that have a term of 12 months or less.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
The components of lease cost for the years ended December 31, 2020 and 2019 were as follows:
Operating lease cost
$
4,637
$
4,899
Short-term lease cost
3,408
3,406
Variable lease cost
Finance leases:
Amortization of ROU assets
Interest on lease liabilities
Finance lease cost
Total lease cost
$
9,429
$
9,437
Rent expense under operating lease agreements was $6.1 million for the year ended December 31, 2018.
Supplemental cash flow information for leases for the years ended December 31, 2020 and 2019 were as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
3,982
$
4,077
Operating cash flows from finance leases
Financing cash flows from finance leases
3,086
2,223
ROU assets obtained in exchange for lease obligations:
Finance leases
2,417
2,866
Operating leases
3,003
34,931
ROU assets for operating and finance leases recognized in the consolidated balance sheets were comprised of the following at:
December 31, 2020
Real Estate
Equipment
Total
Balance Sheet Location
Operating leases
$
22,565
$
$
22,754
Other Assets
Finance leases
-
2,120
2,120
Property and Equipment, net
December 31, 2019
Real Estate
Equipment
Total
Balance Sheet Location
Operating leases
$
30,926
$
$
31,342
Other Assets
Finance leases
-
2,632
2,632
Property and Equipment, net
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Operating and finance lease liabilities recognized in the consolidated balance sheets were as follows at:
December 31, 2020
Operating Leases
Finance Leases
Accrued liabilities
$
3,171
$
Other liabilities
17,342
Total
$
20,513
$
December 31, 2019
Operating Leases
Finance Leases
Accrued liabilities
$
2,812
$
1,485
Other liabilities
25,651
-
Total
$
28,463
$
1,485
The weighted-average remaining lease terms and weighted-average discount rates for operating and finance leases were as follows at:
December 31, 2020
Operating Leases
Finance Leases
Weighted-average remaining lease term (years)
9.4
0.6
Weighted-average discount rate
3.6
%
1.9
%
December 31, 2019
Operating Leases
Finance Leases
Weighted-average remaining lease term (years)
10.1
0.6
Weighted-average discount rate
3.1
%
2.9
%
The following table reconciles the undiscounted future lease payments for operating and finance leases to the operating and finance leases recorded in the consolidated balance sheet at December 31, 2020:
Undiscounted Future Lease Payments
Operating Leases
Finance Leases
$
3,785
$
3,131
2,387
1,899
1,603
-
2026 and thereafter
11,588
-
Total lease payments
24,393
Less imputed interest
(3,880)
(5)
Total
$
20,513
$
As of December 31, 2020, the Company did not have any significant additional operating or finance leases that had not yet commenced.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
4. INVESTMENTS
The following table summarizes the Company’s investments at:
Continuous
Continuous
Gross
Gross
Unrealized
Unrealized
Unrealized
Unrealized
Loss Position
Loss Position
Amortized
Holding
Holding
Fair
less than 12
greater than 12
December 31, 2020
Cost
Gains
Losses
Value
Months
Months
Available-for-sale
Short-term:
Commercial paper
$
119,886
$
-
$
-
$
119,886
$
-
$
-
Certificates of deposit
20,387
-
-
20,387
-
-
Municipal securities
9,083
-
-
9,083
-
-
U.S. government agency securities
81,521
81,531
-
U.S. treasuries
650,386
650,467
-
Long-term:
U.S. government agency securities
10,350
-
10,351
-
-
U.S. treasuries
33,946
33,940
-
Total
$
925,559
$
$
$
925,645
$
$
-
Continuous
Continuous
Gross
Gross
Unrealized
Unrealized
Unrealized
Unrealized
Loss Position
Loss Position
Amortized
Holding
Holding
Fair
less than 12
greater than 12
December 31, 2019
Cost
Gains
Losses
Value
Months
Months
Available-for-sale
Short-term:
Commercial paper
$
83,478
$
-
$
-
$
83,478
$
-
$
-
Certificates of deposit
28,049
-
-
28,049
-
-
Municipal securities
147,983
148,108
-
U.S. government agency securities
40,620
40,590
-
U.S. treasuries
211,055
211,158
-
Variable rate demand notes
21,680
-
-
21,680
-
-
Long-term:
Municipal securities
1,562
-
1,561
-
U.S. government agency securities
5,267
-
5,266
-
U.S. treasuries
6,077
-
6,078
-
-
Total
$
545,771
$
$
$
545,968
$
$
-
During the years ended December 31, 2020, 2019 and 2018, realized gains or losses recognized on the sale of investments were not significant.
The Company’s investments at December 31, 2020 and 2019 carried investment grade credit ratings. Variable rate demand notes (“VRDNs”) are floating rate municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest. All of the put options are secured by a pledged liquidity source. While they are classified as marketable investment securities, the put option allows the VRDNs to be liquidated at par on a same day, or more generally, on a seven-day settlement basis.
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, 2020
December 31, 2019
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Less than 1 year:
Commercial paper
$
119,886
$
119,886
$
83,478
$
83,478
Municipal securities
9,083
9,083
147,983
148,108
U.S. government agency securities
81,521
81,531
40,620
40,590
Certificates of deposit
20,387
20,387
28,049
28,049
U.S. treasuries
650,386
650,467
211,055
211,158
Due 1 -10 years:
Municipal securities
-
-
1,562
1,561
U.S. treasuries
33,946
33,940
6,077
6,078
U.S. government agency securities
10,350
10,351
5,267
5,266
Variable rate demand notes
-
-
3,905
3,905
Due 11 - 20 years:
Variable rate demand notes
-
-
8,886
8,886
Due 21 - 30 years:
Variable rate demand notes
-
-
6,885
6,885
Due 31 - 40 years:
Variable rate demand notes
-
-
2,004
2,004
Total
$
925,559
$
925,645
$
545,771
$
545,968
5. 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.
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.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
The following tables present the fair value of Company's financial assets and liabilities that are recorded at fair value on a recurring basis, segregated among the appropriate levels within the fair value hierarchy at:
December 31, 2020
Level 1
Level 2
Level 3
Total
Cash
$
796,421
$
-
$
-
$
796,421
Money market funds
352,730
-
-
352,730
Certificates of deposit
-
23,137
-
23,137
Commercial paper
-
130,883
-
130,883
Municipal securities
-
9,083
-
9,083
U.S. government agency securities
-
91,882
-
91,882
U.S. treasuries
-
701,922
-
701,922
Foreign currency derivatives
-
(2,578)
-
(2,578)
Total
$
1,149,151
$
954,329
$
-
$
2,103,480
Amounts included in:
Cash and cash equivalents
$
1,149,151
$
31,262
$
-
$
1,180,413
Short-term investments
-
881,354
-
881,354
Accounts receivable, net
-
-
Investments
-
44,291
-
44,291
Accrued liabilities
-
(2,647)
-
(2,647)
Total
$
1,149,151
$
954,329
$
-
$
2,103,480
December 31, 2019
Level 1
Level 2
Level 3
Total
Cash
$
518,178
$
-
$
-
$
518,178
Money market funds
191,131
-
-
191,131
Certificates of deposit
-
28,049
-
28,049
Commercial paper
-
96,867
-
96,867
Variable rate demand notes
-
21,680
-
21,680
Municipal securities
-
167,224
-
167,224
U.S. government agency securities
-
73,634
-
73,634
U.S. treasuries
-
247,162
-
247,162
Foreign currency derivatives
-
(687)
-
(687)
Total
$
709,309
$
633,929
$
-
$
1,343,238
Amounts included in:
Cash and cash equivalents
$
709,309
$
88,648
$
-
$
797,957
Short-term investments
-
533,063
-
533,063
Accounts receivable, net
-
-
Investments
-
12,905
-
12,905
Accrued liabilities
-
(1,016)
-
(1,016)
Total
$
709,309
$
633,929
$
-
$
1,343,238
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
All of the Company’s short-term and long-term investments are classified within Level 1 or Level 2 within 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, 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, 2020 and 2019, and there were no changes in the Company’s valuation techniques.
6. 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, 2020, 2019 and 2018, the Company entered into forward currency exchange contracts with financial institutions to create an economic hedge to specifically manage a portion of the foreign exchange risk exposure associated with certain consolidated subsidiaries’ non-functional currency denominated assets and liabilities. All foreign currency exchange contracts entered into by the Company that were outstanding as of December 31, 2020 have terms of three months 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 income, net, in the consolidated statements of income, and are largely offset by the changes in the fair value of the underlying economically hedged item.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
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, 2020
Derivatives not designated as
hedging instruments under
Notional
Fair
FASB ASC 815-20
Amount
Value
Balance Sheet Location
Assets:
Foreign currency exchange contracts:
Receive SGD/pay USD
$
18,713
$
Accounts receivable, net
Receive RSD/pay USD
10,127
Accounts receivable, net
Liabilities:
Foreign currency exchange contracts:
Receive EUR/pay USD
$
1,298,899
$
(1,768)
Accrued liabilities
Receive USD/pay GBP
35,256
(416)
Accrued liabilities
Receive USD/pay AUD
8,508
(130)
Accrued liabilities
Receive USD/pay ZAR
2,403
(106)
Accrued liabilities
Receive USD/pay COP
5,436
(93)
Accrued liabilities
Receive USD/pay CNY
12,344
(50)
Accrued liabilities
Receive USD/pay RUB
7,780
(40)
Accrued liabilities
Receive NOK/pay USD
4,411
(18)
Accrued liabilities
Receive USD/pay NZD
2,290
(13)
Accrued liabilities
Receive SEK/pay USD
2,275
(10)
Accrued liabilities
Receive USD/pay DKK
3,151
(3)
Accrued liabilities
December 31, 2019
Derivatives not designated as
hedging instruments under
Notional
Fair
FASB ASC 815-20
Amount
Value
Balance Sheet Location
Assets:
Foreign currency exchange contracts:
Receive EUR/pay USD
$
26,731
$
Accounts receivable, net
Receive RSD/pay USD
9,018
Accounts receivable, net
Receive NOK/pay USD
2,122
Accounts receivable, net
Receive USD/pay SGD
1,555
Accounts receivable, net
Liabilities:
Foreign currency exchange contracts:
Receive USD/pay GBP
$
38,406
$
(695)
Accrued liabilities
Receive USD/pay AUD
12,819
(172)
Accrued liabilities
Receive USD/pay RUB
12,777
(55)
Accrued liabilities
Receive USD/pay NZD
3,071
(33)
Accrued liabilities
Receive USD/pay ZAR
3,349
(32)
Accrued liabilities
Receive USD/pay COP
3,793
(18)
Accrued liabilities
Receive USD/pay DKK
1,283
(11)
Accrued liabilities
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
The net gain (loss) on derivative instruments in the consolidated statements of income was as follows:
Amount of gain (loss)
recognized in income on
derivatives
Derivatives not designated as
Location of gain (loss)
Year ended
hedging instruments under
recognized in income on
December 31,
December 31,
December 31,
FASB ASC 815-20
derivatives
Foreign currency exchange contracts
Other (expense) income, net
$
(3,317)
$
(2,555)
$
9,737
7. INVENTORIES
Inventories consist of the following at December 31:
Raw materials
$
155,166
$
134,885
Finished goods
177,919
225,846
$
333,085
$
360,731
8. PROPERTY AND EQUIPMENT, Net
Property and equipment consist of the following at December 31:
Land
$
85,876
$
78,275
Leasehold improvements
11,524
10,417
Furniture and fixtures
8,271
8,426
Office and computer equipment
21,657
22,766
Computer software
6,945
4,450
Equipment
185,348
214,293
Buildings
156,616
126,338
Vehicles
43,173
41,109
519,410
506,074
Less: accumulated depreciation and amortization
(204,754)
(207,434)
$
314,656
$
298,640
Total depreciation and amortization expense recorded was $49.3 million, $49.1 million and $45.0 million for the years ended December 31, 2020, 2019 and 2018, respectively.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
9. GOODWILL AND OTHER INTANGIBLE ASSETS
The following is a roll-forward of goodwill for the years ended December 31, 2020 and 2019 by reportable segment:
Monster
Energy®
Strategic
Drinks
Brands
Other
Total
Balance at December 31, 2019
$
693,644
$
637,999
$
-
$
1,331,643
Acquisitions
-
-
-
-
Balance at December 31, 2020
$
693,644
$
637,999
$
-
$
1,331,643
Monster
Energy®
Strategic
Drinks
Brands
Other
Total
Balance at December 31, 2018
$
693,644
$
637,999
$
-
$
1,331,643
Acquisitions
-
-
-
-
Balance at December 31, 2019
$
693,644
$
637,999
$
-
$
1,331,643
Intangible assets consist of the following at:
December 31,
December 31,
Amortizing intangibles
$
66,875
$
66,949
Accumulated amortization
(56,801)
(49,128)
10,074
17,821
Non-amortizing intangibles
1,048,972
1,034,284
$
1,059,046
$
1,052,105
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 $7.7 million, $11.6 million and $11.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. Total impairment recorded was $8.7 million for the year ended December 31, 2020. No impairment was recorded for the years ended December 31, 2019 and 2018.
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, 2020:
Year Ending December 31:
$
4,426
4,405
1,111
2026 and thereafter
$
10,074
At December 31, 2020, non-amortizing intangibles primarily consist of indefinite-lived tradenames, flavors and formulas.
10. DISTRIBUTION AGREEMENTS
In accordance with FASB ASC 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 $0.2 million, $11.3 million and $26.6 million for the years ended December 31, 2020, 2019 and 2018, respectively. Such termination costs have been expensed in full and are included in operating expenses for the years ended December 31, 2020, 2019 and 2018.
In the normal course of business, amounts received pursuant to new and/or amended distribution agreements entered into with certain bottlers/distributors, relating to the costs associated with terminating agreements with the Company’s prior distributors, are accounted for as deferred revenue and are recognized as revenue ratably over the anticipated life of the respective distribution agreement, generally 20 years. Revenue recognized was $21.4 million, $25.0 million and $21.9 million for the years ended December 31, 2020, 2019 and 2018, respectively.
11. DEBT
The Company entered into a credit facility with Comerica Bank (“Comerica”) consisting of a revolving line of credit, which was amended in April 2020, 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, 2025. Interest on borrowings under the line of credit is based on Comerica’s base (prime) rate minus 1.00% to 1.50%, 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, 2020. 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, 2020.
In December 2016, the Company entered into a credit facility with HSBC Bank (China) Company Limited, Shanghai Branch consisting of a non-collateralized working capital line of credit. In February 2018, the working capital line limit was increased to $15.0 million. At December 31, 2020, the interest rate on borrowings under the line of credit was 5.5%. As of December 31, 2020, the Company had no amounts outstanding on this line of credit.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
12. COMMITMENTS AND CONTINGENCIES
The Company is obligated under various non-cancellable lease agreements providing for office space, warehouse space, vehicles and warehouse equipment that expire at various dates through the year 2033. See Note 3.
Contractual Obligations - The Company had the following contractual obligations related primarily to sponsorships and other commitments as of December 31, 2020:
Year Ending December 31:
$
97,979
25,409
5,814
2026 and thereafter
-
$
129,255
Purchase Commitments - The Company had purchase commitments aggregating approximately $101.8 million at December 31, 2020, 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, supplement ingredients, containers, milk, glucose, sucralose, cream and protein, from a limited number of suppliers. 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, 2020, 2019 and 2018 was $401.8 million, $335.3 million and $289.6 million, respectively.
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 - From time to time in the normal course of business, the Company is named in litigation, including labor and employment matters, personal injury matters, consumer class actions, intellectual property matters and claims from prior distributors. Although it is not possible to predict the ultimate outcome of such litigation, based on the facts known to the Company, management believes that such litigation in aggregate will likely not have a material adverse effect on the Company’s financial position or results of operations.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
On September 18, 2020, a derivative complaint was filed on purported behalf of the Company in the United States District Court for the Central District of California. The action is styled Falat v. Sacks, et al., 8:20-cv-01782, and asserts claims against certain officers, current and former directors, and employees of the Company, including Rodney C. Sacks, Hilton H. Schlosberg, Guy P. Carling, Thomas J. Kelly, Emelie C. Tirre, Mark J. Hall, Kathleen E. Ciaramello, Gary P. Fayard, Jeanne P. Jackson, Steven G. Pizula, Benjamin M. Polk, Sydney Selati and Mark S. Vidergauz (collectively, the “Individual Defendants”). The Company is named as a nominal defendant.
The derivative complaint alleges, among other things, that the Individual Defendants breached their fiduciary duties to the Company by allowing others to cause, or themselves causing, the Company to hide discrimination and failing to ensure sufficient diversity, including by permitting conduct to occur that was inconsistent with statements made in the Company’s policies and disclosures, and failing to ensure the Company’s compliance with laws regarding diversity and anti-discrimination. The complaint also asserts claims for abuse of control, unjust enrichment and violation of Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The complaint seeks from the Individual Defendants an unspecified amount of damages, restitution, punitive damages and costs to be paid to the Company, and seeks to require the Company to adopt corporate governance reforms, and other equitable relief.
On January 15, 2021, the Company filed a motion to dismiss the action because the plaintiff failed to make a demand on the Company as required by Federal Rule of Civil Procedure 23.1 or to show that demand would have been futile. The Individual Defendants also filed a motion to dismiss the complaint for failure to state a claim against the Individual Defendants, among other reasons. Those motions are scheduled for hearing in the 2021 second quarter. While the Company continues to evaluate these claims, management believes that such litigation will likely not have a material adverse effect on the Company’s financial position or results of operations.
The Company evaluates, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of the liability that is accrued, if any, and any related insurance reimbursements. As of December 31, 2020, the Company’s consolidated balance sheet included accrued loss contingencies of approximately $18.4 million.
13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss) are as follows at December 31:
Accumulated net unrealized (gain) loss on available-for-sale securities
$
$
Foreign currency translation adjustments, net of tax
2,950
(32,581)
Total accumulated other comprehensive income (loss)
$
3,034
$
(32,387)
14. TREASURY STOCK PURCHASE
On February 26, 2019, the Company’s Board of Directors authorized a share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock (the “February 2019 Repurchase Plan”). During the year ended December 31, 2020, the Company purchased 0.6 million shares of common stock at an average purchase price of $58.16 per share, for a total amount of $36.6 million (excluding broker commissions), which exhausted the availability under the February 2019 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2020.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
On November 6, 2019, the Company’s Board of Directors authorized a new share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock (the “November 2019 Repurchase Plan”). During the year ended December 31, 2020, the Company purchased 9.1 million shares of common stock at an average purchase price of $54.86 per share, for a total amount of $499.9 million (excluding broker commissions), which exhausted the availability under the November 2019 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2020.
On March 13, 2020, the Company’s Board of Directors authorized a new share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock (the “March 2020 Repurchase Plan”). During the year ended December 31, 2020, the Company purchased 1.0 million shares of common stock at an average purchase price of $55.85 per share, for a total amount of $58.5 million (excluding broker commissions), under the March 2020 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2020. As of March 1, 2021, $441.5 million remained available for repurchase under the March 2020 Repurchase Plan.
During the year ended December 31, 2020, 0.02 million 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 $1.0 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, 2020.
15. STOCK-BASED COMPENSATION
The Company has two stock-based compensation plans under which shares were available for grant at December 31, 2020: (i) the Monster Beverage Corporation 2020 Omnibus Incentive Plan (the “2020 Omnibus Incentive Plan”), which includes the Monster Beverage Corporation Deferred Compensation Plan as a sub plan thereunder, and (ii) the Monster Beverage Corporation 2017 Compensation Plan for Non-Employee Directors, which includes the Monster Beverage Corporation Deferred Compensation Plan for Non-Employee Directors as a sub plan thereunder. The 2020 Omnibus Incentive Plan was approved by the Board of Directors on April 14, 2020 and approved by the stockholders of the Company at the annual meeting of the Company’s stockholders held on June 3, 2020 (the “Effective Date”). The 2020 Omnibus Incentive Plan replaced the Monster Beverage Corporation 2011 Omnibus Incentive Plan (the “2011 Omnibus Incentive Plan”).
The 2020 Omnibus Incentive Plan provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, and other share-based awards up to an aggregate of 46,169,367 shares of the Company’s common stock, comprised of 32,000,000 new shares of common stock reserved under the 2020 Omnibus Incentive Plan and 14,169,367 shares of common stock that were available for grant under the 2011 Omnibus Incentive Plan as of December 31, 2019 and prior to the Effective Date. Shares authorized under the 2020 Omnibus Incentive Plan are reduced by one (1) share for options or stock appreciation rights granted under the 2020 Omnibus Incentive Plan and for any grants after December 31, 2019 under the 2011 Omnibus Incentive Plan, and by 2.6 shares for each share granted or issued with respect to a Full Value Award under either the 2020 Omnibus Incentive Plan or for any shares granted after December 31, 2019 under the 2011 Omnibus Incentive Plan. A “Full Value Award” is an award other than an incentive stock option, a non-qualified stock option, or a stock appreciation right, which is settled by the issuance of shares. Options granted under the 2020 Omnibus Incentive Plan may be incentive stock options under Section 422 of the Internal Revenue Code, as amended (the “Code”), or non-qualified stock options.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Shares previously granted under the 2011 Omnibus Incentive Plan after December 31, 2019 and prior to the Effective Date of the 2020 Omnibus Incentive Plan reduced the number of shares available for grant under the 2020 Omnibus Incentive Plan. As of December 31, 2020, 1,431,030 shares of the Company’s common stock have been granted, net of cancellations, and 44,201,385 shares (as adjusted for Full Value Awards) of the Company’s common stock remain available for grant under the 2020 Omnibus Incentive Plan.
The Compensation Committee of the Board of Directors (the “Compensation Committee”) has sole and exclusive authority to grant stock awards to all employees who are not new hires and to all new hires who are subject to Section 16 of the Exchange Act. Each of the Compensation Committee and the Executive Committee of the Board of Directors (the “Executive Committee”) independently has the authority to grant stock awards to new hires and employees receiving a promotion who are not Section 16 employees. Awards granted by the Executive Committee are not subject to approval or ratification by the Board of Directors or the Compensation Committee. Options granted under the 2020 Omnibus Incentive Plan generally vest over a three- to five-year period from the grant date and are generally exercisable up to 10 years after the grant date. Restricted stock units granted under the 2020 Omnibus Incentive Plan generally vest over a three- or five-year period from the grant date. Performance share units will generally vest based on the achievement of performance goals specified for the applicable award.
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, 2020 deferrals under the Deferred Compensation Plan are solely comprised of cash compensation and equity compensation and are not material in the aggregate.
In 2017, the Company adopted the 2017 Directors Plan, a successor plan to the 2009 Monster Beverage Corporation Stock Incentive Plan for Non-Employee Directors. The 2017 Directors Plan permits the granting of stock options, stock appreciation rights, restricted shares or restricted stock units, deferred awards, dividend equivalents, and other share based-awards up to an aggregate of 1,250,000 shares of common stock of the Company to non-employee directors of the Company.
Each calendar year, a non-employee director will receive an annual retainer and annual equity award, as provided for in the 2017 Directors Plan, which may be modified from time to time. Currently, with respect to equity awards, each non-employee director receives an award of restricted stock units at each annual meeting of the Company’s stockholders or promptly thereafter. A non-employee director’s annual award of restricted stock units will generally vest on the earliest to occur of: (a) the last business day immediately preceding the annual meeting of the Company’s stockholders in the calendar year following the calendar year in which the grant date occurs, (b) a Change of Control (as defined in the 2017 Directors Plan), (c) the non-employee director’s death, or (d) the date of the non-employee director’s separation from service due to disability, so long as the non-employee director remains a non-employee director through such date. The Board of Directors may in its discretion award non-employee directors stock options, stock appreciation rights, restricted stock and other share-based awards in lieu of or in addition to restricted stock units. The Board of Directors may amend or terminate the 2017 Directors Plan at any time, subject to certain limitations set forth in the 2017 Directors Plan. As of December 31, 2020, 85,699 shares of the Company’s common stock had been granted under the 2017 Directors Plan, and 1,164,301 shares of the Company’s common stock remain available for grant.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
In 2017, the Company adopted the Deferred Compensation Plan for Non-Employee Directors (as a sub plan to the 2017 Directors Plan), pursuant to which the Board of Directors may permit non-employee directors to elect, at such times and in accordance with rules and procedures (or sub-plan) adopted by the Board of Directors (which are intended to comply with Section 409A of the Code, as applicable), to receive all or any portion of such non-employee director’s compensation, whether payable in cash or in equity, on a deferred basis. Deferrals under the Deferred Compensation Plan for Non-Employee Directors are unfunded and unsecured. As of December 31, 2020, deferrals under the Deferred Compensation Plan for Non-Employee Directors are solely comprised of cash compensation and equity compensation and are not material in the aggregate. The 2017 Directors Plan was adopted to effectuate any such deferrals. The 2017 Directors Plan is administered by the Board of Directors. Each award granted under the 2017 Directors Plan will be evidenced by a written agreement and will contain the terms and conditions that the Board of Directors deems appropriate.
Under the 2017 Directors Plan, the Board of Directors requires each non-employee director to satisfy the share ownership guidelines set forth below, as may be amended by the Board of Directors from time to time. The current share ownership guidelines provide that non-employee directors of the Company must:
● Hold at least 9,000 shares of Company common stock. For this purpose, deferred shares or deferred restricted stock units will be deemed held, to the extent vested.
● The minimum stock ownership level must be achieved by each non-employee director by the third anniversary of such non-employee director’s initial appointment to the Board of Directors.
● Once achieved, ownership of the guideline amount should be maintained for so long as the non-employee director retains his or her seat on the Board of Directors.
● There may be rare instances where these guidelines would place a hardship on a non-employee director. In these cases or in similar circumstances, the Board of Directors will make the final decision as to developing an alternative stock ownership guideline for a non-employee director that reflects the intention of these guidelines and his or her personal circumstances.
The Company recorded $70.3 million, $63.4 million and $57.1 million of compensation expense relating to outstanding options, restricted stock units, performance share units and other share-based awards during the years ended December 31, 2020, 2019 and 2018, respectively.
The tax benefit for tax deductions from non-qualified stock option exercises, disqualifying dispositions of incentive stock options and vesting of restricted stock units and performance share units for the years ended December 31, 2020, 2019 and 2018 was $10.5 million, $25.9 million and $8.5 million, respectively.
Stock Options
Under the Company’s stock-based compensation plans, all stock options granted through December 31, 2020 were granted at prices based on the fair value of the Company’s common stock on the date of grant. The Company records compensation expense for 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
30.4
%
30.2
%
34.7
%
Risk-free interest rate
0.70
%
2.37
%
2.81
%
Expected term
5.8 Years
6.0 Years
6.0 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:
Weighted-
Weighted-
Average
Average
Remaining
Number of
Exercise
Contractual
Aggregate
Shares (in
Price Per
Term (In
Intrinsic
Options
thousands)
Share
years)
Value
Outstanding at January 1, 2020
14,941
$
42.88
6.3
$
308,884
Granted 01/01/20 - 03/31/20
1,027
$
62.45
Granted 04/01/20 - 06/30/20
-
$
-
Granted 07/01/20 - 09/30/20
-
$
-
Granted 10/01/20 - 12/31/20
$
77.92
Exercised
(1,916)
$
38.06
Cancelled or forfeited
(91)
$
54.41
Outstanding at December 31, 2020
13,973
$
44.93
5.7
$
664,432
Vested and expected to vest in the future at December 31, 2020
13,463
$
44.43
5.7
$
646,907
Exercisable at December 31, 2020
8,323
$
37.36
4.5
$
458,734
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, 2020:
Options Outstanding
Options Exercisable
Weighted
Average
Weighted
Number
Weighted
Number
Remaining
Average
Exercisable
Average
Range of Exercise
Outstanding (In
Contractual
Exercise
(In
Exercise
Prices ($)
Thousands)
Term (Years)
Price ($)
Thousands)
Price ($)
$
11.35
-
$
17.99
1,483
2.3
$
17.58
1,483
$
17.58
$
18.64
-
$
23.35
1,613
3.1
$
23.05
1,613
$
23.05
$
36.05
-
$
36.05
4.0
$
36.05
$
36.05
$
37.10
-
$
43.64
1,033
5.6
$
42.75
$
42.33
$
43.99
-
$
43.99
1,641
5.2
$
43.99
1,185
$
43.99
$
44.73
-
$
45.16
1,581
4.5
$
45.10
1,494
$
45.11
$
45.55
-
$
51.50
1,478
6.4
$
47.61
$
46.46
$
53.24
-
$
57.95
7.7
$
55.79
$
54.82
$
58.73
-
$
58.73
2,230
7.2
$
58.73
$
58.73
$
58.77
-
$
77.92
2,570
8.6
$
60.93
$
59.86
13,973
5.7
$
44.93
8,323
$
37.36
The weighted-average grant-date fair value of options granted during the years ended December 31, 2020, 2019 and 2018 was $18.82 per share, $20.17 per share and $22.37 per share, respectively. The total intrinsic value of options exercised during the years ended December 31, 2020, 2019 and 2018 was $68.8 million, $220.2 million and $56.8 million, respectively.
Cash received from option exercises under all plans for the years ended December 31, 2020, 2019 and 2018 was $72.9 million, $92.4 million and $25.9 million, respectively.
At December 31, 2020, there was $59.2 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 2.1 years.
Restricted Stock Units and Performance Share Units
The cost of stock-based compensation for restricted stock units and performance share units is measured based on the closing fair market value of the Company’s common stock at the date of grant. In the event that the Company has the option and intent to settle a restricted stock unit or performance share unit in cash, the award is classified as a liability and revalued at each balance sheet date.
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 and performance share units as follows:
Weighted
Number of
Average
Shares (in
Grant-Date
thousands)
Fair Value
Non-vested at January 1, 2020
$
57.62
Granted 01/01/20 - 03/31/201
$
62.39
Granted 04/01/20 - 06/30/20
$
71.72
Granted 07/01/20 - 09/30/20
$
71.76
Granted 10/01/20 - 12/31/20
$
78.04
Vested
(287)
$
55.65
Forfeited/cancelled
(6)
$
64.72
Non-vested at December 31, 2020
$
60.52
1The grant activity for performance share units is recorded based on the target performance level earning 100% of target performance share units. The actual number of performance share units earned could range from 0% to 200% of target dependent on the pre-established performance goals.
The weighted-average grant-date fair value of restricted stock units and/or performance share units granted during the years ended December 31, 2020, 2019 and 2018 was $62.97, $59.79 and $57.59 per share, respectively. As of December 31, 2020, 0.8 million of restricted stock units and performance share units are expected to vest.
At December 31, 2020, total unrecognized compensation expense relating to non-vested restricted stock units and performance share units was $32.1 million, which is expected to be recognized over a weighted-average period of 2.3 years.
Other Share-Based Awards
The Company has granted other share-based awards to certain employees that are payable in cash. These awards are classified as liabilities and are valued based on the fair value of the award at the grant date and are remeasured at each reporting date until settlement with compensation expense being recognized in proportion to the completed requisite service period up until date of settlement. At December 31, 2020, other share-based awards outstanding included grants that vest over three years payable in the first quarters of 2022 and 2023.
At December 31, 2020, there was $2.3 million of total unrecognized compensation expense related to nonvested other share-based awards granted to employees under the Company’s stock-based compensation plans. That cost is expected to be recognized over a weighted-average period of 1.6 years.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Employee and Non-Employee Share-Based Compensation Expense
The table below shows the amounts recognized in the consolidated financial statements for the years ended December 31, 2020, 2019 and 2018 for share-based compensation related to employees and non-employees. Employee and non-employee share-based compensation expense of $70.3 million for the year ended December 31, 2020 is comprised of $9.4 million relating to incentive stock options, $2.7 million relating to other share-based awards and $58.2 million relating to non-qualified stock options, restricted units and performance units. Employee and non-employee share-based compensation expense of $63.4 million for the year ended December 31, 2019 is comprised of $10.0 million relating to incentive stock options and $53.4 million relating to non-qualified stock options and restricted units. Employee and non-employee share-based compensation expense of $57.1 million for the year ended December 31, 2018 is comprised of $10.0 million relating to incentive stock options and $47.1 million relating to non-qualified stock options and restricted units.
Operating expenses
$
70,289
$
63,356
$
57,111
Total employee and non-employee share-based compensation expense included in income, before income tax
70,289
63,356
57,111
Less: Amount of income tax benefit recognized in earnings
(15,499)
(36,326)
(14,892)
Amount charged against net income
$
54,790
$
27,030
$
42,219
16. INCOME TAXES
The Company evaluated the various provisions of the Tax Reform Act, including, the global intangible low-taxed income (“GILTI”) and the foreign derived intangible income provisions. The Company will treat any U.S. tax on foreign earnings under GILTI as a current period expense when incurred.
The Company currently considers the earnings of its foreign entities (excluding Japan) to be permanently reinvested outside the United States based on estimates that future domestic cash generation will be sufficient to meet future domestic cash needs. Accordingly, deferred income taxes have not been recorded for the undistributed earnings of the Company’s foreign subsidiaries excluding Japan. Deferred income taxes have not been recorded for Japan, as any federal, state, or foreign withholding taxes associated with the repatriation of those earnings would be immaterial.
The domestic and foreign components of the Company’s income before provision for income taxes are as follows:
Year Ended December 31,
Domestic*
$
1,374,402
$
1,196,883
$
1,100,487
Foreign*
251,755
219,079
192,785
Income before provision for income taxes
$
1,626,157
$
1,415,962
$
1,293,272
*After intercompany royalties, management fees and interest charges from the Company’s domestic to foreign entities of $54.2 million, $51.2 million and $40.5 million for the years ended December 31, 2020, 2019 and 2018, respectively.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Components of the provision for income taxes are as follows:
Year Ended December 31,
Current:
Federal
$
259,073
$
212,068
$
209,147
State
43,704
39,982
41,934
Foreign
70,658
55,167
42,541
373,435
307,217
293,622
Deferred:
Federal
11,401
8,320
9,804
State
4,709
(6,878)
1,644
Foreign
(167,595)
(4,219)
(8,778)
(151,485)
(2,777)
2,670
Valuation allowance
(5,387)
3,687
3,976
$
216,563
$
308,127
$
300,268
A reconciliation of the total provision for income taxes after applying the U.S. federal statutory rate of 21% to income before provision for income taxes to the reported provision for income taxes are as follows for the years ended:
Year Ended December 31,
U.S. Federal tax expense at statutory rates
$
341,493
$
297,352
$
271,587
State income taxes, net of federal tax benefit
37,478
30,098
36,312
Permanent differences
(1,064)
(2,128)
3,606
Stock based compensation
1,097
(13,473)
(370)
Intra-company transfer benefit
(165,075)
-
-
Other
(7,388)
(12,423)
(8,438)
Foreign rate differential
15,409
5,014
(6,405)
Valuation allowance
(5,387)
3,687
3,976
$
216,563
$
308,127
$
300,268
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, 2020 and 2019 are as follows:
Deferred Tax Assets:
Reserve for sales returns
$
$
Reserve for inventory obsolescence
2,366
2,066
Reserve for marketing development fund
9,629
8,469
Capitalization of inventory costs
3,365
2,310
State franchise tax - current
4,229
2,346
Accrued compensation
1,284
1,944
Accrued other liabilities
7,464
5,674
Deferred revenue
75,592
81,903
Stock-based compensation
23,370
22,665
Foreign net operating loss carryforward
21,626
30,187
Prepaid supplies
5,551
5,799
Termination payments
63,009
69,467
Operating lease liabilities
4,434
6,155
Intangibles
87,687
-
Impairment-trademarks and others
2,055
-
Other deferred tax assets
27,164
17,615
Total gross deferred tax assets
$
339,100
$
256,740
Deferred Tax Liabilities:
Amortization of trademarks
$
(42,161)
$
(35,227)
Intangibles
-
(76,047)
State franchise tax - deferred
(6,318)
(7,173)
Operating lease ROU assets
(4,434)
(6,155)
Other deferred tax liabilities
(58)
(93)
Depreciation
(9,363)
(6,765)
Total gross deferred tax liabilities
(62,334)
(131,460)
Valuation Allowance
(35,116)
(40,503)
Net deferred tax assets
$
241,650
$
84,777
During the years ended December 31, 2020, 2019 and 2018, 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 decrease the Company’s provision for income taxes by $5.4 million for the year ended December 31, 2020, and increase $3.7 million and $4.0 million for the years ended December 31, 2019 and 2018, respectively. At December 31, 2020, the Company had net operating loss carryforwards of approximately $84.5 million. Of this amount, $52.4 million may be carried forward indefinitely. The remaining $32.1 million of net operating loss carryforwards will begin to expire in 2021.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
In October 2020, the Company completed an intra-entity transfer of intangible assets between certain of the Company’s foreign subsidiaries to better align its international structure with its expanding operations. The transfer resulted in a step-up of the tax-deductible basis in the transferred assets in a foreign jurisdiction, and created a temporary difference between the tax basis and book basis for such intangible assets. The Company recognized deferred tax assets of approximately $165.1 million, with a corresponding reduction to the provision for income taxes during the fourth quarter of 2020 in its consolidated financial statements. The tax deductions for the amortization of the deferred tax assets will be recognized in the future and any amortization not deducted for tax purposes will be carried forward indefinitely. The tax impact on the foreign subsidiary transferor was not material.
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, 2020, 2019 and 2018:
Gross Unrecognized Tax
Benefits
Balance at January 1, 2018
$
6,540
Additions for tax positions related to the current year
-
Additions for tax positions related to the prior year
1,159
Decreases for tax positions related to prior years
(2,664)
Balance at December 31, 2018
$
5,035
Additions for tax positions related to the current year
-
Additions for tax positions related to the prior year
1,833
Decreases for tax positions related to prior years
(3,875)
Balance at December 31, 2019
$
2,993
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
(2,251)
Balance at December 31, 2020
$
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, 2020, 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 any change in 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.
The Company is in various stages of examination with certain states and certain foreign jurisdictions, including the United Kingdom and Ireland. The Company’s 2017 through 2019 U.S. federal income tax returns are subject to examination by the IRS. The Company’s state income tax returns are subject to examination for the 2016 through 2019 tax years.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
17. 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, 2020, 2019 and 2018 is presented below (in thousands):
Weighted-average shares outstanding:
Basic
529,639
542,191
557,166
Dilutive securities
5,168
4,417
7,088
Diluted
534,807
546,608
564,254
For the years ended December 31, 2020, 2019 and 2018, options and awards outstanding totaling 1.8 million shares, 4.4 million shares and 3.2 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.
18. 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 into a traditional plan with pretax salary or into a Roth plan with after tax salary up to statutory limits. The Company contributes 50% of the employee contribution, up to 8% of each employee’s earnings, which vest over four years (2 years of service = 50%, 3 years of service = 75%, 4 years of service = 100%). Matching contributions were $4.7 million, $3.4 million and $2.9 million for the years ended December 31, 2020, 2019 and 2018, respectively.
19. SEGMENT INFORMATION
The Company has three operating and reportable segments: (i) Monster Energy® Drinks segment, which is primarily comprised of the Company’s Monster Energy® drinks and Reign Total Body Fuel® high performance energy drinks, (ii) Strategic Brands segment, which is primarily comprised of the various energy drink brands acquired from TCCC in 2015 as well as the Company’s affordable energy brands, and (iii) Other segment, which is comprised of the AFF Third-Party Products.
The Company’s Monster Energy® Drinks segment primarily generates net operating revenues by selling ready-to-drink packaged drinks primarily to bottlers/distributors. In some cases, the Company sells directly to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, drug stores, foodservice customers, value stores, e-commerce retailers and the military.
The Company’s Strategic Brands segment primarily generates net operating revenues by selling “concentrates” and/or “beverage bases” to authorized bottling and canning operations. Such bottlers generally combine the concentrates and/or beverage bases with sweeteners, water and other ingredients to produce ready-to-drink packaged energy drinks. The ready-to-drink packaged energy drinks are then sold by such bottlers to other bottlers/distributors and to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, foodservice customers, drug stores, value stores, e-commerce retailers and the military. To a lesser extent, the Strategic Brands segment generates net operating revenues by selling certain ready-to-drink packaged energy drinks to bottlers/distributors.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Generally, the Monster Energy® Drinks segment generates higher per case net operating revenues, but lower per case gross profit margin percentages than the Strategic Brands segment.
Corporate and unallocated amounts that do not relate to a reportable segment have been allocated to “Corporate & Unallocated.” No asset information, other than goodwill and other intangible assets, has been provided in the Company’s reportable segments, as management does not measure or allocate such assets on a segment basis.
The net revenues derived from the Company’s reportable segments and other financial information related thereto for the years ended December 31, 2020, 2019 and 2018 are as follows:
Net sales:
Monster Energy® Drinks⁽¹⁾
$
4,305,246
$
3,904,029
$
3,498,427
Strategic Brands
266,354
274,925
285,836
Other
27,038
21,865
22,920
Corporate and unallocated
-
-
-
$
4,598,638
$
4,200,819
$
3,807,183
Operating Income:
Monster Energy® Drinks⁽¹⁾ ⁽²⁾
$
1,820,346
$
1,565,977
$
1,371,062
Strategic Brands
155,047
164,053
176,520
Other
5,930
3,650
5,362
Corporate and unallocated
(348,170)
(330,741)
(269,325)
$
1,633,153
$
1,402,939
$
1,283,619
Income before tax:
Monster Energy® Drinks⁽¹⁾ ⁽²⁾
$
1,820,625
$
1,567,022
$
1,372,001
Strategic Brands
155,047
164,049
176,540
Other
5,933
3,655
5,362
Corporate and unallocated
(355,448)
(318,764)
(260,631)
$
1,626,157
$
1,415,962
$
1,293,272
(1) Includes $42.1 million, $46.3 million and $44.3 million for the years ended December 31, 2020, 2019 and 2018, respectively, related to the recognition of deferred revenue.
(2) Includes $0.2 million, $11.3 million and $26.6 million for the years ended December 31, 2020, 2019 and 2018, respectively, related to distributor termination costs.
Depreciation and amortization:
Monster Energy® Drinks
$
38,277
$
39,397
$
36,387
Strategic Brands
4,178
7,935
7,774
Other
4,631
4,637
4,657
Corporate and unallocated
9,944
8,758
8,161
$
57,030
$
60,727
$
56,979
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Corporate and unallocated expenses were $348.2 million for the year ended December 31, 2020 and included $234.1 million of payroll costs, of which $69.9 million was attributable to stock-based compensation expense (See Note 15, “Stock-Based Compensation”), $67.6 million of professional service expenses, including accounting and legal costs, $7.5 million of insurance costs and $39.0 million of other operating expenses.
Corporate and unallocated expenses were $330.7 million for the year ended December 31, 2019 and included $203.3 million of payroll costs, of which $63.4 million was attributable to stock-based compensation expense (See Note 15, “Stock-Based Compensation”), $78.5 million of professional service expenses, including accounting and legal costs, $6.1 million of insurance costs and $42.8 million of other operating expenses.
Corporate and unallocated expenses were $269.3 million for the year ended December 31, 2018 and included $174.9 million of payroll costs, of which $57.1 million was attributable to stock-based compensation expense (See Note 15, “Stock-Based Compensation”), $53.6 million of professional service expenses, including accounting and legal costs, $6.0 million of insurance costs and $34.8 million of other operating expenses.
Coca-Cola Consolidated, Inc. accounted for approximately 12%, 13% and 13% of the Company's net sales for the years ended December 31, 2020, 2019 and 2018, respectively.
Reyes Coca-Cola Bottling, LLC accounted for approximately 11%, 11% and 12% of the Company’s net sales for the years ended December 31, 2020, 2019 and 2018, respectively.
Coca-Cola European Partners accounted for approximately 10% of the Company’s net sales for the years ended December 31, 2020, 2019 and 2018.
Net sales to customers outside the United States amounted to $1.51 billion, $1.33 billion and $1.09 billion for the years ended December 31, 2020, 2019 and 2018, respectively. Such sales were approximately 33%, 32% and 29% of net sales for the years ended December 31, 2020, 2019 and 2018, respectively.
Goodwill and other intangible assets for the Company’s reportable segments as of December 31, 2020 and 2019 are as follows:
Goodwill and other intangible assets:
Monster Energy® Drinks
$
1,406,646
$
1,384,940
Strategic Brands
974,132
984,393
Other
9,911
14,415
Corporate and unallocated
-
-
$
2,390,689
$
2,383,748
20. RELATED PARTY TRANSACTIONS
TCCC controls approximately 19.3% of the voting interests of the Company. The TCCC Subsidiaries, the TCCC Related Parties and certain TCCC independent bottlers, purchase and distribute the Company’s products in domestic and certain international markets. The Company also pays TCCC a commission based on certain sales within the TCCC distribution network.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
TCCC commissions, based on sales to the TCCC Subsidiaries and the TCCC Related Parties, for the year ended December 31, 2020 were $56.5 million, and are included as a reduction to net sales. TCCC commissions, based on sales to the TCCC Independent Bottlers for the year ended December 31, 2020 were $21.4 million, and are included in operating expenses.
TCCC commissions, based on sales to the TCCC Subsidiaries and the TCCC Related Parties, for the year ended December 31, 2019 were $50.1 million, and are included as a reduction to net sales. TCCC commissions, based on sales to the TCCC Independent Bottlers for the year ended December 31, 2019 were $17.7 million, and are included in operating expenses.
TCCC commissions, based on sales to the TCCC Subsidiaries and the TCCC Related Parties, for the year ended December 31, 2018 were $48.0 million, and are included as a reduction to net sales. TCCC commissions, based on sales to the TCCC Independent Bottlers for the year ended December 31, 2018 were $14.8 million, and are included in operating expenses.
Net sales to the TCCC Subsidiaries for the years ended December 31, 2020, 2019 and 2018 were $83.3 million, $79.5 million and $132.5 million, respectively.
The Company also purchases concentrates from TCCC which are then sold to certain of the Company's bottlers/distributors. Concentrate purchases from TCCC were $23.9 million, $25.4 million and $27.5 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Certain TCCC Subsidiaries also contract manufacture certain of the Company’s Monster Energy® brand energy drinks. Such contract manufacturing expenses were $17.2 million, $17.1 million and $22.8 million for the years ended December 31, 2020, 2019 and 2018, 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
$
44,925
$
21,670
Accounts payable
$
(30,792)
$
(18,217)
Accrued promotional allowances
$
(5,834)
$
(5,321)
Accrued liabilities
$
(15,446)
$
-
One director of the Company through certain trusts, and a family member of one director, are principal owners of a company that provides promotional materials to the Company. Expenses incurred with such company in connection with promotional materials purchased during the years ended December 31, 2020, 2019 and 2018 were $2.1 million, $1.5 million and $1.8 million, respectively.
In December 2018, the Company and a director of the Company entered into a 50-50 partnership that purchased land, and real property thereon, in Kona, Hawaii for the purpose of producing coffee products. The Company’s initial 50% contribution of $1.9 million was accounted for as an equity investment. During the year ended December 31, 2020, the Company recorded an equity loss of $0.3 million. As of December 31, 2020, the Company’s equity investment is $1.6 million and is included in other assets (non-current) in the accompanying consolidated balance sheet at December 31, 2020.
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, 2020
$
1,062,097
$
637,196
$
278,835
$
0.52
$
0.52
June 30, 2020
1,093,896
659,469
311,369
$
0.59
$
0.59
September 30, 2020
1,246,362
736,531
347,654
$
0.66
$
0.65
December 31, 2020
1,196,283
690,684
471,736
$
0.89
$
0.88
$
4,598,638
$
2,723,880
$
1,409,594
Quarter ended:
March 31, 2019
$
945,991
$
573,532
$
261,485
$
0.48
$
0.48
June 30, 2019
1,104,045
661,283
292,473
$
0.54
$
0.53
September 30, 2019
1,133,577
673,002
298,923
$
0.55
$
0.55
December 31, 2019
1,017,206
610,768
254,954
$
0.47
$
0.47
$
4,200,819
$
2,518,585
$
1,107,835
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, 2020, 2019 AND 2018 (Dollars in Thousands)
Balance at
Charged to
Balance at
beginning
cost and
end of
Description
of period
expenses
Deductions
period
Allowance for doubtful accounts, sales returns and cash discounts:
$
2,045
$
9,664
$
(9,831)
$
1,878
$
1,589
$
9,583
$
(9,127)
$
2,045
$
1,105
$
7,890
$
(7,406)
$
1,589
Allowance on Deferred Tax Assets and Unrecognized Tax Benefits:
$
43,853
$
(7,860)
$
-
$
35,993
$
42,748
$
1,105
$
-
$
43,853
$
40,680
$
2,068
$
-
$
42,748