SEC Form 10-K Filing Report

Company: Monster Beverage Corp
CIK: 865752
SIC Code: 2086
Filing Date: 2019-02-28 00:00:00
Market Capitalization: 34669137.83453369

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ITEM 1. BUSINESS
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®
· Caffé Monster®
· Predator®
· Live+
· NOS®
· Full Throttle®
· Burn®
· Mother®
· Nalu®
· Ultra Energy®
· Play® and Power Play(stylized)®
· Relentless®
· BPM®
· BU®
· Gladiator®
· Samurai®
· Mutant®
Our Monster Energy® brand energy drinks, which represented 91.7%, 90.1% and 90.1% of our net sales for the years ended December 31, 2018, 2017 and 2016, respectively, primarily include the following energy drinks1:
· Monster Energy®
· Lo-Carb Monster Energy®
· Monster Assault®
· Monster Energy Absolutely Zero®
· Juice Monster® Khaos®
· Juice Monster® Ripper®
· Juice Monster® Pipeline Punch®
· Juice Monster® Mango LocoTM
· Juice Monster® Pacific PunchTM
· Punch Monster® Baller’s Blend®
· Monster Cuba LibreTM
· Monster Energy® Import
· Monster Energy® Export
· Monster Rehab® Tea + Lemonade + Energy
· Monster Rehab® Raspberry Tea + Energy
· Monster Rehab® Tea + Orangeade + Energy
· Monster Rehab® Peach Tea + Energy
· Monster Rehab® White Dragon Tea + Energy
· Muscle Monster® Vanilla
· Java Monster® Kona Blend
· Java Monster® Loca Moca®
· Java Monster® Mean Bean®
· Java Monster® Vanilla Light
· Java Monster® Irish Blend®
· Java Monster® Salted Caramel
· Java Monster® Swiss Chocolate
· Monster MAXX® Super Dry
· Monster MAXX® Eclipse
· Monster MAXX® Solaris
· Monster Energy® Fury®
· M3(stylized)® Monster Energy® Super Concentrate
· Monster Energy Zero Ultra®
· Monster Energy Ultra Blue®
· Monster Energy Ultra Red®
· Monster Energy Ultra Black®
· Monster Energy Ultra Sunrise®
· Monster Energy Ultra Citron®
· Muscle Monster® Chocolate
· Monster Hydro® Mean Green®
· Monster Hydro® Manic Melon®
· Monster Hydro® Tropical Thunder®
· Monster Hydro® Purple Passion®
· Monster Hydro® Blue Ice®
· Monster Hydro® Zero Sugar®
· Monster Energy® Gronk
· Monster MuleTM
· Monster Energy Ultra Violet®
· Monster Energy® Valentino Rossi
· Monster Energy® Lewis Hamilton 44
· Caffé Monster® Vanilla
· Caffé Monster® Salted Caramel
· Caffé Monster® Mocha
· Espresso Monster® Espresso and Cream
· Espresso Monster® Vanilla Espresso
1Discontinued products have been omitted.
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 2018 for the “alternative” beverage category of the market are estimated at approximately $55.5 billion, representing an increase of approximately 6.7% over estimated domestic U.S. wholesale sales in 2017 of approximately $52.0 billion.
Reportable Segments
We have three operating and reportable segments: (i) Monster Energy® Drinks segment (“Monster Energy® Drinks”), which is comprised of our Monster Energy® drinks, (ii) Strategic Brands segment (“Strategic Brands”), which is comprised primarily of the various energy drink brands acquired from The Coca-Cola Company (“TCCC”) in 2015 as well as our Predator® energy drinks and (iii) Other segment (“Other”), which is comprised of certain products sold by American Fruits and Flavors LLC (“AFF”) (a wholly-owned subsidiary of the Company) to independent third-party customers (“AFF Third-Party Products”). Corporate and unallocated amounts that do not specifically relate to a reportable segment have been allocated to “Corporate and unallocated.”
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 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 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,

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
In addition to the other information in this report, you should carefully consider the following risks. If any of the following risks actually occur, our business, financial condition and/or operating results could be materially adversely affected. The risk factors summarized below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition and/or operating results.
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 certain third parties’ rights to distribute the Company’s products in most territories in the U.S. to members of TCCC’s distribution network, which largely consists of independent bottlers/distributors. In addition, TCCC has become 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 continue 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 substantially 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, there can be no assurance of this as disagreements as to the interpretation of the provisions in such agreements may arise and TCCC is a much larger company with many strategic priorities. In addition, TCCC does not control all members of its distribution system, many of which are independent companies that make their own business decisions that may not always align with TCCC’s interests. Moreover, it is possible that we may fail to recognize the expected benefits of the new distribution arrangements regardless of TCCC’s priorities or the priorities of the members of TCCC’s distribution system. In any such case, our operating results could suffer and the value of the Company’s common shares could be adversely affected.
On October 31, 2018, the Company and TCCC mutually agreed to submit an issue to the American Arbitration Association (“AAA”) in order to obtain clarification of an exception to a provision under various agreements preventing TCCC from competing in the energy drink category. TCCC has developed three energy products that it believes it may market under such exception, relating to the Coca-Cola brand. We expect a decision will be reached during the second quarter of 2019. In addition, TCCC has indicated that it has suspended the proposed launch of such products until April 2019. While we believe that the exception does not apply to this situation, there can be no assurances that the arbitration will resolve in our favor. As the relief sought is limited, no reasonable possible range of losses, if any, can be estimated. In addition, if TCCC proceeds with the launch of such products, there can be no assurances that we will not encounter difficulties in maintaining our current revenues, market share or position in the energy drink category in such territories, which could 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 and our Strategic Brand energy drinks acquired from TCCC in 2015. Our Monster Energy® brand energy drinks and Strategic Brands represented 91.7% and 7.5% of net sales, respectively, for the year ended December 31, 2018. Any decrease in the sales of our Monster Energy® brand and other energy drinks could significantly adversely affect our future revenues and net income. Historically, we have experienced substantial competition from new entrants in the energy drink category as well as from the energy shot category. Domestically, our energy drinks compete directly with Red Bull, Rockstar, Amp, Venom, VPX Redline, Xenergy, MiO Energy, Rip It, Starbucks Doubleshot, Starbucks Doubleshot Energy Plus Coffee, Rockstar Roasted, 5-Hour Energy Shots, Stacker 2, VPX Bang, V8+ Energy, UPTIME, hi*ball, CELSIUS, C4 and many other brands. In addition, certain large companies, such as PepsiCo, market and/or distribute products in that market segment, such as Pepsi Max, Mountain Dew and Mountain Dew Kickstart. Internationally, our energy drinks compete with Red Bull, Rockstar, V-Energy, Lucozade and numerous local and private-label brands that usually differ from country to country, such as HELL, Shock, Tiger, Boost, Speed, TNT, Shark, Hot 6, Shark Energy, Dragon, Score, Sting, Battery, Bullit, Flash Up, Black, Non-Stop, Bomba, Semtex, Vive 100, Dark Dog, Guaraná, M-150, Lipovitan, Bacchus, Volt, Bolt, Mr. Big, Boom, Raptor, Amp, Fusion, Hi-Tiger,
Eastroc Super Drink, Carabao, Power Horse, XL, Crazy Tiger, Effect, Missile, NOCCO, Adrenaline Rush and a host of other international brands. Our Java Monster®, Espresso Monster® and Caffé Monster® product lines compete directly with Starbucks Frappuccino, Starbucks Doubleshot, Starbucks Doubleshot Energy Plus Coffee and other Starbucks coffee drinks, Rockstar Roasted, Dunkin Donuts, Gold Peak Tea, Stok, High Brew, McCafé, hi*ball and International Delight. Our Muscle Monster® product line competes directly with Muscle Milk, Core Power, Premier Protein, Kellogg’s Special K Protein, Bolthouse Farms Protein, EAS AdvantEDGE, EAS Myoplex, Gatorade G Series 03 Recover, 5-Hour and PowerBar. Our Monster Hydro® product line competes directly with Vitamin Water, Sparkling Ice, Bai, Propel, Vita Coco, Lucozade and BODYARMOR. 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.
The Company, in several markets, owns multiple potentially competing brands in the energy drink category.
The Strategic Brands acquired from TCCC in 2015 represented 7.5% of consolidated net sales for the year ended December 31, 2018. In several markets our Monster Energy® brand energy drinks and Strategic Brands compete with each other. Although we continue to integrate the Strategic Brands with our broader energy drink portfolio, we may encounter difficulties managing different and potentially competing brands in such shared markets, which could adversely impact our business and results of operations.
TCCC is a significant shareholder of the Company and may have interests that are different from the Company’s other shareholders (including current shareholders of the Company).
As of February 20, 2019, TCCC owned common shares of the Company representing approximately 19% of the total number of the Company’s outstanding common shares. TCCC has also nominated two directors to the Company’s board of directors. The number of directors that TCCC is entitled to nominate is subject to reduction in certain circumstances. In March 2018, we entered into an agreement extending TCCC’s right to nominate two directors to serve until June 2019.
TCCC’s ownership could also have an effect on the Company’s ability to engage in a change in control transaction. TCCC is obligated for a period of time to vote all of its common shares of the Company in excess of 20% of the outstanding common shares in the same proportion as all common shares not owned by TCCC with respect to a proposal for a change of control. However, if TCCC were to oppose such a change-in-control transaction, a bidder would be required to secure the support of holders of 62.5% of the Company’s common shares not owned by TCCC (assuming that TCCC increased its ownership to 20% of the Company’s common shares) to achieve a vote of a majority of the Company’s outstanding shares for a change-in-control transaction. In addition, TCCC would have a bidding advantage if the Company’s board of directors were to seek to sell the Company in the future because TCCC would not need to pay a control premium on the shares it owns at such time. TCCC and the Company would also be permitted to terminate TCCC’s distribution coordination agreements with the Company after a change in control of the Company. In such event, TCCC would receive a termination fee if TCCC terminated the distribution coordination agreements following a change in control of the Company involving certain TCCC competitors, or if the Company terminated following a change in control of the Company involving any third-party.
The interests of TCCC may be different from or conflict with the interests of the Company’s other shareholders and, as a result, TCCC’s influence may result in the delay or prevention of potential actions or transactions, including a potential change of management or control of the Company, even if such action or transaction may be beneficial to the Company’s other shareholders. Moreover, TCCC’s ownership of a significant amount of the Company’s outstanding common shares could result in downward pressure on the trading price of the Company’s common shares if TCCC were to sell a large portion of its shares (when permitted to sell) or as a result of the perception that such a sale might occur.
Changes in government regulation, or failure to comply with existing regulations, could adversely affect our business, financial condition and results of operations.
Legislation has been proposed and/or adopted at the U.S. federal, state and/or municipal level and proposed and/or adopted in certain foreign jurisdictions to restrict the sale of energy drinks (including, prohibiting the sale of energy drinks at certain establishments or pursuant to certain governmental programs), limit 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 and municipal level in respect of each of the foregoing subject areas. Public health officials and health advocates are increasingly focused on the public health consequences associated with obesity, especially as it affects children, and are seeking legislative change to reduce the consumption of sweetened beverages. There also has been an increased focus on caffeine content in beverages. To the extent any such legislation is enacted in one or more jurisdictions where a significant amount of our products are sold, individually or in the aggregate, it could result in a reduction in demand for, or availability of, our energy drinks, and adversely affect our business, financial condition and results of operations.
The production, distribution and sale in the United States of many of our products are also currently subject to various federal and state regulations, including, but not limited to: the FD&C Act; 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 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 such products may have to be recalled, reformulated and/or have the packaging changed, which could adversely affect our business, financial condition and results of operations.
We cannot predict the effect of inquiries from and/or actions by attorneys general, other government agencies and/or quasi-government agencies into the production, advertising, marketing, promotion, 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. 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.
In addition, from time to time, government and/or quasi-governmental agencies may investigate the safety of caffeine and energy drinks. For example, in January 2013, the Company received and responded to inquiries from U.S. legislators in response to FDA’s investigation into the safety of caffeine in food products, particularly its effects on children and adolescents. These legislators ultimately released a report in January 2015, recommending, inter alia, that the energy drink industry not market to consumers under the age of 18 and not market their products for hydration, and that the FDA develop and release definitions and guidance for this market sector. In addition, other organizations, such as the European Food Safety Authority, have also published reports, studies, articles and opinions on caffeine and energy drinks.
Litigation regarding our products, and related unfavorable media attention, could expose us to significant liabilities and reduce demand for our products.
We have been and are currently named as a defendant in personal injury lawsuits which allege that consumption of our products has been responsible for wrongful deaths and/or injuries. We do not believe that our products are responsible for such wrongful deaths and/or injuries, and we intend to vigorously defend such lawsuits.
Several other lawsuits have been filed against us claiming that certain statements made in our advertisements and/or on the labels of our products were false and/or misleading 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 recently been filed against certain of our competitors asserting that certain claims in their advertisements amount to false advertising. We do not believe any statements made by us in our promotional materials or set forth on our product labels are false or misleading or noncompliant with local law, or that our products are in any way unsafe and we vigorously defend these 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 and injury to our reputation.
Criticism of our energy drink products and/or criticism or a negative perception of energy drinks generally, could adversely affect us.
An unfavorable report on the health effects of caffeine, or criticism or negative publicity regarding the caffeine content and/or any other ingredients in our products or energy drinks generally, 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.
Increased competition could hurt our business.
The beverage industry is highly competitive. The principal areas of competition are pricing, packaging, development of new products, flavors, product positioning as well as promotion and marketing strategies. Our products compete with a wide range of drinks produced by a relatively large number of manufacturers, some of which have substantially greater financial, marketing and distribution resources than we do.
Important factors affecting our ability to compete successfully include the taste and flavor of our products, trade and consumer promotions, rapid and effective development of new and unique cutting edge products, attractive and different packaging, branded product advertising and pricing. Our products compete with all liquid refreshments and in some cases with products of much larger and substantially better financed competitors, including the products of numerous nationally and internationally known producers such as TCCC, PepsiCo, Red Bull GmbH and 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, may result in a shift away from physical retail operations to digital channels.
Due to competition in the beverage industry, there can be no assurance that we will not encounter difficulties in maintaining our current revenues, market share or position in the beverage industry. If our revenues decline, our business, financial condition and results of operations could be adversely affected.
Our inability to innovate successfully and to provide new cutting edge products could adversely affect our business and financial results.
Our ability to compete in the highly competitive beverage industry and to achieve our business growth objectives depends, in part, on our ability to develop new flavors, products and packaging. The success of our innovation, in turn, depends on our ability to identify consumer trends and cater to consumer preferences. If we are not successful in our innovation activities, our business, financial condition and results of operation could be adversely affected.
Uncertainty in the financial markets and other adverse changes in general economic or political conditions in any of the major countries in which we do business could adversely affect our industry, business and results of operations.
Global economic uncertainties, 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, including uncertainties surrounding the United Kingdom’s impending withdrawal from the European Union, commonly referred to as “Brexit,” and increases in tariffs that may result, 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.
Changes in consumer preferences may reduce demand for some of our products.
The beverage industry is subject to changing consumer preferences and shifts in consumer preferences may adversely affect us. There is increasing awareness of and concern for the health consequences of obesity. This may reduce demand for our non-diet beverages, which could reduce our revenues and adversely affect our results of operations. Recently, concerns have emerged regarding diet sodas and in particular, aspartame, which is contained in certain of our Strategic Brands energy drinks.
Consumers are seeking greater variety in their beverages. Our future success will depend, in part, upon our continued ability to develop and introduce different and innovative beverages that appeal to consumers. In order to retain and expand our market share, we must continue to develop and introduce different and innovative beverages and be competitive in the areas of taste, quality and price, although there can be no assurance of our ability to do so. There is no assurance that consumers will continue to purchase our products in the future. Product lifecycles for some beverage brands, products and/or
packages may be limited to a few years before consumers’ preferences change. The beverages we currently market are in varying stages of their product lifecycles, and there can be no assurance that such beverages will become or remain profitable for us. We may be unable to achieve volume growth through product and packaging initiatives. We may also be unable to penetrate new markets. 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. If our revenues decline, our business, financial condition and results of operations could be adversely affected.
Our continued expansion outside of the United States exposes us to uncertain conditions and other risks in international markets.
We have continued expanding our operations internationally into a variety of new markets, including launches in China and various African and Middle Eastern countries. Our gross sales to customers outside of the United States were approximately 31%, 28% and 25% of consolidated gross sales for the years ended December 31, 2018, 2017 and 2016, respectively. As our growth strategy includes further expanding our international business, if we are unable to continue to expand distribution of our products outside the United States, our growth rate could be adversely affected. In many international markets, we have limited operating experience and in some areas we have no operating experience. It is costly to establish, develop and maintain international operations and develop and promote our brands in international markets. Our percentage gross profit margins in many international markets are expected to be less than the comparable percentage gross profit margins obtained in the United States. We face and will continue to face substantial risks associated with having foreign operations, including: economic and/or political instability in our international markets; unfavorable 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.
Global or regional catastrophic events could impact our operations and affect our ability to grow our business.
Because of our increasingly global presence, our business could be affected by unstable political conditions, civil unrest, large-scale terrorist acts, especially those directed against the United States or other major industrialized countries where our products are distributed, the outbreak or escalation of armed hostilities, major natural disasters or widespread outbreaks of infectious diseases. Such events could impact the production and/or distribution of our products. In addition, such events could disrupt global or regional economic activity, which could affect consumer purchasing power, thereby reducing demand for our products. If we are unable to grow our business internationally as a result of these factors, our growth rate could decline.
Fluctuations in foreign currency exchange rates may adversely affect our operating results.
We are exposed to foreign currency exchange rate risk with respect to our sales, expenses, profits, assets and liabilities denominated in currencies other than the U.S. dollar. We may enter into forward currency exchange contracts with financial institutions to create an economic hedge to specifically manage a portion of the foreign exchange risk exposure associated with certain consolidated subsidiaries’ non-functional currency denominated assets and liabilities. We have not used instruments to hedge against all foreign currency risks and are therefore not protected against all foreign currency fluctuations. As a result, our reported earnings may be affected by changes in foreign currency exchange rates. Moreover, any favorable impacts to profit margins or financial results from fluctuations in foreign currency exchange rates are likely to be unsustainable over time. Foreign currency transaction losses were $4.0 million, $3.3 million and $9.7 million for the years ended December 31, 2018, 2017 and 2016, respectively.
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.
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 manufacture 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, including certain of our Monster Energy® brand energy drinks, our Muscle Monster® product line, our Java Monster® product line, our Espresso Monster® product line, our Monster Hydro® product line and certain of our other products. For example, in the second half of 2016 and into the fourth quarter of 2017, 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 short-term 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 soda, carbonated and non-carbonated brands and other beverage products (both alcoholic and non-alcoholic). In many cases, such products compete directly with our products.
Unilateral decisions could be taken by our bottlers/distributors, convenience and gas chains, grocery chains, specialty chain stores, club stores and other customers to discontinue carrying certain or all of our products that they are carrying at any time, which could cause our business to suffer.
The TCCC North American Bottlers, Coca-Cola European Partners, Coca-Cola Hellenic, 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 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/or Coca-Cola İçecek, or if 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/or Coca-Cola İçecek do not effectively focus on marketing, promoting, selling and distributing our products, sales of our products could be adversely affected.
TCCC, through the TCCC Subsidiaries, accounted for approximately 3%, 18% and 41% of our net sales for the years ended December 31, 2018, 2017 and 2016, respectively. A decision by certain TCCC North American Bottlers (including CCBCC Operations, LLC and Reyes Coca-Cola Bottling), Coca-Cola European Partners, Coca-Cola Hellenic, Coca-Cola FEMSA, Coca-Cola Amatil, Swire Coca-Cola (China), COFCO Coca-Cola, Coca-Cola Beverages Africa, Coca-Cola İçecek, Wal-Mart, Inc. (including Sam’s Club), or any other large customer to decrease the amount purchased from us or to cease carrying our products could have a material adverse effect on our financial condition and consolidated results of operations.
The marketing efforts of our distributors are important for our success. If our brands prove to be less attractive to our existing bottlers and distributors, if we fail to attract additional bottlers and distributors, and/or our bottlers/distributors do not market, promote and distribute our products effectively, our business, financial condition and results of operations could be adversely affected.
Increases in costs and/or shortages of raw materials and/or ingredients and/or fuel and/or costs of co-packing could harm our business.
The principal raw materials used by us are aluminum cans, sleek aluminum cans, aluminum Cap Cans, aluminum cans with re-sealable ends, PET plastic bottles, glass bottles, caps, flavors, juice concentrates, glucose, sugar, sucralose, milk, cream, protein, coffee, tea, dietary 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, dairy-based products, dietary 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 retaliatory trade measures taken by China or other countries in response, could result in an increase in supply chain costs.
In addition, some of these raw materials, including certain sizes of cans, are available from limited suppliers.
Our failure to accurately estimate demand for our products could adversely affect our business and financial results.
We may not correctly estimate demand for our existing products and/or new products. Our ability to estimate demand for our products is imprecise, particularly with regard to new products, and may be less precise during periods of rapid growth, particularly in new markets. If we materially underestimate demand for our products or are unable to secure sufficient ingredients or raw materials including, but not limited to, aluminum cans, aluminum Cap Cans, sleek aluminum cans, aluminum cans with re-sealable ends, PET plastic bottles, glass bottles, caps, labels, sucralose, flavors, dietary ingredients, juice concentrates, certain sweeteners, coffee, tea, protein and packaging materials or experience difficulties with our co-packing arrangements, including production shortages or quality issues, we might not be able to satisfy demand on a short-term basis. Moreover, industry-wide shortages of certain juice concentrates, dietary ingredients and sweeteners have been and could, from time to time in the future, be experienced, resulting in production fluctuations and/or 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 maintain sufficient inventory levels, if we are unable to deliver our products to our customers in sufficient quantities, and/or if our customers’ or retailers’ inventory levels are too high, our operating results could be adversely affected.
If we do not accurately anticipate the future demand for a particular product or the time it will take to obtain new inventory, our inventory levels may be inadequate and our results of operations may be negatively impacted. If we fail to meet our shipping schedules, we could damage our relationships with distributors and/or retailers, increase our distribution costs and/or cause sales opportunities to be delayed or lost. In order to be able to deliver our products on a timely basis, we need to maintain adequate inventory levels of the desired products. If the inventory of our products held by our distributors and/or retailers is too high, they will not place orders for additional products, which could unfavorably impact our future sales and adversely affect our operating results.
The costs of packaging supplies are subject to price increases from time to time, and we may be unable to pass all or some of such increased costs on to our customers.
Many of our packaging supply contracts allow our suppliers to alter the costs they charge us for packaging supplies based on changes in the costs of the underlying commodities that are used to produce those packaging supplies, such as aluminum for cans and pulp and paper for cartons and/or trays. These changes in the prices we pay for our packaging supplies occur at certain predetermined times that vary by product and supplier. In some cases, we are able to fix the prices of certain packaging supplies and/or
commodities for a reasonable period. In other cases, we bear the risk of increases in the costs of these packaging supplies, including the underlying costs of the commodities that comprise these packaging supplies. We do not use derivative instruments to manage this risk. If the costs of these packaging supplies increase, we may be unable to pass these costs along to our customers through corresponding adjustments to the prices we charge, which could have a material adverse effect on our results of operations.
Our intellectual property rights are critical to our success, and the loss of such rights could materially adversely affect our business.
We own numerous trademarks that are very important to our business. We also own the copyright in, and to, a portion of the content on the packaging of our products. We regard our trademarks, copyrights and similar intellectual property as critical to our success and attempt to protect such intellectual property through registration and enforcement actions. However, there can be no assurance that other parties will not infringe or misappropriate our trademarks, copyrights and similar proprietary rights. If we lose some or all of our intellectual property rights, our business may be materially adversely affected.
Negative publicity (whether or not warranted) concerning product safety or quality, human and workplace rights, obesity or other issues 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 and human rights will have the desired impact on our products’ brand image and on consumer preference and demand. Product safety, quality and/or ingredient content issues, efficacy or lack thereof (real or imagined), or allegations of product contamination, even if false or unfounded, could tarnish the image of the affected brands and may cause consumers to choose other products. Furthermore, our brand image or perceived product quality could be adversely affected by litigation, unfavorable reports in the media (internet or elsewhere), studies in general and regulatory or other governmental inquiries (in each case whether involving our products or those of our competitors) and proposed or new legislation affecting our industry. 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 issues could adversely impact our corporate image and reputation. We have made a number of commitments to respect human rights, including through our Human Rights Policy, Supplier Code of Conduct, Code of Business Conduct and Ethics and our grievance procedures. Allegations, even if untrue, that we are not respecting one or more of the 30 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; and adverse publicity surrounding obesity and health concerns related to our products, water usage, environmental impact, labor relations 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.
If we encounter product recalls, our business may suffer and we may incur material losses.
We may be required from time to time to recall products entirely or from specific co-packers, markets or batches if such products become contaminated, damaged, mislabeled or otherwise materially non-compliant with applicable regulatory requirements. Material product recalls could adversely affect our profitability and our brand image. We do not maintain recall insurance.
If we are not able to retain the full-time services of senior management, there may be an adverse effect on our operations and/or our operating performance until we find suitable replacements.
Our business is dependent, to a large extent, upon the services of our senior management. We do not maintain key person life insurance on any members of our senior management. The loss of services of either Rodney Sacks, Chairman and Chief Executive Officer, Hilton Schlosberg, Vice-Chairman, President and Chief Financial Officer, or any other key members of our senior management could adversely affect our business until suitable replacements can be found. There may be a limited number of personnel with the requisite skills to serve in these positions, and we may be unable to locate or employ such qualified personnel on acceptable terms.
Climate change may negatively affect our business.
There is concern that a gradual increase in global average temperatures 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. While warmer weather has historically been associated with increased sales of our products, changing weather patterns could result in decreased agricultural productivity in certain regions, which may limit availability and/or increase the cost of certain key ingredients, juice concentrates, and dietary 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 (including, without limitation, the availability of, and/or result in higher prices for, juice concentrates, natural flavors and dietary and other ingredients) and/or impact demand for our products. Natural disasters and extreme weather conditions, such as hurricanes, wildfires, earthquakes or floods, may affect our operations and the operation of our supply chain and unfavorably impact the demand for, or 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. As a result, the effects of climate change could have a long-term adverse impact on our business and results of operations. Sales of our products may also be influenced to some extent by weather conditions in the markets in which we operate. Weather conditions may influence consumer demand for certain of our beverages, which could have an effect on our operations, either positively or negatively.
Potential changes in accounting standards or practices and/or taxation may adversely affect our financial results.
We cannot predict the impact that future changes in accounting standards or practices may have on our financial results. New accounting standards could be issued that change the way we record revenues, expenses, assets and liabilities. These changes in accounting standards could adversely affect our reported earnings. Increases in direct and indirect income tax rates could affect after-tax income. Equally, increases in indirect taxes (including environmental taxes pertaining to the disposal of beverage containers and/or indirect taxes on beverages generally or energy drinks in particular) could affect our products’ affordability and reduce our sales.
Fluctuations in our effective tax rate could adversely affect our financial condition and results of operations.
We are subject to income and other taxes in both the U.S. and certain foreign jurisdictions. Therefore, we may be subjected to audits for multiple tax years in various jurisdictions at once. At any given time, events may occur which change our expectation about how any such tax audits will be resolved and thus, there could be variability in our quarterly and/or annual tax rates, because these events may change our plans for uncertain tax positions. On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Tax Reform Act”) which imposes broad and complex changes to the U.S. tax code. We completed our analysis of the Tax Reform Act during 2018 and adjusted the 2017 provisional estimate to the final amounts in accordance with Staff Accounting Bulletin No. 118.
Volatility of stock price may restrict sale opportunities.
Our stock price is affected by a number of factors, including stockholder expectations, financial results, the introduction of new products by us and our competitors, general economic and market conditions, estimates and projections by the investment community and public comments by other parties as well as many other factors including litigation, many of which are beyond our control. We do not provide guidance on our future performance, including, but not limited to, our revenues, margins, product mix, operating expenses or net income. We may be unable to achieve analysts’ net revenue and/or earnings forecasts, which are based on their own projected revenues, sales volumes and sales mix of many product types and/or new products, certain of which are more profitable than others, as well as their own estimates of gross margin and operating expenses. There can be no assurance that we will achieve any such projected levels or mixes of product sales, revenues, gross margins, operating profits and/or net income. As a result, our stock price is subject to significant volatility, and stockholders may not be able to sell our stock at attractive prices. In addition, periods of volatility in the market price of our stock could result in the initiation of securities class action litigation against us. During the fiscal year ended December 31, 2018, the high of our stock price was $70.22 and the low was $47.61.
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 20, 2019, Mr. Sacks and Mr. Schlosberg together may be deemed to beneficially own and/or exercise voting control over approximately 9.8% of our outstanding common stock. As of February 20, 2019, TCCC owned approximately 19% of our common stock. Consequently, Mr. Sacks, Mr. Schlosberg and TCCC could exercise significant control over matters submitted to a vote of our stockholders, including electing directors, amending organizational documents and disapproving extraordinary transactions such as a takeover attempt, even though such actions may be favorable to the other common stockholders.
Our cash flow may not be sufficient to fund our long-term goals.
Although we currently have sufficient cash to support our planned operating activities in the current year, we may be unable to generate sufficient cash flow to support our capital expenditure plans and general operating activities in the future. In addition, the terms and/or availability of our credit facility and/or the activities of our debtors and/or creditors could affect the financing of our future growth.
Our investments in marketable securities are subject to risks which may cause losses and affect the liquidity of these investments.
At December 31, 2018, we had $637.5 million in cash and cash equivalents and $320.7 million in short-term investments. We have historically invested these amounts in U.S. treasuries, certificates of deposit, commercial paper, government agencies and municipal securities (which may have an auction reset feature), variable rate demand notes and money market funds meeting certain criteria. Certain of these investments are subject to general credit, liquidity, market and interest rate risks. These risks associated with our investment portfolio may have an adverse effect on our future results of operations, liquidity and financial condition.
We may be required to record a significant charge to earnings if our goodwill or intangible assets become impaired.
Under GAAP, we are required to review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our intangible assets may not be recoverable include, declining or slower than anticipated growth rates for certain of our existing products, a decline in stock price and market capitalization, and slower growth rates in our industry.
We may be required to record a significant charge to earnings in our financial statements during the period in which we determine that our intangible assets have been impaired. Any such charge would adversely impact our results of operations. As of December 31, 2018, our goodwill totaled approximately $1.33 billion and other intangible assets totaled approximately $1.05 billion.
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.
Litigation, legal proceedings, arbitrations, government and regulatory inquiries and/or proceedings could expose us to significant liabilities and thus negatively affect our financial results.
We are a party, from time to time, to various litigation claims and legal proceedings, arbitrations, government and regulatory inquiries and/or proceedings, including, but not limited to, intellectual property, fraud, unfair business practices, false advertising, product liability, breach of contract claims, securities actions and shareholder derivative actions. Material legal proceedings are described more fully in, “Part I, Item 3 - Legal Proceedings” and in “Part II, Item 8, Note 11” to our consolidated financial statements contained in this Form 10-K.
Defending these proceedings can result in significant ongoing expenditures and the diversion of our management’s time and attention from the operation of our business, which could have a negative effect on our business operations. Our failure to successfully defend or settle any litigation or legal proceedings could result in liabilities that, to the extent not covered by our insurance, could have a material adverse effect on our financial condition, revenue and profitability, and could cause the market value of our common stock to decline.
We must continually maintain, protect and/or upgrade our information technology systems, 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 and virus), attempts to gain unauthorized access to networks, computer systems and data 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 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.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
Our principal properties include our corporate headquarters as well as our Southern California warehouse and distribution center.
Our owned corporate headquarters are located at 1 Monster Way, Corona, California 92879, consisting 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, and (iii) an adjacent approximately 75,426 square foot, free-standing, three-story building (pursuing ENERGY STAR certification).
Our owned Southern California warehouse is located in Rialto, California, consisting of an approximately 1,000,000 square-foot building which is LEED certified.
In addition, we lease many smaller office and/or warehouse spaces, both domestically and in certain international locations.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
The Company, TCCC and certain affiliates are parties to various agreements setting forth, among other things, provisions relating to TCCC’s equity holding in the Company and the terms on which the Company’s energy products are distributed globally by members of TCCC’s distribution network. Among other provisions, the agreements restrict TCCC from competing in the energy drink category in certain territories prior to the termination of the applicable distribution coordination agreement with TCCC, with certain exceptions.
TCCC has developed three energy products that it believes it may market under the exception relating to the Coca-Cola brand. The Company believes that the exception does not apply to this situation. By mutual agreement to obtain clarification, the issue was submitted to AAA arbitration on October 31, 2018. We expect a decision will be reached during the second quarter of 2019. TCCC has indicated that it has suspended the proposed launch of such products until April 2019. As the relief sought is limited, no reasonable possible range of losses, if any, can be estimated.
The Company is currently a defendant in a number of personal injury lawsuits, claiming that the death or other serious injury of the plaintiffs was caused by consumption of Monster Energy® brand energy drinks. The plaintiffs in these lawsuits allege strict product liability, negligence, fraudulent concealment, breach of implied warranties and wrongful death. The Company believes that each complaint is without merit and plans a vigorous defense. The Company also believes that any damages, if awarded, would not have a material adverse effect on the Company’s financial position or results of operations.
Furthermore, from time to time in the normal course of business, the Company is named in other litigation, including consumer class actions, intellectual property litigation and claims from prior distributors. Although it is not possible to predict the ultimate outcome of such litigation, based on the facts known to the Company, management believes that such litigation in the aggregate will likely not have a material adverse effect on the Company’s financial position or results of operations.
The Company evaluates, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of the liability that is accrued, if any, or in the amount of any related insurance reimbursements recorded. As of December 31, 2018, the Company’s consolidated balance sheet includes accrued loss contingencies of approximately $0.06 million.

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ITEM 4. RESERVED
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
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 same symbol, “MNST”. As of February 20, 2019, there were 543,148,169 shares of the Company’s common stock outstanding held by approximately 198 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 28, 2017, 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 2017 Repurchase Plan”). During the year ended December 31, 2018, the Company purchased 4.3 million shares of common stock at an average purchase price of $57.74 per share, for a total amount of $249.9 million (excluding broker commissions), under the February 2017 Repurchase Plan, which exhausted the availability under the February 2017 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2018.
On February 27, 2018, the Company’s Board of Directors authorized a share repurchase program for the purchase of up to $250.0 million of the Company’s outstanding common stock (the “February 2018 Repurchase Program”). During the year ended December 31, 2018, the Company purchased 5.0 million shares of common stock at an average purchase price of $49.81 per share, for a total amount of $249.9 million (excluding broker commissions), which exhausted the availability under the February 2018 Repurchase Program. Such shares are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2018.
On May 29, 2018, the Company’s Board of Directors authorized a share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock (the “May 2018 Repurchase Plan”). During the year ended December 31, 2018, the Company purchased 9.0 million shares of common stock at an average purchase price of $55.55 per share, for a total amount of $499.9 million (excluding broker commissions), under the May 2018 Repurchase Plan, which exhausted the availability under the May 2018 Repurchase Plan. Such shares are included in the common stock in treasury in the accompanying consolidated balance sheet at December 31, 2018.
On August 7, 2018, the Company’s Board of Directors authorized a share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock (the “August 2018 Repurchase Plan”). During the year ended December 31, 2018, the Company purchased 6.0 million shares of common stock at an average purchase price of $57.11 per share, for a total amount of $340.3 million (excluding broker commissions), under the August 2018 Repurchase Plan. Such shares are included in the common stock in treasury in the accompanying consolidated balance sheet at December 31, 2018. As a result of purchases of our common stock in January 2019 and February 2019, as of February 26, 2019, $20.6 million remained available for repurchase under the August 2018 Repurchase Plan.
During the year ended December 31, 2018, 34,976 shares of common stock were purchased from employees in lieu of cash payments for options exercised or withholding taxes due for a total amount of $2.1 million. While such purchases are considered common stock repurchases, they are not counted as purchases against our authorized share repurchase programs. Such shares are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2018.
The following tabular summary reflects the Company’s repurchase activity during the quarter ended December 31, 2018:
Period
Total Number
of Shares
Purchased
Average Price
per Share¹
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number (or
Approximate Dollar
Value) of Shares that
May Yet Be Purchased
Under the Plans or
Programs (In
thousands)²
Nov 1 - Nov 30, 2018
4,812,896
$
57.41
4,812,896
$
420,288
Dec 1 - Dec 31, 2018
4,607,630
$
56.56
4,607,630
$
159,612
¹Excluding broker commissions paid.
²Net of broker commissions paid.
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, 2013. The Company’s self-selected peer group is comprised of TCCC, Dr Pepper Snapple Group, Inc. (through July 9, 2018), National Beverage Corporation, Jones Soda Company and PepsiCo.

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ITEM 6. SELECTED FINANCIAL DATA
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, 2016 through 2018 and the balance sheet data as of December 31, 2018 and 2017, 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,

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided as a supplement to - and should be read in conjunction with - our financial statements and the accompanying notes (“Notes”) included in Part II, Item 8 of this Form 10-K. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements. See “Forward-Looking Statements” and “Part I, Item 1A - Risk Factors.”
This overview provides our perspective on the individual sections of MD&A. MD&A includes the following sections:
· Our Business - a general description of our business, the value drivers of our business, and opportunities and risks facing our Company, stock repurchases, acquisitions and divestitures;
· Results of Operations - an analysis of our consolidated results of operations for the three years presented in our financial statements;
· Sales - details of our sales measured on a quarterly basis in both dollars and cases;
· Inflation - information about the impact that inflation may or may not have on our results;
· Liquidity and Capital Resources - an analysis of our cash flows, sources and uses of cash and contractual obligations;
· Accounting Policies and Pronouncements - a discussion of accounting policies that require critical judgments and estimates including newly issued accounting pronouncements;
· Forward-Looking Statements - cautionary information about forward-looking statements and a description of certain risks and uncertainties that could cause our actual results to differ materially from the Company’s historical results or our current expectations or projections; and
· Market Risks - information about market risks and risk management. (See “Forward-Looking Statements” and “Part II,

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business our financial position is routinely subject to a variety of risks. The principal market risks (i.e., the risk of loss arising from adverse changes in market rates and prices) to which we are exposed are fluctuations in commodity and other input prices affecting the costs of our raw materials (including, but not limited to, increases in the costs of juice concentrates, increases in the price of aluminum for cans, as well as sugar and other sweeteners, glucose, sucrose, milk, cream, 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 certain raw materials. We generally do not use hedging agreements or alternative instruments to manage the risks associated with securing sufficient ingredients or raw materials. We are also subject to market risks with respect to the cost of commodities and other inputs because our ability to recover increased costs through higher pricing is limited by the competitive environment in which we operate.
We do not use derivative financial instruments to protect ourselves from fluctuations in interest rates and generally do not hedge against fluctuations in commodity prices.
Our gross sales to customers outside of the United States were approximately 31% and 28% of consolidated gross sales for the years ended December 31, 2018 and 2017, 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, 2018, 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, 2018 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 expense, net, in the consolidated statements of income, and are largely offset by the changes in the fair value of the underlying economically hedged item. We do not consider the potential loss resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates as of December 31, 2018 to be significant.
As of December 31, 2018, we had $637.5 million in cash and cash equivalents and $320.7 million in short-term investments including certificates of deposit, commercial paper, U.S. government agency securities, U.S. treasuries, variable rate demand notes and municipal securities (which may have an auction reset feature). Certain of these investments are subject to general credit, liquidity, market and interest rate risks.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 72 through 115.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures - Under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Exchange Act) as of the end of the period covered by this report. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in rules and forms of the SEC and (2) accumulated and communicated to our management, including our principal executive and principal financial officers as appropriate to allow timely decisions regarding required disclosures.
Management’s Report on Internal Control Over Financial Reporting - Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2018, 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, 2018.
Our internal control over financial reporting as of December 31, 2018, 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, 2018, 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, 2018, 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, 2018, 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, 2018, of the Company and our report dated February 28, 2019, expressed an unqualified opinion on those financial statements and financial statement schedule.
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
February 28, 2019

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
On February 26, 2019, our Board of Directors authorized a new share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock (the “February 2019 Repurchase Plan”). As of February 26, 2019, $20.6 million remained available for grant under the August 2018 Repurchase Plan. The aggregate amount available to repurchase the Company’s common stock is currently $520.6 million.
PART III

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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
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 2019 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2018 (the “2019 Proxy Statement”) and is incorporated herein by reference.
Information concerning compliance with Section 16(a) of the Exchange Act is included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our 2019 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 2019 Proxy Statement and is incorporated herein by reference.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all our directors, officers (including our principal executive officer, principal financial officer, principal accounting officer and controllers) and employees. 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/governance.cfm 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

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ITEM 11. EXECUTIVE COMPENSATION
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 2019 Proxy Statement and is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP
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 2019 Proxy Statement and is incorporated herein by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 2019 Proxy Statement and is incorporated herein by reference.

---

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
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 2019 Proxy Statement and is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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, 2018 and 2017
Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Valuation and Qualifying Accounts for the years ended December 31, 2018, 2017 and 2016
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 Refreshments (incorporated by reference to Exhibit 2.2 to our Form 8-K dated August 18, 2014).
3.1
Certificate of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to our Form 10-Q dated November 7, 2016).
3.2
Second Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to our Form 8-K dated April 16, 2018).
10.1
Amended and Restated Distribution Coordination Agreement, dated as of June 12, 2015, between Monster Energy Company and The Coca-Cola Company (incorporated by reference to Exhibit 10.1 to our 10-Q dated August 10, 2015).
10.2
Amended and Restated International Distribution Coordination Agreement, dated as of June 12, 2015, between Monster Energy Ltd. and Monster Energy Company and The Coca-Cola Company (incorporated by reference to Exhibit 10.2 to our 10-Q dated August 10, 2015).
10.3
Form of Indemnification Agreement (to be provided by Hansen Natural Corporation to its directors) (incorporated by reference to Exhibit 10.1 to our Form 8-K dated November 14, 2005).
10.4+
Hansen Natural Corporation 2001 Amended and Restated Stock Option Plan (incorporated by reference to Exhibit A to our Proxy Statement dated September 25, 2007).
10.5+
Form of Restricted Stock Unit Agreement pursuant to the 2009 Hansen Natural Corporation Stock Incentive Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.1 to our Form 10-Q dated August 5, 2016).
10.6+
Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.1 to our Form 10-Q dated August 9, 2011).
10.7+
Monster Beverage Corporation 2011 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to our Form 8-K dated May 24, 2011).
10.8+
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).
10.9+
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).
10.10+
Form of Stock Option Agreement (incorporated by reference to Exhibit 10.10 to our Form 10-K dated March 1, 2018).
10.11+
Form of Stock Option Agreement of Chief Executive Officer and President and Chief Financial Officer (incorporated by reference to Exhibit 10.11 to our Form 10-K dated March 1, 2018).
10.12+
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).
10.13+
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).
10.14+
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 CEO pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
31.2*
Certification by CFO pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
32.1*
Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
32.2*
Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
101*
The following materials from Monster Beverage Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 are furnished herewith, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of December 31, 2018 and 2017, (ii) the Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016, (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016, (iv) the Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016, and (vi) the Notes to Consolidated Financial Statements.
* 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: February 28, 2019
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature
Title
Date
/s/ RODNEY C. SACKS
Chairman of the Board of Directors and Chief Executive Officer (principal executive officer)
February 28, 2019
Rodney C. Sacks
/s/ HILTON H. SCHLOSBERG
Vice Chairman of the Board of Directors, President, Chief Operating Officer, Chief Financial Officer and Secretary (principal financial officer, controller and principal accounting officer)
February 28, 2019
Hilton H. Schlosberg
/s/ NORMAN C. EPSTEIN
Director
February 28, 2019
Norman C. Epstein
/s/ MARK J. HALL
Director
February 28, 2019
Mark J. Hall
/s/ GARY P. FAYARD
Director
February 28, 2019
Gary P. Fayard
/s/ BENJAMIN M. POLK
Director
February 28, 2019
Benjamin M. Polk
/s/ SYDNEY SELATI
Director
February 28, 2019
Sydney Selati
/s/ HAROLD C. TABER, JR.
Director
February 28, 2019
Harold C. Taber, Jr.
/s/ MARK S. VIDERGAUZ
Director
February 28, 2019
Mark S. Vidergauz
/s/ KATHY N. WALLER
Director
February 28, 2019
Kathy N. Waller
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, 2018 and 2017
Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
Financial Statement Schedule - Valuation and Qualifying Accounts for the years ended December 31, 2018, 2017 and 2016
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, 2018 and 2017, 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, 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, 2018, 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 February 28, 2019, 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.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
February 28, 2019
We have served as the Company’s auditor since 1991.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2018 AND 2017 (In Thousands, Except Par Value)
December 31,
December 31,
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
637,513
$
528,622
Short-term investments
320,650
672,933
Accounts receivable, net
484,562
449,476
Inventories
277,705
255,745
Prepaid expenses and other current assets
44,909
40,877
Prepaid income taxes
38,831
138,724
Total current assets
1,804,170
2,086,377
INVESTMENTS
-
2,366
PROPERTY AND EQUIPMENT, net
243,051
230,276
DEFERRED INCOME TAXES
85,687
92,333
GOODWILL
1,331,643
1,331,643
OTHER INTANGIBLE ASSETS, net
1,045,878
1,034,085
OTHER ASSETS
16,462
13,932
Total Assets
$
4,526,891
$
4,791,012
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
$
248,760
$
245,910
Accrued liabilities
112,507
87,475
Accrued promotional allowances
145,741
137,998
Accrued distributor terminations
-
Deferred revenue
44,045
43,236
Accrued compensation
39,903
34,996
Income taxes payable
10,189
10,645
Total current liabilities
601,145
560,351
DEFERRED REVENUE
312,224
334,354
OTHER LIABILITIES
2,621
1,095
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS’ EQUITY:
Common stock - $0.005 par value; 1,250,000 shares authorized; 630,970 shares issued and 543,676 shares outstanding as of December 31, 2018; 629,255 shares issued and 566,298 shares outstanding as of December 31, 2017
3,155
3,146
Additional paid-in capital
4,238,170
4,150,628
Retained earnings
3,914,645
2,928,226
Accumulated other comprehensive loss
(32,864)
(16,659)
Common stock in treasury, at cost; 87,294 shares and 62,957 shares as of December 31, 2018 and December 31, 2017, respectively
(4,512,205)
(3,170,129)
Total stockholders’ equity
3,610,901
3,895,212
Total Liabilities and Stockholders’ Equity
$
4,526,891
$
4,791,012
See accompanying notes to consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
(In Thousands, Except Per Share Amounts)
NET SALES
$
3,807,183
$
3,369,045
$
3,049,393
COST OF SALES
1,511,808
1,231,355
1,107,393
GROSS PROFIT
2,295,375
2,137,690
1,942,000
OPERATING EXPENSES
1,011,756
938,903
856,662
OPERATING INCOME
1,283,619
1,198,787
1,085,338
OTHER INCOME (EXPENSE), NET
9,653
2,836
(5,653)
INCOME BEFORE PROVISION FOR INCOME TAXES
1,293,272
1,201,623
1,079,685
PROVISION FOR INCOME TAXES
300,268
380,945
367,000
NET INCOME
$
993,004
$
820,678
$
712,685
NET INCOME PER COMMON SHARE:
Basic
$
1.78
$
1.45
$
1.21
Diluted
$
1.76
$
1.42
$
1.19
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS:
Basic
557,166
566,782
587,874
Diluted
564,254
577,141
599,819
See accompanying notes to consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 (In Thousands)
Net income, as reported
$
993,004
$
820,678
$
712,685
Other comprehensive (loss) income:
Change in foreign currency translation adjustment, net of tax
(16,957)
7,238
(1,178)
Available-for-sale investments:
Change in net unrealized gains (losses)
(648)
(193)
Reclassification adjustment for net gains included in net income
-
-
-
Net change in available-for-sale investments
(648)
(193)
Other comprehensive (loss) income
(16,205)
6,590
(1,371)
Comprehensive income
$
976,799
$
827,268
$
711,314
See accompanying notes to consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 (In Thousands)
Common stock
Additional
Retained
Accumulated
Other
Comprehensive
Treasury stock
Total
Stockholders’
Shares
Amount
Paid-in Capital
Earnings
Loss
Shares
Amount
Equity
Balance, January 1, 2016
621,057
$
3,105
$
3,989,787
$
1,394,863
$
(21,878)
(12,357)
$
(556,467)
$
4,809,410
Stock-based compensation
-
-
45,848
-
-
-
-
45,848
Exercise of stock options
2,144
16,441
-
-
-
-
16,452
Unrealized loss on available-for- sale securities
-
-
-
-
(193)
-
-
(193)
Excess tax benefits from share based payment arrangements
-
-
(831)
-
-
-
-
(831)
Repurchase of common stock
-
-
-
-
-
(44,278)
(2,252,484)
(2,252,484)
Foreign currency translation
-
-
-
-
(1,178)
-
-
(1,178)
Net income
-
-
-
712,685
-
-
-
712,685
Balance, December 31, 2016
623,201
$
3,116
$
4,051,245
$
2,107,548
$
(23,249)
(56,635)
$
(2,808,951)
$
3,329,709
Stock-based compensation
-
-
52,282
-
-
-
-
52,282
Exercise of stock options
6,054
52,596
-
-
-
-
52,626
Unrealized loss on available-for- sale securities
-
-
-
-
(648)
-
-
(648)
Reversal of excess tax benefits from share based payment arrangements
-
-
(5,495)
-
-
-
-
(5,495)
Repurchase of common stock
-
-
-
-
-
(6,322)
(361,178)
(361,178)
Foreign currency translation
-
-
-
-
7,238
-
-
7,238
Net income
-
-
-
820,678
-
-
-
820,678
Balance, December 31, 2017
629,255
$
3,146
$
4,150,628
$
2,928,226
$
(16,659)
(62,957)
$
(3,170,129)
$
3,895,212
Stock-based compensation
-
-
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
See accompanying notes to consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 (In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$
993,004
$
820,678
$
712,685
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
56,979
48,887
40,845
Gain on disposal of property and equipment
(783)
(1,161)
(204)
Stock-based compensation
57,111
52,282
45,848
Deferred income taxes
(510)
67,935
(19,092)
Effect on cash of changes in operating assets and liabilities, net of acquisitions and divestitures:
Accounts receivable
(48,370)
11,822
(86,382)
TCCC Transaction receivable
-
125,000
-
Distributor receivables
9,958
4,716
(19,981)
Inventories
(26,146)
(88,867)
20,875
Prepaid expenses and other current assets
(6,682)
(2,396)
(6,682)
Prepaid income taxes
98,716
(71,332)
(48,023)
Accounts payable
9,852
29,579
45,340
Accrued liabilities
18,145
(4,499)
(2,852)
Accrued promotional allowances
11,719
21,135
(3,939)
Accrued distributor terminations
(91)
(8,172)
(3,328)
Accrued compensation
5,477
4,491
8,051
Income taxes payable
1,943
(3,590)
4,375
Other liabilities
1,526
1,095
-
Deferred revenue
(19,967)
(19,872)
13,819
Net cash provided by operating activities
1,161,881
987,731
701,355
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of held-to-maturity investments
-
-
868,304
Sales of available-for-sale investments
1,181,484
533,183
120,987
Purchase of AFF assets, net
-
-
(688,485)
Proceeds from sale of property and equipment
4,295
1,416
Purchases of held-to-maturity investments
-
-
(152,050)
Purchases of available-for-sale investments
(826,084)
(971,813)
(300,426)
Purchases of property and equipment
(61,941)
(83,435)
(99,819)
Additions to intangibles
(12,984)
(9,693)
(5,518)
(Increase) decrease in other assets
(11,814)
(1,199)
Net cash provided by (used in) investing activities
272,956
(531,541)
(256,193)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt
(1,886)
(2,583)
(2,359)
Issuance of common stock
27,851
52,626
16,405
Purchases of common stock held in treasury
(1,342,076)
(361,178)
(2,252,437)
Net cash used in financing activities
(1,316,111)
(311,135)
(2,238,391)
Effect of exchange rate changes on cash and cash equivalents
(9,835)
5,985
(4,606)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
108,891
151,040
(1,797,835)
CASH AND CASH EQUIVALENTS, beginning of year
528,622
377,582
2,175,417
CASH AND CASH EQUIVALENTS, end of year
$
637,513
$
528,622
$
377,582
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Interest
$
$
$
Income taxes
$
200,767
$
389,490
$
431,273
See accompanying notes to consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS:
During the years ended December 31, 2018, 2017 and 2016, the Company entered into capital leases of $1.5 million, $2.7 million and $2.6 million, respectively, for the acquisition of promotional vehicles.
Accounts payable included equipment purchases of $0.7 million, $2.3 million and $0.1 million as of December 31, 2018, 2017 and 2016, respectively.
Accrued liabilities included equipment purchases of $0.0 million, $3.8 million and $4.6 million as of December 31, 2018, 2017 and 2016, respectively.
Accrued liabilities included additions to intangibles of $10.8 million, $3.7 million and $3.8 million as of December 31, 2018, 2017 and 2016, respectively.
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®, Punch Monster®, Juice Monster®, Monster Hydro®, Espresso Monster®, Caffé Monster®, Nalu®, NOS®, Full Throttle®, Burn®, Mother®, Ultra Energy®, Play® and Power Play(stylized)®, Relentless®, BPM®, Predator®, Mutant®, BU® 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 loss as a separate component of stockholders’ equity. FASB ASC 820 defines fair value as the price that
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available (See Note 4). Under FASB ASC 320-10-35, a security is considered to be other-than-temporarily impaired if the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference being defined as the “Credit Loss”) or if the fair value of the security is less than the security’s amortized cost basis and the investor intends, or will be required, to sell the security before recovery of the security’s amortized cost basis. If an other-than-temporary impairment exists, the charge to earnings is limited to the amount of Credit Loss if the investor does not intend to sell the security, and will not be required to sell the security, before recovery of the security’s amortized cost basis. Any remaining difference between fair value and amortized cost is recognized in other comprehensive loss, net of applicable taxes. The Company evaluates whether the decline in fair value of its investments is other-than-temporary at each quarter-end. This evaluation consists of a review by management, and includes market pricing information and maturity dates for the securities held, market and economic trends in the industry and information on the issuer’s financial condition and, if applicable, information on the guarantors’ financial condition. Factors considered in determining whether a loss is temporary include the length of time and extent to which the investment’s fair value has been less than its cost basis, the financial condition and near-term prospects of the issuer and guarantors, including any specific events which may influence the operations of the issuer and the Company’s 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 determines that the fair value is less than the carrying value,
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
the Company will use a two-step process to determine the amount of goodwill impairment. The first step requires comparing the fair value of the reporting unit to its net book value, including goodwill. A potential impairment exists if the fair value of the reporting unit is lower than its net book value. The second step of the process, performed only if a potential impairment exists, involves determining the difference between the fair value of the reporting unit’s net assets, other than goodwill, and the fair value of the reporting unit. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. For the years ended December 31, 2018, 2017 and 2016 there were no impairments recorded.
Other Intangibles - Other Intangibles are comprised primarily of trademarks that represent the Company’s exclusive ownership of the Monster Energy®, ®, Monster Energy Ultra®, Unleash the Beast!®, Monster Rehab®, Mutant®, Java Monster®, Monster Hydro®, Monster MAXX®, Muscle Monster®, Punch Monster®, Juice Monster®, Espresso Monster®, Caffé Monster®, M3(stylized)®, BU®, Nalu®, NOS®, Full Throttle®, Burn®, Mother®, Ultra Energy®, Play® and Power Play(stylized)®, Predator®, Gladiator®, Relentless®, Samurai® and BPM® 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 years ended December 31, 2018, 2017 and 2016 there were no impairments recorded.
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, 2018, 2017 and 2016, there were no impairment indicators identified. Long-lived assets held for sale are recorded at the lower of their carrying amount or fair value less cost to sell.
Foreign Currency Translation and Transactions - The accounts of the Company’s foreign subsidiaries are translated in accordance with FASB ASC 830. Foreign currency transaction gains and losses are recognized in other expense, net, at the time they occur. Net foreign currency exchange gains or losses resulting from the translation of assets and liabilities of foreign subsidiaries whose functional currency is not the U.S. dollar are recorded as a part of accumulated other comprehensive loss in stockholders’ equity. Unrealized foreign currency exchange gains and losses on certain intercompany transactions that are of a long-term investment nature (i.e., settlement is not planned or anticipated in the foreseeable future) are also recorded in accumulated other comprehensive loss in stockholders’ equity. During the years ended December 31, 2018, 2017 and 2016, 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-
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
functional currency denominated assets and liabilities. All foreign currency exchange contracts outstanding as of December 31, 2018 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 expense, net, in the consolidated statements of income, and are largely offset by the changes in the fair value of the underlying economically hedged item. For the years ended December 31, 2018, 2017 and 2016, aggregate foreign currency transaction losses, including the gains or losses on forward currency exchange contracts, amounted to $4.0 million, $3.3 million and $9.7 million, respectively, and have been recorded in other income (expense), net, in the accompanying consolidated statements of income.
Revenue Recognition - The Company has three operating and reportable segments, (i) Monster Energy® Drinks segment (“Monster Energy® Drinks”), which is primarily comprised of the Company’s Monster Energy® drinks, (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 Predator® energy drinks, and (iii) Other segment (“Other”), which is comprised of certain products sold by American Fruits & Flavors LLC, a wholly-owned subsidiary of the Company, to independent third-party customers.
The Company’s Monster Energy® Drinks segment generates net operating revenues by selling ready-to-drink packaged energy drinks primarily to bottlers and full service beverage distributors. In some cases, the Company sells directly to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, drug stores, foodservice customers and the military.
The Company’s Strategic Brands segment primarily generates net operating revenues by selling “concentrates” and/or “beverage bases” to authorized bottling and canning operations. Such bottlers generally combine the concentrates and/or beverage bases with sweeteners, water and other ingredients to produce ready-to-drink packaged energy drinks. The ready-to-drink packaged energy drinks are then sold to other bottlers and full service distributors and to retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, foodservice customers, drug stores and the military. To a lesser extent, our Strategic Brands segment generates net operating revenues by selling certain ready-to-drink packaged energy drinks to bottlers and full service beverage distributors.
The majority of the Company’s revenue is recognized when it satisfies a single performance obligation by transferring control of its products to a customer. Control is generally transferred when the Company’s products are either shipped or delivered based on the terms contained within the underlying contracts or agreements. Certain of the Company’s bottlers/distributors may also perform a separate function as a co-packer on the Company’s behalf. In such cases, control of the Company’s products passes to such bottlers/distributors when they notify the Company that they have taken possession or transferred the relevant portion of the Company’s finished goods. The Company’s general payment terms are short-term in duration. The Company does not have significant financing components or payment terms. The Company did not have any material unsatisfied performance obligations as of December 31, 2018 or December 31, 2017.
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.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Distribution expenses to transport the Company’s products, where applicable, and warehousing expense after manufacture are accounted for within operating expenses.
Promotional and other allowances (variable consideration) recorded as a reduction to net sales, primarily include consideration given to the Company’s bottlers/distributors or retail customers including, but not limited to the following:
· discounts granted off list prices to support price promotions to end-consumers by retailers;
· reimbursements given to the Company’s bottlers/distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products;
· the Company’s agreed share of fees given to bottlers/distributors and/or directly to retailers for advertising, in-store marketing and promotional activities;
· the Company’s agreed share of slotting, shelf space allowances and other fees given directly to retailers;
· incentives given to the Company’s bottlers/distributors and/or retailers for achieving or exceeding certain predetermined sales goals;
· discounted or free products;
· contractual fees given to the Company’s bottlers/distributors related to sales made directly by the Company to certain customers that fall within the bottlers’/distributors’ sales territories; and
· commissions paid to TCCC based on the Company’s sales to the TCCC Subsidiaries and/or 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, 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 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. Differences between such estimated expenses and actual expenses for promotional and other allowance costs have historically been insignificant and are recognized in earnings in the period such differences are determined.
Amounts received pursuant to new and/or amended distribution agreements entered into with certain distributors, relating to the costs associated with terminating the Company’s prior distributors, are accounted for as revenue ratably over the anticipated life of the respective distribution agreements, generally 20 years.
The Company also enters into license agreements that generate revenues associated with third-party sales of non-beverage products bearing our 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)
Cost of Sales - Cost of sales consists of the costs of flavors, concentrates 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, 2018, 2017 and 2016, freight-out costs amounted to $128.5 million, $91.9 million and $83.6 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 $353.9 million, $324.0 million and $270.6 million for the years ended December 31, 2018, 2017 and 2016, 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 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.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Stock-Based Compensation - The Company accounts for stock-based compensation under the provisions of FASB ASC 718. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes-Merton option pricing formula. The Company records compensation expense for non-employee stock options based on the estimated fair value of the options as of the earlier of (1) the date at which a commitment for performance by the non-employee to earn the stock option is reached or (2) the date at which the non-employee’s performance is complete, using the Black-Scholes-Merton option pricing formula. Stock-based compensation cost for restricted stock awards and restricted stock units is measured based on the closing fair market value of the Company’s common stock at the date of grant. In the event that the Company has the option and intent to settle a restricted stock unit in cash, the award is classified as a liability and revalued at each balance sheet date. (See Note 14).
Net Income Per Common Share - In accordance with FASB ASC 260, net income per common share, on a basic and diluted basis, is presented for all periods. Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during each period. Diluted net income per share is computed by dividing net income by the weighted average number of common and dilutive common equivalent shares outstanding. The calculation of common equivalent shares assumes the exercise of dilutive stock options, net of assumed treasury share repurchases at average market prices, as applicable.
Concentration of Risk - Certain of the Company’s products utilize components (raw materials and/or co-packing services) from a limited number of sources. A disruption in the supply of such components could significantly affect the Company’s revenues from those products, as alternative sources of such components may not be available at commercially reasonable rates or within a reasonably short time period. The Company continues to endeavor to secure the availability of alternative sources for such components and minimize the risk of any disruption in production.
The Coca-Cola Company (“TCCC”), through certain wholly-owned subsidiaries (the “TCCC Subsidiaries”), accounted for approximately 3%, 18% and 41% of the Company’s net sales for the years ended December 31, 2018, 2017 and 2016, respectively. As part of TCCC’s North America Refranchising initiative (the “North America Refranchising”), the territories of certain TCCC Subsidiaries have been transitioned to certain independent/non wholly-owned TCCC bottlers/distributors. Accordingly, the Company’s percentage of net sales classified as sales to the TCCC Subsidiaries decreased for the years ended December 31, 2018 and 2017.
CCBCC Operations, LLC accounted for approximately 13%, 13% and 9% of the Company’s net sales for the years ended December 31, 2018, 2017 and 2016, respectively.
Reyes Coca-Cola Bottling accounted for approximately 12%, 6% and 2% of the Company’s net sales for the years ended December 31, 2018, 2017 and 2016, respectively.
Coca-Cola European Partners accounted for approximately 10%, 9% and 9% of the Company’s net sales for the years ended December 31, 2018, 2017 and 2016, respectively.
Credit Risk - The Company sells its products nationally and internationally, primarily to full service beverage distributors, retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains and foodservice customers. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for estimated credit losses, and historically, such losses have been within management’s expectations.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Fair Value of Financial Instruments - The carrying value of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to the relatively short maturity of the respective instruments.
Use of Estimates - The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
Recently issued accounting pronouncements not yet adopted
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 is effective for the Company on a prospective or retrospective basis beginning on January 1, 2020, with early adoption permitted. The Company is currently evaluating the impact of ASU No. 2018-15 on its financial position, results of operations and liquidity.
In August 2018, the FASB issued ASU No. 2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General (Topic 715): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans.” ASU No. 2018-14 removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and requires certain additional disclosures. ASU No. 2018-14 is effective for the Company on a retrospective basis beginning in the year ending December 31, 2020, with early adoption permitted. The Company is currently evaluating the impact of ASU No. 2018-14 on its financial position, results of operations and liquidity.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” ASU No. 2018-13 removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. ASU No. 2018-13 disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU No. 2018-13 is effective for the Company beginning on January 1, 2020, with early adoption permitted. Certain disclosures in the new guidance will need to be applied on a retrospective basis and others on a prospective basis. The Company is currently evaluating the impact of ASU No. 2018-13 on its financial position, results of operations and liquidity.
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220)”, which amends the previous guidance to allow for certain tax effects “stranded” in accumulated other comprehensive income, which are impacted by the Tax Cuts and Jobs Act (the “Tax Reform Act”), to be reclassified from accumulated other comprehensive income into retained earnings. This amendment pertains only to those items impacted by the new tax law and will not apply to any future tax effects stranded in accumulated other comprehensive income. This standard is
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
effective for fiscal years beginning after December 15, 2018, and allows for early adoption. The Company has completed its evaluation of the impact of ASU No. 2018-02 and determined that there are no “stranded” tax effects in accumulated other comprehensive income to be reclassified.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which eliminates the requirement to calculate the implied fair value of goodwill, but rather requires an entity to record an impairment charge based on the excess of a reporting unit’s carrying value over its fair value. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of ASU No. 2017-04 on its financial position, results of operations and liquidity.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The accounting standard changes the methodology for measuring credit losses on financial instruments and the timing when such losses are recorded. ASU No. 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently evaluating the impact of ASU No. 2016-13 on its financial position, results of operations and liquidity.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. This update is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This update is effective for annual and interim reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company will adopt ASU No. 2016-02 in the first quarter of 2019 utilizing the modified retrospective transition method. In July 2018, the FASB further amended ASU No. 2016-02 and the Company will elect the transition provision permitting it to record existing operating leases on the Consolidated Balance Sheet without adjusting comparative periods. Further, the Company intends to elect the package of practical expedients allowing it to not reassess prior conclusions related to expired or existing contracts that are or that contain leases, lease classification and the accounting for initial direct costs. These practical expedients must be elected as a package and applied consistently. Operating leases with a term of 12 months or less will not be recorded on the Consolidated Balance Sheet. The Company does not expect that the adoption of ASU No. 2016-02 will have a material impact on its financial position, results of operations and liquidity. In conjunction with the adoption of ASU No. 2016-02, the Company is implementing a software solution to manage and account for leases as well as updating business processes and internal controls.
Recently adopted accounting pronouncements
In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory”, in an effort to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Previous GAAP prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset had been sold to an outside party. FASB ASU No. 2016-16 established the requirement that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU No. 2016-16 was effective for financial statements issued for annual periods beginning after December 15, 2017 and interim periods within those annual periods. The Company adopted ASU No. 2016-16 effective January 1, 2018 on a modified retrospective basis, resulting in a $6.6 million reclassification of the unrecognized income tax effects related to assets transfers that occurred prior to the adoption from deferred income taxes to opening retained earnings.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which superseded previous revenue recognition guidance. ASU No. 2014-09 and its amendments were included in Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”. ASC 606 requires that a company recognizes revenue at an amount that reflects the consideration to which the company expects to be entitled in exchange for transferring goods or services to a customer. The Company adopted ASC 606 effective January 1, 2018, using the modified retrospective approach, with no impact to the opening retained earnings. Results for periods beginning on or after January 1, 2018 are presented under ASC 606, while prior periods are not adjusted and continue to be reported in accordance with the prior accounting guidance under ASC 605, “Revenue Recognition”. See Note 2.
2. REVENUE RECOGNITION
Upon adoption of ASC 606, commissions paid to TCCC based on sales to certain of the Company’s bottlers/distributors who are (i) consolidated subsidiaries of TCCC (the “TCCC Subsidiaries”), (ii) accounted for under the equity method by TCCC (the “TCCC Related Parties”) and (iii) those not included in (i) or (ii) (the “TCCC Independent Bottlers”) are accounted for as follows:
Year Ended December 31, 2018
Commissions Related To:
As Reported
Without Adoption of
ASC 606
TCCC Subsidiaries
Reduction to net sales
Reduction to net sales
TCCC Related Parties
Reduction to net sales
Operating expenses
TCCC Independent Bottlers
Operating expenses
Operating expenses
The impact of the adoption of ASC 606 on the Company’s consolidated statement of income for the year ended December 31, 2018 was as follows:
Year Ended December 31, 2018
As Reported
Without Adoption
of ASC 606
Decrease due to
Adoption of ASC
Net Sales
$
3,807,183
$
3,849,424
$
(42,241)
Operating Expenses
$
1,011,756
$
1,053,997
$
(42,241)
1 TCCC commissions based on sales to the TCCC Related Parties. There were no other identified changes to our revenue recognition policies as a result of the adoption of ASC 606.
Disaggregation of Revenue
The following table disaggregates the Company’s revenue by geographical markets and reportable segments:
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Year Ended December 31, 2018
Net Sales
U.S. and
Canada
EMEA2
Asia Pacific
Latin
America
and
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, 2018, the Company had $356.3 million of deferred revenue, which is included in current and long-term deferred revenue in the Company’s consolidated balance sheet. As of December 31, 2017, the Company had $377.6 million of deferred revenue, which is included in current and long-term deferred revenue in the Company’s consolidated balance sheet. During the years ended December 31, 2018 and 2017, $44.3 million and $43.4 million, respectively, of deferred revenue, was recognized in net sales. See Note 18.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
3. INVESTMENTS
The following table summarizes the Company’s investments at:
December 31, 2018
Amortized
Cost
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
Fair
Value
Continuous
Unrealized
Loss Position
less than 12
Months
Continuous
Unrealized
Loss Position
greater than 12
Months
Available-for-sale
Short-term:
Commercial paper
$
52,838
$
-
$
-
$
52,838
$
-
$
-
Certificates of deposit
14,075
-
-
14,075
-
-
Municipal securities
151,690
151,644
-
U.S. government agency securities
19,943
-
19,931
-
U.S. treasuries
78,189
-
78,157
-
Variable rate demand notes
4,005
-
-
4,005
-
-
Total
$
320,740
$
$
$
320,650
$
$
-
December 31, 2017
Amortized
Cost
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
Fair
Value
Continuous
Unrealized
Loss Position
less than 12
Months
Continuous
Unrealized
Loss Position
greater than 12
Months
Available-for-sale
Short-term:
Commercial paper
$
81,026
$
-
$
-
$
81,026
$
-
$
-
Certificates of deposit
11,869
-
-
11,869
-
-
Municipal securities
469,604
468,865
-
U.S. government agency securities
61,307
-
61,219
-
Variable rate demand notes
49,954
-
-
49,954
-
-
Long-term:
U.S. government agency securities
2,369
-
2,366
-
Total
$
676,129
$
$
$
675,299
$
$
-
During the years ended December 31, 2018 and 2017, realized gains or losses recognized on the sale of investments were not significant.
The Company’s investments at December 31, 2018 and 2017 in commercial paper, certificates of deposit, municipal securities, U.S. government agency securities, U.S. treasuries and/or variable rate demand notes (“VRDNs”) carried investment grade credit ratings. VRDNs are floating rate municipal bonds with embedded put options that allow the bondholder to sell the security at par plus accrued interest. All of the put options are secured by a pledged liquidity source. While they are classified as marketable investment securities, the put option allows the VRDNs to be liquidated at par on a same day, or more generally, on a seven-day settlement basis.
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, 2018
December 31, 2017
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Less than 1 year:
Commercial paper
$
52,838
$
52,838
$
81,026
$
81,026
Municipal securities
151,690
151,644
469,604
468,865
U.S. government agency securities
19,943
19,931
61,307
61,219
Certificates of deposit
14,075
14,075
11,869
11,869
U.S. treasuries
78,189
78,157
-
-
Due 1 -10 years:
U.S. government agency securities
-
-
2,369
2,366
Variable rate demand notes
-
-
6,366
6,366
Due 11 - 20 years:
Variable rate demand notes
-
-
28,377
28,377
Due 21 - 30 years:
Variable rate demand notes
4,005
4,005
15,211
15,211
Total
$
320,740
$
320,650
$
676,129
$
675,299
4. FAIR VALUE OF CERTAIN FINANCIAL ASSETS AND LIABILITIES
FASB ASC 820 provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The three levels of inputs required by the standard that the Company uses to measure fair value are summarized below.
· Level 1: Quoted prices in active markets for identical assets or liabilities.
· Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.
· Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
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 Company’s financial assets that are recorded at fair value on a recurring basis, segregated among the appropriate levels within the fair value hierarchy at:
December 31, 2018
Level 1
Level 2
Level 3
Total
Cash
$
393,936
$
-
$
-
$
393,936
Money market funds
191,358
-
-
191,358
Certificates of deposit
-
14,075
-
14,075
Commercial paper
-
60,422
-
60,422
Variable rate demand notes
-
4,005
-
4,005
Municipal securities
-
177,118
-
177,118
U.S. government agency securities
-
39,092
-
39,092
U.S. treasuries
-
78,157
-
78,157
Foreign currency derivatives
-
(492)
-
(492)
Total
$
585,294
$
372,377
$
-
$
957,671
Amounts included in:
Cash and cash equivalents
$
585,294
$
52,219
$
-
$
637,513
Short-term investments
-
320,650
-
320,650
Accounts receivable, net
-
-
Investments
-
-
-
-
Accrued liabilities
-
(535)
-
(535)
Total
$
585,294
$
372,377
$
-
$
957,671
December 31, 2017
Level 1
Level 2
Level 3
Total
Cash
$
310,885
$
-
$
-
$
310,885
Money market funds
112,848
-
-
112,848
Certificates of deposit
-
15,720
-
15,720
Commercial paper
-
99,903
-
99,903
Variable rate demand notes
-
49,954
-
49,954
Municipal securities
-
529,984
-
529,984
U.S. government agency securities
-
81,230
-
81,230
U.S. treasuries
-
3,397
-
3,397
Foreign currency derivatives
-
(1,484)
-
(1,484)
Total
$
423,733
$
778,704
$
-
$
1,202,437
Amounts included in:
Cash and cash equivalents
$
423,733
$
104,889
$
-
$
528,622
Short-term investments
-
672,933
-
672,933
Accounts receivable, net
-
-
Investments
-
2,366
-
2,366
Accrued liabilities
-
(1,579)
-
(1,579)
Total
$
423,733
$
778,704
$
-
$
1,202,437
All of the Company’s short-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, 2018 and 2017, and there were no changes in the Company’s valuation techniques.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to foreign currency exchange rate risks related primarily to its foreign business operations. During the years ended December 31, 2018, 2017 and 2016, respectively, the Company entered into forward currency exchange contracts with financial institutions to create an economic hedge to specifically manage a portion of the foreign exchange risk exposure associated with certain consolidated subsidiaries’ non-functional currency denominated assets and liabilities. All foreign currency exchange contracts entered into by the Company that were outstanding as of December 31, 2018 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 (expense), net, in the consolidated statements of income, and are largely offset by the changes in the fair value of the underlying economically hedged item.
The notional amount and fair value of all outstanding foreign currency derivative instruments in the consolidated balance sheets consist of the following at:
December 31, 2018
Derivatives not designated as
hedging instruments under
FASB ASC 815-20
Notional
Amount
Fair
Value
Balance Sheet Location
Assets:
Foreign currency exchange contracts:
Receive SGD/pay USD
$
8,341
$
Accounts receivable, net
Receive NOK/pay USD
Accounts receivable, net
Liabilities:
Foreign currency exchange contracts:
Receive USD/pay GBP
$
40,648
$
(323)
Accrued liabilities
Receive USD/pay AUD
15,124
(105)
Accrued liabilities
Receive USD/pay ZAR
8,618
(68)
Accrued liabilities
Receive USD/pay COP
2,931
(33)
Accrued liabilities
Receive USD/pay NZD
2,952
(4)
Accrued liabilities
Receive USD/pay EUR
6,894
(2)
Accrued liabilities
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
December 31, 2017
Derivatives not designated as
hedging instruments under
FASB ASC 815-20
Notional Amount
Fair
Value
Balance Sheet Location
Assets:
Foreign currency exchange contracts:
Receive CAD/pay USD
$
4,892
$
Accounts receivable, net
Receive SGD/pay USD
Accounts receivable, net
Receive NOK/pay USD
1,534
Accounts receivable, net
Receive USD/pay BRL
1,806
Accounts receivable, net
Receive USD/pay COP
2,803
Accounts receivable, net
Liabilities:
Foreign currency exchange contracts:
Receive USD/pay GBP
$
31,342
$
(334)
Accrued liabilities
Receive USD/pay EUR
65,131
(642)
Accrued liabilities
Receive USD/pay AUD
17,238
(177)
Accrued liabilities
Receive USD/pay ZAR
21,311
(222)
Accrued liabilities
Receive USD/pay MXN
7,720
(126)
Accrued liabilities
Receive USD/pay NZD
1,826
(18)
Accrued liabilities
Receive USD/pay TRY
5,483
(52)
Accrued liabilities
Receive USD/pay CLP
1,112
(8)
Accrued liabilities
The net gain (loss) on derivative instruments in the consolidated statements of income were as follows:
Amount of gain (loss)
recognized in income on
derivatives
Year ended
Derivatives not designated as
hedging instruments under
FASB ASC 815-20
Location of gain (loss)
recognized in income on
derivatives
December 31,
December 31,
December 31,
Foreign currency exchange contracts
Other income (expense), net
$
9,737
$
(13,733)
$
1,819
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
6. INVENTORIES
Inventories consist of the following at December 31:
Raw materials
$
94,421
$
78,834
Finished goods
183,284
176,911
$
277,705
$
255,745
7. PROPERTY AND EQUIPMENT, Net
Property and equipment consist of the following at December 31:
Land
$
44,261
$
47,373
Leasehold improvements
5,909
3,109
Furniture and fixtures
6,932
6,461
Office and computer equipment
18,717
14,506
Computer software
3,278
3,650
Equipment
183,727
148,434
Building
115,242
107,374
Vehicles
39,026
38,179
417,092
369,086
Less: accumulated depreciation and amortization
(174,041)
(138,810)
$
243,051
$
230,276
Total depreciation and amortization expense recorded was $45.0 million, $37.0 million and $30.2 million for the years ended December 31, 2018, 2017 and 2016, respectively.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
The following is a roll-forward of goodwill for the years ended December 31, 2018 and 2017 by reportable segment:
Monster
Energy®
Drinks
Strategic
Brands
Other
Total
Balance at December 31, 2017
$
693,644
$
637,999
$
-
$
1,331,643
Acquisitions
-
-
-
-
Balance at December 31, 2018
$
693,644
$
637,999
$
-
$
1,331,643
Monster
Energy®
Drinks
Strategic
Brands
Other
Total
Balance at December 31, 2016
$
693,644
$
637,999
$
-
$
1,331,643
Acquisitions
-
-
-
-
Balance at December 31, 2017
$
693,644
$
637,999
$
-
$
1,331,643
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Intangible assets consist of the following at:
December 31,
December 31,
Amortizing intangibles
$
71,350
$
71,400
Accumulated amortization
(38,311)
(26,383)
33,039
45,017
Non-amortizing intangibles
1,012,839
989,068
$
1,045,878
$
1,034,085
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 $11.9 million, $11.9 million and $10.6 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The following is the future estimated amortization expense related to amortizing intangibles as of December 31, 2018:
Year Ending December 31:
$
11,847
7,965
4,722
4,697
1,404
2024 and thereafter
2,404
$
33,039
At December 31, 2018, non-amortizing intangibles primarily consist of indefinite-lived tradenames, flavors and formulas.
9. DISTRIBUTION AGREEMENTS
In accordance with FASB ASC No. 420 “Exit or Disposal Cost Obligations”, the Company expenses distributor termination costs in the period in which the written notification of termination occurs. As a result, the Company incurred termination costs of $26.6 million, $35.4 million and $79.8 million for the years ended December 31, 2018, 2017 and 2016, respectively. Such termination costs have been expensed in full and are included in operating expenses for the years ended December 31, 2018, 2017 and 2016, respectively.
In the normal course of business, amounts received pursuant to new and/or amended distribution agreements entered into with certain distributors, relating to the costs associated with terminating agreements with the Company’s prior distributors, are accounted for as deferred revenue and are recognized as revenue ratably over the anticipated life of the respective distribution agreement, generally 20 years. Revenue recognized was $21.9 million, $22.3 million and $26.1 million for the years ended December 31, 2018, 2017 and 2016, respectively.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
10. DEBT
The Company entered into a credit facility with Comerica Bank (“Comerica”) consisting of a revolving line of credit, which was amended in June 2017, 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, 2020. Interest on borrowings under the line of credit is based on Comerica’s base (prime) rate minus 1% to 1.5%, or London Interbank Offered Rates plus an additional percentage of 1.25% to 1.75%, depending upon certain financial ratios maintained by the Company. The Company had no outstanding borrowings on this line of credit at December 31, 2018. 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, 2018.
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, 2018, the interest rate on borrowings under the line of credit was 5.5%. As of December 31, 2018, the Company had $11.7 million outstanding on this line of credit, including interest, which is included in accounts payable in the consolidated balance sheet.
The Company’s debt of $0.8 million and $1.3 million at December 31, 2018 and 2017, respectively, consisted of capital leases, collateralized by vehicles, payable over 12 months in monthly installments at various effective interest rates, with final payments ending on or before December 31, 2018.
At December 31, 2018 and 2017, the assets acquired under capital leases had a net book value of $4.9 million and $5.3 million, net of accumulated depreciation of $4.6 million and $4.2 million, respectively.
Interest expense for capital lease obligations amounted to $0.06 million, $0.08 million and $0.07 million for the years ended December 31, 2018, 2017 and 2016, respectively.
11. COMMITMENTS AND CONTINGENCIES
The Company is obligated under various non-cancellable lease agreements providing for office space, warehouse space, and automobiles that expire at various dates through the year 2033.
Rent expense under operating leases was $6.1 million, $10.7 million and $9.9 million for the years ended December 31, 2018, 2017 and 2016, respectively.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Future minimum rental payments at December 31, 2018 under the operating leases referred to above are as follows:
Year Ending December 31:
$
3,954
2,949
2,410
2,114
1,681
2024 and thereafter
14,860
$
27,968
Contractual obligations - The Company has the following contractual obligations related primarily to sponsorships and other commitments as of December 31, 2018:
Year Ending December 31:
$
99,004
51,572
23,577
12,628
3,405
2024 and thereafter
-
$
190,186
Purchase Commitments - The Company has purchase commitments aggregating approximately $49.8 million at December 31, 2018, which represent commitments made by the Company and its subsidiaries to various suppliers of raw materials for the production of its products. These obligations vary in terms, but are generally satisfied within one year.
The Company purchases various raw material items, including, but not limited to, flavors, ingredients, dietary ingredients, containers, milk, glucose, sucralose, cream and protein, from a limited number of 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, 2018, 2017 and 2016 was $289.6 million, $273.6 million and $205.9 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.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Litigation - The Company, TCCC and certain affiliates are parties to various agreements setting forth, among other things, provisions relating to TCCC’s equity holding in the Company and the terms on which the Company’s energy products are distributed globally by members of TCCC’s distribution network. Among other provisions, the agreements restrict TCCC from competing in the energy drink category in certain territories prior to the termination of the applicable distribution coordination agreement with TCCC, with certain exceptions.
TCCC has developed three energy products that it believes it may market under the exception relating to the Coca-Cola brand. The Company believes that the exception does not apply to this situation. By mutual agreement to obtain clarification, the issue was submitted to the American Arbitration Association on October 31, 2018. We expect a decision will be reached during the second quarter of 2019. TCCC has indicated that it has suspended the proposed launch of such products until April 2019. As the relief sought is limited, no reasonable possible range of losses, if any, can be estimated.
The Company is currently a defendant in a number of personal injury lawsuits, claiming that the death or other serious injury of the plaintiffs was caused by consumption of Monster Energy® brand energy drinks. The plaintiffs in these lawsuits allege strict product liability, negligence, fraudulent concealment, breach of implied warranties and wrongful death. The Company believes that each complaint is without merit and plans a vigorous defense. The Company also believes that any damages, if awarded, would not have a material adverse effect on the Company’s financial position or results of operations.
Furthermore, from time to time in the normal course of business, the Company is named in other litigation, including consumer class actions, intellectual property litigation and claims from prior distributors. Although it is not possible to predict the ultimate outcome of such litigation, based on the facts known to the Company, management believes that such litigation in the aggregate will likely not have a material adverse effect on the Company’s financial position or results of operations.
The Company evaluates, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of the liability that is accrued, if any, or in the amount of any related insurance reimbursements recorded. As of December 31, 2018, the Company’s consolidated balance sheet includes accrued loss contingencies of approximately $0.06 million.
12. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss are as follows at December 31:
Accumulated net unrealized loss on available-for-sale securities
$
$
Foreign currency translation adjustments, net of tax
32,775
15,818
Total accumulated other comprehensive loss
$
32,864
$
16,659
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
13. TREASURY STOCK PURCHASE
On February 28, 2017, 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 2017 Repurchase Plan”). During the year ended December 31, 2018, the Company purchased 4.3 million shares of common stock at an average purchase price of $57.74 per share, for a total amount of $249.9 million (excluding broker commissions), under the February 2017 Repurchase Plan, which exhausted the availability under the February 2017 Repurchase Plan. Such shares are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2018.
On February 27, 2018, the Company’s Board of Directors authorized a share repurchase program for the purchase of up to $250.0 million of the Company’s outstanding common stock (the “February 2018 Repurchase Program”). During the year ended December 31, 2018, the Company purchased 5.0 million shares of common stock at an average purchase price of $49.81 per share, for a total amount of $249.9 million (excluding broker commissions), which exhausted the availability under the February 2018 Repurchase Program. Such shares are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2018.
On May 29, 2018, the Company’s Board of Directors authorized a share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock (the “May 2018 Repurchase Plan”). During the year ended December 31, 2018, the Company purchased 9.0 million shares of common stock at an average purchase price of $55.55 per share, for a total amount of $499.9 million (excluding broker commissions), under the May 2018 Repurchase Plan, which exhausted the availability under the May 2018 Repurchase Plan. Such shares are included in the common stock in treasury in the accompanying consolidated balance sheet at December 31, 2018.
On August 7, 2018, the Company’s Board of Directors authorized a share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock (the “August 2018 Repurchase Plan”). During the year ended December 31, 2018, the Company purchased 6.0 million shares of common stock at an average purchase price of $57.11 per share, for a total amount of $340.3 million (excluding broker commissions), under the August 2018 Repurchase Plan. Such shares are included in the common stock in treasury in the accompanying consolidated balance sheet at December 31, 2018. As of February 26, 2019, $20.6 million remained available for repurchase under the August 2018 Repurchase Plan.
During the year ended December 31, 2018, 34,976 shares of common stock were purchased from employees in lieu of cash payments for options exercised or withholding taxes due for a total amount of $2.1 million. While such purchases are considered common stock repurchases, they are not counted as purchases against our authorized share repurchase programs. Such shares are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2018.
14. STOCK-BASED COMPENSATION
The Company has two stock-based compensation plans under which shares were available for grant at December 31, 2018: the Monster Beverage Corporation 2011 Omnibus Incentive Plan (the “2011 Omnibus Incentive Plan”), including the Monster Beverage Deferred Compensation Plan (the “Deferred Compensation Plan”) as a sub plan thereunder, and the Monster Beverage Corporation 2017 Compensation Plan for Non-Employee Directors (the “2017 Directors Plan”), including the Monster Beverage Deferred Compensation Plan for Non-Employee Directors as a sub plan thereunder.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
The 2011 Omnibus Incentive Plan permits the granting of options, stock appreciation rights, restricted stock, restricted stock units, performance awards and other stock-based awards up to an aggregate of 43,500,000 shares of the common stock of the Company to employees or consultants of the Company and its subsidiaries. Shares authorized under the 2011 Omnibus Incentive Plan are reduced by 2.16 shares for each share granted or issued with respect to a Full Value Award. A Full Value Award is an award other than an incentive stock option, a non-qualified stock option, or a stock appreciation right, which is settled by the issuance of shares. Options granted under the 2011 Omnibus Incentive Plan may be incentive stock options under Section 422 of the Internal Revenue Code, as amended, or non-qualified stock options. The Compensation Committee of the Board of Directors (the “Compensation Committee”) has sole and exclusive authority to grant stock awards to all employees who are not new hires and to all new hires who are subject to Section 16 of the Exchange Act. The Compensation Committee and the Executive Committee of the Board of Directors (the “Executive Committee”) each independently has the authority to grant stock awards to new hires who are not Section 16 employees. Awards granted by the Executive Committee are not subject to approval or ratification by the Board of Directors or the Compensation Committee. Options granted under the 2011 Omnibus Incentive Plan generally vest over a five-year period from the grant date and are generally exercisable up to 10 years after the grant date. As of December 31, 2018, 22,740,597 shares of the Company’s common stock have been granted, net of cancellations, and 16,611,623 shares (as adjusted for Full Value Awards) of the Company’s common stock remain available for grant under the 2011 Omnibus Incentive Plan.
In 2016, the Company adopted the Deferred Compensation Plan (as a sub plan to the 2011 Omnibus Incentive Plan), pursuant to which eligible employees may elect to defer cash and/or equity based compensation and to receive the deferred amounts, together with an investment return (positive or negative), either at a pre-determined time in the future or upon termination of their employment with the Company or its subsidiaries or affiliates that are participating employers under the Deferred Compensation Plan, as provided under the Deferred Compensation Plan and in relevant deferral elections. Deferrals under the Deferred Compensation Plan are unfunded and unsecured. As of December 31, 2018, deferrals under the Deferred Compensation Plan are solely comprised of cash compensation and equity compensation. Future amounts due 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, 2018, 47,880 shares of the Company’s common stock had been granted under the 2017 Directors Plan, and 1,202,120 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 Code Section 409A, 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, 2018, deferrals under the Deferred Compensation Plan for Non-Employee Directors are solely comprised of cash compensation and equity compensation. Future amounts due 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 (3rd) 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 $57.1 million, $52.3 million and $45.8 million of compensation expense relating to stock options, restricted stock awards and restricted stock units during the years ended December 31, 2018, 2017 and 2016, respectively.
The excess tax benefit realized for tax deductions from non-qualified stock option exercises, disqualifying dispositions of incentive stock options and vesting of restricted stock units for the years ended December 31, 2018, 2017 and 2016 was $8.5 million, $96.7 million and $20.8 million, respectively.
Stock Options
Under the Company’s stock-based compensation plans, all stock options granted through December 31, 2018 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
34.7 %
36.5 %
36.2 %
Risk-free interest rate
2.81 %
2.11 %
1.57 %
Expected term
6.0 Years
6.1 Years
6.3 Years
Expected Volatility: The Company uses historical volatility as it provides a reasonable estimate of the expected volatility. Historical volatility is based on the most recent volatility of the stock price over a period of time equivalent to the expected term of the option.
Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. treasury zero coupon yield curve in effect at the time of grant for the expected term of the option.
Expected Term: The Company’s expected term represents the weighted-average period that the Company’s stock options are expected to be outstanding. The expected term is based on expected time to post-vesting exercise of options by employees. The Company uses historical exercise patterns of previously granted options to derive employee behavioral patterns used to forecast expected exercise patterns.
The following table summarizes the Company’s activities with respect to its stock option plans as follows:
Options
Number of
Shares (In
thousands)
Weighted-
Average
Exercise
Price Per
Share
Weighted-
Average
Remaining
Contractual
Term (In
years)
Aggregate
Intrinsic Value
Outstanding at January 1, 2018
17,819
$
29.62
6.1
$
600,032
Granted 01/01/18 - 03/31/18
2,615
$
58.76
Granted 04/01/18 - 06/30/18
$
51.72
Granted 07/01/18 - 09/30/18
$
58.77
Granted 10/01/18 - 12/31/18
$
55.91
Exercised
(1,450)
$
19.20
Cancelled or forfeited
(659)
$
45.22
Outstanding at December 31, 2018
18,890
$
34.61
5.8
$
303,627
Vested and expected to vest in the future at December 31, 2018
18,052
$
33.83
5.7
$
301,723
Exercisable at December 31, 2018
10,432
$
23.10
4.1
$
272,636
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, 2018:
Options Outstanding
Options Exercisable
Range of Exercise
Prices ($)
Number
Outstanding (In
Thousands)
Weighted
Average
Remaining
Contractual
Term (Years)
Weighted
Average
Exercise
Price ($)
Number
Exercisable
(In
Thousands)
Weighted
Average
Exercise
Price ($)
$5.94
-
$5.94
3,086
0.9
$
5.94
3,086
$
5.94
$6.02
-
$17.99
2,109
4.0
$
16.13
2,109
$
16.13
$18.64
-
$23.68
2,227
5.0
$
22.77
1,970
$
22.71
$36.05
-
$43.64
1,932
7.2
$
41.59
$
40.41
$43.99
-
$43.99
2,325
7.2
$
43.99
$
43.99
$44.73
-
$45.01
7.1
$
44.94
$
44.94
$45.16
-
$45.16
1,998
6.1
$
45.16
1,183
$
45.16
$45.55
-
$55.20
1,899
8.4
$
48.24
$
46.81
$56.08
-
$57.36
9.6
$
57.16
$
56.08
$58.73
-
$67.93
2,610
9.1
$
58.89
$
62.92
18,890
5.8
$
34.61
10,432
$
23.10
The weighted-average grant-date fair value of options granted during the years ended December 31, 2018, 2017 and 2016 was $22.37 per share, $18.29 per share and $16.90 per share, respectively. The total intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 was $56.8 million, $285.8 million and $70.6 million, respectively.
Cash received from option exercises under all plans for the years ended December 31, 2018, 2017 and 2016 was $25.9 million, $52.6 million and $16.4 million, respectively.
At December 31, 2018, there was $98.7 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 2.6 years.
Restricted Stock Units
Stock-based compensation cost for restricted stock units is measured based on the closing fair market value of the Company’s common stock at the date of grant. In the event that the Company has the option and intent to settle a restricted stock unit in cash, the award is classified as a liability and revalued at each balance sheet date.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
The following table summarizes the Company’s activities with respect to non-vested restricted stock units as follows:
Number of
Shares (in
thousands)
Weighted
Average
Grant-Date
Fair Value
Non-vested at January 1, 2018
$
45.09
Granted 01/01/18- 03/31/18
$
58.75
Granted 04/01/18- 06/30/18
$
52.31
Granted 07/01/18- 09/30/18
$
58.72
Granted 10/01/18- 12/31/18
$
56.19
Vested
(265)
$
45.26
Forfeited/cancelled
(7)
$
33.60
Non-vested at December 31, 2018
$
51.55
The weighted-average grant-date fair value of restricted stock units granted during the years ended December 31, 2018, 2017 and 2016 was $57.59, $46.74 and $44.71 per share, respectively. As of December 31, 2018, 0.5 million of restricted stock units are expected to vest.
At December 31, 2018, total unrecognized compensation expense relating to non-vested restricted stock units was $15.7 million, which is expected to be recognized over a weighted-average period of 1.6 years.
Employee and Non-Employee Share-Based Compensation Expense
The table below shows the amounts recognized in the consolidated financial statements for the years ended December 31, 2018, 2017 and 2016 for share-based compensation related to employees and non-employees. 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. Employee and non-employee share-based compensation expense of $52.3 million for the year ended December 31, 2017 is comprised of $8.7 million relating to incentive stock options and $43.6 million relating to non-qualified stock options and restricted units. Employee and non-employee share-based compensation expense of $45.8 million for the year ended December 31, 2016 is comprised of $8.0 million relating to incentive stock options and $37.8 million relating to non-qualified stock options and restricted units.
Operating expenses
$
57,111
$
52,282
$
45,848
Total employee and non-employee share-based
compensation expense included in income, before
income tax
57,111
52,282
45,848
Less: Amount of income tax benefit recognized in
earnings
(14,892)
(100,635)
(34,909)
Amount charged against net income
$
42,219
$
(48,353)
$
10,939
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
15. INCOME TAXES
On December 22, 2017, the President of the United States signed into law the Tax Reform Act. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The SEC staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. A company may select between one of three scenarios to determine a reasonable estimate for certain income tax effects arising from the Tax Reform Act. Those scenarios are (i) a final estimate which effectively closes the measurement window; (ii) a reasonable estimate leaving the measurement window open for future revisions; and (iii) no estimate as the law is still being analyzed. The Company was able to provide a reasonable estimate for the revaluation of deferred taxes and the effects of the toll charge on undistributed foreign subsidiary earnings and profits (“E&P”). As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its net deferred tax assets at December 31, 2017, resulting in a provisional $39.8 million charge included in the provision for income taxes for the year ended December 31, 2017. The Tax Reform Act also provided for a one-time deemed mandatory repatriation of post-1986 E&P through the year ended December 31, 2017. As a result, the Company recognized a provisional $2.1 million charge in the provision for income taxes for the year ended December 31, 2017 related to such deemed mandatory repatriation. The Company completed its analysis of the Tax Reform Act during 2018 and adjusted the 2017 provisional estimate to the final amounts in accordance with Staff Accounting Bulletin No. 118. The measurement window begins in the reporting period that includes the enactment date and ends when an entity has obtained, prepared and analyzed the information needed in order to complete the accounting requirements under ASC 740. For the year ended December 31, 2018, the Company made an adjustment to the provisional amount and recognized an additional $1.8 million provision for income tax related to the deemed mandatory repatriation.
The Company has not made additional measurement window adjustments to these items during the year ended December 31, 2018.
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 domestic and foreign components of the Company’s income before provision for income taxes are as follows:
Year Ended December 31,
Domestic*
$
1,100,487
$
1,062,713
$
1,029,763
Foreign*
192,785
138,910
49,922
Income before provision for income taxes
$
1,293,272
$
1,201,623
$
1,079,685
*After intercompany royalties, management fees and interest charges from the Company’s domestic to foreign entities of $40.5 million, $42.5 million and $25.6 million for the years ended December 31, 2018, 2017 and 2016, 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
$
209,147
$
243,127
$
212,283
State
41,934
43,252
35,756
Foreign
42,541
27,522
17,171
293,622
313,901
265,210
Deferred:
Federal
9,804
61,797
87,360
State
1,644
3,062
15,254
Foreign
(8,778)
(4,579)
(9,709)
2,670
60,280
92,905
Valuation allowance
3,976
6,764
8,885
$
300,268
$
380,945
$
367,000
A reconciliation of the total provision for income taxes after applying the U.S. federal statutory rate of 21% for 2018 and 35% for 2017 and 2016 to income before provision for income taxes to the reported provision for income taxes are as follows:
Year Ended December 31,
U.S. Federal tax expense at statutory rates
$
271,587
$
420,568
$
377,599
State income taxes, net of federal tax benefit
36,312
27,569
33,148
Permanent differences
3,606
10,356
Stock based compensation
(370)
(79,687)
(13,654)
Domestic production deduction
-
(22,229)
(21,447)
Deferred tax asset reduction (Tax Reform Act)
-
39,763
-
Other
(8,438)
3,736
(8,765)
Foreign rate differential
(6,405)
(25,895)
(9,720)
Valuation allowance
3,976
6,764
8,885
$
300,268
$
380,945
$
367,000
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, 2018 and 2017 are as follows:
Deferred Tax Assets:
Reserve for sales returns
$
$
Reserve for inventory obsolescence
2,836
Reserve for marketing development fund
4,666
6,360
Capitalization of inventory costs
1,210
1,598
State franchise tax - current
2,663
2,050
Accrued compensation
1,473
Accrued other liabilities
5,276
3,917
Deferred revenue
87,573
93,321
Stock-based compensation
25,439
21,119
Foreign net operating loss carryforward
28,030
28,965
Prepaid supplies
7,476
7,273
Termination payments
71,918
70,637
Gain on intercompany transfer
-
6,793
Other deferred tax assets
11,010
3,449
Total gross deferred tax assets
$
248,808
$
247,636
Deferred Tax Liabilities:
Amortization of trademarks
$
(31,445)
$
(21,657)
Intangibles
(82,544)
(84,867)
State franchise tax - deferred
(7,093)
(7,617)
Other deferred tax liabilities
(99)
(62)
Depreciation
(5,123)
(8,260)
Total gross deferred tax liabilities
(126,304)
(122,463)
Valuation Allowance
(36,816)
(32,840)
Net deferred tax assets
$
85,688
$
92,333
During the years ended December 31, 2018, 2017 and 2016, the Company established full valuation allowances against certain deferred tax assets, resulting from cumulative net operating losses incurred by certain foreign subsidiaries of the Company. The effect of the valuation allowances and the subsequent related impact on the Company’s overall tax rate was to increase the Company’s provision for income taxes by $4.0 million, $6.8 million and $8.9 million for the years ended December 31, 2018, 2017 and 2016, respectively. At December 31, 2018, the Company had net operating loss carryforwards of approximately $102.6 million. Of this amount, $74.7 million may be carried forward indefinitely. The remaining $27.9 million of net operating loss carryforwards will begin to expire in 2019.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
The following is a roll-forward of the Company’s total gross unrecognized tax benefits, not including interest and penalties, for the years ended December 31, 2018, 2017 and 2016:
Gross Unrealized Tax
Benefits
Balance at January 1, 2016
$
Additions for tax positions related to the current year
-
Additions for tax positions related to the prior year
-
Decreases for tax positions related to prior years
(462)
Balance at December 31, 2016
$
Additions for tax positions related to the current year
-
Additions for tax positions related to the prior year
6,540
Decreases for tax positions related to prior years
(9)
Balance at December 31, 2017
$
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
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, 2018, the Company had accrued approximately $0.9 million in interest and penalties related to unrecognized tax benefits. If the Company were to prevail on all uncertain tax positions it would not have a significant impact on the Company’s effective tax rate.
It is expected that the amount of unrecognized tax benefit change within the next 12 months will not be significant.
The Company is subject to U.S. federal income tax as well as to income tax in multiple state and foreign jurisdictions.
On October 18, 2016, the IRS began its examination of the Company’s U.S. federal income tax return for the year ended December 31, 2014. On March 27, 2017, the IRS began its examination of the Company’s U.S. federal income tax return for the year ended December 31, 2015.
The Company is in various stages of examination with certain states and certain foreign jurisdictions. The Company’s 2014 through 2017 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 2013 through 2017 tax years.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
16. EARNINGS PER SHARE
A reconciliation of the weighted average shares used in the basic and diluted earnings per common share computations for the years ended December 31, 2018, 2017 and 2016 is presented below (in thousands):
Weighted-average shares outstanding:
Basic
557,166
566,782
587,874
Dilutive securities
7,088
10,359
11,945
Diluted
564,254
577,141
599,819
For the years ended December 31, 2018, 2017 and 2016, options and awards outstanding totaling 3.2 million shares, 7.9 million shares and 5.7 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.
17. EMPLOYEE BENEFIT PLAN
Employees of the Company may participate in the Monster Beverage Corporation 401(k) Plan, a defined contribution plan, which qualifies under Section 401(k) of the Internal Revenue Code. Participating employees may contribute up to 15% of their pretax salary up to statutory limits. The Company contributes 50% of the employee contribution, up to 6% of each employee’s earnings, which vest 25% each year for four years after the first anniversary date. Matching contributions were $2.9 million, $2.5 million and $2.0 million for the years ended December 31, 2018, 2017 and 2016, respectively.
18. SEGMENT INFORMATION
The Company has three operating and reportable segments, (i) Monster Energy® Drinks segment, which is primarily comprised of the Company’s Monster Energy® drinks, (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 Predator® energy drinks, and (iii) Other segment, which is comprised of certain products sold by AFF, a wholly-owned subsidiary of the Company, to independent third-party customers.
The Company’s Monster Energy® Drinks segment generates net operating revenues by selling ready-to-drink packaged drinks primarily to bottlers and full service beverage distributors. In some cases, the Company sells directly to retail grocery and specialty chains, wholesalers, club stores, drug stores, mass merchandisers, convenience chains, foodservice customers and the military.
The Company’s Strategic Brands segment primarily generates net operating revenues by selling “concentrates” and/or “beverage bases” to authorized bottling and canning operations. Such bottlers generally combine the concentrates and/or beverage bases with sweeteners, water and other ingredients to produce ready-to-drink packaged energy drinks. The ready-to-drink packaged energy drinks are then sold to other bottlers, full service distributors or retailers, including, retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, foodservice customers, drug stores and the military. To a lesser extent, the Company’s Strategic Brands segment generates net operating revenues by selling ready-to-drink packaged energy drinks to bottlers and full service beverage 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 margins than the Strategic Brands segment.
Corporate and unallocated amounts that do not relate to a reportable segment have been allocated to “Corporate and unallocated.” No asset information, other than goodwill and other intangible assets, has been provided for in the Company’s reportable segments as management does not measure or allocate such assets on a segment basis.
The net revenues derived from the Company’s reportable segments and other financial information related thereto for the years ended December 31, 2018, 2017 and 2016 are as follows:
Net sales:
Monster Energy® Drinks(1)
$
3,498,427
$
3,047,596
$
2,759,862
Strategic Brands
285,836
299,844
272,520
Other
22,920
21,605
17,011
Corporate and unallocated
-
-
-
$
3,807,183
$
3,369,045
$
3,049,393
Operating Income:
Monster Energy® Drinks(1) (2)
$
1,371,062
$
1,264,579
$
1,148,427
Strategic Brands
176,520
174,458
163,121
Other
5,362
5,583
2,295
Corporate and unallocated
(269,325)
(245,833)
(228,505)
$
1,283,619
$
1,198,787
$
1,085,338
Income before tax:
Monster Energy® Drinks(1) (2)
$
1,372,001
$
1,264,555
$
1,148,640
Strategic Brands
176,540
174,442
163,084
Other
5,362
5,583
2,295
Corporate and unallocated
(260,631)
(242,957)
(234,334)
$
1,293,272
$
1,201,623
$
1,079,685
(1) Includes $44.3 million, $43.4 million and $40.3 million for the years ended December 31, 2018, 2017 and 2016, respectively, related to the recognition of deferred revenue.
(2) Includes $26.6 million, $35.4 million and $79.8 million for the years ended December 31, 2018, 2017 and 2016, respectively, related to distributor termination costs.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Depreciation and amortization:
Monster Energy® Drinks
$
36,387
$
29,591
$
24,048
Stategic Brands
7,774
7,443
7,113
Other
4,657
4,608
3,457
Corporate and unallocated
8,161
7,245
6,227
$
56,979
$
48,887
$
40,845
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 14, “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.
Corporate and unallocated expenses were $245.8 million for the year ended December 31, 2017 and included $156.3 million of payroll costs, of which $52.3 million was attributable to stock-based compensation expense (See Note 14, “Stock-Based Compensation”), $51.8 million of professional service expenses, including accounting and legal costs, $6.0 million of insurance costs and $31.7 million of other operating expenses.
Corporate and unallocated expenses were $228.5 million for the year ended December 31, 2016 and included $128.0 million of payroll costs, of which $45.8 million was attributable to stock-based compensation expense (See Note 14, “Stock-Based Compensation”), $66.3 million of professional service expenses, including accounting and legal costs, $6.0 million of insurance costs and $28.2 million of other operating expenses.
TCCC, through the TCCC Subsidiaries, accounted for approximately 3%, 18% and 41% of the Company’s net sales for the years ended December 31, 2018, 2017 and 2016, respectively. As part of the North America Refranchising, the territories of certain TCCC Subsidiaries have been transitioned to certain independent/non wholly-owned TCCC bottlers/distributors. Accordingly, the Company’s percentage of net sales classified as sales to the TCCC Subsidiaries decreased for the years ended December 31, 2018 and 2017.
CCBCC Operations, LLC accounted for approximately 13%, 13% and 9% of the Company’s net sales for the years ended December 31, 2018, 2017 and 2016, respectively.
Reyes Coca-Cola Bottling accounted for approximately 12%, 6% and 2% of the Company’s net sales for the years ended December 31, 2018, 2017 and 2016, respectively.
Coca-Cola European Partners accounted for approximately 10%, 9% and 9% of the Company’s net sales for the years ended December 31, 2018, 2017 and 2016, respectively.
Net sales to customers outside the United States amounted to $1.09 billion, $909.3 million and $733.7 million for the years ended December 31, 2018, 2017 and 2016, respectively. Such sales were approximately 29%, 27% and 24% of net sales for the years ended December 31, 2018, 2017 and 2016, respectively.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Goodwill and other intangible assets for the Company’s reportable segments as of December 31, 2018 and 2017 are as follows:
Goodwill and other intangible assets:
Monster Energy® Drinks
$
1,368,620
$
1,346,648
Strategic Brands
989,944
995,582
Other
18,957
23,498
Corporate and unallocated
-
-
$
2,377,521
$
2,365,728
19. RELATED PARTY TRANSACTIONS
TCCC controls approximately 19% of the voting interests of the Company. The TCCC Subsidiaries, the TCCC Related Parties and the TCCC Independent Bottlers, purchase and distribute certain of the Company’s products in certain domestic and international markets. The Company also pays TCCC a commission based on certain sales within the TCCC distribution network.
TCCC commissions, based on sales to the TCCC Subsidiaries and the TCCC Related Parties, 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.
TCCC commissions, based on sales to the TCCC Subsidiaries, for the year ended December 31, 2017 were $9.8 million, and are included as a reduction to net sales. TCCC commissions, based on sales to the TCCC Related Parties and the TCCC Independent Bottlers, for the year ended December 31, 2017 were $45.0 million, and are included in operating expenses.
Upon adoption of ASC 606, commissions paid to TCCC, based on sales to the TCCC Related Parties, are included as a reduction to net sales. Prior to January 1, 2018, such commissions, based on sales to the TCCC Related Parties, were included in operating expenses.
Net sales to the TCCC Subsidiaries for the years ended December 31, 2018 and 2017 were $132.5 million and $594.1 million, respectively. As part of the North America Refranchising, the territories of certain TCCC Subsidiaries have been transitioned to certain independent TCCC bottlers/distributors and/or TCCC Related Parties. Accordingly, the Company’s net sales classified as sales to the TCCC Subsidiaries significantly decreased for the year ended December 31, 2018.
The Company also purchases concentrates from TCCC which are then sold to certain of the Company’s bottlers/distributors. Concentrate purchases from TCCC were $27.5 million, $26.2 million and $26.2 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Certain TCCC Subsidiaries also contract manufacture certain of the Company’s Monster Energy® brand energy drinks. Such contract manufacturing expenses were $22.8 million, $11.8 million and $9.6 million for the years ended December 31, 2018, 2017 and 2016, respectively.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts)
Accounts receivable, accounts payable and accrued promotional allowances related to the TCCC Subsidiaries are as follows at:
December 31,
December 31,
Accounts receivable, net
$
25,312
$
32,607
Accounts payable
$
(54,430)
$
(45,465)
Accrued promotional allowances
$
(4,044)
$
(5,884)
Two directors and officers of the Company and their families are principal owners of a company that provides promotional materials to the Company. Expenses incurred with such company in connection with promotional materials purchased during the years ended December 31, 2018, 2017 and 2016 were $1.8 million, $2.2 million and $1.5 million, respectively.
In December 2018, the Company and a director of the Company entered into a 50-50 partnership that purchased land in Kona, Hawaii for the purpose producing coffee products. The Company’s $1.9 million 50% contribution is accounted for as an equity investment and is included in other long-term assets in the accompanying consolidated balance sheet at December 31, 2018.
20. SUBSEQUENT EVENTS
On February 26, 2019, the Company’s Board of Directors authorized a new share repurchase program for the purchase of up to $500.0 million of the Company’s outstanding common stock. As of February 26, 2019 $20.6 million remained available for grant under the August 2018 Repurchase Plan. The aggregate amount available to repurchase the Company’s common stock is currently $520.6 million.
21. QUARTERLY FINANCIAL DATA (Unaudited)
Net Income per Common
Share
Net Sales
Gross Profit
Net Income
Basic
Diluted
Quarter ended:
March 31, 2018
$
850,921
$
515,257
$
216,050
$
0.38
$
0.38
June 30, 2018
1,015,873
620,258
270,116
$
0.48
$
0.48
September 30, 2018
1,016,160
607,659
267,733
$
0.48
$
0.48
December 31, 2018
924,229
552,201
239,105
$
0.43
$
0.43
$
3,807,183
$
2,295,375
$
993,004
Quarter ended:
March 31, 2017
$
742,146
$
480,874
$
177,980
$
0.31
$
0.31
June 30, 2017
907,068
583,497
222,633
$
0.39
$
0.39
September 30, 2017
909,476
569,709
218,744
$
0.39
$
0.38
December 31, 2017
810,355
503,610
201,321
$
0.36
$
0.35
$
3,369,045
$
2,137,690
$
820,678
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 (Dollars in Thousands)
Certain of the figures reported above may differ from previously reported figures for individual quarters due to rounding.
Description
Balance at
beginning
of period
Charged to
cost and
expenses
Deductions
Balance at
end of
period
Allowance for doubtful accounts, sales returns and cash discounts:
$
1,105
$
7,890
$
(7,406)
$
1,589
$
1,121
$
8,364
$
(8,380)
$
1,105
$
1,248
$
7,389
$
(7,516)
$
1,121
Allowance on Deferred Tax Assets and Unrecognized Tax Benefits:
$
40,680
$
2,068
$
-
$
42,748
$
26,086
$
14,594
$
-
$
40,680
$
17,846
$
8,240
$
-
$
26,086

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Stock Performance Metrics:
Return: 0.08665304630994797
1-Day Return: $1_day_return
3-Day Return: $3_day_return
5-Day Return: $5_day_return
10-Day Return: $10_day_return
20-Day Return: $20_day_return
40-Day Return: $40_day_return
60-Day Return: $60_day_return
80-Day Return: $80_day_return
100-Day Return: $100_day_return
150-Day Return: $150_day_return
252-Day Return: $252_day_return