UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
|
For the quarterly period ended March 31, 2012 |
Commission File Number 0-18761 |
MONSTER BEVERAGE CORPORATION
(Exact name of Registrant as specified in its charter)
|
Delaware |
39-1679918 |
|
(State or other jurisdiction of |
(I.R.S. Employer |
|
incorporation or organization) |
Identification No.) |
550 Monica Circle, Suite 201
Corona, California 92880
(Address of principal executive offices) (Zip code)
(951) 739 – 6200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No __
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes X No __
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
Large Accelerated Filer x |
Accelerated filer o |
|
Non-accelerated filer o (Do not check if smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes ___ No _ X__
The Registrant had 176,207,845 shares of common stock, par value $0.005 per share, outstanding as of April 26, 2012.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
MARCH 31, 2012
PART I – FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2012 AND DECEMBER 31, 2011
(In Thousands, Except Par Value) (Unaudited)
See accompanying notes to condensed consolidated financial statements
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE-MONTHS ENDED MARCH 31, 2012 AND 2011
(In Thousands, Except Per Share Amounts) (Unaudited)
|
|
|
Three-Months Ended |
|
|||||
|
|
|
March 31, |
|
|||||
|
|
|
2012 |
|
2011 |
|
|||
|
|
|
|
|
|
|
|
||
|
NET SALES |
|
$ |
454,605 |
|
|
$ |
356,419 |
|
|
|
|
|
|
|
|
|
||
|
COST OF SALES |
|
213,436 |
|
|
170,882 |
|
||
|
|
|
|
|
|
|
|
||
|
GROSS PROFIT |
|
241,169 |
|
|
185,537 |
|
||
|
|
|
|
|
|
|
|
||
|
OPERATING EXPENSES |
|
114,884 |
|
|
97,082 |
|
||
|
|
|
|
|
|
|
|
||
|
OPERATING INCOME |
|
126,285 |
|
|
88,455 |
|
||
|
|
|
|
|
|
|
|
||
|
OTHER INCOME: |
|
|
|
|
|
|
||
|
Interest and other (expense) income, net |
|
(50 |
) |
|
4 |
|
||
|
Gain on investments and put option, net (Note 3) |
|
396 |
|
|
297 |
|
||
|
Total other income |
|
346 |
|
|
301 |
|
||
|
|
|
|
|
|
|
|
||
|
INCOME BEFORE PROVISION FOR INCOME TAXES |
|
126,631 |
|
|
88,756 |
|
||
|
|
|
|
|
|
|
|
||
|
PROVISION FOR INCOME TAXES |
|
50,532 |
|
|
33,713 |
|
||
|
|
|
|
|
|
|
|
||
|
NET INCOME |
|
$ |
76,099 |
|
|
$ |
55,043 |
|
|
|
|
|
|
|
|
|
||
|
NET INCOME PER COMMON SHARE: |
|
|
|
|
|
|
||
|
Basic |
|
$ |
0.44 |
|
|
$ |
0.31 |
|
|
Diluted |
|
$ |
0.41 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
||
|
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK AND COMMON STOCK EQUIVALENTS: |
|
|
|
|
|
|
||
|
Basic |
|
174,832 |
|
|
177,858 |
|
||
|
Diluted |
|
185,262 |
|
|
187,248 |
|
||
See accompanying notes to condensed consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE-MONTHS ENDED MARCH 31, 2012 AND 2011
(In Thousands) (Unaudited)
|
|
|
Three-Months Ended
|
|
|||||
|
|
|
2012 |
|
2011 |
|
|||
|
Net income, as reported |
|
$ |
76,099 |
|
|
$ |
55,043 |
|
|
Other comprehensive income: |
|
|
|
|
|
|
||
|
Change in unrealized gain on available-for-sale securities, net of tax |
|
- |
|
|
101 |
|
||
|
Foreign currency translation adjustments |
|
2,455 |
|
|
728 |
|
||
|
Comprehensive income |
|
$ |
78,554 |
|
|
$ |
55,872 |
|
See accompanying notes to condensed consolidated financial statements
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTHS ENDED MARCH 31, 2012 AND 2011
(In Thousands) (Unaudited)
|
|
|
Three-Months Ended |
|
|||||
|
|
|
March 31, 2012 |
|
March 31, 2011 |
|
|||
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
||
|
Net income |
|
$ |
76,099 |
|
|
$ |
55,043 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
||
|
Amortization of trademark |
|
12 |
|
|
12 |
|
||
|
Depreciation and other amortization |
|
4,956 |
|
|
3,581 |
|
||
|
Gain on disposal of property and equipment |
|
(39 |
) |
|
(74 |
) |
||
|
Stock-based compensation |
|
6,571 |
|
|
3,779 |
|
||
|
Loss (gain) on put option |
|
1,391 |
|
|
(20 |
) |
||
|
Gain on investments, net |
|
(1,787 |
) |
|
(278 |
) |
||
|
Deferred income taxes |
|
2,574 |
|
|
- |
|
||
|
Tax benefit from exercise of stock options |
|
(492 |
) |
|
(190 |
) |
||
|
Effect on cash of changes in operating assets and liabilities: |
|
|
|
|
|
|
||
|
Accounts receivable |
|
(33,867 |
) |
|
(51,722 |
) |
||
|
Distributor receivables |
|
(43 |
) |
|
397 |
|
||
|
Inventories |
|
(34,128 |
) |
|
(19,548 |
) |
||
|
Prepaid expenses and other current assets |
|
257 |
|
|
(4,015 |
) |
||
|
Prepaid income taxes |
|
(1,216 |
) |
|
9,802 |
|
||
|
Accounts payable |
|
16,201 |
|
|
21,418 |
|
||
|
Accrued liabilities |
|
14,058 |
|
|
6,278 |
|
||
|
Accrued promotional allowances |
|
(34,034 |
) |
|
(17,844 |
) |
||
|
Accrued distributor terminations |
|
(76 |
) |
|
(393 |
) |
||
|
Accrued compensation |
|
(3,836 |
) |
|
(2,417 |
) |
||
|
Income taxes payable |
|
25,784 |
|
|
20,921 |
|
||
|
Deferred revenue |
|
(1,615 |
) |
|
(1,117 |
) |
||
|
Net cash provided by operating activities |
|
36,770 |
|
|
23,613 |
|
||
|
|
|
|
|
|
|
|
||
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
||
|
Maturities of held-to-maturity investments |
|
141,806 |
|
|
41,950 |
|
||
|
Sales of available-for-sale investments |
|
29,891 |
|
|
4,551 |
|
||
|
Sales of trading investments |
|
15,750 |
|
|
1,000 |
|
||
|
Purchases of held-to-maturity investments |
|
(190,635 |
) |
|
(80,894 |
) |
||
|
Purchases of available-for-sale investments |
|
(2,001 |
) |
|
(6,774 |
) |
||
|
Purchases of property and equipment |
|
(14,542 |
) |
|
(6,523 |
) |
||
|
Proceeds from sale of property and equipment |
|
164 |
|
|
207 |
|
||
|
Additions to intangibles |
|
(749 |
) |
|
(1,996 |
) |
||
|
Decrease (increase) in other assets |
|
302 |
|
|
(26 |
) |
||
|
Net cash used in investing activities |
|
(20,014 |
) |
|
(48,505 |
) |
||
|
|
|
|
|
|
|
|
||
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
||
|
Principal payments on debt |
|
(610 |
) |
|
(249 |
) |
||
|
Tax benefit from exercise of stock options |
|
492 |
|
|
190 |
|
||
|
Issuance of common stock |
|
2,722 |
|
|
4,247 |
|
||
|
Purchases of common stock held in treasury |
|
- |
|
|
(38,862 |
) |
||
|
Net cash provided by (used in) financing activities |
|
2,604 |
|
|
(34,674 |
) |
||
|
|
|
|
|
|
|
|
||
|
Effect of exchange rate changes on cash and cash equivalents |
|
12,747 |
|
|
229 |
|
||
|
|
|
|
|
|
|
|
||
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
32,107 |
|
|
(59,337 |
) |
||
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
359,331 |
|
|
354,842 |
|
||
|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
391,438 |
|
|
$ |
295,505 |
|
|
|
|
|
|
|
|
|
||
|
SUPPLEMENTAL INFORMATION: |
|
|
|
|
|
|
||
|
Cash paid during the period for: |
|
|
|
|
|
|
||
|
Interest |
|
$ |
14 |
|
|
$ |
10 |
|
|
Income taxes |
|
$ |
23,491 |
|
|
$ |
2,870 |
|
See accompanying notes to condensed consolidated financial statements
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTHS ENDED MARCH 31, 2012 AND 2011
(In Thousands) (Unaudited) (Continued)
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS
The Company entered into capital leases for the acquisition of promotional vehicles of $0.8 million and $1.6 million for the three-months ended March 31, 2012 and 2011, respectively.
See accompanying notes to condensed consolidated financial statements.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
1. BASIS OF PRESENTATION
Reference is made to the Notes to Consolidated Financial Statements, in Monster Beverage Corporation and Subsidiaries (the “Company” or “Hansen Natural Corporation”) Annual Report on Form 10-K for the year ended December 31, 2011 (“Form 10-K”) for a summary of significant accounting policies utilized by the Company and its consolidated subsidiaries and other disclosures, which should be read in conjunction with this Quarterly Report on Form 10-Q (“Form 10-Q”).
The Company’s condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and Securities and Exchange Commission (“SEC”) rules and regulations applicable to interim financial reporting. They do not include all the information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP. The information set forth in these interim condensed consolidated financial statements for the three-months ended March 31, 2012 and 2011 is unaudited and reflects all adjustments, which include only normal recurring adjustments and which in the opinion of management are necessary to make the interim condensed consolidated financial statements not misleading. Results of operations for periods covered by this report may not necessarily be indicative of results of operations for the full year.
The preparation of financial statements in conformity with GAAP necessarily requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.
As disclosed in the Company’s Form 10-K, management concluded that its presentation of accounts receivable, net of certain promotional allowances as of December 31, 2010, should be adjusted to present such receivables and accrued expenses on a gross basis with regard to those customers for which the Company does not allow net settlement. Such adjustment did not change total net cash provided by operating activities in the condensed consolidated statement of cash flows for the three-months ended March 31, 2011. However, the following line items within net cash flows from operating activities were adjusted as follows for the three-months ended March 31, 2011; (i) accounts receivable by ($4.1) million; (ii) accounts payable by $17.9 million; (iii) accrued liabilities by $4.0 million; and (iv) accrued promotional allowances by ($17.8) million. See Item 2, “Management Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations” for additional discussion of the Company’s promotional allowances.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. ASU 2011-05 became effective for the Company on January 1, 2012. The adoption of ASU 2011-05 did not have any impact on the Company’s financial position, results of operations or liquidity.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. ASU 2011-04 became effective for the Company on January 1, 2012. The adoption of ASU 2011-04 did not have any impact on the Company’s financial position, results of operations or liquidity.
3. INVESTMENTS
The following table summarizes the Company’s investments at:
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
|
March 31, 2012 |
|
Amortized
|
|
Gross
|
|
Gross
|
|
Fair
|
|
Continuous
|
|
Continuous
|
|
||||||
|
Held-to-Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
U.S. Treasuries |
|
$ |
402 |
|
$ |
- |
|
$ |
- |
|
$ |
402 |
|
$ |
- |
|
$ |
- |
|
|
Certificates of deposit |
|
37,594 |
|
- |
|
- |
|
37,594 |
|
- |
|
- |
|
||||||
|
Municipal securities |
|
330,546 |
|
- |
|
89 |
|
330,457 |
|
89 |
|
- |
|
||||||
|
U.S. government agency securities |
|
19,988 |
|
- |
|
1 |
|
19,987 |
|
1 |
|
- |
|
||||||
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Variable rate demand notes |
|
31,058 |
|
- |
|
- |
|
31,058 |
|
- |
|
- |
|
||||||
|
Long-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Auction rate securities |
|
3,310 |
|
- |
|
- |
|
3,310 |
|
- |
|
- |
|
||||||
|
Total |
|
$ |
422,898 |
|
$ |
- |
|
$ |
90 |
|
422,808 |
|
$ |
90 |
|
$ |
- |
|
|
|
Trading |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Auction rate securities |
|
|
|
|
|
|
|
- |
|
|
|
|
|
||||||
|
Long-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Auction rate securities |
|
|
|
|
|
|
|
18,554 |
|
|
|
|
|
||||||
|
Total |
|
|
|
|
|
|
|
$ |
441,362 |
|
|
|
|
|
|||||
|
December 31, 2011 |
|
Amortized
|
|
Gross
|
|
Gross
|
|
Fair
|
|
Continuous
|
|
Continuous
|
|
||||||||
|
Held-to-Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
U.S. Treasuries |
|
$ |
8,034 |
|
$ |
5 |
|
$ |
- |
|
$ |
8,039 |
|
$ |
- |
|
$ |
- |
|
||
|
Certificates of deposit |
|
29,034 |
|
1 |
|
- |
|
29,035 |
|
- |
|
- |
|
||||||||
|
Corporate bonds |
|
2,022 |
|
- |
|
- |
|
2,022 |
|
- |
|
- |
|
||||||||
|
Municipal securities |
|
284,605 |
|
- |
|
64 |
|
284,541 |
|
64 |
|
- |
|
||||||||
|
U.S. government agency securities |
|
16,005 |
|
2 |
|
- |
|
16,007 |
|
- |
|
- |
|
||||||||
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Variable rate demand notes |
|
58,924 |
|
- |
|
- |
|
58,924 |
|
- |
|
- |
|
||||||||
|
Long-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Auction rate securities |
|
3,320 |
|
- |
|
- |
|
3,320 |
|
- |
|
- |
|
||||||||
|
Total |
|
$ |
401,944 |
|
$ |
8 |
|
$ |
64 |
|
401,888 |
|
$ |
64 |
|
$ |
- |
|
|||
|
Trading |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Auction rate securities |
|
|
|
|
|
|
|
12,658 |
|
|
|
|
|
||||||||
|
Long-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Auction rate securities |
|
|
|
|
|
|
|
19,874 |
|
|
|
|
|
||||||||
|
Total |
|
|
|
|
|
|
|
$ |
434,420 |
|
|
|
|
|
|||||||
During the three-months ended March 31, 2012 and the year ended December 31, 2011, realized gains or losses recognized on the sale of investments were not significant.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
The Company recognized a net gain through earnings on its trading securities as follows:
|
|
|
Three-Months Ended
|
|
||||
|
|
|
2012 |
|
2011 |
|
||
|
Gain on transfer from available-for-sale to trading |
|
$ |
- |
|
$ |
- |
|
|
Gain on trading securities sold |
|
1,034 |
|
126 |
|
||
|
Gain on trading securities held |
|
753 |
|
152 |
|
||
|
Gain on trading securites |
|
$ |
1,787 |
|
$ |
278 |
|
The Company’s investments at March 31, 2012 and December 31, 2011 in U.S. Treasuries, certificates of deposit, corporate bonds, municipal securities, U.S. government agency securities and variable rate demand notes (“VRDNs”) carry 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 generally, on a seven day settlement basis. A portion of the Company’s investments at March 31, 2012 and December 31, 2011 in municipal, educational or other public body securities with an auction reset feature (“auction rate securities”) also carry investment grade credit ratings.
The following table summarizes the underlying contractual maturities of the Company’s investments at:
|
|
|
March 31, 2012 |
|
December 31, 2011 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
|
||||
|
Less than 1 year: |
|
|
|
|
|
|
|
|
|
||||
|
U.S. Treasuries |
|
$ |
402 |
|
$ |
402 |
|
$ |
8,034 |
|
$ |
8,039 |
|
|
Certificates of deposit |
|
37,594 |
|
37,594 |
|
29,034 |
|
29,035 |
|
||||
|
Corporate bonds |
|
- |
|
- |
|
2,022 |
|
2,022 |
|
||||
|
Municipal securities |
|
330,546 |
|
330,457 |
|
284,605 |
|
284,541 |
|
||||
|
U.S. government agency securities |
|
19,988 |
|
19,987 |
|
16,005 |
|
16,007 |
|
||||
|
Due 1 - 10 years: |
|
|
|
|
|
|
|
|
|
||||
|
Variable rate demand notes |
|
- |
|
- |
|
5,775 |
|
5,775 |
|
||||
|
Due 11 - 20 years: |
|
|
|
|
|
|
|
|
|
||||
|
Variable rate demand notes |
|
6,801 |
|
6,801 |
|
12,716 |
|
12,716 |
|
||||
|
Auction rate securities |
|
5,350 |
|
5,350 |
|
5,158 |
|
5,158 |
|
||||
|
Due 21 - 30 years: |
|
|
|
|
|
|
|
|
|
||||
|
Variable rate demand notes |
|
18,082 |
|
18,082 |
|
27,902 |
|
27,902 |
|
||||
|
Auction rate securities |
|
16,514 |
|
16,514 |
|
25,134 |
|
25,134 |
|
||||
|
Due 31 - 40 years: |
|
|
|
|
|
|
|
|
|
||||
|
Variable rate demand notes |
|
6,175 |
|
6,175 |
|
12,532 |
|
12,532 |
|
||||
|
Auction rate securities |
|
- |
|
- |
|
5,559 |
|
5,559 |
|
||||
|
Total |
|
$ |
441,452 |
|
$ |
441,362 |
|
$ |
434,476 |
|
$ |
434,420 |
|
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
4. FAIR VALUE OF CERTAIN FINANCIAL ASSETS AND LIABILITIES
Accounting Standards Codification (“ASC”) 820 provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. 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. 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.
ASC 820 requires the use of observable market inputs (quoted market prices) when measuring fair value and requires a Level 1 quoted price to be used to measure fair value whenever possible.
The following tables present the Company’s held-to-maturity investments at amortized costs as well as the fair value of 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:
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
|
March 31, 2012 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
|
Cash |
|
$ |
112,725 |
|
$ |
- |
|
$ |
- |
|
$ |
112,725 |
|
|
Money market funds |
|
258,096 |
|
- |
|
- |
|
258,096 |
|
||||
|
U.S. Treasuries |
|
402 |
|
- |
|
- |
|
402 |
|
||||
|
Certificates of deposit |
|
- |
|
42,197 |
|
- |
|
42,197 |
|
||||
|
Municipal securities |
|
- |
|
346,560 |
|
- |
|
346,560 |
|
||||
|
U.S. government agency securities |
|
- |
|
19,988 |
|
- |
|
19,988 |
|
||||
|
Variable rate demand notes |
|
- |
|
31,058 |
|
- |
|
31,058 |
|
||||
|
Auction rate securities |
|
- |
|
- |
|
21,864 |
|
21,864 |
|
||||
|
Put option related to auction rate securities |
|
- |
|
- |
|
1,649 |
|
1,649 |
|
||||
|
Total |
|
$ |
371,223 |
|
$ |
439,803 |
|
$ |
23,513 |
|
$ |
834,539 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Amounts included in: |
|
|
|
|
|
|
|
|
|
||||
|
Cash and cash equivalents |
|
$ |
370,821 |
|
$ |
20,617 |
|
$ |
- |
|
$ |
391,438 |
|
|
Short-term investments |
|
402 |
|
419,186 |
|
- |
|
419,588 |
|
||||
|
Investments |
|
- |
|
- |
|
21,864 |
|
21,864 |
|
||||
|
Other assets |
|
- |
|
- |
|
1,649 |
|
1,649 |
|
||||
|
Total |
|
$ |
371,223 |
|
$ |
439,803 |
|
$ |
23,513 |
|
$ |
834,539 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
December 31, 2011 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
|
Cash |
|
$ |
81,879 |
|
$ |
- |
|
$ |
- |
|
$ |
81,879 |
|
|
Money market funds |
|
230,029 |
|
- |
|
- |
|
230,029 |
|
||||
|
U.S. Treasuries |
|
8,034 |
|
- |
|
- |
|
8,034 |
|
||||
|
Certificates of deposit |
|
- |
|
69,078 |
|
- |
|
69,078 |
|
||||
|
Corporate bonds |
|
- |
|
2,022 |
|
- |
|
2,022 |
|
||||
|
Municipal securities |
|
- |
|
291,984 |
|
- |
|
291,984 |
|
||||
|
U.S. government agency securities |
|
- |
|
16,005 |
|
- |
|
16,005 |
|
||||
|
Variable rate demand notes |
|
- |
|
58,924 |
|
- |
|
58,924 |
|
||||
|
Auction rate securities |
|
- |
|
- |
|
35,852 |
|
35,852 |
|
||||
|
Put options related to auction rate securities |
|
- |
|
- |
|
3,041 |
|
3,041 |
|
||||
|
Total |
|
$ |
319,942 |
|
$ |
438,013 |
|
$ |
38,893 |
|
$ |
796,848 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Amounts included in: |
|
|
|
|
|
|
|
|
|
||||
|
Cash and cash equivalents |
|
$ |
311,908 |
|
$ |
47,423 |
|
$ |
- |
|
$ |
359,331 |
|
|
Short-term investments |
|
8,034 |
|
390,590 |
|
12,658 |
|
411,282 |
|
||||
|
Investments |
|
- |
|
- |
|
23,194 |
|
23,194 |
|
||||
|
Prepaid expenses and other current assets |
|
- |
|
- |
|
873 |
|
873 |
|
||||
|
Other assets |
|
- |
|
- |
|
2,168 |
|
2,168 |
|
||||
|
Total |
|
$ |
319,942 |
|
$ |
438,013 |
|
$ |
38,893 |
|
$ |
796,848 |
|
The majority of the Company’s short-term investments are classified within Level 1 or Level 2 of the fair value hierarchy. The Company’s valuation of its Level 1 investments, which include money market funds and U.S. Treasuries, is based on quoted market prices in active markets for identical securities. The Company’s valuation of its Level 2 investments, which include
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
certificates of deposit, corporate bonds, municipal securities, U.S. government agency securities and VRDNs, is based on other observable inputs, specifically a valuation model which utilized vendor pricing for similar securities. There were no transfers between Level 1 and Level 2 measurements during the three-months ended March 31, 2012, and there were no changes in the Company’s valuation techniques.
The Company’s Level 3 assets are comprised of auction rate securities and put options. The Company’s Level 3 valuation utilized a mark-to-model approach which included estimates for interest rates, timing and amount of cash flows, credit and liquidity premiums, as well as expected holding periods for the auction rate securities. These assumptions are typically volatile and subject to change as the underlying data sources and market conditions evolve. A significant change in any single input could have a significant valuation impact, however, no single input has a more significant impact on valuation than another. There were no changes in the Company’s valuation techniques of its Level 3 assets during the three-months ended March 31, 2012.
The following table presents quantitative information related to the significant unobservable inputs utilized in the Company’s Level 3 recurring fair value measurements as of March 31, 2012.
|
|
|
Valuation Technique |
|
Unobservable Input |
|
Range (Weighted Average) |
|
Auction Rate Securities: |
|
|
|
|
|
|
|
Trading |
|
Discounted cash flow |
|
Maximum rate probability |
|
0.02%-6.68% (1.04%) |
|
|
|
|
|
Principal returned probability |
|
81.84%-95.79% (87.93%) |
|
|
|
|
|
Default probability |
|
4.08%-12.29% (11.03%) |
|
|
|
|
|
Liquidity risk |
|
3.50%-3.50% (3.50%) |
|
|
|
|
|
Recovery rate |
|
60-80 (60.76) |
|
Auction Rate Securities: |
|
|
|
|
|
|
|
Available-for-sale |
|
Market comparable bonds |
|
Market price |
|
51-64 (55) |
|
|
|
|
|
|
|
|
|
Put Options |
|
Discounted cash flow |
|
Counterparty risk |
|
1.79%-2.50% (2.15%) |
At March 31, 2012, the Company held auction rate securities with a face value of $29.1 million (amortized cost basis of $21.9 million). A Level 3 valuation was performed on the Company’s auction rate securities as of March 31, 2012 resulting in a fair value of $3.3 million for the Company’s available-for-sale auction rate securities (after a $5.0 million impairment) and $18.6 million for the Company’s trading auction rate securities (after a $2.2 million impairment), which are included in long-term investments.
In June 2011, the Company entered into an agreement (the “2011 ARS Agreement”), related to $24.5 million of par value auction rate securities (the “2011 ARS Securities”). Under the 2011 ARS Agreement, the Company has the right to sell the 2011 ARS Securities including all accrued but unpaid interest thereon (the “2011 Put Option”) as follows: (i) on or after July 1, 2013, up to $1.0 million aggregate par value; (ii) on or after October 1, 2013, up to an additional $1.0 million aggregate par value; and (iii) in quarterly installments thereafter based on a formula of the then
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
outstanding 2011 ARS Securities, as adjusted for normal market redemptions, with full sale rights available on or after April 1, 2016. The 2011 ARS Securities will continue to accrue interest until redeemed through the 2011 Put Option, or as determined by the auction process, or should the auction process fail, the terms outlined in the prospectus of the respective 2011 ARS Securities. Under the 2011 ARS Agreement, the Company has the obligation, should it receive written notification from the put issuer, to sell the 2011 ARS Securities at par plus all accrued but unpaid interest. During the three-months ended March 31, 2012, no 2011 ARS Securities were redeemed through normal market channels ($3.7 million of par value 2011 ARS Securities were redeemed at par through normal market channels during the year ended December 31, 2011). The 2011 Put Option does not meet the definition of derivative instruments under ASC 815. Therefore, the Company elected the fair value option under ASC 825-10 in accounting for the 2011 Put Option. As of March 31, 2012, the Company recorded $1.6 million as the fair market value of the 2011 Put Option, included in other assets in the condensed consolidated balance sheet.
In March 2010, the Company entered into an agreement (the “2010 ARS Agreement”), related to $54.2 million of par value auction rate securities (the “2010 ARS Securities”). Under the 2010 ARS Agreement, the Company had the right, but not the obligation, to sell the 2010 ARS Securities including all accrued but unpaid interest thereon (the “2010 Put Option”), under various terms. During the three-months ended March 31, 2012, the remaining $15.7 million of par value 2010 ARS Securities were redeemed at par through the exercise of the 2010 Put Option, which exhausted the Company’s rights under the 2010 ARS Agreement (as of December 31, 2011, $38.5 million of par value 2010 ARS Securities had been redeemed at par through the exercise of the 2010 Put Option as well as through normal market channels).
The Company holds additional auction rate securities that do not have a related put option. These auction rate securities continue to be classified as available-for-sale securities. The Company intends to retain such investments until the earlier of the anticipated recovery in market value or maturity.
The net effect of (i) the revaluation of the 2011 Put Option and the 2010 Put Option as of March 31, 2012; (ii) the revaluation of the Company’s trading auction rate securities as of March 31, 2012; (iii) the redemption at par of certain 2010 ARS Securities, including those redeemed at par through the exercise of the 2010 Put Option; and (iv) a recognized gain resulting from the redemption at par of a previously other-than-temporary impaired security; resulted in a gain of $0.4 million, which is included in other income for the three-months ended March 31, 2012. The net effect of (i) the revaluation of the 2010 Put Option as of March 31, 2011; (ii) the revaluation of the Company’s trading auction rate securities as of March 31, 2011; (iii) the redemption at par of certain 2010 ARS Securities; and (iv) a recognized gain resulting from the redemption at par of a previously other-than-temporary impaired security during the first fiscal quarter of 2011; resulted in a gain of $0.3 million, which is included in other income for the three-months ended March 31, 2011.
The following table provides a summary reconciliation of the Company’s financial assets that are recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three-months ended:
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
|
|
|
March 31, 2012 |
|
March 31, 2011 |
|
||||||||
|
|
|
Auction
|
|
Put Options |
|
Auction
|
|
Put Options |
|
||||
|
Opening Balance |
|
$ |
35,852 |
|
$ |
3,041 |
|
$ |
68,252 |
|
$ |
3,768 |
|
|
Transfers into Level 3 |
|
- |
|
- |
|
- |
|
- |
|
||||
|
Transfers out of Level 3 |
|
- |
|
- |
|
- |
|
- |
|
||||
|
Total gains (losses) for the period: |
|
|
|
|
|
|
|
|
|
||||
|
Included in earnings |
|
1,787 |
|
(1,392) |
|
278 |
|
20 |
|
||||
|
Included in other comprehensive income |
|
- |
|
- |
|
164 |
|
- |
|
||||
|
Settlements |
|
(15,775) |
|
- |
|
(1,050) |
|
- |
|
||||
|
Closing Balance |
|
$ |
21,864 |
|
$ |
1,649 |
|
$ |
67,644 |
|
$ |
3,788 |
|
5. INVENTORIES
Inventories consist of the following at:
|
|
|
March 31,
|
|
December 31,
|
|
|
Raw materials |
|
$ 58,332 |
|
$ 51,103 |
|
|
Finished goods |
|
120,795 |
|
104,510 |
|
|
|
|
$ 179,127 |
|
$ 155,613 |
|
6. PROPERTY AND EQUIPMENT, Net
Property and equipment consist of the following at:
|
|
|
March 31,
|
|
December 31,
|
|
|
Land |
|
$ 3,888 |
|
$ 3,626 |
|
|
Leasehold improvements |
|
2,213 |
|
2,132 |
|
|
Furniture and fixtures |
|
2,006 |
|
2,000 |
|
|
Office and computer equipment |
|
7,087 |
|
6,727 |
|
|
Computer software |
|
9,317 |
|
9,303 |
|
|
Equipment |
|
36,569 |
|
33,286 |
|
|
Buildings |
|
12,609 |
|
3,211 |
|
|
Vehicles |
|
23,710 |
|
21,827 |
|
|
|
|
97,399 |
|
82,112 |
|
|
Less: accumulated depreciation and amortization |
|
(41,710) |
|
(36,961) |
|
|
|
|
$ 55,689 |
|
$ 45,151 |
|
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
7. INTANGIBLES, Net
Intangibles consist of the following at:
|
|
|
March 31,
|
|
December 31,
|
|
|
Amortizing intangibles |
|
$ 1,060 |
|
$ 1,059 |
|
|
Accumulated amortization |
|
(517) |
|
(504) |
|
|
|
|
543 |
|
555 |
|
|
Non-amortizing intangibles |
|
48,589 |
|
47,841 |
|
|
|
|
$ 49,132 |
|
$ 48,396 |
|
All amortizing intangibles have been assigned an estimated useful life and such intangibles are amortized on a straight-line basis over the number of years that approximate their respective useful lives ranging from one to 25 years (weighted-average life of 20 years). Amortization expense was $0.01 million for both the three-months ended March 31, 2012 and 2011, respectively.
8. DISTRIBUTION AGREEMENTS
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, have been accounted for as deferred revenue in the accompanying condensed consolidated balance sheets and are recognized as revenue ratably over the anticipated life of the respective distribution agreement, generally 20 years. Revenue recognized was $2.5 million and $1.8 million for the three-months ended March 31, 2012 and 2011, respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company has purchase commitments aggregating approximately $64.6 million at March 31, 2012, 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 has contractual obligations aggregating approximately $121.2 million, which are related primarily to sponsorships and other marketing activities.
The Company has operating lease commitments aggregating approximately $17.6 million, which are related primarily to warehouse and office space.
In March 2012, the Company acquired an approximately 75,425 square foot, free standing, three-story office building, including the real property thereunder and improvements thereon, located in Corona, CA for a purchase price of $9.7 million. The Company intends to complete the necessary improvements thereon and occupy the building as the Company’s new corporate headquarters at some time in the future.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
Litigation – In September 2006, Christopher Chavez purporting to act on behalf of himself and a certain class of consumers filed an action in the Superior Court of the State of California, County of San Francisco, against the Company and its subsidiaries for unfair business practices, false advertising, violation of California Consumers Legal Remedies Act (“CLRA”), fraud, deceit and/or misrepresentation alleging that the Company misleadingly labels its Blue Sky® beverages as manufactured and canned/bottled wholly in Santa Fe, New Mexico. Defendants removed this Superior Court action to the United States District Court for the Northern District of California (the “District Court”) under the Class Action Fairness Act and filed motions for dismissal or transfer. On June 11, 2007, the District Court granted the Company’s motion to dismiss Chavez’s complaint with prejudice. On June 23, 2009, the United States Court of Appeals for the Ninth Circuit (“Ninth Circuit”) filed a memorandum opinion reversing the decision of the District Court and remanded the case to the District Court for further proceedings. The Company filed a motion to dismiss the CLRA claims; the plaintiff filed a motion for a decision on a preemption issue; and the plaintiff filed a motion for class certification. On June 18, 2010, the District Court entered an order certifying the class, ruled that there was no preemption by federal law, and denied the Company’s motion to dismiss. The class that the District Court certified initially consists of all persons who purchased any beverage bearing the Blue Sky mark or brand in the United States at any time between May 16, 2002 and June 30, 2006. On September 9, 2010, the District Court approved the form of the class notice and its distribution plan; and set an opt-out date of December 10, 2010. On January 27, 2012, the parties entered into a settlement agreement on terms acceptable to the Company. On February 23, 2012, the District Court granted preliminary approval of the class action settlement agreement. A final approval hearing is scheduled for May 11, 2012. If approved, the Company does not believe that the settlement will have a material adverse effect on the Company’s financial position or results of operations.
In May 2009, Avraham Wellman, purporting to act on behalf of himself and a class of consumers in Canada, filed a putative class action in the Ontario Superior Court of Justice, in the City of Toronto, Ontario, Canada, against the Company and its former Canadian distributor, Pepsi-Cola Canada Ltd., as defendants. The plaintiff alleges that the defendants misleadingly packaged and labeled Monster Energy® products in Canada by not including sufficiently specific statements with respect to contra-indications and/or adverse reactions associated with the consumption of the energy drink products. The plaintiff’s claims against the defendants are for negligence, unjust enrichment, and making misleading/false representations in violation of the Competition Act (Canada), the Food and Drugs Act (Canada) and the Consumer Protection Act, 2002 (Ontario). The plaintiff claims general damages on behalf of the putative class in the amount of CDN$20 million, together with punitive damages of CDN$5 million, plus legal costs and interest. The plaintiff’s certification motion materials have not yet been filed. The Company believes that any such damages, if awarded, would not have a material adverse effect on the Company’s financial position or results of operations. In accordance with class action practices in Ontario, the Company will not file an answer to the complaint until after the determination of the certification motion. The Company believes that the plaintiff’s complaint is without merit and plans a vigorous defense.
Securities Litigation — On September 11, 2008, a federal securities class action complaint styled Cunha v. Hansen Natural Corp., et al. was filed in the United States District Court for the Central District of California (the “District Court”). On September 17, 2008, a second federal securities class action complaint styled Brown v. Hansen Natural Corp., et al. was also filed in the District Court.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
On July 14, 2009, the District Court entered an order consolidating the actions and appointing lead counsel and the Structural Ironworkers Local Union #1 Pension Fund as lead plaintiff. On August 28, 2009, lead plaintiff filed a Consolidated Complaint for Violations of Federal Securities Laws (the “Consolidated Class Action Complaint”). The Consolidated Class Action Complaint purported to be brought on behalf of a class of purchasers of the Company’s stock during the period November 9, 2006 through November 8, 2007 (the “Class Period”). It named as defendants the Company, Rodney C. Sacks, Hilton H. Schlosberg, and Thomas J. Kelly. Plaintiff principally alleged that, during the Class Period, the defendants made false and misleading statements relating to the Company’s distribution coordination agreements with Anheuser-Busch, Inc. (“AB”) and its sales of “Allied” energy drink lines, and engaged in sales of shares in the Company on the basis of material non-public information. Plaintiff also alleged that the Company’s financial statements for the second quarter of 2007 did not include certain promotional expenses. The Consolidated Class Action Complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, and sought an unspecified amount of damages.
On November 16, 2009, the defendants filed their motion to dismiss the Consolidated Class Action Complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b), as well as the Private Securities Litigation Reform Act. On July 12, 2010, following a hearing, the District Court granted the defendants’ motion to dismiss the Consolidated Class Action Complaint, with leave to amend, on the grounds, among others, that it failed to specify which statements plaintiff claimed were false or misleading, failed adequately to allege that certain statements were actionable or false or misleading, and failed adequately to demonstrate that defendants acted with scienter.
On August 27, 2010, plaintiff filed a Consolidated Amended Class Action Complaint for Violations of Federal Securities Laws (the “Amended Class Action Complaint”). While similar in many respects to the Consolidated Class Action Complaint, the Amended Class Action Complaint drops certain of the allegations set forth in the Consolidated Class Action Complaint and makes certain new allegations, including that the Company engaged in “channel stuffing” during the Class Period that rendered false or misleading the Company’s reported sales results and certain other statements made by the defendants. In addition, it no longer names Thomas J. Kelly as a defendant. The Amended Class Action Complaint continues to allege violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, and seeks an unspecified amount of damages.
Defendants filed a motion to dismiss the Amended Class Action Complaint on November 8, 2010. At a hearing on defendants’ motion to dismiss the Amended Class Action Complaint held on May 12, 2011, the District Court issued a tentative ruling that would grant the motion to dismiss as to certain of plaintiff’s claims, but would deny the motion to dismiss with regard to the majority of plaintiff’s claims. The District Court has not, however, issued a final ruling. The District Court held an additional hearing on the motion to dismiss on May 25, 2011, and has received supplemental submissions from the parties. Defendants’ motion to dismiss remains sub judice.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
The Amended Class Action Complaint seeks an unspecified amount of damages. As a result, the amount or range of reasonably possible litigation losses to which the Company is exposed cannot be estimated. Although the ultimate outcome of this action cannot be determined with certainty, the Company believes that the allegations in the Amended Class Action Complaint are without merit. The Company intends to vigorously defend against this lawsuit.
In addition to the above matters, the Company is subject to litigation from time to time in the normal course of business, including claims from terminated distributors. Although it is not possible to predict the outcome of such litigation, based on the facts known to the Company and after consultation with counsel, 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.
10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss) are as follows:
|
|
|
March 31, 2012 |
|
December 31, 2011 |
|
|
Foreign currency translation adjustments |
|
$ 908 |
|
$ (1,547 |
) |
|
Total accumulated other comprehensive income (loss) |
|
$ 908 |
|
$ (1,547 |
) |
11. TREASURY STOCK PURCHASE
On October 12, 2011, the Company’s Board of Directors authorized a new share repurchase program for the repurchase of up to $250.0 million of the Company’s outstanding common stock (the “2011 Repurchase Plan”). No shares have been repurchased under the 2011 Repurchase Plan as of March 31, 2012.
On March 11, 2010, the Company’s Board of Directors authorized the repurchase of up to $200.0 million of the Company’s common stock (the “2010 Repurchase Plan”). During the year ended December 31, 2011, the Company purchased 5.0 million shares of common stock at an average purchase price of $35.63 per share for a total amount of $176.4 million, which the Company holds in treasury. This repurchase, coupled with the repurchases during the year ended December 31, 2010, exhausted the availability under the 2010 Repurchase Plan.
12. STOCK-BASED COMPENSATION
The Company has two stock-based compensation plans under which shares were available for grant at March 31, 2012: the Monster Beverage Corporation 2011 Omnibus Incentive Plan (the “2011 Omnibus Incentive Plan”) and the 2009 Monster Beverage Corporation Stock Incentive Plan for Non-Employee Directors (the “2009 Directors Plan”).
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
The Company recorded $6.6 million and $3.8 million of compensation expense relating to outstanding options, restricted stock awards, stock appreciation rights and restricted stock units during the three-months ended March 31, 2012 and 2011, respectively.
Stock Options
Under the Company’s stock-based compensation plans, all stock options granted as of March 31, 2012 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.
The following weighted-average assumptions were used to estimate the fair value of options granted during:
|
|
|
Three-Months Ended March 31, |
|
||
|
|
|
2012 |
|
2011 |
|
|
Dividend yield |
|
0.0 % |
|
0.0 |
% |
|
Expected volatility |
|
48.3 % |
|
55.9 |
% |
|
Risk-free interest rate |
|
0.9 % |
|
2.0 |
% |
|
Expected term |
|
5.5 Years |
|
6.1 Years |
|
Expected Volatility : The Company uses historical volatility as it provides a reasonable estimate of the expected volatility. Historical volatility is based on the most recent volatility of the stock price over a period of time equivalent to the expected term of the option.
Risk-Free Interest Rate : The risk-free interest rate is based on the U.S. Treasury zero coupon yield curve in effect at the time of grant for the expected term of the option.
Expected Term : The Company’s expected term represents the weighted-average period that the Company’s stock options are expected to be outstanding. The expected term is based on the expected time to post-vesting exercise of options by employees. The Company uses historical exercise patterns of previously granted options to derive employee behavioral patterns used to forecast expected exercise patterns.
The following table summarizes the Company’s activities with respect to its stock option plans as follows:
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
|
Options |
|
Number of
|
|
Weighted-
|
|
Weighted-
|
|
Aggregate
|
|
||
|
Balance at January 1, 2012 |
|
18,569 |
|
$ |
8.57 |
|
4.1 |
|
$ |
696,371 |
|
|
Granted |
|
120 |
|
$ |
57.45 |
|
|
|
|
|
|
|
Exercised |
|
(1,920) |
|
$ |
1.42 |
|
|
|
|
|
|
|
Cancelled or forfeited |
|
(97) |
|
$ |
19.24 |
|
|
|
|
|
|
|
Outstanding at March 31, 2012 |
|
16,672 |
|
$ |
9.68 |
|
4.3 |
|
$ |
873,781 |
|
|
Vested and expected to vest in the future at March 31, 2012 |
|
16,060 |
|
$ |
9.14 |
|
4.1 |
|
$ |
850,404 |
|
|
Exercisable at March 31, 2012 |
|
12,547 |
|
$ |
5.86 |
|
3.2 |
|
$ |
705,494 |
|
The weighted-average grant-date fair value of options granted during the three-months ended March 31, 2012 and 2011 was $25.48 per share and $15.51 per share, respectively. The total intrinsic value of options exercised during the three-months ended March 31, 2012 and 2011 was $107.4 million and $2.5 million, respectively.
Cash received from option exercises under all plans for the three-months ended March 31, 2012 and 2011 was approximately $2.7 million and $4.2 million, respectively. The excess tax benefit realized for tax deductions from non-qualified stock option exercises and disqualifying dispositions of incentive stock options for the three-months ended March 31, 2012 and 2011 was $0.5 million and $0.2 million, respectively.
At March 31, 2012, there was $38.5 million of total unrecognized compensation expense related to non-vested options granted under the Company’s share-based payment plans. That cost is expected to be recognized over a weighted-average period of 2.4 years.
Restricted Stock Awards and Restricted Stock Units
Stock-based compensation cost for restricted stock awards and restricted stock units is measured based on the closing fair market value of the Company’s common stock at the date of grant. In the event that the Company has the option and intent to settle a restricted stock unit in cash, the award is classified as a liability and revalued at each balance sheet date. Total cash paid to settle restricted stock unit liabilities and the increase in the liabilities for future cash settlements during the three-months ended March 31, 2012 and the year ended December 31, 2011 were not material.
The following table summarizes the Company’s activities with respect to non-vested restricted stock awards and non-vested restricted stock units as follows:
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
|
|
|
Number of
|
|
|
Weighted-
|
|
|
|
Non-vested at January 1, 2012 |
|
724 |
|
|
$ |
41.66 |
|
|
Granted |
|
91 |
|
|
$ |
57.45 |
|
|
Vested |
|
- |
|
|
$ |
- |
|
|
Forfeited/cancelled |
|
- |
|
|
$ |
- |
|
|
Non-vested at March 31, 2012 |
|
815 |
|
|
$ |
43.44 |
|
The weighted-average grant-date fair value of restricted stock units and restricted stock awards granted during the three-months ended March 31, 2012 was $57.45. No restricted stock units or restricted stock awards were granted during the three-months ended March 31, 2011. As of March 31, 2012, 0.7 million restricted stock units and restricted stock awards are expected to vest.
At March 31, 2012, total unrecognized compensation expense relating to non-vested restricted stock awards and non-vested restricted stock units was $29.0 million, which is expected to be recognized over a weighted-average period of 2.1 years.
13. INCOME TAXES
The following is a roll-forward of the Company’s total gross unrecognized tax benefits, not including interest and penalties, for the three-months ended March 31, 2012:
|
|
|
Gross Unrealized Tax
|
|
|
|
Balance at December 31, 2011 |
|
$ |
1,910 |
|
|
Additions for tax positions related to the current year |
|
- |
|
|
|
Additions for tax positions related to the prior year |
|
- |
|
|
|
Decreases related to settlement with taxing authority |
|
- |
|
|
|
Balance at March 31, 2012 |
|
$ |
1,910 |
|
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Company’s condensed consolidated financial statements. As of March 31, 2012, the Company had accrued approximately $0.5 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.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
It is expected that the amount of unrecognized tax benefits will change within the next 12 months as a result of ongoing audits. However, the Company does not expect the change to have a significant impact on its financial position, results of operations or liquidity.
On February 10, 2011, the Internal Revenue Service (“IRS”) began its examination of the Company’s U.S. federal income tax return for the years ended December 31, 2009 and 2008. The examination was completed in April 2012 with no material adjustments. The Company is also currently under examination by certain state jurisdictions.
The Company is subject to U.S. federal income tax as well as to income tax in multiple state and foreign jurisdictions. Federal income tax returns are subject to IRS examination for the 2010 and 2011 tax years. State income tax returns are subject to examination for the 2007 through 2011 tax years.
14. EARNINGS PER SHARE
A reconciliation of the weighted-average shares used in the basic and diluted earnings per common share computations is presented below:
|
|
|
Three-Months Ended |
|
||
|
|
|
March 31, |
|
||
|
|
|
2012 |
|
2011 |
|
|
Weighted-average shares outstanding: |
|
|
|
|
|
|
Basic |
|
174,832 |
|
177,858 |
|
|
Dilutive securities |
|
10,430 |
|
9,390 |
|
|
Diluted |
|
185,262 |
|
187,248 |
|
For the three-months ended March 31, 2012 and 2011, options outstanding totaling 0.2 million and 0.7 million shares, respectively, were excluded from the calculations as their effect would have been antidilutive.
15. SEGMENT INFORMATION
The Company has two reportable segments, namely Direct Store Delivery (“DSD”), whose principal products comprise energy drinks, and Warehouse (“Warehouse”), whose principal products comprise juice based and soda beverages. The DSD segment develops, markets and sells products primarily through an exclusive distributor network, whereas the Warehouse segment develops, markets and sells products primarily direct to retailers. Corporate and unallocated amounts that do not relate to DSD or Warehouse segments have been allocated to “Corporate & Unallocated.”
The net revenues derived from the DSD and Warehouse segments and other financial information related thereto are as follows:
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
|
|
|
Three-Months Ended March 31, 2012 |
|
||||||||||||||
|
|
|
DSD |
|
Warehouse |
|
Corporate and
|
|
Total |
|
||||||||
|
Net sales |
|
$ |
431,182 |
|
|
$ |
23,423 |
|
|
$ |
- |
|
|
$ |
454,605 |
|
|
|
Contribution margin |
|
149,092 |
|
|
2,157 |
|
|
- |
|
|
151,249 |
|
|
||||
|
Corporate and unallocated expenses |
|
- |
|
|
- |
|
|
(24,964 |
) |
|
(24,964 |
) |
|
||||
|
Operating income |
|
|
|
|
|
|
|
|
|
|
126,285 |
|
|
||||
|
Other income |
|
100 |
|
|
- |
|
|
246 |
|
|
346 |
|
|
||||
|
Income before provision for income taxes |
|
|
|
|
|
|
|
|
|
|
126,631 |
|
|
||||
|
Depreciation and amortization |
|
3,783 |
|
|
29 |
|
|
1,144 |
|
|
4,956 |
|
|
||||
|
Trademark amortization |
|
- |
|
|
11 |
|
|
1 |
|
|
12 |
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
Three-Months Ended March 31, 2011 |
|
||||||||||||||
|
|
|
DSD |
|
Warehouse |
|
Corporate and
|
|
Total |
|
||||||||
|
Net sales |
|
$ |
334,722 |
|
|
$ |
21,697 |
|
|
$ |
- |
|
|
$ |
356,419 |
|
|
|
Contribution margin |
|
110,075 |
|
|
(340 |
) |
|
- |
|
|
109,735 |
|
|
||||
|
Corporate and unallocated expenses |
|
- |
|
|
- |
|
|
(21,280 |
) |
|
(21,280 |
) |
|
||||
|
Operating income |
|
|
|
|
|
|
|
|
|
|
88,455 |
|
|
||||
|
Other income |
|
13 |
|
|
- |
|
|
288 |
|
|
301 |
|
|
||||
|
Income before provision for income taxes |
|
|
|
|
|
|
|
|
|
|
88,756 |
|
|
||||
|
Depreciation and amortization |
|
2,545 |
|
|
17 |
|
|
1,019 |
|
|
3,581 |
|
|
||||
|
Trademark amortization |
|
- |
|
|
11 |
|
|
1 |
|
|
12 |
|
|
||||
Revenue is derived from sales to external customers. Operating expenses that pertain to each segment are allocated to the appropriate segment.
Corporate and unallocated expenses were $25.0 million for the three-months ended March 31, 2012 and included $17.7 million of payroll costs, of which $6.6 million was attributable to stock-based compensation expense (see Note 12, “Stock-Based Compensation”), $4.7 million attributable to professional service expenses, including accounting and legal costs, and $2.6 million of other operating expenses. Corporate and unallocated expenses were $21.3 million for the three-months ended March 31, 2011 and included $12.7 million of payroll costs, of which $3.8 million was attributable to stock-based compensation expense (see Note 12, “Stock-Based Compensation”), $5.2 million attributable to professional service expenses, including accounting and legal costs, and $3.4 million of other operating expenses. Certain items, including operating assets and income taxes, are not allocated to individual segments and therefore are not presented above.
Coca-Cola Refreshments, a customer of the DSD segment, accounted for approximately 30% of the Company’s net sales for both the three-months ended March 31, 2012 and 2011, respectively.
MONSTER BEVERAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Dollars in Thousands, Except Per Share Amounts) (Unaudited)
Net sales to customers outside the United States amounted to $79.2 million and $55.5 million for the three-months ended March 31, 2012 and 2011, respectively. Such sales were approximately 17.4% and 15.6% of net sales for the three-months ended March 31, 2012 and 2011, respectively.
The Company’s net sales by product line were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended |
||||
|
|
|
March 31, |
||||
|
Product Line |
|
2012 |
|
2011 |
||
|
Energy drinks |
|
$ |
418,912 |
|
$ |
327,642 |
|
Non-carbonated (primarily juice based beverages and Peace Tea® iced teas) |
|
24,252 |
|
18,944 |
||
|
Carbonated (primarily soda beverages) |
|
7,661 |
|
7,269 |
||
|
Other |
|
3,780 |
|
2,564 |
||
|
|
|
$ |
454,605 |
|
$ |
356,419 |
|
|
|
|
|
|
|
|
16. RELATED PARTY TRANSACTIONS
A director of the Company was a partner in a law firm (the director resigned from the law firm effective July 10, 2011) that serves as counsel to the Company. Expenses incurred in connection with services rendered by such firm to the Company during the three-months ended March 31, 2012 and 2011 were $0.6 million and $1.2 million, respectively.
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 three-months ended March 31, 2012 and 2011 were $0.1 million and $0.2 million, respectively.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Business
Overview
Monster Beverage Corporation was incorporated in Delaware on April 25, 1990. Our principal place of business is located at 550 Monica Circle, Suite 201, Corona, California 92880 and our telephone number is (951) 739-6200. When this report uses the words “the Company”, “Hansen Natural Company” “we”, “us”, and “our”, these words refer to Monster Beverage Corporation and its subsidiaries, unless the context otherwise requires. We are a holding company and conduct no operating business except through our consolidated subsidiaries.
We develop, market, sell and distribute “alternative” beverage category beverages primarily under the following brand names:
|
· Monster Energy® |
· Hansen’s® |
|
· Monster Rehab® |
· Hansen’s Natural Soda® |
|
· Monster Energy Extra Strength Nitrous Technology® |
· Junior Juice® |
|
· Java Monster® |
· Blue Sky® |
|
· X-Presso Monster® |
· Hubert’s® |
|
· Worx Energy® |
· Vidration® |
|
· Peace Tea® |
|
Our Monster Energy® drinks, which represented 91.6% and 91.5% of our net sales for the three-months ended March 31, 2012 and 2011, respectively, include the following:
We have two reportable segments, namely Direct Store Delivery (“DSD”), whose principal products comprise energy drinks, and Warehouse (“Warehouse”), whose principal products comprise juice-based and soda beverages. The DSD segment develops, markets and sells products primarily through an exclusive distributor network, whereas the Warehouse segment develops, markets and sells products primarily direct to retailers.
During the three-months ended March 31, 2012, we continued to expand our existing product lines and flavors and further developed our markets. In particular, we continued to focus on developing and marketing beverages that fall within the category generally described as the “alternative” beverage category. During the three-months ended March 31, 2012, we introduced the following products:
|
· |
Monster Rehab® Tea + Orangeade + Energy, a non-carbonated rehydration energy drink (February 2012). |
|
· |
Übermonster™ Energy Brew, a non-alcoholic energy drink manufactured using a brewed fermentation process (February 2012). |
|
· |
Hansen’s® Coconut Water, in original and tropical flavors, packaged in re-sealable Tetra Prisma boxes (March 2012). |
Our gross sales* of $517.3 million for the three-months ended March 31, 2012 represented record sales for our first fiscal quarter. The vast majority of our gross sales are derived from our Monster Energy® brand energy drinks. Gross sales of our Monster Energy® brand energy drinks were $481.4 million for the three-months ended March 31, 2012, an increase of $106.1 million, or 96.7% of our overall increase in gross sales for the three-months ended March 31, 2012. Any decrease in gross sales of our Monster Energy® brand energy drinks could have a significant adverse effect on our future revenues and net income. Competitive pressure in the energy drink category could also adversely affect our operating results.
*Gross sales — see definition below.
Our DSD segment represented 94.8% and 93.9% of our consolidated net sales for the three-months ended March 31, 2012 and 2011, respectively. Our Warehouse segment represented 5.2% and 6.1% of our consolidated net sales for the three-months ended March 31, 2012 and 2011, respectively.
Our sales and marketing strategy for all our beverages is to focus our efforts on developing brand awareness through image enhancing programs and product sampling. We use our branded vehicles and other promotional vehicles at events where we offer samples of our products to consumers. We utilize “push-pull” methods to enhance shelf and display space exposure in sales outlets (including advertising, in-store promotions and in-store placement of point-of-sale materials, racks, coolers and barrel coolers) to enhance demand from consumers for our products. We also support our brands with prize promotions, price promotions, competitions, endorsements from selected public and extreme sports figures, personality endorsements (including from television and other well known sports personalities), coupons, sampling and sponsorship of selected causes, events, athletes and teams. In-store posters, outdoor posters, print, radio and television advertising and coupons, may also be used to promote our brands.
We believe that one of the keys to success in the beverage industry is differentiation, making our brands and products visually distinctive from other beverages on the shelves of retailers. We review our products and packaging on an ongoing basis and, where practical, endeavor to make them different, better and unique. The labels and graphics for many of our products are redesigned from time to time to maximize their visibility and identification, wherever they may be placed in stores, which we will continue to reevaluate from time to time.
All of our beverage products are manufactured by various third party bottlers and co-packers situated throughout the United States and abroad, under separate arrangements with each party.
Our growth strategy includes expanding our international business. Gross sales to customers outside the United States amounted to $100.6 million and $72.8 million for the three-months ended March 31, 2012 and 2011, respectively. Such sales were approximately 19% and 18% of gross sales for the three-months ended March 31, 2012 and 2011, respectively.
Our customers are primarily full service beverage distributors, retail grocery and specialty chains, wholesalers, club stores, drug chains, mass merchandisers, convenience chains, health food distributors, food service customers and the military. Gross sales to our various customer types for the three-months ended March 31, 2012 and 2011 are reflected below. Such information includes sales made by us directly to the customer types concerned, which include our full service beverage distributors in the United States. Such full service beverage distributors in turn sell certain of our products to the same customer types listed below. We do not have complete details of such full service distributors’ sales of our products to their respective customers and therefore limit our description of our customer types to include only our sales to such full service distributors without reference to such distributors’ sales to their own customers.
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Three-Months Ended
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2012 |
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2011 |
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Full service distributors |
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65% |
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65% |
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Club stores, drug chains & mass merchandisers |
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10% |
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10% |
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Outside the U.S. |
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19% |
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18% |
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Retail grocery, specialty chains and wholesalers |
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4% |
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5% |
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Other |
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2% |
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2% |
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Our customers include Coca-Cola Refreshments (“CCR”), Coca-Cola Enterprises, Coca-Cola Refreshments Canada, Ltd. (formerly known as Coca-Cola Bottling Company), CCBCC Operations, LLC, United Bottling Contracts Company, LLC and other Coca-Cola Company independent bottlers, Wal-Mart, Inc. (including Sam’s Club), select Anheuser-Busch, Inc. distributors, certain bottlers of the Coca-Cola Hellenic group, Kalil Bottling Group, Trader Joe’s, John Lenore & Company, Swire Coca-Cola, Costco, The Kroger Co. and Safeway, Inc. A decision by any large customer to decrease amounts purchased from us or to cease carrying our products could have a material negative effect on our financial condition and consolidated results of operations. CCR accounted for approximately 30% of our net sales for both the three-months ended March 31, 2012 and 2011, respectively.