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MNST > SEC Filings for MNST > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for MONSTER BEVERAGE CORP


9-Aug-2013

Quarterly Report


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 Corporation" (the Company's former name), "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:

††††††††††††††††††††††††††††††††††††††††††    ††††††††††††††††††††††† Hansen's®
Monster Energy®
††††††††††††††††††††††††††††††††††††††††††    ††††††††††††††††††††††† Hansen's
Monster Rehab®                                Natural Cane Soda®
††††††††††††††††††††††††††††††††††††††††††    ††††††††††††††††††††††† Junior
Monster Energy Extra Strength Nitrous         Juice®
Technology®
††††††††††††††††††††††††††††††††††††††††††    ††††††††††††††††††††††† Blue Sky®
Java Monster®
††††††††††††††††††††††††††††††††††††††††††    ††††††††††††††††††††††† Hubert's®
X-Presso Monster®
††††††††††††††††††††††††††††††††††††††††††    ††††††††††††††††††††††† Vidration®
Muscle Monster®
††††††††††††††††††††††††††††††††††††††††††    ††††††††††††††††††††††† Worx
Peace Tea®                                    Energy®

Our Monster Energy® drinks, which represented 92.2% and 92.5% of our net sales for the three-months ended June 30, 2013 and 2012, respectively, include the following:

††††††††††††††††††††††††††††††††††††††††††       ††††††††††††††††††††††††††††††††††††††††††
Monster Energy®                                  Java Monster® Kona Blend
††††††††††††††††††††††††††††††††††††††††††       ††††††††††††††††††††††††††††††††††††††††††
Lo-Carb Monster Energy®                          Java Monster® Loca Moca®
††††††††††††††††††††††††††††††††††††††††††       ††††††††††††††††††††††††††††††††††††††††††
Monster Energy® Assault®                         Java Monster® Mean Bean®
††††††††††††††††††††††††††††††††††††††††††       ††††††††††††††††††††††††††††††††††††††††††
Monster Khaos®                                   Java Monster® Vanilla Light
††††††††††††††††††††††††††††††††††††††††††       ††††††††††††††††††††††††††††††††††††††††††
Monster M-80® (named Ripper® in certain          Java Monster® Irish Blend®
countries)                                       ††††††††††††††††††††††††††††††††††††††††††
††††††††††††††††††††††††††††††††††††††††††       Java Monster® Toffee
Monster MIXXD®                                   ††††††††††††††††††††††††††††††††††††††††††
††††††††††††††††††††††††††††††††††††††††††       Java Monster® Kona Cappuccino
Monster Energy® Absolutely Zero                  ††††††††††††††††††††††††††††††††††††††††††
††††††††††††††††††††††††††††††††††††††††††       Monster Energy Extra Strength Nitrous
Monster Energy® Import                           Technology® Super Dry™
††††††††††††††††††††††††††††††††††††††††††       ††††††††††††††††††††††††††††††††††††††††††
Monster Energy® Import Light                     Monster Energy Extra Strength Nitrous
††††††††††††††††††††††††††††††††††††††††††       Technology® Anti-Gravity®
Monster Energy® Dub Edition Baller's Blend       ††††††††††††††††††††††††††††††††††††††††††
††††††††††††††††††††††††††††††††††††††††††       Monster Energy Extra Strength Nitrous
Monster Energy® Dub Edition Mad Dog              Technology® Black Ice™
††††††††††††††††††††††††††††††††††††††††††       ††††††††††††††††††††††††††††††††††††††††††
Monster Rehab® Tea + Lemonade + Energy           X-Presso Monster® Hammer
††††††††††††††††††††††††††††††††††††††††††       ††††††††††††††††††††††††††††††††††††††††††
Monster Rehab® Rojo Tea + Energy                 X-Presso Monster® Midnite
††††††††††††††††††††††††††††††††††††††††††       ††††††††††††††††††††††††††††††††††††††††††
Monster Rehab® Green Tea + Energy                Monster Cuba-Lima®
††††††††††††††††††††††††††††††††††††††††††       ††††††††††††††††††††††††††††††††††††††††††
Monster Rehab® Protean + Energy                  Monster Energy® Zero Ultra
††††††††††††††††††††††††††††††††††††††††††       ††††††††††††††††††††††††††††††††††††††††††
Monster Rehab® Tea + Orangeade + Energy          Monster Energy® Ultra Blue
††††††††††††††††††††††††††††††††††††††††††       ††††††††††††††††††††††††††††††††††††††††††
Monster Rehab® Tea + Pink Lemonade + Energy      Übermonster® Energy Brew
††††††††††††††††††††††††††††††††††††††††††       ††††††††††††††††††††††††††††††††††††††††††
Muscle Monster® Vanilla                          M3® Monster Energy® Super Concentrate
††††††††††††††††††††††††††††††††††††††††††
Muscle Monster® Chocolate
††††††††††††††††††††††††††††††††††††††††††
Muscle Monster® Coffee


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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 six-months ended June 30, 2013, 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 six-months ended June 30, 2013, we introduced the following products:

† Monster Mini's, 12-packs in 8-ounce size cans (January 2013).
† Peace Tea® iced teas, 12-packs in 8.4-ounce size cans (February 2013).
† Muscle Monster® Energy Shakes, non-carbonated energy shakes with 25-grams of protein (March 2013).
† Monster Rehab® Tea + Pink Lemonade + Energy (March 2013).
† Monster Energy® Ultra Blue, a carbonated energy drink which contains zero calories and zero sugar (March 2013).
† Java Monster® Kona Cappuccino (March 2013).
† Hansen's® Sparkling beverages, a line of 10-calorie beverages with all natural sweeteners (March 2013).
† Peace Tea® Peach and Sno-Berry, ready-to-drink iced teas (June 2013).

In the normal course of business we discontinue certain products and/or product lines. Those products or product lines discontinued during the three- and six-months ended June 30, 2013, either individually or in aggregate, did not have a material adverse impact on our financial position, results of operations or liquidity.

During the three-months ended June 30, 2013 and 2012, we incurred foreign currency transaction losses of $3.6 million and $0.5 million, respectively. During the six-months ended June 30, 2013 and 2012, we incurred foreign currency transaction losses of $8.3 million and $1.0 million, respectively. Such amounts are included in other (expense) income. The increase in foreign currency losses during the three- and six-months ended June 30, 2013 was primarily related to our operations in Australia, Japan, South Africa and Europe.

During the three- and six-months ended June 30, 2013, we incurred an increase in professional service costs, net of insurance reimbursements, of $5.0 million and $10.0 million, respectively. The increase included $4.2 million and $7.2 million for the three- and six-months ended June 30, 2013, respectively, related to regulatory matters and litigation concerning the advertising, marketing, promotion, ingredients, usage, safety and sale of our Monster Energy® brand energy drinks.

During the three-months ended June 30, 2013 and 2012, we incurred termination costs to certain of our prior distributors amounting to $2.0 million and $0.6 million, respectively. During the six-months ended June 30, 2013 and 2012, we incurred termination costs to certain of our prior distributors amounting to $10.3 million and $0.6 million, respectively. Such termination costs have been expensed in full and are included in operating expenses for the three- and six-months ended June 30, 2013 and 2012.


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In addition, pursuant to new and/or amended distribution agreements entered into with certain distributors, net amounts of $9.7 million from such distributors were recorded during the six-months ended June 30, 2013, relating to the costs associated with terminating agreements with certain of our prior distributors. Such amounts 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.

Our gross sales (as defined below) of $723.9 million for the three-months ended June 30, 2013 represented record sales for our second 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 $671.8 million for the three-months ended June 30, 2013, an increase of $40.0 million, or 88.7% of our overall increase in gross sales for the three-months ended June 30, 2013.

The percentage increase in gross sales was 6.6% and 28.7% for the three-months ended June 30, 2013 and 2012, respectively. We believe the decrease in the percentage growth rate for the three-months ended June 30, 2013 was primarily attributable to less robust growth of our Monster Energy® drink line in our North American and European energy drink markets. In addition, the growth rate for the three-months ended June 30, 2012 was positively impacted by sales in Japan, which began in the second quarter of 2012 and therefore did not have a 2011 second quarter comparable.

Our DSD segment represented 95.3% and 95.8% of our consolidated net sales for the three-months ended June 30, 2013 and 2012, respectively. Our Warehouse segment represented 4.7% and 4.2% of our consolidated net sales for the three-months ended June 30, 2013 and 2012, respectively. Our DSD segment represented 95.2% and 95.4% of our consolidated net sales for the six-months ended June 30, 2013 and 2012, respectively. Our Warehouse segment represented 4.8% and 4.6% of our consolidated net sales for the six-months ended June 30, 2013 and 2012, 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 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 (directly and through our sponsorships and endorsements) and coupons may also be used to promote our brands.

We have historically marketed our Monster Energy®, Hansen's® and Blue Energy® energy drink products as dietary supplements in accordance with the statutory definition of "dietary supplement" set forth in the Federal Food, Drug, and Cosmetic Act (the "Act"). However, as permitted under that Act and FDA regulations, we recently decided to transition the labeling and marketing of these energy drink products from dietary supplements to conventional foods. In the first quarter of 2013, we began transitioning the labeling of such products. Products marketed under the Worx Energy® brand, which are sold in 2-ounce bottles, will continue to be labeled as dietary supplements. We do not expect the cost of the labeling changes to be significant.


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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 $160.4 million and $153.4 million for the three-months ended June 30, 2013 and 2012, respectively. Such sales were approximately 22% and 23% of gross sales for the three-months ended June 30, 2013 and 2012, respectively. Gross sales to customers outside the United States amounted to $291.1 million and $254.0 million for the six-months ended June 30, 2013 and 2012, respectively. Such sales were approximately 23% and 21% of gross sales for the six-months ended June 30, 2013 and 2012, 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- and six-months ended June 30, 2013 and 2012 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 as well as to other customer types. We 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.

                                         Three-Months Ended       Six-Months Ended
                                              June 30,                June 30,
                                          2013        2012        2013        2012
Full service distributors                 62%         62%         62%         63%
Club stores, drug chains & mass
merchandisers                             11%          9%         10%          9%
Outside the U.S.                          22%         23%         23%         21%
Retail grocery, specialty chains and
wholesalers                                3%          4%          3%          4%
Other                                      2%          2%          2%          3%

Our customers include Coca-Cola Refreshments USA Inc. ("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, 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 29% and 28% of our net sales for the three-months ended June 30, 2013 and 2012, respectively. CCR accounted for approximately 30% and 29% of our net sales for the six-months ended June 30, 2013 and 2012, respectively.


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Results of Operations



The following table sets forth key statistics for the three- and six-months
ended June 30, 2013 and 2012, respectively.



(In thousands,
except per share           Three-Months Ended       Percentage          Six-Months Ended         Percentage
amounts)                        June 30,              Change                June 30,               Change
                           2013          2012        13 vs. 12        2013            2012        13 vs. 12
Gross sales, net of
discounts & returns
*                       $   723,887    $  678,852          6.6%    $  1,278,838    $ 1,196,165          6.9%
Less: Promotional
and other
allowances**                 92,953        86,212          7.8%         163,680        148,920          9.9%
Net sales                   630,934       592,640          6.5%       1,115,158      1,047,245          6.5%

Cost of sales               294,672       285,632          3.2%         526,857        499,068          5.6%
Gross profit***             336,262       307,008          9.5%         588,301        548,177          7.3%
Gross profit margin
as a percentage of
net sales                     53.3%         51.8%                         52.8%          52.3%

Operating expenses1         156,835       137,235         14.3%         301,569        252,118         19.6%
Operating expenses
as a percentage of
net sales                     24.9%         23.2%                         27.0%          24.1%

Operating income            179,427       169,773          5.7%         286,732        296,059        (3.2%)
Operating income as
a percentage of net
sales                         28.4%         28.6%                         25.7%          28.3%

Other (expense)
income:
Interest and other
(expense) income,
net                         (3,468)          (27)   (12,744.4%)         (7,940)           (77)   (10,211.7%)
Gain (loss) on
investments and put
options, net                     66          (33)        300.0%           2,637            363      (626.4%)
Total other
(expense) income            (3,402)          (60)    (5,570.0%)         (5,303)            286      1,954.2%

Income before
provision for income
taxes                       176,025       169,713          3.7%         281,429        296,345        (5.0%)

Provision for income
taxes                        69,152        59,918         15.4%         111,060        110,450          0.6%

Net income              $   106,873    $  109,795        (2.7%)    $    170,369    $   185,895        (8.4%)
Net income as a
percentage of net
sales                         16.9%         18.5%                         15.3%          17.8%

Net income per
common share:
Basic                   $      0.64    $     0.62          3.0%    $       1.03    $      1.06        (3.1%)
Diluted                 $      0.62    $     0.59          4.6%    $       0.98    $      1.00        (1.5%)

Case sales (in
thousands)
(in 192-ounce case
equivalents)                 61,615        57,525          7.1%         109,364        101,921          7.3%

1Includes $2.0 million and $0.6 million for the three-months ended June 30, 2013 and 2012, respectively, and $10.3 million and $0.6 million for the six-months ended June 30, 2013 and 2012, respectively, related to expenditures attributable to the costs associated with terminating existing distributors.

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


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** Although the expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the disclosure thereof does not conform with GAAP presentation requirements. Additionally, our definition of promotional and other allowances may not be comparable to similar items presented by other companies. Promotional and other allowances primarily include consideration given to the Company's distributors or retail customers including, but not limited to the following: (i) discounts granted off list prices to support price promotions to end-consumers by retailers; (ii) reimbursements given to the Company's distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products; (iii) the Company's agreed share of fees given to distributors and/or directly to retailers for advertising, in-store marketing and promotional activities; (iv) the Company's agreed share of slotting, shelf space allowances and other fees given directly to retailers;
(v) incentives given to the Company's distributors and/or retailers for achieving or exceeding certain predetermined sales goals; (vi) discounted or free products; (vii) contractual fees given to the Company's distributors related to sales made by the Company direct to certain customers that fall within the distributors' sales territories; and (viii) commissions paid to our customers. The presentation of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and the spending levels incurred or correlated with such sales. Promotional and other allowances constitute a material portion of our marketing activities. The Company's promotional allowance programs with its numerous 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.

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

Results of Operations for the Three-Months Ended June 30, 2013 Compared to the Three-Months Ended June 30, 2012.

Gross Sales. Gross sales were $723.9 million for the three-months ended June 30, 2013, an increase of approximately $45.0 million, or 6.6% higher than gross sales of $678.9 million for the three-months ended June 30, 2012. The increase in the gross sales of our Monster Energy® brand energy drinks represented approximately $40.0 million, or 88.7%, of the overall increase in gross sales. Gross sales of our Monster Energy® brand energy drinks increased primarily due to increased sales by volume as a result of increased domestic and international consumer demand as well as our expansion into new international markets. The increase in gross sales of our Hubert's® lemonades represented approximately $7.0 million, or 15.5%, of the overall increase in gross sales. Gross sales of our Hubert's® lemonades increased primarily due to increased sales by volume as a result of increased distribution and increased domestic consumer demand. Pricing changes did not have a material impact on the increase in gross sales. No other individual product line contributed either a material increase or decrease to gross sales for the three-months ended June 30, 2013. Promotional and other allowances, as described in the footnote above, were $93.0 million for the three-months ended June 30, 2013, an increase of $6.7 million, or 7.8% higher than promotional and other allowances of $86.2 million for the three-months ended June 30, 2012. Promotional and other allowances as a percentage of gross sales increased to 12.8% from 12.7% for the three-months ended June 30, 2013 and 2012, respectively. As a result, the percentage increase in gross sales for the three-months ended June 30, 2013 was higher than the percentage increase in net sales.


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Net Sales. Net sales were $630.9 million for the three-months ended June 30, 2013, an increase of approximately $38.3 million, or 6.5% higher than net sales of $592.6 million for the three-months ended June 30, 2012. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $33.4 million, or 87.1%, of the overall increase in net sales. Net sales of our Monster Energy® brand energy drinks increased primarily due to increased sales by volume as a result of increased domestic and international consumer demand as well as our expansion into new international markets. The increase in net sales of our Hubert's® lemonades represented approximately $6.6 million, or 17.2%, of the overall increase in net sales. Net sales of our Hubert's® lemonades increased primarily due to increased sales by volume as a result of increased distribution and increased domestic consumer demand. Pricing changes did not have a material impact on the increase in net sales. No other individual product line contributed either a material increase or decrease to net sales for the three-months ended June 30, 2013.

Case sales, in 192-ounce case equivalents, were 61.6 million cases for the three-months ended June 30, 2013, an increase of approximately 4.1 million cases or 7.1% higher than case sales of 57.5 million cases for the three-months ended June 30, 2012. The overall average net sales per case decreased to $10.24 for the three months ended June 30, 2013, which was 0.6% lower than the average net sales per case of $10.30 for the three-months ended June 30, 2012.

Net sales for the DSD segment were $601.0 million for the three-months ended June 30, 2013, an increase of approximately $33.0 million, or 5.8% higher than net sales of $568.0 million for the three-months ended June 30, 2012. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $33.4 million, or 101.2%, of the overall increase in net sales for the DSD segment. Net sales for the DSD segment of our Monster Energy® brand energy drinks increased primarily due to increased sales by volume as a result of increased domestic and international consumer demand as well as our expansion into new international markets. Pricing changes did not have a material impact on the increase in net sales for the DSD segment. No other individual product line contributed either a material increase or decrease to net sales for the DSD . . .

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