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MNST > SEC Filings for MNST > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for MONSTER BEVERAGE CORP

Form 10-Q for MONSTER BEVERAGE CORP


12-Nov-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 1 Monster Way, Corona, California 92879 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:

† Monster Energy® † Hansen's®
† Monster Rehab® † Hansen's Natural Cane Soda®
† Monster Energy Extra Strength Nitrous Technology® † Junior Juice®

† Java Monster®                                     † Blue Sky®
† X-Presso Monster®                                 † Hubert's®
† Muscle Monster®                                   † Vidration®
† Peace Tea®                                        † Worx Energy®

Our Monster Energy® drinks, which represented 92.7% and 91.8% of our net sales for the three-months ended September 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      †     Java Monster® Irish Blend®
       certain countries)
†      Monster MIXXD®                       †     Java Monster® Toffee
†      Monster Energy® Absolutely Zero      †     Java Monster® Kona Cappuccino
†      Monster Energy® Import               †     Monster Energy Extra Strength
†      Monster Energy® Import Light               Nitrous Technology® Super Dry™
†      Monster Energy® Dub Edition Baller's †     Monster Energy Extra Strength
†      Blend                                      Nitrous Technology®
       Monster Energy® Dub Edition Mad Dog        Anti-Gravity®
†      Monster Rehab® Tea + Lemonade +      †     Monster Energy Extra Strength
†      Energy                                     Nitrous Technology® Black Ice™
       Monster Rehab® Rojo Tea + Energy
†      Monster Rehab® Green Tea + Energy    †     X-Presso Monster® Hammer
†      Monster Rehab® Protean + Energy      †     X-Presso Monster® Midnite
†      Monster Rehab® Tea + Orangeade +     †     Monster Cuba-Lima®
       Energy
†      Monster Rehab® Tea + Pink Lemonade + †     Monster Energy® Zero Ultra
       Energy
†      Muscle Monster® Vanilla              †     Monster Energy® Ultra Blue
†      Muscle Monster® Chocolate            †     Monster Energy® Ultra Red
†      Muscle Monster® Coffee               †     M3® Monster Energy® Super
                                                  Concentrate
†      Übermonster® Energy Brew


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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 nine-months ended September 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 nine-months ended September 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).
† Hubert's® Lemonade, Strawberry Lemonade, Blackberry Lemonade and Cherry Limeade in 40-ounce glass bottles (July 2013).
† Monster Energy® Ultra Red, a carbonated energy drink which contains zero calories and zero sugar (September 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 nine-months ended September 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- and nine-months ended September 30, 2013, we incurred an increase in professional service costs, net of insurance reimbursements, of $6.5 million and $16.4 million, respectively. The increase included $5.3 million and $12.5 million for the three- and nine-months ended September 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.

Our gross sales (as defined below) of $686.6 million for the three-months ended September 30, 2013 represented record sales for our third 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 $638.7 million for the three-months ended September 30, 2013, an increase of $53.5 million, or 98.5% of our overall increase in gross sales for the three-months ended September 30, 2013.


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The percentage increase in gross sales was 8.6% and 15.4% for the three-months ended September 30, 2013 and 2012, respectively. We believe the decrease in the percentage growth rate for the three-months ended September 30, 2013 was primarily attributable to less robust growth of our Monster Energy® drink line in our United States and European energy drink markets. In addition, the growth rate for the three-months ended September 30, 2012 was positively impacted by sales in Japan, which began in the second quarter of 2012 and therefore did not have a 2011 third quarter comparable.

Our DSD segment represented 96.0% and 95.3% of our consolidated net sales for the three-months ended September 30, 2013 and 2012, respectively. Our Warehouse segment represented 4.0% and 4.7% of our consolidated net sales for the three-months ended September 30, 2013 and 2012, respectively. Our DSD segment represented 95.4% of our consolidated net sales for both the nine-months ended September 30, 2013 and 2012. Our Warehouse segment represented 4.6% of our consolidated net sales for both the nine-months ended September 30, 2013 and 2012.

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 determined 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. The costs of the labeling changes have not been significant and we do not expect the remaining costs, if any, to be significant.

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.


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Our growth strategy includes expanding our international business. Gross sales to customers outside the United States amounted to $151.6 million and $144.7 million for the three-months ended September 30, 2013 and 2012, respectively. Such sales were approximately 22% and 23% of gross sales for the three-months ended September 30, 2013 and 2012, respectively. Gross sales to customers outside the United States amounted to $442.6 million and $398.7 million for the nine-months ended September 30, 2013 and 2012, respectively. Such sales were approximately 23% and 22% of gross sales for the nine-months ended September 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 nine-months ended September 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       Nine-Months Ended
                                         September 30,            September 30,
                                       2013         2012        2013         2012
Full service distributors               63%          62%         63%          63%
Club stores, drug chains & mass         9%           10%         10%          9%
merchandisers
Outside the U.S.                        22%          23%         23%          22%
Retail grocery, specialty chains        4%           3%          3%           4%
and wholesalers
Other                                   2%           2%          1%           2%

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 September 30, 2013 and 2012, respectively. CCR accounted for approximately 29% of our net sales for both the nine-months ended September 30, 2013 and 2012.


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Results of Operations



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



(In thousands, except per share       Three-Months Ended       Percentage        Nine-Months Ended        Percentage
amounts)                                September 30,            Change            September 30,            Change
                                     2013           2012       13 vs. 12        2013           2012       13 vs. 12
Gross sales, net of discounts &
returns *                          $  686,623    $   632,290         8.6%    $ 1,965,461    $ 1,828,455         7.5%
Less: Promotional and other
allowances**                           96,201         90,350         6.5%        259,882        239,270         8.6%
Net sales                             590,422        541,940         8.9%      1,705,579      1,589,185         7.3%

Cost of sales                         282,952        268,348         5.4%        809,809        767,417         5.5%
Gross profit***                       307,470        273,592        12.4%        895,770        821,768         9.0%
Gross profit margin as a
percentage of net sales                 52.1%          50.5%                       52.5%          51.7%

Operating expenses1                   156,041        132,907        17.4%        457,610        385,026        18.9%
Operating expenses as a
percentage of net sales                 26.4%          24.5%                       26.8%          24.2%

Operating income                      151,429        140,685         7.6%        438,160        436,742         0.3%
Operating income as a
percentage of net sales                 25.6%          26.0%                       25.7%          27.5%

Other (expense) income:
Interest and other (expense)
income, net                             (750)            331       326.6%        (8,690)            255     3,507.8%
Gain on investments and put
options, net                               44            222      (80.2%)          2,681            585       358.3%
Total other (expense) income            (706)            553       227.7%        (6,009)            840       815.4%

Income before provision for
income taxes                          150,723        141,238         6.7%        432,151        437,582       (1.2%)

Provision for income taxes             58,536         55,096         6.2%        169,596        165,545         2.4%

Net income                         $   92,187    $    86,142         7.0%    $   262,555    $   272,037       (3.5%)
Net income as a percentage of
net sales                               15.6%          15.9%                       15.4%          17.1%
Net income per common share:
Basic                                   $0.55          $0.49        11.9%          $1.58          $1.55         1.7%
Diluted                                 $0.53          $0.47        13.1%          $1.51          $1.47         3.2%

Case sales (in thousands) (in
192-ounce case equivalents)            59,204         54,611         8.4%        168,568        156,532         7.7%

1Includes $0.4 million and $0.01 million for the three-months ended September 30, 2013 and 2012, respectively, and $10.7 million and $0.6 million for the nine-months ended September 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 September 30, 2013 Compared to the Three-Months Ended September 30, 2012.

Gross Sales. Gross sales were $686.6 million for the three-months ended September 30, 2013, an increase of approximately $54.3 million, or 8.6% higher than gross sales of $632.3 million for the three-months ended September 30, 2012. The increase in the gross sales of our Monster Energy® brand energy drinks represented approximately $53.5 million, or 98.5%, 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 demand as well as our expansion into new international markets. 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 September 30, 2013. Promotional and other allowances, as described in the footnote above, were $96.2 million for the three-months ended September 30, 2013, an increase of $5.9 million, or 6.5% higher than promotional and other allowances of $90.3 million for the three-months ended September 30, 2012. Promotional and other allowances as a percentage of gross sales decreased to 14.0% from 14.3% for the three-months ended September 30, 2013 and 2012, respectively. As a result, the percentage increase in gross sales for the three-months ended September 30, 2013 was lower than the percentage increase in net sales.


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Net Sales. Net sales were $590.4 million for the three-months ended September 30, 2013, an increase of approximately $48.5 million, or 8.9% higher than net sales of $541.9 million for the three-months ended September 30, 2012. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $49.8 million, or 102.7%, 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 demand as well as our expansion into new international markets. 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 September 30, 2013.

Case sales, in 192-ounce case equivalents, were 59.2 million cases for the three-months ended September 30, 2013, an increase of approximately 4.6 million cases or 8.4% higher than case sales of 54.6 million cases for the three-months ended September 30, 2012. The overall average net sales per case was $9.97 for the three-months ended September 30, 2013, which was 0.5% higher than the average net sales per case of $9.92 for the three-months ended September 30, 2012.

Net sales for the DSD segment were $566.8 million for the three-months ended September 30, 2013, an increase of approximately $50.5 million, or 9.8% higher than net sales of $516.3 million for the three-months ended September 30, 2012. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $49.8 million, or 98.6%, 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 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 segment for the three-months ended September 30, 2013.

Net sales for the Warehouse segment were $23.7 million for the three-months ended September 30, 2013, a decrease of approximately $2.0 million, or 7.9% lower than net sales of $25.7 million for the three-months ended September 30, 2012. The decrease in net sales for the Warehouse segment was primarily attributable to lower net sales of Hubert's® lemonades as a result of increased promotional and other allowances.

Gross Profit. Gross profit was $307.5 million for the three-months ended September 30, 2013, an increase of approximately $33.9 million, or 12.4% higher than the gross profit of $273.6 million for the three-months ended September 30, 2012. Gross profit as a percentage of net sales increased to 52.1% for the three-months ended September 30, 2013 from 50.5% for the three-months ended September 30, 2012. The increase in gross profit dollars was primarily the result of the $53.5 million increase in gross sales of our Monster Energy® brand energy drinks. The increase in gross profit as a percentage of net sales was largely attributable to changes in product sales mix, a reduction in product damages as well as compensation for past product damages in connection with shipments to Asia and a reduction in the cost of certain containers.

Operating Expenses. Total operating expenses were $156.0 million for the three-months ended September 30, 2013, an increase of approximately $23.1 million, or 17.4% higher than total operating expenses of $132.9 million for the three-months ended September 30, 2012. The increase in operating expenses was partially attributable to increased expenditures of $6.5 million for professional service costs, including legal and accounting fees (of which $5.3 million related to regulatory matters and litigation concerning our Monster Energy® brand energy drinks), increased expenditures of $4.6 million for sponsorships and endorsements, increased out-bound freight and warehouse costs of $3.3 million, a $2.5 million non-routine indirect tax related provision, increased expenditures of $2.0 for merchandise displays and increased expenditures of $1.2 million for allocated trade development. Total operating expenses as a percentage of net sales was 26.4% for the three-months ended September 30, 2013, compared to 24.5% for the three-months ended September 30, 2012.


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Contribution Margin. Contribution margin for the DSD segment was $194.9 million for the three-months ended September 30, 2013, an increase of approximately $24.8 million, or 14.6% higher than the contribution margin of $170.1 million for the three-months ended September 30, 2012. The increase in the contribution margin for the DSD segment was primarily the result of the $53.5 million increase in gross sales of our Monster Energy® brand energy drinks. Contribution margin for the Warehouse segment was ($2.2) million for the three-months ended September 30, 2013, approximately $2.2 million lower than the contribution margin of $0.04 million for the three-months ended September 30, 2012. The decrease in the contribution margin for the Warehouse segment was primarily attributable to increased promotional and other allowances as well as increased operating expenses.

Operating Income. Operating income was $151.4 million for the three-months . . .

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