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MNST > SEC Filings for MNST > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for MONSTER BEVERAGE CORP

Form 10-Q for MONSTER BEVERAGE CORP


12-May-2014

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     †         Junior Juice®
Strength Nitrous Technology®
†                     Java Monster®            †         Blue Sky®
†                     X-Presso Monster®        †         Hubert's®
†                     Muscle Monster®          †         Worx Energy®
†                     Punch Monster™           †         Peace Tea®

Our Monster Energy® drinks, which represented 92.9% and 91.9% of our net sales for the three-months ended March 31, 2014 and 2013, respectively, include the following:

†                     Monster Energy®          †                Java Monster®
                                               Kona Blend
†                     Lo-Carb Monster          †                Java Monster®
Energy®                                        Loca Moca®
†                     Monster Assault®         †                Java Monster®
                                               Mean Bean®
†                     Monster Khaos®           †                Java Monster®
                                               Vanilla Light
†                     Monster M-80® (named     †                Java Monster®
Ripper® in certain countries)                  Irish Blend®
†                     Monster Energy®          †                Java Monster®
Absolutely Zero                                Toffee
†                     Monster Energy®          †                Java Monster®
Import                                         Kona Cappuccino™
†                     Monster Energy®          †                Monster Energy
Import Light                                   Extra Strength Nitrous
                                               Technology® Super Dry™
†                     Punch Monster™
Baller's Blend (formerly Dub Edition)
†                     Punch Monster™ Mad       †                Monster Energy
Dog (formerly Dub Edition)                     Extra Strength Nitrous
                                               Technology® Anti-Gravity®
†                     Monster Rehab® Tea +
Lemonade + Energy
†                     Monster Rehab® Rojo      †                Monster Energy
Tea + Energy                                   Extra Strength Nitrous
                                               Technology® Black Ice™
†                     Monster Rehab® Green
Tea + Energy
†                     Monster Rehab®           †                X-Presso
Protean + Energy                               Monster® Hammer
†                     Monster Rehab® Tea +     †                X-Presso
Orangeade + Energy                             Monster® Midnite
†                     Monster Rehab® Tea +     †                Monster
Pink Lemonade + Energy                         Cuba-Lima®
†                     Muscle Monster®          †                Monster Energy®
Vanilla                                        Zero Ultra
†                     Muscle Monster®          †                Monster Energy®
Chocolate                                      Ultra Blue™
†                     Muscle Monster®          †                Monster Energy®
Coffee                                         Ultra Red™
†                     Muscle Monster®          †                M3® Monster
Strawberry                                     Energy® Super Concentrate
†                     Muscle Monster®          †                Übermonster®
Peanut Butter Cup                              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 three-months ended March 31, 2014, 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, 2014, we introduced the following products:

† Punch Monster™ Baller's Blend (formerly Dub Edition) (January 2014).

† Punch Monster™ Mad Dog (formerly Dub Edition) (January 2014).

† Peace Tea Beverage Company™ Viva Mango™, a mango flavored juice drink (February 2014).

In the normal course of business we discontinue certain products and/or product lines. Those products or product lines discontinued during the three-months ended March 31, 2014, either individually or in aggregate, did not have a material adverse impact on our financial position, results of operations or liquidity.

Our gross sales (as defined below) of $613.7 million for the three-months ended March 31, 2014 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 $576.5 million for the three-months ended March 31, 2014, an increase of $55.3 million, or 94.2% of our overall increase in gross sales for the three-months ended March 31, 2014.

Our DSD segment represented 95.9% and 95.0% of our consolidated net sales for the three-months ended March 31, 2014 and 2013, respectively. Our Warehouse segment represented 4.1% and 5.0% of our consolidated net sales for the three-months ended March 31, 2014 and 2013, 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 encourage 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 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 $144.3 million and $130.7 million for the three-months ended March 31, 2014 and 2013, respectively. Such sales were approximately 23% of gross sales for both the three-months ended March 31, 2014 and 2013.

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, 2014 and 2013 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 some of the same customer types listed below. 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
                                                        March 31,
                                                     2014        2013
Full service distributors                            62%         62%
Club stores, drug chains & mass merchandisers         9%         10%
Outside the U.S.                                     23%         23%
Retail grocery, specialty chains and wholesalers      4%          3%
Other                                                 2%          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, certain bottlers of the Coca-Cola Hellenic Bottling Company, Swire Coca-Cola, USA and certain other Coca-Cola Company independent bottlers, Anheuser-Busch, Inc. ("AB"), select independent AB distributors, Asahi, Kalil Bottling Group, Wal-Mart, Inc. (including Sam's Club) and Costco. 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 31% and 30% of our net sales for the three-months ended March 31, 2014 and 2013, respectively.


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Results of Operations



The following table sets forth key statistics for the three-months ended
March 31, 2014 and 2013, respectively.



(In thousands, except per share                Three-Months Ended         Percentage
amounts)                                           March 31,                Change
                                              2014            2013         14 vs. 13
Gross sales, net of discounts &
returns *                                  $   613,723     $   554,951          10.6%
Less: Promotional and other
allowances**                                    77,594          70,728           9.7%
Net sales                                      536,129         484,223          10.7%

Cost of sales                                  249,311         232,184           7.4%
Gross profit***                                286,818         252,039          13.8%
Gross profit as a percentage of net
sales                                            53.5%           52.1%

Operating expenses1                            137,955         144,733         (4.7%)
Operating expenses as a percentage of
net sales                                        25.7%           29.9%

Operating income                               148,863         107,306          38.7%
Operating income as a percentage of
net sales                                        27.8%           22.2%

Other income (expense):
Interest and other income (expense),
net                                                155         (4,473)         103.5%
(Loss) gain on investments and put
options, net                                       (1)           2,571         100.0%
Total other income (expense)                       154         (1,902)         108.1%

Income before provision for income
taxes                                          149,017         105,404          41.4%

Provision for income taxes                      53,767          41,908          28.3%

Income taxes as a percentage of income
before taxes                                     36.1%           39.8%

Net income                                 $    95,250     $    63,496          50.0%
Net income as a percentage of net
sales                                            17.8%           13.1%

Net income per common share:
Basic                                            $0.57           $0.38          48.8%
Diluted                                          $0.55           $0.37          49.0%

Case sales (in thousands)
(in 192-ounce case equivalents)                 51,926          47,749           8.7%

1Includes $0.01 million and $8.3 million for the three-months ended March 31, 2014 and 2013, 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


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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.

** 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 March 31, 2014 Compared to the Three-Months Ended March 31, 2013.

Gross Sales. Gross sales were $613.7 million for the three-months ended March 31, 2014, an increase of approximately $58.8 million, or 10.6% higher than gross sales of $555.0 million for the three-months ended March 31, 2013. The increase in the gross sales of our Monster Energy® brand energy drinks represented approximately $55.3 million, or 94.2%, 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. 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 March 31, 2014. Promotional and other allowances, as described in the footnote above, were $77.6 million for the three-months ended March 31, 2014, an increase of $6.9 million, or 9.7% higher than promotional and other allowances of $70.7 million for the three-months ended March 31, 2013. Promotional and other allowances as a percentage of gross sales decreased to 12.6% from 12.7% for the three-months ended March 31, 2014 and 2013, respectively. As a result, the percentage increase in net sales for the three-months ended March 31, 2014 was slightly higher than the percentage increase in gross sales.

Net Sales. Net sales were $536.1 million for the three-months ended March 31, 2014, an increase of approximately $51.9 million, or 10.7% higher than net sales of $484.2 million for the three-months ended March 31, 2013. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $52.8 million, or 101.8%, 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. 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 March 31, 2014.


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Case sales, in 192-ounce case equivalents, were 51.9 million cases for the three-months ended March 31, 2014, an increase of approximately 4.2 million cases or 8.7% higher than case sales of 47.7 million cases for the three-months ended March 31, 2013. The overall average net sales per case increased to $10.32 for the three-months ended March 31, 2014, which was 1.8% higher than the average net sales per case of $10.14 for the three-months ended March 31, 2013.

Net sales for the DSD segment were $514.4 million for the three-months ended March 31, 2014, an increase of approximately $54.2 million, or 11.8% higher than net sales of $460.2 million for the three-months ended March 31, 2013. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $52.8 million, or 97.5%, 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 segment for the three-months ended March 31, 2014.

Net sales for the Warehouse segment were $21.8 million for the three-months ended March 31, 2014, a decrease of approximately $2.3 million, or 9.5% lower than net sales of $24.0 million for the three-months ended March 31, 2013. The decrease in net sales for the Warehouse segment was primarily attributable to decreased sales by volume of Hubert's® lemonades.

Gross Profit. Gross profit was $286.8 million for the three-months ended March 31, 2014, an increase of approximately $34.8 million, or 13.8% higher than the gross profit of $252.0 million for the three-months ended March 31, 2013. Gross profit as a percentage of net sales increased to 53.5% for the three-months ended March 31, 2014 from 52.1% for the three-months ended March 31, 2013. The increase in gross profit dollars was primarily the result of the $55.3 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 as well as an increase in production efficiencies.

Operating Expenses. Total operating expenses were $138.0 million for the three-months ended March 31, 2014, a decrease of approximately $6.8 million, or 4.7% lower than total operating expenses of $144.7 million for the three-months ended March 31, 2013. The decrease in operating expenses was partially attributable to decreased expenditures of $8.3 million relating to the costs associated with terminating existing distributors, decreased expenditures of $5.4 million for premiums, decreased expenditures of $1.8 million for allocated trade development and decreased expenditures of $1.3 million for other marketing expenses. The decrease in operating expenses was partially offset by increased out-bound freight and warehouse costs of $2.9 million, increased expenditures of $2.6 million for professional service costs, including legal and accounting fees (of which $2.0 million related to an increase in expenditures for regulatory matters and litigation concerning our Monster Energy® brand energy drinks) and increased payroll expenses of $2.2 million (of which $0.03 million related to an increase in stock-based compensation).

Contribution Margin. Contribution margin for the DSD segment was $186.5 million for the three-months ended March 31, 2014, an increase of approximately $47.5 million, or 34.2% higher than contribution margin of $139.0 million for the three-months ended March 31, 2013. The increase in the contribution margin for the DSD segment was primarily the result of the $55.3 million increase in gross sales of our Monster Energy® brand energy drinks. Contribution margin for the Warehouse segment was $0.3 million for the three-months ended March 31, 2014, approximately $0.1 million lower than contribution margin of $0.4 million for the three-months ended March 31, 2013.


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Operating Income. Operating income was $148.9 million for the three-months ended March 31, 2014, an increase of approximately $41.6 million, or 38.7% higher than operating income of $107.3 million for the three-months ended March 31, 2013. Operating income as a percentage of net sales increased to 27.8% for the three-months ended March 31, 2014 from 22.2% for the three-months ended March 31, 2013, primarily due to the increase in gross profit as a percentage of net sales as well as the decrease in operating expenses as a percentage of net sales. The increase in operating income in dollars was primarily due to an increase of $34.8 million in gross profit as well as a decrease in operating expenses of $6.8 million. Operating income (loss) was $1.9 million and ($2.3) million for the three-months ended March 31, 2014 and 2013, respectively, in relation to our operations in Africa, Asia, Australia, Europe, the Middle East and South America.

Other Income (Expense). Other income (expense) was $0.2 million for the three-months ended March 31, 2014, as compared to other income (expense) of ($1.9) million for the three-months ended March 31, 2013. Foreign currency transaction losses were $0.2 million and $4.7 million for the three-months ended March 31, 2014 and 2013, respectively. The decrease in foreign currency losses during the three-months ended March 31, 2014 was primarily related to our foreign currency transactions in Japan and Canada. Interest income was $0.4 million and $0.1 million for the three-months ended March 31, 2014 and 2013, respectively.

Provision for Income Taxes. Provision for income taxes was $53.8 million for the three-months ended March 31, 2014, an increase of $11.9 million or 28.3% higher than the provision for income taxes of $41.9 million for the three-months ended March 31, 2013. The effective combined federal, state and foreign tax rate decreased to 36.1% from 39.8% for the three-months ended March 31, 2014 and 2013, respectively. The decrease in the effective tax rate was primarily the result of profits earning in certain foreign subsidiaries that have no related income tax expense as a result of the prior establishment of valuation allowances on their deferred tax assets. In addition, the effective tax rate for the three-months ended March 31, 2013 was partially increased by the establishment of a full valuation allowance during the three-months ended March 31, 2013 against a tax capital loss recognized on the sale of certain available-for-sale auction rate securities.

Net Income. Net income was $95.3 million for the three-months ended March 31, 2014, an increase of $31.8 million or 50.0% higher than net income of $63.5 million for the three-months ended March 31, 2013. The increase in net income was primarily attributable to an increase in gross profit of $34.8 million and a decrease in operating expenses of $6.8 million. The increase in net income was partially offset by an increase in the provision for income taxes of $11.9 million.

Liquidity and Capital Resources

Cash flows provided by operating activities. Net cash provided by operating activities was $136.4 million for the three-months ended March 31, 2014, as compared with net cash provided by operating activities of $45.9 million for the three-months ended March 31, 2013. For the three-months ended March 31, 2014, cash provided by operating activities was primarily attributable to net income earned of $95.3 million and adjustments for certain non-cash expenses, . . .

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