filings.toolsItem 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided as a supplement to – and should be read in conjunction with – our financial statements and the accompanying notes (“Notes”) included in Part II, Item 8 of this Form 10-K. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements. See “Forward-Looking Statements” and “Part I. Item 1A – Risk Factors.”
This overview provides our perspective on the individual sections of MD&A. MD&A includes the following sections:
| · | Our Business – a general description of our business; the value drivers of our business; and opportunities and risks facing our Company; |
|---|---|
| · | Results of Operations – an analysis of our consolidated results of operations for the three years presented in our financial statements; |
| · | Sales – details of our sales measured on a quarterly basis in both dollars and cases; |
| · | Inflation – information about the impact that inflation may or may not have on our results; |
| · | Liquidity and Capital Resources – an analysis of our cash flows, sources and uses of cash and contractual obligations; |
| · | Accounting Policies and Pronouncements – a discussion of accounting policies that require critical judgments and estimates including newly issued accounting pronouncements; |
| · | Forward-Looking Statements – cautionary information about forward-looking statements and a description of certain risks and uncertainties that could cause our actual results to differ materially from the Company’s historical results or our current expectations or projections; and |
| · | Market Risks – information about market risks and risk management. (See “Forward-Looking Statements” and “Part II, Item 7A – Qualitative and Quantitative Disclosures About Market Risks”). |
Our Business
Acquisitions and Divestitures
On August 14, 2014, the Company and TCCC entered into definitive agreements for the TCCC Transaction. Pursuant to the TCCC Transaction Agreements, the Company will reorganize into a new holding company by merging Merger Sub into the Company, with the Company surviving as a wholly owned subsidiary of NewCo. In the merger, each outstanding share of the Company’s common stock will be converted into one share of NewCo’s common stock.
Subject to the terms and conditions of the TCCC Transaction Agreements, upon the closing of the TCCC Transaction, (1) NewCo will issue to TCCC newly issued shares of common stock representing approximately 16.7% of the total number of shares of issued and outstanding NewCo common stock (after giving effect to the new issuance) and TCCC will have the right to nominate two individuals (reduced to one upon the earlier of (i) 36 months after the closing of the TCCC Transaction and (ii) TCCC’s equity interest in NewCo exceeding 20% of the outstanding shares of NewCo common stock) to NewCo’s Board of Directors, (2) TCCC will transfer its global energy drink business (including the NOS®, Full Throttle®, Burn®, Mother®, Play® and Power Play®, and Relentless® brands) to
NewCo, and the Company will transfer its non-energy drink business (including Hansen’s® Natural Sodas, Peace Tea®, Hubert’s® Lemonade and Hansen’s® Juice Products) to TCCC, (3) the Company and TCCC will amend their current distribution coordination agreements, which will contemplate expanding distribution of the Company’s products into additional territories pursuant to long-term distribution agreements with TCCC’s network of owned or controlled bottlers/distributors and independent bottling and distribution partners, and (4) TCCC will make a net cash payment of $2.15 billion to the Company (up to $625.0 million of which will be held in escrow, subject to release upon achievement of milestones relating to the transfer of distribution rights).
The waiting period under the HSR Act with respect to the TCCC Transaction expired on October 15, 2014, and all necessary approvals or consents from foreign antitrust authorities have been obtained. The closing of the transaction is subject to customary closing conditions and is expected to close in the second quarter of 2015.
Overview
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® | |
| · | Muscle Monster® | · | Hubert’s® | |
| · | Punch Monster® | · | Peace Tea® |
Our Monster Energy® drinks, which represented 93.3%, 92.5% and 92.3% of our net sales for the years ended December 31, 2014, 2013 and 2012, respectively, primarily include the following:
| · | Monster Energy® | · | Java Monster® Kona Blend | |
|---|---|---|---|---|
| · | Lo-Carb Monster Energy® | · | Java Monster® Loca Moca® | |
| · | Monster Assault® | · | Java Monster® Mean Bean® | |
| · | Juice Monster™ Khaos® | · | Java Monster® Vanilla Light | |
| · | Juice Monster™ Ripper® | · | Java Monster® Irish Blend® | |
| · | Monster Energy® Absolutely Zero | · | Java Monster® Cappuccino | |
| · · | Monster Energy® Import Punch Monster® Baller’s Blend (formerly Dub Edition) | · | Monster Energy Extra Strength Nitrous Technology® Super Dry™ | |
| · · | Punch Monster® Mad Dog (formerly Dub Edition) Monster Rehab® Tea + Lemonade + Energy | · | Monster Energy Extra Strength Nitrous Technology® Anti-Gravity® | |
| · | Monster Rehab® Rojo Tea + Energy | · | Monster Cuba-Lima® | |
| · | Monster Rehab® Green Tea + Energy | · | Monster Energy® Zero Ultra | |
| · | Monster Rehab® Tea + Orangeade + Energy | · | Monster Energy® Ultra Blue™ | |
| · | Monster Rehab® Tea + Pink Lemonade + Energy | · | Monster Energy® Ultra Red™ | |
| · | Muscle Monster® Vanilla | · | Monster Energy® Ultra Black™ | |
| · | Muscle Monster® Chocolate | · | Monster Energy® Ultra Sunrise™ | |
| · | Muscle Monster® Coffee | · | Monster Energy® Unleaded | |
| · | Muscle Monster® Strawberry | · | Übermonster® Energy Brew™ | |
| · | Muscle Monster® Peanut Butter Cup | · | M3® Monster Energy® Super Concentrate | |
| · | Monster Energy® Valentino Rossi |
We have two operating and reportable segments, namely Direct Store Delivery (“DSD”), the principal products of which comprise energy drinks, and Warehouse (“Warehouse”), the principal products of which 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. Following the consummation of the TCCC Transaction, the Company anticipates that it will have two operating and reporting segments: Concentrate, the principal products of which will likely include the various energy drink brands transferred to the Company from TCCC, and Finished Products, the principal products of which will likely include the Company’s Monster Energy® drink products that currently make up the majority of the DSD segment.
During the year ended December 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 year ended December 31, 2014, we introduced the following products:
| · | Punch Monster® Baller’s Blend (formerly Dub Edition) (January 2014). |
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| · | Punch Monster® Mad Dog (formerly Dub Edition) (January 2014). |
| · | Peace Tea Beverage Company™ Viva Mango™, a mango flavored juice drink (February 2014). |
| · | Monster Energy® Valentino Rossi, a carbonated energy drink (May 2014). |
| · | Hubert’s® Organic Lemonade, a line of certified organic lemonades in a variety of flavors (May 2014). |
| · | Monster Energy® Ultra Black™, a carbonated energy drink which contains zero calories and zero sugar, launched as a summer promotion with 7-eleven (July 2014). |
| · | Monster Energy® Unleaded, a carbonated energy drink which contains no caffeine (August 2014). |
| · | Monster Energy® Ultra Sunrise™, a carbonated energy drink which contains zero calories and zero sugar (September 2014). |
In the normal course of business we discontinue certain products and/or product lines. Those products or product lines discontinued in 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 of $2,827.1 million for the year ended December 31, 2014 represented record annual sales. 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 $2,649.3 million for the year ended December 31, 2014, an increase of $236.9 million, or 98.5% of our overall increase in gross sales for the year ended December 31, 2014. 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.
Our DSD segment represented 96.1%, 95.6% and 95.4% of our consolidated net sales for the years ended December 31, 2014, 2013 and 2012, respectively. Our Warehouse segment represented 3.9%, 4.4% and 4.6% of our consolidated net sales for the years ended December 31, 2014, 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 racks, coolers and barrel coolers), advertising, in-store promotions and in-store placement of point-of-sale materials 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 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 FFDC Act. However, as permitted under the FFDC Act and FDA regulations, we transitioned the labeling and marketing of these energy drink products from dietary supplements to conventional foods beginning in the first quarter of 2013.
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 $657.9 million, $580.6 million and $513.9 million for the years ended December 31, 2014, 2013 and 2012, respectively. Such sales were approximately 23%, 23% and 22% of gross sales for the years ended December 31, 2014, 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 years ended December 31, 2014, 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 some of the same customer types listed below. We limit our description of our customer types to include only our sales to our full service distributors without reference to such distributors’ sales to their own customers.
| 2014 | 2013 | 2012 | ||||
|---|---|---|---|---|---|---|
| Full service distributors | 62% | 63% | 63% | |||
| Club stores, drug chains & mass merchandisers | 9% | 9% | 9% | |||
| Outside the U.S. | 23% | 23% | 22% | |||
| Retail grocery, specialty chains and wholesalers | 4% | 3% | 4% | |||
| Other | 2% | 2% | 2% |
Our customers include the TCCC North American Bottlers, New CCE, certain bottlers of Coca-Cola Hellenic, Swire Coca-Cola, USA and certain other Coca-Cola independent bottlers, Asahi, Kalil Bottling Group, Wal-Mart, Inc. (including Sam’s Club) Costco and the AB Distributors. In February 2015, in accordance with its existing agreements with the applicable AB Distributors, the Company sent notices of termination to the majority of the AB Distributors in the U.S. for the termination of their respective distribution agreements, to be effective at various dates beginning in March 2015. The associated distribution rights will be transitioned to TCCC’s network of owned or controlled bottlers/distributors and independent bottling and distribution partners as of the effective date of termination of the AB Distributors’ rights in the applicable territories (see Note 8 “Distribution Agreements” in the notes to consolidated financial statements). CCR accounted for approximately 29%, 29% and 28% of our net sales for the years ended December 31, 2014, 2013 and 2012, respectively.
We continue to incur expenditures in connection with the development and introduction of new products and flavors.
Value Drivers of our Business
We believe that the key value drivers of our business include the following:
| · | International Growth – The introduction, development and sustained profitability of our Monster Energy® brand internationally remains a key value driver for our corporate growth. The TCCC Transaction is expected to secure fully aligned access to TCCC’s leading global distribution system, which we anticipate will accelerate our international performance. In addition, we anticipate that the TCCC Transaction will provide scale and platform synergies in a range of international geographies where we currently have limited presence, which is expected to increase our energy business in a number of international markets and establish a strong presence in additional countries. |
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| · | Profitable Growth – We believe “functional” value added brands properly supported by marketing and innovation, targeted to a diverse consumer base, drive profitable growth. We continue to broaden our family of brands. In particular, we are expanding our energy drinks, including through the addition of TCCC’s existing energy product lines in connection with the TCCC Transaction, to provide more alternatives to consumers. We are focused on maintaining profit margins and believe that tailored branding, packaging, pricing and distribution channel strategies help achieve profitable growth. We are implementing these strategies with a view to continuing profitable growth. |
| · | Cost Management – The principal focus of cost management will continue to be on reducing input supply and production costs on a per-case basis, including raw material costs and co-packing fees. Another key area of focus is to decrease promotional allowances, selling and general and administrative costs, including sponsorships, sampling, promotional and marketing expenses, as a percentage of net sales. The reduction of accounts receivable and inventory days on hand also remains a further key area of focus. |
| · | Efficient Capital Structure – Our capital structure is intended to optimize our working capital to finance expansion, both domestically and internationally. We believe our strong capital position, our ability to raise funds, if necessary, at a relatively low effective cost of borrowings, provide a competitive advantage. Furthermore, it is anticipated that, following the TCCC Transaction, we will have a substantial amount of cash and cash equivalents, and we expect that a substantial portion of our cash and cash equivalents will be used to return capital to our shareholders pursuant to share repurchases, which could be effected pursuant to a self-tender offer, accelerated share repurchase or otherwise, alone or potentially in conjunction with dividend payments. The timing, terms and amount of any such share repurchase will be determined by the NewCo board of directors. |
We believe that, subject to increases in the costs of certain raw materials being contained, these value drivers, when properly implemented in the U.S. and internationally, will result in: (1) improving or maintaining our product gross profit margins; (2) providing additional leverage over time through reduced expenses as a percentage of net operating revenues; and (3) optimizing our cost of capital. The ultimate measure of success is and will be reflected in our current and future results of operations.
Gross and net sales, gross profit, operating income, net income and net income per share represent key measurements of the above value drivers. These measurements will continue to be a key management focus in 2015 and beyond **(**See “Part II, Item 7 – Results of Operations – Results of Operations for the Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013”).
As of December 31, 2014, the Company had working capital of $1,337.7 million compared to $867.0 million as of December 31, 2013. The increase in working capital was primarily the result of retained profits reflected in a combined overall increase in cash, cash equivalents and short-term investments. For the year ended December 31, 2014, our net cash provided by operating activities was approximately $585.6 million as compared to $342.0 million for the year ended December 31, 2013. Principal uses of cash flows in 2014 were purchases of investments, purchases of inventory, development of our Monster Energy® brand internationally, acquisition of property and equipment and acquisition of trademarks. These principal uses of cash flows are expected to be and remain our principal recurring use of cash and working capital funds in the future (See “Part II, Item 7 – Liquidity and Capital Resources”).
Opportunities, Challenges and Risks
Looking forward, our management has identified certain challenges and risks for the beverage industry and our Company, including, following the completion of the TCCC Transaction, those relating to the transition of the distribution of our products to TCCC’s distribution network, our significant commercial relationships with TCCC and TCCC’s status as a significant shareholder of NewCo, in each case as described above under “Part I, Item 1A – Risk Factors.”
In addition, legislation has been proposed and/or adopted at the U.S. state and/or county and/or municipal level and proposed and/or adopted in certain foreign jurisdictions to restrict the sale of energy drinks (including prohibiting the sale of energy drinks at certain establishments or pursuant to certain governmental programs), limit caffeine content in beverages, require certain product labeling disclosures and/or warnings, impose taxes, limit product sizes or impose age restrictions for the sale of energy drinks. In addition, articles critical of the caffeine content in energy drinks and their perceived benefits and articles indicating certain health risks of energy drinks have been published. The proposal and/or adoption of such legislation and the publication of such articles, or the future proposal and/or adoption of similar legislation or publication of similar articles, may adversely affect our Company. In addition, uncertainty and/or volatility in our domestic and/or our international economic markets could negatively affect both the stability of our industry and our Company. Furthermore, our growth strategy includes expanding our international business which exposes us to risks inherent in conducting international operations, including the risks associated with foreign currency exchange rate fluctuations. Consumer discretionary spending also represents a challenge to the successful marketing and sale of our products. Increases in consumer and regulatory awareness of the health problems arising from obesity and inactive lifestyles continue to represent a challenge. We recognize that obesity is a complex and serious public health problem. Our commitment to consumers begins with our broad product line and a wide selection of diet, light and low calorie beverages within our energy drink product line. We continuously strive to meet changing consumer needs through beverage innovation, choice and variety. (See “Part I, Item 1A – Risk Factors”).
Our historical success is attributable, in part, to our introduction of different and innovative beverages which have been positively accepted by consumers. Our future success will depend, in part, upon our continued ability to develop and introduce different and innovative beverages that meet consumer preferences, although there can be no assurance of our ability to do so. In order to retain and expand our market share, we must continue to develop and introduce different and innovative beverages and be competitive in the areas of quality, method of distribution, brand image and intellectual property protection. The beverage industry is subject to changing consumer preferences that may adversely affect us if we misjudge such preferences.
In addition, other key challenges and risks that could impact our Company’s future financial results include, but are not limited to:
| · | the risks associated with consummation of, and the realization of benefits from, the TCCC Transaction, including the transition of the distribution of our products to TCCC’s distribution network; |
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| · | changes in consumer preferences and demand for our products; |
| · | economic uncertainty in the United States, Europe and other countries in which we operate; |
| · | the risks associated with foreign currency exchange rate fluctuations; |
| · | maintenance of our brand image and product quality; |
| · | increasing concern over various health matters, including obesity, caffeine consumption and energy drinks generally, and changes in regulation and consumer preferences in response to those concerns; |
| · | profitable expansion and growth of our family of brands in the competitive market place (See “Part I, Item 1 – Business – Competition” and “Part I, Item 1 – Sales and Marketing”); |
| · | costs of establishing and promoting our brands internationally; |
| · | restrictions on imports and sources of supply; duties or tariffs; changes in related government regulations; and disruptions in the timely import or export of our products and/or ingredients due to port strikes and related labor issues; |
| · | protection of our existing intellectual property portfolio of trademarks and copyrights and the continuous pursuit to develop and protect new and innovative trademarks and copyrights for our expanding product lines; |
| · | limitations on available quantities of certain package containers such as the 24-ounce cap-can and co-packing availability; and |
| · | the imposition of additional regulation, including regulation restricting the sale of energy drinks, limiting caffeine content in beverages, requiring product labeling and/or warnings, imposing excise taxes and/or sales taxes, and/or limiting product size and/or age restrictions. |
See “Part I, Item 1A – Risk Factors” for additional information about risks and uncertainties facing our Company.
We believe that the following opportunities exist for us:
| · | domestic and international growth potential of our products due to our transition to a leading global distribution network and the scale and platform synergies expected in connection with the TCCC Transaction; |
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| · | growth potential of the energy drink category, both domestically and internationally; |
| · | planned and future new product and product line introductions with the objective of contributing to higher profitability; |
| · | the introduction of premium packages designed to generate strong revenue growth; |
| · | significant package, pricing and channel opportunities to increase profitable growth; |
| · | effective strategic positioning to capitalize on industry growth; |
| · | broadening distribution/expansion opportunities in both domestic and international markets; |
| · | launching our products into new geographic markets; and |
| · | continued focus on reducing our cost base. |
Results of Operations
(in thousands, except per share information)
| Percentage Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2013 | 2012 | 14 vs. 13 | 13 vs. 12 | ||||||||||
| Gross sales, net of discounts & returns* | $ | 2,827,092 | $ | 2,586,531 | $ | 2,373,499 | 9.3% | 9.0% | ||||||
| Less: Promotional and other allowances** | 362,225 | 340,103 | 312,797 | 6.5% | 8.7% | |||||||||
| Net sales | 2,464,867 | 2,246,428 | 2,060,702 | 9.7% | 9.0% | |||||||||
| Cost of sales | 1,125,057 | 1,073,497 | 995,046 | 4.8% | 7.9% | |||||||||
| Gross profit*** | 1,339,810 | 1,172,931 | 1,065,656 | 14.2% | 10.1% | |||||||||
| Gross profit as a percentage of net sales | 54.4% | 52.2% | 51.7% | |||||||||||
| Operating expenses | 592,305 | 600,015 | 515,033 | (1.3%) | 16.5% | |||||||||
| Operating expenses as a percentage of net sales | 24.0% | 26.7% | 25.0% | |||||||||||
| Operating income | 747,505 | 572,916 | 550,623 | 30.5% | 4.0% | |||||||||
| Operating income as a percentage of net sales | 30.3% | 25.5% | 26.7% | |||||||||||
| Other (expense) income: | ||||||||||||||
| Interest and other (expense) income, net | (1,676) | (11,737) | (2,256) | (85.7%) | 420.3% | |||||||||
| (Loss) gain on investments and put option, net | (41) | 2,715 | 787 | (101.5%) | 245.0% | |||||||||
| Total other (expense) income | (1,717) | (9,022) | (1,469) | |||||||||||
| Income before provision for income taxes | 745,788 | 563,894 | 549,154 | 32.3% | 2.7% | |||||||||
| Provision for income taxes | 262,603 | 225,233 | 209,134 | 16.6% | 7.7% | |||||||||
| Income taxes as a percentage of income before taxes | 35.2% | 39.9% | 38.1% | |||||||||||
| Net income | $ | 483,185 | $ | 338,661 | $ | 340,020 | 42.7% | (0.4%) | ||||||
| Net income as a percentage of net sales | 19.6% | 15.1% | 16.5% | |||||||||||
| Net income per common share: | ||||||||||||||
| Basic | $2.89 | $2.03 | $1.96 | 42.2% | 3.8% | |||||||||
| Diluted | $2.77 | $1.95 | $1.86 | 41.9% | 5.2% | |||||||||
| Case sales (in thousands) (in 192-ounce case equivalents) | 238,280 | 221,348 | 202,918 | 7.6% | 9.1% |
*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. (See “Part II, Item 6 – Selected Financial Data”).
** 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 Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013.
Gross Sales. Gross sales were $2,827.1 million for the year ended December 31, 2014, an increase of approximately $240.6 million, or 9.3% higher than gross sales of $2,586.5 million for the year ended December 31, 2013. The increase in the gross sales of our Monster Energy® brand energy drinks represented approximately $236.9 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 consumer demand as well as our expansion into new international markets. Price increases on our 24-ounce Monster Energy® brand energy drinks and our Peace Tea® line represented approximately 7% of the overall increase in gross sales. No other individual product line contributed either a material increase or decrease to gross sales for the year ended December 31, 2014. Promotional and other allowances, as described in the footnote above, were $362.2 million for the year ended December 31, 2014, an increase of $22.1 million, or 6.5% higher than promotional and other allowances of $340.1 million for the year ended December 31, 2013. Promotional and other allowances as a percentage of gross sales decreased to 12.8% from 13.1% for the year ended December 31, 2014 and 2013, respectively. As a result, the percentage increase in net sales for the year ended December 31, 2014 was higher than the percentage increase in gross sales.
Collective changes in foreign currency exchange rates did not have a material impact on gross sales for the year ended December 31, 2014.
Net Sales. Net sales were $2,464.9 million for the year ended December 31, 2014, an increase of approximately $218.4 million, or 9.7% higher than net sales of $2,246.4 million for the year ended December 31, 2013. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $220.4 million, or 100.9%, 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. Price increases on our 24-ounce Monster Energy® brand energy drinks and our Peace Tea® line represented approximately 7% of the overall increase in net sales. No other individual product line contributed either a material increase or decrease to net sales for the year ended December 31, 2014.
Collective changes in foreign currency exchange rates did not have a material impact on net sales for the year ended December 31, 2014.
Case sales, in 192-ounce case equivalents, were 238.3 million cases for the year ended December 31, 2014, an increase of approximately 16.9 million cases or 7.6% higher than case sales of 221.3 million cases for the year ended December 31, 2013. The overall average net sales per case increased to $10.34 for the year ended December 31, 2014, which was 1.9% higher than the average net sales per case of $10.15 for the year ended December 31, 2013.
Net sales for the DSD segment were $2,369.2 million for the year ended December 31, 2014, an increase of approximately $221.9 million, or 10.3% higher than net sales of $2,147.4 million for the year ended December 31, 2013. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $220.4 million, or 99.4%, 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. Price increases on our 24-ounce Monster Energy® brand energy drinks and our Peace Tea® line represented approximately 7% of the overall 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 year ended December 31, 2014.
Net sales for the Warehouse segment were $95.7 million for the year ended December 31, 2014, a decrease of approximately $3.4 million, or 3.4% lower than net sales of $99.1 million for the year ended December 31, 2013. The decrease in net sales for the Warehouse segment was primarily attributable to decreased sales by volume of Hubert’s® lemonades and apple juice. The decrease in net sales for the Warehouse segment was partially offset by increased sales by volume of aseptic juices.
Gross Profit. Gross profit was $1,339.8 million for the year ended December 31, 2014, an increase of approximately $166.9 million, or 14.2% higher than the gross profit of $1,172.9 million for the year ended December 31, 2013. Gross profit as a percentage of net sales increased to 54.4% for the year ended December 31, 2014 from 52.2% for the year ended December 31, 2013. The increase in gross profit dollars was primarily the result of the $236.9 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 lower promotional and other allowances as a percentage of gross sales, price increases on our 24-ounce Monster Energy® brand energy drinks and our Peace Tea® line, changes in product sales mix, lower costs of certain sweeteners and other raw materials as well as an increase in production efficiencies.
Operating Expenses. Total operating expenses were $592.3 million for the year ended December 31, 2014, a decrease of approximately $7.7 million, or 1.3% lower than total operating expenses of $600.0 million for the year ended December 31, 2013. The decrease in operating expenses was partially attributable to decreased expenditures of $10.9 million relating to the costs associated with terminating existing distributors, decreased expenditures of $9.9 million for premiums, decreased expenditures of $8.6 million for allocated trade development, a $2.5 million non-routine indirect tax related provision recorded in the third quarter of 2013, subsequently reversed in the second quarter of 2014 for non-realization, and decreased expenditures of $4.0 million for point-of-sale materials. The decrease in operating expenses was partially offset by increased out-bound freight and warehouse costs of $7.2 million, increased expenditures of $6.3 million for sponsorships and endorsements, increased payroll expenses of $6.4 million (inclusive of decreased stock-based compensation of $0.2 million), increased expenditures of $2.7 million related to regulatory matters and litigation concerning our Monster Energy® brand energy drinks and expenditures of $4.8 million for professional service costs related to the TCCC Transaction.
Contribution Margin. Contribution margin for the DSD segment was $908.8 million for the year ended December 31, 2014, an increase of approximately $182.0 million, or 25.0% higher than contribution margin of $726.8 million for the year ended December 31, 2013. The increase in the contribution margin for the DSD segment was primarily the result of the $236.9 million increase in gross sales of our Monster Energy® brand energy drinks. Contribution margin for the Warehouse segment was $3.0 million for the year ended December 31, 2014, approximately $4.7 million higher than contribution loss of ($1.7) million for the year ended December 31, 2013.
Operating Income. Operating income was $747.5 million for the year ended December 31, 2014, an increase of approximately $174.6 million, or 30.5% higher than operating income of $572.9 million for the year ended December 31, 2013. Operating income as a percentage of net sales increased to 30.3% for the year ended December 31, 2014 from 25.5% for the year ended December 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 $166.9 million in gross profit. Operating income (loss) was $37.8 million and ($12.9) million for the years ended December 31, 2014 and 2013, respectively, in relation to our operations in Africa, Asia, Australia, Europe, the Middle East and South America.
Other (Expense) Income. Other (expense) income was ($1.7) million for the year ended December 31, 2014, as compared to other (expense) income of ($9.0) million for the year ended December 31, 2013. Foreign currency transaction losses were ($3.4) million and ($12.9) million for the years ended December 31, 2014 and 2013, respectively. The decrease in foreign currency losses during the year ended December 31, 2014 was primarily related to our foreign currency transactions in Australia, Japan, Ireland and South Africa. Interest income was $1.7 million and $1.0 million for the years ended December 31, 2014 and 2013, respectively.
Provision for Income Taxes. Provision for income taxes was $262.6 million for the year ended December 31, 2014, an increase of $37.4 million or 16.6% higher than the provision for income taxes of $225.2 million for the year ended December 31, 2013. The effective combined federal, state and foreign tax rate decreased to 35.2% from 39.9% for the years ended December 31, 2014 and 2013, respectively. The decrease in the effective tax rate was primarily the result of profits earned 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.
Net Income. Net income was $483.2 million for the year ended December 31, 2014, an increase of $144.5 million or 42.7% higher than net income of $338.7 million for the year ended December 31, 2013. The increase in net income was primarily attributable to an increase in gross profit of $166.9 million. The increase in net income was partially offset by an increase in the provision for income taxes of $37.4 million.
Results of Operations for the Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012.
Gross Sales. Gross sales were $2,586.5 million for the year ended December 31, 2013, an increase of approximately $213.0 million, or 9.0% higher than gross sales of $2,373.5 million for the year ended December 31, 2012. The increase in the gross sales of our Monster Energy® brand energy drinks represented approximately $207.4 million, or 97.4%, 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. The increase in gross sales of our Hubert’s® lemonades represented approximately $10.5 million, or 4.9%, 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 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 year ended December 31, 2013. Promotional and other allowances, as described in the footnote above, were $340.1 million for the year ended December 31, 2013, an increase of $27.3 million, or 8.7% higher than promotional and other allowances of $312.8 million for the year ended December 31, 2012. Promotional and other allowances as a percentage of gross sales increased to 13.1% from 13.2% for the years ended December 31, 2013 and 2012, respectively.
Collective changes in foreign currency exchange rates did not have a material impact on gross sales for the year ended December 31, 2013.
Net Sales. Net sales were $2,246.4 million for the year ended December 31, 2013, an increase of approximately $185.7 million, or 9.0% higher than net sales of $2,060.7 million for the year ended December 31, 2012. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $177.5 million, or 95.6%, 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. The increase in net sales of our Hubert’s® lemonades represented approximately $8.4 million, or 4.5%, 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 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 year ended December 31, 2013.
Collective changes in foreign currency exchange rates did not have a material impact on net sales for the year ended December 31, 2013.
Case sales, in 192-ounce case equivalents, were 221.3 million cases for the year ended December 31, 2013, an increase of approximately 18.4 million cases or 9.1% higher than case sales of 202.9 million cases for the year ended December 31, 2012. The overall average net sales per case decreased to $10.15 for the year ended December 31, 2013, which was 0.1% lower than the average net sales per case of $10.16 for the year ended December 31, 2012.
Net sales for the DSD segment were $2,147.4 million for the year ended December 31, 2013, an increase of approximately $180.9 million, or 9.2% higher than net sales of $1,966.5 million for the year ended December 31, 2012. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $177.5 million, or 98.1%, 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 year ended December 31, 2013.
Net sales for the Warehouse segment were $99.1 million for the year ended December 31, 2013, an increase of approximately $4.9 million, or 5.1% higher than net sales of $94.2 million for the year ended December 31, 2012. The increase in net sales for the Warehouse segment was primarily attributable to increased sales by volume of Hubert’s® lemonades. The increase in net sales for the Warehouse segment was partially offset by decreased sales by volume of Hansen’s® soda.
Gross Profit. Gross profit was $1,172.9 million for the year ended December 31, 2013, an increase of approximately $107.3 million, or 10.1% higher than the gross profit of $1,065.7 million for the year ended December 31, 2012. Gross profit as a percentage of net sales increased to 52.2% for the year ended December 31, 2013 from 51.7% for the year ended December 31, 2012. The increase in gross profit dollars was primarily the result of the $207.4 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 a reduction in the cost of certain containers.
Operating Expenses. Total operating expenses were $600.0 million for the year ended December 31, 2013, an increase of approximately $85.0 million, or 16.5% higher than total operating expenses of $515.0 million for the year ended December 31, 2012. The increase in operating expenses was partially attributable to increased expenditures of $19.4 million for professional service costs, including legal and accounting fees (of which $15.9 million related to regulatory matters and litigation concerning our Monster Energy® brand energy drinks), increased payroll expenses of $13.7 million (of which $0.4 million was related to an increase in stock-based compensation), increased out-bound freight and warehouse costs of $11.9 million, increased expenditures of $9.3 million relating to the costs associated with terminating existing distributors, increased expenditures of $7.3 million for sponsorships and endorsements and increased expenditures of $5.2 million for merchandise displays. Total operating expenses as a percentage of net sales was 26.7% for the year ended December 31, 2013, compared to 25.0% for the year ended December 31, 2012.
Contribution Margin. Contribution margin for the DSD segment was $726.8 million for the year ended December 31, 2013, an increase of approximately $66.2 million, or 10.0% higher than the contribution margin of $660.6 million for the year ended December 31, 2012. The increase in the contribution margin for the DSD segment was primarily the result of the $207.4 million increase in gross sales of our Monster Energy® brand energy drinks. Contribution margin for the Warehouse segment was ($1.7) million for the year ended December 31, 2013, approximately $5.2 million lower than the contribution margin of $3.5 million for the year ended December 31, 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 $572.9 million for the year ended December 31, 2013, an increase of approximately $22.3 million, or 4.0% higher than operating income of $550.6 million for the year ended December 31, 2012. Operating income as a percentage of net sales decreased to 25.5% for the year ended December 31, 2013 from 26.7% for the year ended December 31, 2012, primarily due to the increase in operating expenses as a percentage of net sales. The increase in operating income dollars was primarily due to an increase in gross profit of $107.3 million, partially offset by an $85.0 million increase in operating expenses. Operating income was negatively affected by combined operating losses of $12.9 million and $10.1 million for the years ended December 31, 2013 and 2012, respectively, in relation to our operations in Africa, Asia, Australia, Europe, the Middle East and South America.
Other (Expense) Income. Other (expense) was ($9.0) million for the year ended December 31, 2013, as compared to other (expense) of ($1.5) million for the year ended December 31, 2012. Foreign currency transaction losses were $12.9 million and $3.7 million for the years ended December 31, 2013 and 2012, respectively. The increase in foreign currency losses during the year ended December 31, 2013 was primarily related to our operations in Australia, Europe, Japan and South Africa. Interest income was $1.0 million and $1.4 million for the years ended December 31, 2013 and 2012, respectively.
Provision for Income Taxes. Provision for income taxes was $225.2 million for the year ended December 31, 2013, an increase of $16.1 million or 7.7% higher than the provision for income taxes of $209.1 million for year ended December 31, 2012. The effective combined federal, state and foreign tax rate increased to 39.9% from 38.1% for the years ended December 31, 2013 and 2012, respectively. The increase in the effective tax rate during the year ended December 31, 2013 was primarily the result of the impact of increased losses in certain foreign subsidiaries for which there is no tax benefit and the establishment of a full valuation allowance against the deferred tax assets of certain foreign subsidiaries.
Net Income. Net income was $338.7 million for the year ended December 31, 2013, a decrease of $1.4 million or 0.4% lower than net income of $340.0 million for the year ended December 31, 2012. The decrease in net income was partially attributable to: (i) an increase in professional service costs of $15.9 million related to regulatory matters and litigation concerning the advertising, marketing, promotion, ingredients, usage, safety and sale of our Monster Energy® brand energy drinks; (ii) an increase in expenditures attributable to the costs associated with terminating existing distributors of $9.3 million; (iii) an increase in foreign currency losses of $9.2 million primarily related to our operations in Australia, Europe, Japan and South Africa; and (iv) an increase in the effective combined federal, state and foreign tax rate from 38.1% to 39.9% due in part to a $4.7 million increase in the impact of both existing and newly established valuation allowances against the deferred tax assets of certain foreign subsidiaries.
Sales
The table set forth below discloses selected quarterly data regarding sales for the past five years. Data from any one or more quarters is not necessarily indicative of annual results or continuing trends.
Sales of beverages are expressed in unit case volume. A “unit case” means a unit of measurement equal to 192 U.S. fluid ounces of finished beverage (24 eight-ounce servings). Unit case volume means the number of unit cases (or unit case equivalents) of beverages sold by us.
Our quarterly results of operations reflect seasonal trends that are primarily the result of increased demand in the warmer months of the year. It has been our experience that beverage sales tend to be lower during the first and fourth quarters of each calendar year. In addition, our experience with our energy drink products suggests they are less seasonal than the seasonality expected from traditional beverages. Quarterly fluctuations may also be affected by other factors including the introduction of new products, the opening of new markets where temperature fluctuations are more pronounced, the addition of new bottlers, distributors and customers, changes in the sales mix of our products and changes in and/or increased advertising and promotional expenses. (See “Part I, Item 1 – Business – Seasonality”).
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Unit Case Volume / Sales (in Thousands) | ||||||||||||||||
| Quarter 1 | 51,926 | 47,749 | 44,396 | 34,681 | 24,205 | |||||||||||
| Quarter 2 | 65,587 | 61,615 | 57,525 | 44,272 | 35,861 | |||||||||||
| Quarter 3 | 62,204 | 59,204 | 54,611 | 46,277 | 37,856 | |||||||||||
| Quarter 4 | 58,563 | 52,780 | 46,386 | 39,431 | 31,109 | |||||||||||
| Total | 238,280 | 221,348 | 202,918 | 164,661 | 129,031 | |||||||||||
| Net Sales (in Thousands) | ||||||||||||||||
| Quarter 1 | $ | 536,129 | $ | 484,223 | $ | 454,605 | $ | 356,419 | $ | 238,110 | ||||||
| Quarter 2 | 687,199 | 630,934 | 592,640 | 462,145 | 365,701 | |||||||||||
| Quarter 3 | 635,972 | 590,422 | 541,940 | 474,709 | 381,466 | |||||||||||
| Quarter 4 | 605,567 | 540,849 | 471,517 | 409,957 | 318,665 | |||||||||||
| Total | $ | 2,464,867 | $ | 2,246,428 | $ | 2,060,702 | $ | 1,703,230 | $ | 1,303,942 | ||||||
| Average Net Sales Per Case | ||||||||||||||||
| Quarter 1 | $ | 10.32 | $ | 10.14 | $ | 10.24 | $ | 10.28 | $ | 9.84 | ||||||
| Quarter 2 | 10.48 | 10.24 | 10.30 | 10.44 | 10.20 | |||||||||||
| Quarter 3 | 10.22 | 9.97 | 9.92 | 10.26 | 10.08 | |||||||||||
| Quarter 4 | 10.34 | 10.25 | 10.17 | 10.40 | 10.24 | |||||||||||
| Total | $ | 10.34 | $ | 10.15 | $ | 10.16 | $ | 10.34 | $ | 10.11 |
Inflation
We do not believe that inflation had a significant impact on our results of operations for the years ended December 31, 2014, 2013 or 2012.
Liquidity and Capital Resources
Cash flows provided by operating activities – Net cash provided by operating activities was $585.6 million for the year ended December 31, 2014, as compared with net cash provided by operating activities of $342.0 million for the year ended December 31, 2013. For the year ended December 31, 2014, cash provided by operating activities was primarily attributable to net income earned of $483.2 million and adjustments for certain non-cash expenses consisting of $28.6 million of stock-based compensation and $25.7 million of depreciation and other amortization. For the year ended December 31, 2014, cash provided by operating activities also increased due to a $42.8 million decrease in inventory, a $20.5 million increase in accrued promotional allowances, a $11.3 million increase in accounts payable, a $8.4 million increase in income taxes payable, a $4.6 million decrease in distributor receivables, a $3.4 million increase in accrued compensation and a $3.0 million increase in accrued liabilities. For the year ended December 31, 2014, cash provided by operating activities was reduced due to a $14.3 million increase in accounts receivable, an $11.9 million increase in tax benefit from the exercise of stock options, a $9.8 million increase in deferred income taxes, an $8.1 million decrease in deferred revenue and a $2.3 million decrease in accrued distributor terminations.
For the year ended December 31, 2013, cash provided by operating activities was primarily attributable to net income earned of $338.7 million and adjustments for certain non-cash expenses consisting of $28.8 million of stock-based compensation and $22.7 million of depreciation and other amortization. For the year ended December 31, 2013, cash provided by operating activities also increased due to a $34.3 million increase in income taxes payable, a $24.0 million decrease in prepaid income taxes, a $8.9 million increase in accrued promotional allowances, a $3.0 million increase in deferred revenue, a $2.3 million increase in accrued liabilities, a $2.0 million increase in accrued compensation and a $1.6 million increase in accrued distributor terminations. For the year ended December 31, 2013, cash provided by operating activities was reduced due to a $43.0 million increase in accounts receivable, a $30.3 million increase in tax benefit from the exercise of stock options, a $21.6 million increase in inventory, a $7.1 million increase in deferred income taxes, a $8.2 million decrease in accounts payable, a $4.5 million increase in prepaid expenses and other current assets, a $7.4 million increase in distributor receivables, and a $3.6 million gain on investments.
Cash flows (used in) provided by investing activities – Net cash used in investing activities was $440.4 million for the year ended December 31, 2014, as compared to net cash used in investing activities of $339.8 million for the year ended December 31, 2013. For the year ended December 31, 2014, cash used in investing activities was primarily attributable to purchases of held-to-maturity and available for sale investments, purchases of property and equipment, and additions to intangibles. For the year ended December 31, 2013, cash used in investing activities was primarily attributable to purchases of held-to-maturity investments, purchases of property and equipment (including the Company’s new corporate offices), and additions to intangibles. For the year ended December 31, 2014, cash provided by investing activities was primarily attributable to maturities of held-to-maturity investments, sales of trading investments and proceeds from the sale of property and equipment. For the year ended December 31, 2013, cash provided by investing activities was primarily attributable to maturities of held-to-maturity investments and proceeds from the sale of property and equipment.
For both the years ended December 31, 2014 and 2013, cash used in investing activities also included the acquisitions of fixed assets consisting of vans and promotional vehicles, coolers and other equipment to support our marketing and promotional activities, production equipment, furniture and fixtures, office and computer equipment, computer software, and equipment used for sales and administrative activities, as well as certain leasehold improvements. We expect to continue to use a
portion of our cash in excess of our requirements for operations for purchasing short-term and long-term investments, and for other corporate purposes, including leasehold improvements, the acquisition of capital equipment, specifically, vans, trucks and promotional vehicles, coolers, other promotional equipment, merchandise displays, warehousing racks as well as items of production equipment required to produce certain of our existing and/or new products and to develop our brand in international markets. From time to time, we may also purchase additional real property related to our beverage business and/or acquire compatible businesses as a use of cash in excess of our requirements for operations.
Cash flows provided by (used in) financing activities – Net cash provided by financing activities was $19.3 million for the year ended December 31, 2014, as compared to net cash used in financing activities of $17.9 million for the year ended December 31, 2013. For the year ended December 31, 2014, cash provided by financing activities was primarily attributable to $17.2 million received from the issuance of common stock in connection with the exercise of certain stock options and an $11.9 million tax benefit from the exercise of stock options. For the year ended December 31, 2014, cash used in financing activities was primarily attributable to $8.2 million of re-purchases of common stock. For the year ended December 31, 2013, cash provided by financing activities was primarily attributable to a $30.3 million tax benefit from the exercise of stock options and $21.3 million received from the issuance of common stock in connection with the exercise of certain stock options. For the year ended December 31, 2013, cash used in financing activities was primarily attributable to $67.6 million of re-purchases of common stock.
Purchases of inventories, increases in accounts receivable and other assets, acquisition of property and equipment, leasehold improvements, acquisition and maintenance of trademarks, payments of accounts payable, income taxes payable and purchases of our common stock are expected to remain our principal recurring uses of cash.
Cash and cash equivalents, short-term and long-term investments – As of December 31, 2014, we had $370.3 million in cash and cash equivalents and $824.1 million in short-term and long-term investments. We have historically invested these amounts in U.S. Treasury bills, U.S. government agency securities and municipal securities (which may have an auction reset feature), certificates of deposit, commercial paper, variable rate demand notes and money market funds meeting certain criteria. We maintain our investments for cash management purposes and not for purposes of speculation. Our risk management policies emphasize credit quality (primarily based on short-term ratings by nationally recognized statistical rating organizations) in selecting and maintaining our investments. We regularly assess market risk of our investments and believe our current policies and investment practices adequately limit those risks. However, certain of these investments are subject to general credit, liquidity, market and interest rate risks. These risks associated with our investment portfolio may have an adverse effect on our future results of operations, liquidity and financial condition.
Of our $370.3 million of cash and cash equivalents held at December 31, 2014, $117.8 million was held by our foreign subsidiaries. No short-term or long-term investments were held by our foreign subsidiaries at December 31, 2014. We do not intend, nor do we foresee a need, to repatriate undistributed earnings of our foreign subsidiaries other than to repay certain intercompany debt owed to our U.S. operations. Under current tax laws, if funds in excess of intercompany amounts owed were repatriated to our U.S. operations, we would be required to accrue and pay additional income taxes on such excess funds at the tax rates then in effect.
We believe that cash available from operations, including our cash resources and our revolving line of credit, will be sufficient for our working capital needs, including purchase commitments for raw materials and inventory, increases in accounts receivable, payments of tax liabilities, expansion and development needs, purchases of shares of our common stock, as well as purchases of capital assets, equipment and properties, through at least the next 12 months. Based on our current plans, at this time we estimate that capital expenditures are likely to be less than $120.0 million through December 31, 2015. However, future business opportunities may cause a change in this estimate.
The following represents a summary of the Company’s contractual commitments and related scheduled maturities as of December 31, 2014:
| Payments due by period (in thousands) | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||
| Contractual Obligations¹ | $ | 77,981 | $ | 46,290 | $ | 28,898 | $ | 2,793 | $ | - | ||||||
| Capital Leases | 467 | 467 | - | - | - | |||||||||||
| Operating Leases | 12,973 | 5,310 | 5,507 | 990 | 1,166 | |||||||||||
| Purchase Commitments² | 31,253 | 31,253 | - | - | - | |||||||||||
| $ | 122,674 | $ | 83,320 | $ | 34,405 | $ | 3,783 | $ | 1,166 |
¹Contractual obligations include our obligations related to sponsorships and other commitments.
²Purchase commitments include obligations made by us and our subsidiaries to various suppliers for raw materials used in the production of our products. These obligations vary in terms, but are generally satisfied within one year.
In addition, approximately $0.9 million of recognized tax benefits have been recorded as liabilities as of December 31, 2014. It is expected that any change in the amount of unrecognized tax benefit within the next 12 months will not be significant. We have also recorded a liability for potential penalties and interest of $0.4 million as of December 31, 2014.
Accounting Policies and Pronouncements
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with GAAP. GAAP requires us to make estimates and assumptions that affect the reported amounts in our consolidated financial statements. The following summarizes our most significant accounting and reporting policies and practices:
Investments – Our investments in debt securities are classified as either held-to-maturity, available-for-sale or trading, in accordance with the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 320. Held-to-maturity securities are those securities that we have the positive intent and ability to hold until maturity. Trading securities are those securities that we intend to sell in the near term. All other securities not included in the held-to-maturity or trading category are classified as available-for-sale. Held-to-maturity securities are recorded at amortized cost which approximates fair market value. Trading securities are carried at fair value with unrealized gains and losses charged to earnings. Available-for-sale securities are carried at fair value with unrealized gains and losses recorded within accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. 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 (see Note 3 “Fair Value of Certain Financial Assets and Liabilities” in the notes to consolidated financial statements). Under ASC 320-10-35, a security is considered to be other-than-temporarily impaired if the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference being defined as the “Credit Loss”) or if the fair value of the security is less than the security’s amortized cost basis
and the investor intends, or will be required, to sell the security before recovery of the security’s amortized cost basis. If an other-than-temporary impairment exists, the charge to earnings is limited to the amount of Credit Loss if the investor does not intend to sell the security, and will not be required to sell the security, before recovery of the security’s amortized cost basis. Any remaining difference between fair value and amortized cost is recognized in other comprehensive income (loss), net of applicable taxes. We evaluate whether the decline in fair value of our investments is other-than-temporary at each quarter-end. This evaluation consists of a review by management, and includes market pricing information and maturity dates for the securities held, market and economic trends in the industry and information on the issuer’s financial condition and, if applicable, information on the guarantors’ financial condition. Factors considered in determining whether a loss is temporary include the length of time and extent to which the investment’s fair value has been less than its cost basis, the financial condition and near-term prospects of the issuer and guarantors, including any specific events which may influence the operations of the issuer and our intent and ability to retain the investment for a reasonable period of time sufficient to allow for any anticipated recovery of fair value.
Accounts Receivable – We evaluate the collectability of our trade accounts receivable based on a number of factors. In circumstances where we become aware of a specific customer’s inability to meet its financial obligations to us, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount we believe will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on our recent loss history and an overall assessment of past due trade accounts receivable outstanding.
Inventories – Inventories are stated at the lower of cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand, production availability and/or our ability to sell the product(s) concerned. Demand for our products can fluctuate significantly. Factors that could affect demand for our products include unanticipated changes in consumer preferences, general market and economic conditions or other factors that may result in cancellations of advance orders or reductions in the rate of reorders placed by customers and/or continued weakening of economic conditions. Additionally, management’s estimates of future product demand may be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory.
Long-Lived Assets – Management regularly reviews property and equipment and other long-lived assets, including certain definite-lived identifiable intangible assets, for possible impairment. This review occurs annually or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If there is indication of impairment of property and equipment or amortizable intangible assets, then management prepares an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. The fair value is estimated at the present value of the future cash flows discounted at a rate commensurate with management’s estimates of the business risks. No impairment indicators were identified as of December 31, 2014 or 2013. Long-lived assets held for sale are recorded at the lower of their carrying amount or fair value less cost to sell.
Management believes that the accounting estimate related to impairment of its long-lived assets, including its trademarks (as discussed below), is a “critical accounting estimate” because: (1) the estimate is highly susceptible to change from period to period because it requires Company management to make assumptions about cash flows and discount rates; and (2) the impact that
recognizing an impairment would have on the assets reported on our consolidated balance sheet, as well as net income, could be material. Management’s assumptions about cash flows and discount rates require significant judgment because actual revenues and expenses have fluctuated in the past and are expected to continue to do so.
Intangibles – Intangibles are comprised primarily of trademarks that represent our exclusive ownership of the Monster Energy®, 
®, Monster Rehab®, Java Monster®, Muscle Monster®, Unleash the Beast®, Punch Monster®, Juice Monster™, Peace Tea®, Hansen’s®, Blue Sky®, and the Junior Juice® trademarks, all used in connection with the manufacture, sale and distribution of supplements and beverages. We also own in our own right a number of other trademarks in the United States, as well as in a number of countries around the world. During 2002, we adopted ASC 350. Under the provisions of ASC 350, we discontinued amortization on indefinite-lived trademarks while continuing to amortize remaining definite-lived trademarks over one to 25 years.
In accordance with ASC 350, we evaluate our trademarks annually for impairment or earlier if there is an indication of impairment. If there is an indication of impairment of identified intangible assets not subject to amortization, management compares the estimated fair value with the carrying amount of the asset. An impairment loss is recognized to write down the intangible asset to its fair value if it is less than the carrying amount. The fair value is calculated using the income approach. However, preparation of estimated expected future cash flows is inherently subjective and is based on management’s best estimate of assumptions concerning expected future conditions. Based on management’s impairment analysis performed for the year ended December 31, 2014, the estimated fair values of trademarks exceeded the carrying values.
In estimating future revenues, we use internal budgets. Internal budgets are developed based on recent revenue data and future marketing plans for existing product lines and planned timing of future introductions of new products and their impact on our future cash flows.
Revenue Recognition – We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Generally, ownership of and title to our products pass to customers upon delivery of the products to customers. Certain of our distributors may also perform a separate function as a co-packer on our behalf. In such cases, ownership of and title to our products that are co-packed on our behalf by those co-packers who are also distributors, passes to such distributors when we are notified by them that they have taken transfer or possession of the relevant portion of our finished goods. Net sales are determined after deducting promotional and other allowances in accordance with ASC 605-50. The Company’s promotional and other allowances are calculated based on various programs with its distributors and retail customers, and accruals are established during the year for anticipated liabilities. These accruals are based on agreed upon terms as well as the Company’s historical experience with similar programs and require management’s judgment with respect to estimating consumer participation and/or distributor and retail customer performance levels. Differences between such estimated expense and actual expenses for promotional and other allowances have historically been insignificant and are recognized in earnings in the period such differences are determined. Amounts received pursuant to new and/or amended distribution agreements entered into with certain distributors, relating to the costs associated with terminating our prior distributors, are accounted for as revenue ratably over the anticipated life of the respective distribution agreement, which is generally 20 years.
Management believes that adequate provision has been made for cash discounts, returns and spoilage based on our historical experience.
Cost of Sales – Cost of sales consists of the costs of raw materials utilized in the manufacture of products, co-packing fees, repacking fees, in-bound freight charges, as well as certain internal transfer costs, warehouse expenses incurred prior to the manufacture of our finished products and certain quality control costs. Raw materials account for the largest portion of the cost of sales. Raw materials include cans, bottles, other containers, flavors, ingredients and packaging materials.
Operating Expenses – Operating expenses include selling expenses such as distribution expenses to transport products to customers and warehousing expenses after manufacture, as well as expenses for advertising, commissions, sampling and in-store demonstration costs, costs for merchandise displays, point-of-sale materials and premium items, sponsorship expenses, other marketing expenses and design expenses. Operating expenses also include payroll costs, travel costs, professional service fees including legal fees, termination payments made to certain of our prior distributors, entertainment costs, insurance costs, postage costs, depreciation and other general and administrative costs.
Stock-Based Compensation – The Company accounts for stock-based compensation under the provisions of ASC 718. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes-Merton option pricing formula. The Company records compensation expense for non-employee stock options based on the estimated fair value of the options as of the earlier of (1) the date on which a commitment for performance by the non-employee to earn the stock option is reached or (2) the date on which the non-employee’s performance is complete, using the Black-Scholes-Merton option pricing formula. Stock-based compensation cost for restricted stock awards and restricted stock units is measured based on the closing fair market value of the Company’s common stock at the date of grant. In the event that the Company has the option and intent to settle a restricted stock unit in cash, the award is classified as a liability and revalued at each balance sheet date.
Income Taxes – We utilize the liability method of accounting for income taxes as set forth in ASC 740. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. In determining the need for valuation allowances we consider projected future taxable income and the availability of tax planning strategies. If in the future we determine that we would not be able to realize our recorded deferred tax assets, an increase in the valuation allowance would be recorded, decreasing earnings in the period in which such determination is made.
We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available as of the reporting date. For those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, we have recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements.
Recent Accounting Pronouncements
See “Part II, Item 8 – Financial Statements and Supplementary Data – Note 1 – Organization and Summary of Significant Accounting Policies – Recent Accounting Pronouncements” for a full description of recent accounting pronouncements including the respective expected dates of adoption and expected effects on the Company’s consolidated financial position, results of operations or liquidity.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a safe harbor for forward-looking statements made by or on behalf of the Company. Certain statements made in this report may constitute forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act, as amended) regarding our expectations with respect to revenues, profitability, adequacy of funds from operations and our existing credit facility, among other things. All statements containing a projection of revenues, income (loss), earnings (loss) per share, capital expenditures, dividends, capital structure or other financial items, a statement of management’s plans and objectives for future operations, or a statement of future economic performance contained in management’s discussion and analysis of financial condition and results of operations, including statements related to new products, volume growth and statements encompassing general optimism about future operating results and non-historical information, are forward-looking statements within the meaning of the Act. Without limiting the foregoing, the words “believes,” “thinks,” “anticipates,” “plans,” “expects,” “estimates,” and similar expressions are intended to identify forward-looking statements.
Management cautions that these statements are qualified by their terms and/or important factors, many of which are outside our control and involve a number of risks, uncertainties and other factors, that could cause actual results and events to differ materially from the statements made including, but not limited to, the following:
· Our ability to consummate the TCCC Transaction or recognize any benefits from the TCCC Transaction;
· Following the TCCC Transaction, the effect of extensive commercial arrangements between NewCo and TCCC on NewCo’s future performance;
· Following the TCCC Transaction, the effect of TCCC becoming a significant shareholder of NewCo and the potential divergence of TCCC’s interests from those of other NewCo stockholders;
· Disruption in distribution or sales and/or decline in sales due to the termination and/or appointment of existing and/or new domestic and/or international distributors;
· Lack of anticipated demand for our products in international markets;
· Unfavorable regulations, including taxation requirements, product registration requirements, tariffs and/or trade restrictions;
· The effect of inquiries from and/or actions by state attorneys general, the Federal Trade Commission (the “FTC”), the FDA, municipalities or city attorneys and/or other government agencies and/or quasi-government agencies and/or government officials, including members of Congress, into the advertising, marketing, promotion, ingredients, sale and/or consumption of our energy drink products, including voluntary changes to our business practices;
· Our ability to achieve profitability from our operations outside the United States;
· Our ability to manage legal and regulatory requirements in foreign jurisdictions, potential difficulties in staffing and managing foreign operations, potentially higher incidence of fraud or corruption and credit risk of foreign customers and distributors;
· Our ability to produce our products in international markets in which they are sold, thereby reducing freight costs and/or product damages;
· Our ability to effectively manage our inventories and/or our accounts receivables;
· Our foreign currency exchange rate risk with respect to our sales, expenses, profits, assets and liabilities denominated in currencies other than the U.S. dollar, which will continue to increase as foreign sales increase;
· Changes in accounting standards may affect our reported profitability;
· Any proceedings which may be brought against us by the Securities and Exchange Commission (the “SEC”), the FDA, the FTC or other governmental agencies or bodies;
· The outcome of shareholder securities litigation and/or shareholder derivative actions filed against us and/or against certain of our officers and directors, and the possibility of other private shareholder litigation;
· The possibility of future shareholder derivative actions or shareholder securities litigation filed against us;
· The outcome of product liability litigation and/or class action litigation regarding the safety of our products and/or the ingredients in and/or claims made in connection with our products and/or alleging false advertising, marketing and/or promotion, and the possibility of future product liability and/or class action lawsuits;
· The current uncertainty and volatility in the national and global economy;
· Our ability to address any significant deficiencies or material weakness in our internal control over financial reporting;
· Our ability to continue to generate sufficient cash flows to support capital expansion plans and general operating activities;
· Decreased demand for our products resulting from changes in consumer preferences and/or from decreased consumer discretionary spending power and/or from higher gasoline prices;
· Changes in demand that are weather related, particularly in areas outside of California;
· Competitive products and pricing pressures and our ability to gain or maintain our share of sales in the marketplace as a result of actions by competitors;
· Our ability to introduce new products;
· An inability to achieve volume growth through product and packaging initiatives;
· Our ability to sustain the current level of sales and/or increase the sales of our Monster Energy® brand energy drinks and/or our other products, including, following the TCCC Transaction, the energy drinks we will acquire from TCCC;
· The impact of criticism of our energy drink products and/or the energy drink market generally and/or legislation enacted, whether as a result of such criticism or otherwise, that restrict the sale of energy drinks (including prohibiting the sale of energy drinks at certain establishments or pursuant to certain governmental programs), limit caffeine content in beverages, require certain product labeling disclosures and/or warnings, impose excise and/or sales taxes, limit product sizes or impose age restrictions for the sale of energy drinks;
· Our ability to comply with and/or resulting lower consumer demand for energy drinks due to proposed and/or future U.S. federal, state and local laws and regulations and/or proposed or existing laws and regulations in certain foreign jurisdictions and/or any changes therein, including changes in taxation requirements (including tax rate changes, new tax laws, new and/or increased excise and/or sales and/or other taxes on our products and revised tax law interpretations) and environmental laws, as well as the FFDC Act, including as amended by the Dietary Supplement Health and Education Act, and regulations made thereunder or in connection therewith, as well as changes in any other food, drug or similar laws in the United States and internationally, especially those that may restrict the sale of energy drinks (including prohibiting the sale of energy drinks at certain establishments or pursuant to certain governmental programs), limit caffeine content in beverages, require certain product labeling disclosures and/or warnings, impose excise taxes, limit product sizes, or impose age restrictions for the sale of energy drinks, as well as laws and regulations or rules made or enforced by the FDA, and/or the Bureau of Alcohol, Tobacco and Firearms and Explosives, and/or the Federal Trade Commission;
· Our ability to satisfy all criteria set forth in any model energy drink guidelines, including, without limitation, those adopted by the American Beverage Association, of which the Company is a member, and/or any international beverage association and the impact on the Company of such guidelines;
· Disruptions in the timely import or export of our products and/or ingredients due to port strikes and related labor issues;
· The effect of unfavorable or adverse public relations and/or press and/or articles, comments and/or media attention;
· Changes in the cost, quality and availability of containers, packaging materials, raw materials and other ingredients and juice concentrates, and our ability to obtain and/or maintain favorable supply arrangements and relationships and procure timely and/or sufficient production of all or any of our products to meet customer demand;
· Our ability to pass on to our customers all or a portion of any increases in the costs of raw materials and/or ingredients and/or commodities and/or other cost inputs affecting our business;
· Our ability to achieve both domestic and international forecasts, which may be based on projected volumes and sales of many product types and/or new products, certain of which are more profitable than others; there can be no assurance that we will achieve projected levels of sales as well as forecasted product and/or geographic mixes;
· Our ability to penetrate new domestic and/or international markets and/or gain approval or mitigate the delay in securing approval for the sale of our products in various countries;
· Economic or political instability in one or more of our international markets;
· Our ability to secure and/or retain competent and/or effective distributors internationally;
· The effectiveness of sales and/or marketing efforts of distributors of our products, most of which distribute products that are competitive with our products;
· Unilateral decisions by distributors, convenience chains, grocery chains, specialty chain stores, club stores and other customers to discontinue carrying all or any of our products that they are carrying at any time and/or restrict the range of our products they carry and/or devote less resources to the sale of our products;
· The costs and/or effectiveness, now or in the future, of our advertising, marketing and promotional strategies;
· Changes in product category consumption;
· Unforeseen economic and political changes;
· Possible recalls of our products and/or defective production;
· Our ability to make suitable arrangements for the co-packing of any of our products both domestically and internationally and/or the timely replacement of discontinued co-packing arrangements;
· Our ability to make suitable arrangements for the timely procurement of non-defective raw materials;
· Our inability to protect and/or the loss of our intellectual property rights and/or our inability to use our trademarks and/or trade names or designs in certain countries;
· Volatility of stock prices which may restrict stock sales, stock purchases or other opportunities;
· Provisions in our organizational documents and/or control by insiders which may prevent changes in control even if such changes would be beneficial to other stockholders;
· The failure of our bottlers and contract packers to manufacture our products on a timely basis or at all;
· Exposure to significant liabilities due to litigation, legal or regulatory proceedings;
· Any disruption in and/or lack of effectiveness of our information technology systems that disrupts our business or negatively impacts customer relationships; and
· Recruitment and retention of senior management, other key employees and our employee base in general.
The foregoing list of important factors and other risks detailed from time to time in our reports filed with the Securities and Exchange Commission is not exhaustive. See “Part I, Item 1A – Risk Factors,” for a more complete discussion of these risks and uncertainties and for other risks and uncertainties. Those factors and the other risk factors described therein are not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Consequently, our actual results could be materially different from the results described or anticipated by our forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections and may be better or worse than anticipated. Given these uncertainties, you should not
rely on forward-looking statements. Forward-looking statements represent our estimates and assumptions only as of the date that they were made. We expressly disclaim any duty to provide updates to forward-looking statements, and the estimates and assumptions associated with them, after the date of this report, in order to reflect changes in circumstances or expectations or the occurrence of unanticipated events except to the extent required by applicable securities laws.
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