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, stock repurchases, acquisitions and divestitures;
· 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
Stock Repurchases
On April 28, 2016, our Board of Directors authorized us to commence a “modified Dutch auction” tender offer to repurchase up to $2.0 billion of our outstanding shares of common stock (the “Auction Stock Repurchase Tender”). The Auction Stock Repurchase Tender was authorized under our existing share repurchase authority and was funded with cash on hand. We commenced this tender offer in May 2016. On June 15, 2016, we accepted for payment an aggregate of 38.5 million shares of common stock at a purchase price of $52.00 per share, for a total amount of $2.0 billion (excluding commissions). Such shares of common stock are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2016. We incurred $1.6 million in stock repurchase expenses for the year ended December 31, 2016 related to the Auction Stock Repurchase Tender.
On August 2, 2016, our Board of Directors authorized a new share repurchase program for the repurchase of up to $250.0 million of our outstanding shares of common stock (the “August 2016 Repurchase Plan”). During the year ended December 31, 2016, we purchased 5.8 million shares of common stock at an average purchase price of $43.40 per share, for a total amount of $249.9 million (excluding broker commissions), which exhausted the availability under the August 2016 Repurchase Plan. Such shares of common stock are included in common stock in treasury in the accompanying consolidated balance sheet at December 31, 2016.
Acquisitions and Divestitures
On April 1, 2016, we completed our acquisition of AFF, in an asset acquisition that brought our primary flavor supplier in-house, secured the intellectual property of our most important flavors in perpetuity and further enhanced our flavor development and global flavor footprint capabilities. Pursuant to the terms of the AFF Transaction, we purchased AFF for $688.5 million in cash after adjustments. We accounted for the AFF Transaction in accordance with FASB ASC No. 805 “Business Combinations”.
Inventory purchased under the AFF Transaction was recorded at fair value. Raw material cost savings from the AFF Transaction were approximately $46.4 million in the year ended December 31, 2016. However, raw material cost savings were not immediately recognized upon the completion of the AFF Transaction as both the Company’s inventory on hand and inventory acquired as part of the AFF Transaction were recorded at fair value. As a result, the cost savings were not recognized through cost of goods sold until the end of the second quarter of 2016.
We incurred $4.5 million in AFF Transaction related expenses for the year ended December 31, 2016.
On June 12, 2015, we completed the TCCC Transaction which provided for a long-term strategic relationship in the global energy drink category with TCCC. As part of the TCCC Transaction, we transitioned certain distribution rights to TCCC’s distribution network.
In accordance with FASB ASC No. 420 “Exit or Disposal Cost Obligations”, we expense distributor termination costs in the period in which the written notification of termination occurs. We incurred distributor termination costs of $79.8 million, $224.0 million and ($0.2) million for the years ended December 31, 2016, 2015 and 2014, respectively. Such termination costs have been expensed in full and are included in operating expenses for the years ended December 31, 2016, 2015 and 2014. We recognized as income $5.7 million and $39.8 million for the years ended December 31, 2016 and 2015, respectively, related to the accelerated amortization of the deferred revenue balances associated with certain of our prior distributors who were sent notices of termination during the relevant periods. No accelerated amortization of deferred revenue was recognized for the year ended December 31, 2014.
We incurred $15.5 million and $4.8 million in TCCC Transaction related expenses for the years ended December 31, 2015 and 2014, respectively. We incurred no TCCC Transaction related expenses for the year ended December 31, 2016.
Factors Impacting Profitability
The following table summarizes the selected items discussed above for the years ended December 31, 2016, 2015 and 2014:
| Income Statement Items (in thousands): | 2016 | 2015 | 2014 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Included in Net Sales: | ||||||||||
| Accelerated recognition of deferred revenue | $ | 5,713 | $ | 39,761 | $ | - | ||||
| Included in Operating Expenses: | ||||||||||
| Stock Repurchase expenses | $ | (1,556) | $ | - | $ | - | ||||
| AFF Transaction expenses | (4,483) | - | - | |||||||
| Distributor termination costs | (79,751) | (224,000) | 157 | |||||||
| TCCC Transaction expenses | - | (15,496) | (4,824) | |||||||
| Gain on sale of Monster Non-Energy | $ | - | $ | 161,470 | $ | - | ||||
| Net Impact on Operating Income | $ | (80,077) | $ | (38,265) | $ | (4,667) |
Overview
We develop, market, sell and distribute energy drink beverages, sodas and/or concentrates for energy drink beverages, primarily under the following brand names:
| · Monster Energy® | · Nalu® |
|---|---|
| · Monster Rehab® | · NOS® |
| · Monster Energy Extra Strength Nitrous Technology® | · Full Throttle® |
| · Java Monster® | · Burn® |
| · Muscle Monster® | · Mother® |
| · Mega Monster Energy® | · Ultra® |
| · Punch Monster® | · Play® and Power Play® |
| · Juice Monster® | · Gladiator® |
| · Übermonster® | · Relentless® |
| · BU® | · Samurai® |
| · Mutant® Super Soda | · BPM® |
Our Monster Energy® brand energy drinks, which represented 90.1%, 92.5% and 93.9% of our net sales for the years ended December 31, 2016, 2015 and 2014, 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® |
| · Juice Monster® Pipeline Punch® | · Java Monster® Salted Caramel |
| · Monster Energy Absolutely Zero® | · Mega Monster Energy® |
| · Monster Energy® Import | · Monster Energy Extra Strength Nitrous |
| · Punch Monster® Baller’s Blend® (formerly Dub Edition) | Technology® Super Dry™ |
| · Punch Monster® Mad Dog (formerly Dub Edition) | · Monster Energy Extra Strength Nitrous |
| · Monster Rehab® Tea + Lemonade + Energy | Technology® Anti-Gravity® |
| · Monster Rehab® Raspberry Tea + Energy (formerly Rojo) | · M3® Monster Energy® Super Concentrate |
| · 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® |
| · Monster Rehab® Peach Tea + Energy | · Monster Energy Ultra Black® |
|---|---|
| · Muscle Monster® Vanilla | · Monster Energy Ultra Sunrise® |
| · Muscle Monster® Chocolate | · Monster Energy Ultra Citron® |
| · Muscle Monster® Strawberry | · Monster Energy Ultra Violet™ |
| · Muscle Monster® Banana | · Monster Energy® Valentino Rossi |
| · Monster Energy® Gronk | · Übermonster® Energy Brew™ |
We have three operating and reportable segments, (i) Monster Energy® Drinks segment which is comprised of our Monster Energy® drinks as well as Mutant® Super Soda drinks, (ii) Strategic Brands segment which includes the various energy drink brands acquired from TCCC as a result of the TCCC Transaction and (iii) Other segment (“Other”), the principal products of which include the non-energy brands disposed of as a result of the TCCC Transaction as well as the AFF Third-Party Products.
During 2016, we continued to expand our existing portfolio of drinks and further develop our distribution markets. During 2016, we introduced the following products:
· Monster Energy Ultra Violet™ (December 2016).
· Mutant® Super Soda (September 2016).
· Monster Energy® Gronk (February 2016).
· Java Monster® Salted Caramel (January 2016).
In the normal course of business we discontinue certain products and/or product lines. Those products or product lines discontinued in 2016, either individually or in aggregate, did not have a material adverse impact on our financial position, results of operations or liquidity.
Our net sales of $3,049.4 million for the year ended December 31, 2016 represented record annual net sales. The vast majority of our net sales are derived from our Monster Energy® brand energy drinks. Net sales of our Monster Energy® brand energy drinks were $2,747.9 million for the year ended December 31, 2016, an increase of $229.4 million, or 70.2% of our overall increase in net sales for the year ended December 31, 2016. Any decrease in net 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. Net sales of our Strategic Brands acquired as part of the TCCC Transaction were $272.5 million for the year ended December 31, 2016.
Net changes in foreign currency exchange rates had an unfavorable impact on net sales in the Monster Energy® Drinks segment of approximately $17.6 million for the year ended December 31, 2016, primarily due to our operations in Europe, Mexico, Canada and South Africa, partially offset by our operations in Japan. Net changes in foreign currency exchange rates had an unfavorable impact on net sales in the Strategic Brands segment of approximately $4.7 million for the year ended December 31, 2016, primarily due to our operations in Europe.
Our growth strategy includes expanding our international business. Gross sales to customers outside the United States amounted to $888.7 million, $713.2 million and $657.9 million for the years ended December 31, 2016, 2015 and 2014, respectively. Such sales were approximately 25%, 23% and 23% of gross sales for the years ended December 31, 2016, 2015 and 2014, respectively. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales to customers outside the United States of approximately 3%, 14% and 1% for the years ended December 31, 2016, 2015, and 2014, respectively, primarily due to our operations in Europe, Mexico, Canada and South Africa, partially offset by our operations in Japan.
Our customers are primarily full service beverage bottlers/distributors, retail grocery and specialty chains, wholesalers, club stores, mass merchandisers, convenience chains, food service customers and the military. Percentages of our gross sales to our various customer types for the years ended December 31, 2016, 2015 and 2014 are reflected below. Such information includes sales made by us directly to the customer types concerned, which include our full service beverage bottlers/distributors in the United States. Such full service beverage bottlers/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 bottlers/distributors without reference to such bottlers/distributors’ sales to their own customers.
| 2016 | 2015 | 2014 | |||||
|---|---|---|---|---|---|---|---|
| U.S. full service bottlers/distributors | 65% | 65% | 62% | ||||
| Club stores and mass merchandisers | 8% | 9% | 9% | ||||
| International full service bottlers/distributors | 25% | 23% | 23% | ||||
| Retail grocery, specialty chains and wholesalers | 1% | 2% | 4% | ||||
| Other | 1% | 1% | 2% |
Our customers include the TCCC North American Bottlers, Coca-Cola European Partners, Coca-Cola Hellenic, Coca-Cola FEMSA, Coca-Cola Amatil, Swire Coca-Cola group in China, COFCO Coca-Cola group in China, Asahi, Kalil Bottling Group, Wal-Mart, Inc. (including Sam’s Club), Costco and select Anheuser-Busch distributors (the “AB Distributors”). In February 2015, in accordance with our then existing agreements with the applicable AB Distributors, we sent notices of termination to the majority of the AB Distributors in the United States for the termination of their respective distribution agreements. The associated distribution rights relating to such terminated distribution agreements have been transitioned to TCCC’s network of owned or controlled bottlers/distributors and independent bottlers/distributors as of the effective date of termination of the affected AB Distributors’ rights in the applicable territories. As of March 1, 2017, distribution rights in the U.S. representing approximately 94% of the target case sales have been transitioned to TCCC’s distribution network. A decision by any large customer to decrease amounts purchased from us or to cease carrying our products could have a material negative effect on our financial condition and consolidated results of operations. TCCC, through certain wholly-owned subsidiaries (the “TCCC Subsidiaries”), accounted for approximately 41%, 43% and 29% of our net sales for the years ended December 31, 2016, 2015 and 2014, 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 for our Monster Energy® drinks brand.
· Profitable Growth – We believe “functional” value-added brands supported by marketing and innovation and targeted to a diverse consumer base, drive profitable growth. We continue to broaden our family of products. In particular, we have expanded our range of 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 increasing the profit margins for both our Monster Energy® Drinks segment and our Strategic Brands segment, 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 procurement and production costs on a per-case basis, including raw material costs and co-packing fees, as well as reducing freight costs by securing additional co-packing facilities strategically localized. 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.
· Efficient Capital Structure – Our capital structure is designed to optimize our working capital in order to finance expansion, both domestically and internationally. We believe that with our strong capital position, our ability to raise funds, if necessary, at a relatively low effective cost of borrowings, provides a competitive advantage. The reduction of accounts receivable and inventory days on hand will remain an area of focus.
We believe that, subject to increases in the costs of certain raw materials being contained, these value drivers, when properly implemented in the United States 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) enhancing 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 2017 and beyond **(**See “Part II, Item 7 – Results of Operations – Results of Operations for the Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015”).
As of December 31, 2016, the Company had working capital of $961.7 million compared to $3,189.2 million as of December 31, 2015. The decrease in working capital was primarily the result of the $2.0 billion Auction Stock Repurchase Tender and the AFF Transaction. For the year ended December 31, 2016, our net cash provided by operating activities was approximately $701.4 million as compared to $522.7 million for the year ended December 31, 2015. Principal uses of cash flows in 2016 (other than the Auction Stock Repurchase Tender and the AFF Transaction), were purchases of investments, development of our Monster Energy® brand internationally and acquisition of property and equipment. 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 the Company, including our significant commercial relationship with TCCC and TCCC’s status as a significant shareholder of the Company, 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, 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 price, 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 the realization of benefits from the TCCC Transaction, including the continued transition of the distribution of our products to TCCC’s distribution network; |
|---|---|
| · | 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 – Business – 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; |
| · | limitations on co-packing availability, particularly for retort production; 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 continued transition to a leading global distribution network and the scale and platform synergies expected in connection with the TCCC Transaction;
· growth potential of the energy drink category, both domestically and internationally;
· planned and future new product and product line introductions with the objective of increasing sales and/or contributing to higher profitability;
· the introduction of premium and/or new packages designed to generate strong revenue growth;
· redesign, repackaging and repositioning of our Strategic Brands;
· 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 and/or relaunching our products into new geographic markets such as India and additional markets in China; and
· continued focus on reducing our cost base.
Results of Operations
The following table sets forth key statistics for the years ended December 31, 2016, 2015 and 2014, respectively.
| (In thousands, except per share amounts) | Percentage Change | Percentage Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2014 | 16 vs. 15 | 15 vs. 14 | ||||||||||
| Net sales¹ | $ | 3,049,393 | $ | 2,722,564 | $ | 2,464,867 | 12.0% | 10.5% | ||||||
| Cost of sales | 1,107,393 | 1,090,263 | 1,125,057 | 1.6% | (3.1%) | |||||||||
| Gross profit*¹ | 1,942,000 | 1,632,301 | 1,339,810 | 19.0% | 21.8% | |||||||||
| Gross profit as a percentage of net sales¹ | 63.7% | 60.0% | 54.4% | |||||||||||
| Operating expenses² | 856,662 | 900,118 | 592,305 | (4.8%) | 52.0% | |||||||||
| Operating expenses as a percentage of net sales | 28.1% | 33.1% | 24.0% | |||||||||||
| Gain on sale of Monster Non-Energy | - | 161,470 | - | |||||||||||
| Operating income¹‚² | 1,085,338 | 893,653 | 747,505 | 21.4% | 19.6% | |||||||||
| Operating income as a percentage of net sales | 35.6% | 32.8% | 30.3% | |||||||||||
| Other expense, net | 5,653 | 2,105 | 1,717 | 168.6% | 22.6% | |||||||||
| Income before provision for income taxes¹‚² | 1,079,685 | 891,548 | 745,788 | 21.1% | 19.5% | |||||||||
| Provision for income taxes | 367,000 | 344,815 | 262,603 | 6.4% | 31.3% | |||||||||
| Income taxes as a percentage of income before taxes | 34.0% | 38.7% | 35.2% | |||||||||||
| Net income¹‚² | $ | 712,685 | $ | 546,733 | $ | 483,185 | 30.4% | 13.2% | ||||||
| Net income as a percentage of net sales | 23.4% | 20.1% | 19.6% | |||||||||||
| Net income per common share: | ||||||||||||||
| Basic | $ | 1.21 | $ | 0.97 | $ | 0.96 | 25.6% | 0.2% | ||||||
| Diluted | $ | 1.19 | $ | 0.95 | $ | 0.92 | 25.6% | 2.4% | ||||||
| Case sales (in thousands) | ||||||||||||||
| (in 192-ounce case equivalents) | 320,960 | 274,621 | 238,280 | 16.9% | 15.3% |
¹__Includes $40.3 million, $62.8 million and $15.0 million for the years ended December 31, 2016, 2015 and 2014, respectively, related to the recognition of deferred revenue. Included in the $40.3 million and the $62.8 million recognition of deferred revenue for the years ended December 31, 2016 and 2015, respectively, is $5.7 million and $39.8 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors who were sent notices of termination during the relevant periods.
²Includes $79.8 million, $224.0 million and ($0.2) million for the years ended December 31, 2016, 2015 and 2014, respectively, related to distributor termination costs.
*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, 2016 Compared to the Year Ended December 31, 2015.
Net Sales. Net sales were $3,049.4 million for the year ended December 31, 2016, an increase of approximately $326.8 million, or 12.0% higher than net sales of $2,722.6 million for the year ended December 31, 2015. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $229.4 million of the overall increase in net sales. Net sales of our Monster Energy® brand energy drinks increased partially due to increased sales by volume as a result of increased domestic and international consumer demand. Net sales of our Strategic Brands were $272.5 million for the year ended December 31, 2016, as compared with $143.3 million for the year ended December 31, 2015 (effectively from June 13, 2015 to December 31, 2015). There were no net sales during the year ended December 31, 2016 for the non-energy brands disposed of as a result of the TCCC Transaction on June 12, 2015, which resulted in a decrease in net sales of $60.8 million from the year ended December 31, 2015. Net sales of our AFF Third- Party Products were $17.0 million for the year ended December 31, 2016. There were no net sales of our AFF Third-Party Products for the year ended December 31, 2015. Net sales included $5.7 million and $39.8 million for the years ended December 31, 2016 and 2015, respectively, related to the acceleration of deferred revenue balances associated with certain of the Company’s prior distributors. No other individual product line contributed either a material increase or decrease to net sales for the year ended December 31, 2016.
Net changes in foreign currency exchange rates had an unfavorable impact on net sales in the Monster Energy® Drinks segment of approximately $17.6 million for the year ended December 31, 2016, primarily due to our operations in Europe, Mexico, Canada and South Africa, partially offset by our operations in Japan. Net changes in foreign currency exchange rates had an unfavorable impact on net sales in the Strategic Brands segment of approximately $4.7 million for the year ended December 31, 2016, primarily due to our operations in Europe.
Case sales, in 192-ounce case equivalents, were 321.0 million cases for the year ended December 31, 2016, an increase of approximately 46.3 million cases or 16.9% higher than case sales of 274.6 million cases for the year ended December 31, 2015. The overall average net sales per case (excluding AFF Third-Party Products’ net sales of $17.0 million, as these sales do not have unit case equivalents) decreased to $9.45 for the year ended December 31, 2016, which was 4.7% lower than the average net sales per case of $9.91 for the year ended December 31, 2015. The lower net sales per case was primarily attributable to sales of concentrates and/or beverage bases in the Strategic Brands segment, which generally generate lower net operating revenues than products within the Monster Energy® Drinks segment.
Net sales for the Monster Energy® Drinks segment were $2,759.9 million for the year ended December 31, 2016, an increase of approximately $241.4 million, or 9.6% higher than net sales of $2,518.5 million for the year ended December 31, 2015. No other individual product line contributed either a material increase or decrease to net sales for the year ended December 31, 2016.
Net sales for the Strategic Brands segment were $272.5 million for the year ended December 31, 2016, an increase of approximately $129.2 million, or 90.2% higher than net sales of $143.3 million for the year ended December 31, 2015 (effectively from June 13, 2015 to December 31, 2015).
Net sales for the Other segment were $17.0 million for the year ended December 31, 2016, a decrease of approximately $43.8 million, or 72.0% lower than net sales of $60.8 million for the year ended December 31, 2015. Net sales for the Other segment for the year ended December 31, 2016 are comprised of sales of the AFF Third-Party Products. Net sales for the Other segment for the year ended December 31, 2015 are comprised of sales of the non-energy brands disposed of as a result of the TCCC Transaction on June 12, 2015 (effectively from January 1, 2015 to June 12, 2015).
Gross Profit. Gross profit was $1,942.0 million for the year ended December 31, 2016, an increase of approximately $309.7 million, or 19.0% higher than the gross profit of $1,632.3 million for the year ended December 31, 2015. Gross profit as a percentage of net sales increased to 63.7% for the year ended December 31, 2016 from 60.0% for the year ended December 31, 2015. The increase in gross profit dollars was primarily the result of the $229.4 million and $129.2 million increase in net sales of our Monster Energy® brand energy drinks and our Strategic Brands, respectively. The increase in gross profit as a percentage of net sales was primarily attributable to (i) the Strategic Brands segment, which generally has higher gross margins than the Monster Energy® Drinks segment, (ii) no sales in the year ended December 31, 2016 for the non-energy brands disposed of as a result of the TCCC Transaction on June 12, 2015, which generally had lower gross margins than the Monster Energy® Drinks segment, (iii) lower costs of certain raw materials, (iv) the raw material cost savings resulting from the AFF Transaction and (v) changes in product sales mix.
Operating Expenses. Total operating expenses were $856.7 million for the year ended December 31, 2016, a decrease of approximately $43.5 million, or 4.8% lower than total operating expenses of $900.1 million for the year ended December 31, 2015. The decrease in operating expenses was primarily due to the $144.2 million decrease in costs associated with distributor terminations. To a lesser extent, the decrease in operating expenses was also due to decreased expenditures of $15.4 million of professional service costs and transaction expenses related to the TCCC Transaction, decreased expenditures of $3.5 million for distribution costs and decreased expenditures of $3.5 million for advertising. The decrease in operating expenses was partially offset by increased payroll expenses of $29.5 million (of which $13.1 million was related to an increase in stock-based compensation), increased expenditures of $27.3 million for sponsorships and endorsements, increased expenditures of $15.7 million for professional service costs (exclusive of expenditures related to the Auction Stock Repurchase Tender, the AFF Transaction and the TCCC Transaction), including legal and accounting fees, increased expenditures of $8.4 million for premiums, increased expenditures of $7.9 million for other marketing expenses, increased expenditures of $6.5 million for commissions, increased intangible asset amortization of $6.6 million and $6.0 million of professional service costs and transaction expenses related to the Auction Stock Repurchase Tender and the AFF Transaction, respectively.
Contribution Margin. Contribution margin for the Monster Energy® Drinks segment was $1,148.4 million for the year ended December 31, 2016, an increase of approximately $312.4 million, or 37.4% higher than contribution margin of $836.1 million for the year ended December 31, 2015. The increase in contribution margin for the Monster Energy® Drinks segment was primarily the result of the $144.2 million decrease in costs associated with distributor terminations as well as the $229.4 million increase in net sales of our Monster Energy® brand energy drinks. The increase in contribution margin for the Monster Energy® Drinks segment was partially offset by the $39.8 million of accelerated amortization of deferred revenue during the year ended December 31, 2015 related to distributor terminations, as compared to $5.7 million during the year ended December 31, 2016.
Contribution margin for the Strategic Brands segment was $163.1 million for the year ended December 31, 2016, an increase of approximately $73.3 million, or 81.6% higher than contribution margin of $89.8 million for the year ended December 31, 2015 (effectively from June 13, 2015 to December 31, 2015).
Contribution margin for the Other segment was $2.3 million for the year ended December 31, 2016, as compared to contribution margin of $165.2 million for the year ended December 31, 2015. Included in contribution margin for the Other segment for the year ended December 31, 2015 was the $161.5 million gain on the sale of the rights in and to our non-energy business (“Monster Non-Energy”) to TCCC.
Operating Income. Operating income was $1,085.3 million for the year ended December 31, 2016, an increase of approximately $191.7 million, or 21.4% higher than operating income of $893.7 million for the year ended December 31, 2015. Operating income as a percentage of net sales increased to 35.6% for the year ended December 31, 2016 from 32.8% for the year ended December 31, 2015. The increase in operating income in dollars was primarily due to the $144.2 million decrease in costs associated with distributor terminations, as well as the $309.7 million increase in gross profit. The increase in operating income was partially offset by the $161.5 million gain on the sale of Monster Non-Energy for the year ended December 31, 2015. Operating income was $101.7 million and $67.0 million for the year ended December 31, 2016 and 2015, respectively, in relation to our operations in Africa, Asia, Australia, Europe, the Middle East and South America.
Other Expense, net. Other expense, net was $5.7 million for the year ended December 31, 2016, as compared to other expense, net of $2.1 million for the year ended December 31, 2015. Foreign currency transaction losses were $9.7 million and $5.5 million for the years ended December 31, 2016 and 2015, respectively. Interest income was $4.0 million and $3.1 million for the years ended December 31, 2016 and 2015, respectively.
Provision for Income Taxes. Provision for income taxes was $367.0 million for the year ended December 31, 2016, an increase of $22.2 million or 6.4% higher than the provision for income taxes of $344.8 million for the year ended December 31, 2015. The effective combined federal, state and foreign tax rate decreased to 34.0% from 38.7% for the years ended December 31, 2016 and 2015, respectively. The decrease in the effective tax rate was primarily due to the increase in the stock compensation deduction as well as the increase in the domestic production deduction taken in the year ended December 31, 2016. The decrease in the effective tax rate was partially offset by the disallowance of a tax deduction for certain costs related to the TCCC Transaction and the release of the valuation allowance against the deferred tax assets of a certain foreign jurisdiction in the year ended December 31, 2015.
Net Income. Net income was $712.7 million for the year ended December 31, 2016, an increase of $165.9 million or 30.4% higher than net income of $546.7 million for the year ended December 31, 2015. The increase in net income was primarily attributable to the $144.2 million decrease in costs associated with distributor terminations as well as the increase in gross profit of $309.7 million. The increase in net income was partially offset by the $161.5 million gain on the sale of Monster Non-Energy for the year ended December 31, 2015 as well as an increase in the provision for income taxes of $22.2 million.
Results of Operations for the Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014.
Net Sales. Net sales were $2,722.6 million for the year ended December 31, 2015, an increase of approximately $257.7 million, or 10.5% higher than net sales of $2,464.9 million for the year ended December 31, 2014. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $204.0 million of the overall increase in net sales. Net sales of our Monster Energy® brand energy drinks increased partially due to increased sales by volume as a result of increased domestic and international consumer demand. Net sales of our Strategic Brands were $143.3 million for the year ended December 31, 2015. Net sales for the Other segment, the principal products of which include the brands disposed of as a result of the TCCC Transaction on June 12, 2015, decreased $89.6 million for the year ended December 31, 2015 (effectively from January 1, 2015 to June 12, 2015). Net sales for the year ended December 31, 2015 included $39.8 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors. No other individual product line contributed either a material increase or decrease to net sales for the year ended December 31, 2015.
Net changes in foreign currency exchange rates had an unfavorable impact on net sales in the Monster Energy® Drinks segment of approximately $74.1 million for the year ended December 31, 2015, primarily due to our operations in Europe, Japan, Mexico, Canada and South Africa. Net changes in foreign currency exchange rates had an unfavorable impact on net sales in the Strategic Brands segment of approximately $10.2 million for the year ended December 31, 2015, primarily due to our operations in Europe.
Case sales, in 192-ounce case equivalents, were 274.6 million cases for the year ended December 31, 2015, an increase of approximately 36.3 million cases or 15.3% higher than case sales of 238.3 million cases for the year ended December 31, 2014. The overall average net sales per case decreased to $9.91 for the year ended December 31, 2015, which was 4.2% lower than the average net sales per case of $10.34 for the year ended December 31, 2014. The lower average net sales per case was primarily attributable to sales of concentrates and/or beverage bases in the Strategic Brands segment, which generally generate lower net operating revenues than those products within the Monster Energy® Drinks segment.
Net sales for the Monster Energy® Drinks segment were $2,518.5 million for the year ended December 31, 2015, an increase of approximately $204.0 million, or 8.8% higher than net sales of $2,314.5 million for the year ended December 31, 2014.
Net sales for the Strategic Brands segment were $143.3 million for the year ended December 31, 2015 (effectively from June 13, 2015 to December 31, 2015). There were no net sales for the Strategic Brands segment for the year ended December 31, 2014.
Net sales for the Other segment, the principal products of which include the brands disposed of as a result of the TCCC Transaction, were $60.8 million for the year ended December 31, 2015 (effectively from January 1, 2015 to June 12, 2015), a decrease of approximately $89.6 million, or 59.6% lower than net sales of $150.3 million for the year ended December 31, 2014.
Gross Profit. Gross profit was $1,632.3 million for the year ended December 31, 2015, an increase of approximately $292.5 million, or 21.8% higher than the gross profit of $1,339.8 million for the year ended December 31, 2014. Gross profit as a percentage of net sales increased to 60.0% for the year ended December 31, 2015 from 54.4% for the year ended December 31, 2014. The increase in gross profit dollars was primarily the result of the $204.0 million increase in net sales of our Monster Energy® brand energy drinks, the $143.3 million of net sales for the Strategic Brands segment as well as the $39.8 million accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors. The increase in gross profit as a percentage of net sales was primarily attributable to the Strategic Brands segment, which generally has higher gross margins than the Monster Energy® Drinks segment, the decrease in the net sales of the Other segment, which generally has lower gross margins than the Monster Energy® Drinks segment, the $39.8 million accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors, changes in product sales mix and lower costs of certain sweeteners and other raw materials.
Operating Expenses. Total operating expenses were $900.1 million for the year ended December 31, 2015, an increase of approximately $307.8 million, or 52.0% higher than total operating expenses of $592.3 million for the year ended December 31, 2014. The increase in operating expenses was primarily due to increased costs of $224.2 million associated with terminating certain existing distributors. To a lesser extent, the increase in operating expenses was attributable to increased payroll expenses of $30.0 million (of which $11.9 million was related to payroll taxes in connection with the exercise of certain stock options), increased expenditures of $16.4 million for sponsorships and endorsements and increased expenditures of $10.7 million for transaction expenses related to the TCCC Transaction.
Contribution Margin. Contribution margin for the Monster Energy® Drinks segment was $836.1 million for the year ended December 31, 2015, a decrease of approximately $68.1 million, or 7.5% lower than contribution margin of $904.2 million for the year ended December 31, 2014. The decrease in the contribution margin for the Monster Energy® Drinks segment was primarily the result of the increased expenditures of $224.2 million relating to the costs associated with terminating certain existing distributors. Contribution margin for the Strategic Brands segment was $89.8 million for the year ended December 31, 2015. There was no contribution margin for the Strategic Brands segment for the year ended December 31, 2014. Contribution margin for the Other segment was $165.2 million for the year ended December 31, 2015 (effectively from January 1 to June 12), as compared to $7.6 million for the year ended December 31, 2014. The increase in contribution margin for the Other segment was primarily the result of the $161.5 million gain on the sale of Monster Non-Energy.
Operating Income. Operating income was $893.7 million for the year ended December 31, 2015, an increase of approximately $146.1 million, or 19.6% higher than operating income of $747.5 million for the year ended December 31, 2014. Operating income as a percentage of net sales increased to 32.8% for the year ended December 31, 2015 from 30.3% for the year ended December 31, 2014, primarily due to the $292.5 million increase in gross profit as well as the $161.5 million gain on the sale of Monster Non-Energy. The increase in operating income in dollars was offset by increased costs of $224.2 million associated with terminating certain existing distributors as well as the increase in other operating expenses. Operating income was $67.0 million and $46.3 million for the years ended December 31, 2015 and 2014, respectively, in relation to our operations in Africa, Asia, Australia, Europe, the Middle East and South America.
Other Expense, net. Other expense, net was $2.1 million for the year ended December 31, 2015, as compared to other expense, net of $1.7 million for the year ended December 31, 2014. Foreign currency transaction losses were $5.5 million and $3.4 million for the years ended December 31, 2015 and 2014, respectively. Interest income was $3.1 million and $1.1 million for the years ended December 31, 2015 and 2014, respectively.
Provision for Income Taxes. Provision for income taxes was $344.8 million for the year ended December 31, 2015, an increase of $82.2 million or 31.3% higher than the provision for income taxes of $262.6 million for the year ended December 31, 2014. The effective combined federal, state and foreign tax rate increased to 38.7% for the year ended December 31, 2015 from 35.2% for the year ended December 31, 2014. The increase in the effective tax rate was primarily due to the disallowance for tax purposes of certain costs related to the TCCC Transaction, the decrease in tax benefits relating to the domestic production deduction and the establishment of valuation allowances against the deferred tax assets in certain foreign jurisdictions. In addition, the profits, or a portion thereof, earned in certain foreign subsidiaries during the year ended December 31, 2014 had no related tax expense as a result of the prior establishment of valuation allowances on their deferred tax assets. The increase in the effective tax rate for the year ended December 31, 2015 was partially offset by the release of the valuation allowances against the deferred tax assets of certain foreign jurisdictions.
Net Income. Net income was $546.7 million for the year ended December 31, 2015, an increase of $63.5 million or 13.2% higher than net income of $483.2 million for the year ended December 31, 2014.
Non-GAAP Financial Measures
Gross sales**. Gross sales were $3,485.5 million for the year ended December 31, 2016, an increase of approximately $379.8 million, or 12.2% higher than gross sales of $3,105.7 million for the year ended December 31, 2015. The increase in gross sales of our Monster Energy® brand energy drinks represented approximately $300.7 million of the overall increase in gross sales. Gross sales of our Monster Energy® brand energy drinks increased partially due to increased sales by volume as a result of increased domestic and international consumer demand. Gross sales of our Strategic Brands were $294.6 million for the year ended December 31, 2016, as compared with $156.3 million for the year ended December 31, 2015 (effectively from June 13, 2015 to December 31, 2015). There were no gross sales
during the year ended December 31, 2016 for the non-energy brands disposed of as a result of the TCCC Transaction on June 12, 2015, which resulted in a decrease in gross sales of $68.5 million from the year ended December 31, 2015 for the Other segment. Gross sales of our AFF Third-Party Products were $17.2 million for the year ended December 31, 2016. There were no sales of our AFF Third-Party Products for the year ended December 31, 2015. No other individual product line contributed either a material increase or decrease to gross sales for the year ended December 31, 2016.
Promotional and other allowances, as described in the footnote below, were $436.1 million for the year ended December 31, 2016, an increase of $53.0 million, or 13.8% higher than promotional and other allowances of $383.1 million for the year ended December 31, 2015. Promotional and other allowances as a percentage of gross sales increased to 12.5% for the year ended December 31, 2016 from 12.3% for the year ended December 31, 2015.
Net changes in foreign currency exchange rates had an unfavorable impact on gross sales in the Monster Energy® Drinks segment of approximately $26.2 million for the year ended December 31, 2016, primarily due to our operations in Europe, Mexico, Canada and South Africa. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales in the Strategic Brands segment of approximately $4.7 million for the year ended December 31, 2016, primarily due to our operations in Europe.
Gross sales**. Gross sales were $3,105.7 million for the year ended December 31, 2015, an increase of approximately $278.6 million, or 9.9% higher than gross sales of $2,827.1 million for the year ended December 31, 2014. The increase in the gross sales of our Monster Energy® brand energy drinks represented approximately $222.1 million, or 79.7%, of the overall increase in gross sales. Gross sales of our Monster Energy® brand energy drinks increased primarily due to increased sales by volume as a result of increased domestic and international consumer demand. Gross sales of our Strategic Brands were $156.3 million for the year ended December 31, 2015. Gross sales for the Other segment, the principal products of which include the brands disposed of as a result of the TCCC Transaction on June 12, 2015, decreased $99.8 million for the year ended December 31, 2015 from the year ended December 31, 2014. Gross sales for the year ended December 31, 2015 included $39.8 million related to the accelerated amortization of the deferred revenue balances associated with certain of the Company’s prior distributors, which represented 14.3% of our 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, 2015.
Promotional and other allowances, as described in the footnote below, were $383.1 million for the year ended December 31, 2015, an increase of $20.9 million, or 5.8% higher than promotional and other allowances of $362.2 million for the year ended December 31, 2014. Promotional and other allowances as a percentage of gross sales decreased to 12.3% for the year ended December 31, 2015 from 12.8% for the year ended December 31, 2014.
Net changes in foreign currency exchange rates had an unfavorable impact on gross sales in the Monster Energy® Drinks segment of approximately $92.2 million for the year ended December 31, 2015, primarily due to our operations in Europe, Japan, Mexico, Canada and South Africa. Net changes in foreign currency exchange rates had an unfavorable impact on gross sales in the Strategic Brands segment of approximately $10.2 million for the year ended December 31, 2015, primarily due to our operations in Europe.
**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.
The following table reconciles the non-GAAP financial measure of gross sales with the most directly comparable GAAP financial measure of net sales:
| In thousands | Percentage Change | Percentage Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2014 | 16 vs. 15 | 15 vs. 14 | ||||||||||
| Gross sales, net of discounts and returns | $ | 3,485,463 | $ | 3,105,665 | $ | 2,827,092 | 12.2% | 9.9% | ||||||
| Less: Promotional and other allowances*** | 436,070 | 383,101 | 362,225 | 13.8% | 5.8% | |||||||||
| Net Sales | $ | 3,049,393 | $ | 2,722,564 | $ | 2,464,867 | 12.0% | 10.5% |
***Although the expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the presentation 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 bottlers/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 bottlers/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 bottlers/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 bottlers/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 bottlers/distributors related to sales made by the Company direct to certain customers that fall within the bottler’s/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 bottlers/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. The primary drivers of our promotional and other allowance activities for the years ended December 31, 2016, 2015 and 2014 were (i) to promote trial and increase sales volume, (ii) to address market conditions, and (iii) to secure shelf and display space at retail.
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 finished products or concentrates, as if converted into finished products, 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”).
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net Sales (in Thousands) | ||||||||||||||||
| Quarter 1 | $ | 680,186 | $ | 626,791 | $ | 536,129 | $ | 484,223 | $ | 454,605 | ||||||
| Quarter 2 | 827,488 | 693,722 | 687,199 | 630,934 | 592,640 | |||||||||||
| Quarter 3 | 787,954 | 756,619 | 635,972 | 590,422 | 541,940 | |||||||||||
| Quarter 4 | 753,765 | 645,432 | 605,567 | 540,849 | 471,517 | |||||||||||
| Total | $ | 3,049,393 | $ | 2,722,564 | $ | 2,464,867 | $ | 2,246,428 | $ | 2,060,702 | ||||||
| Less: AFF third party net sales (in Thousands) | ||||||||||||||||
| Quarter 1 | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||
| Quarter 2 | (6,635) | - | - | - | - | |||||||||||
| Quarter 3 | (5,686) | - | - | - | - | |||||||||||
| Quarter 4 | (4,690) | - | - | - | - | |||||||||||
| Total | $ | (17,011) | $ | - | $ | - | $ | - | $ | - | ||||||
| Adjusted Net Sales (in Thousands)¹ | ||||||||||||||||
| Quarter 1 | $ | 680,186 | $ | 626,791 | $ | 536,129 | $ | 484,223 | $ | 454,605 | ||||||
| Quarter 2 | 820,853 | 693,722 | 687,199 | 630,934 | 592,640 | |||||||||||
| Quarter 3 | 782,268 | 756,619 | 635,972 | 590,422 | 541,940 | |||||||||||
| Quarter 4 | 749,075 | 645,432 | 605,567 | 540,849 | 471,517 | |||||||||||
| Total | $ | 3,032,382 | $ | 2,722,564 | $ | 2,464,867 | $ | 2,246,428 | $ | 2,060,702 | ||||||
| Unit Case Volume / Sales (in Thousands) | ||||||||||||||||
| Quarter 1 | 72,653 | 57,779 | 51,926 | 47,749 | 44,396 | |||||||||||
| Quarter 2 | 87,574 | 68,037 | 65,587 | 61,615 | 57,525 | |||||||||||
| Quarter 3 | 82,767 | 81,274 | 62,204 | 59,204 | 54,611 | |||||||||||
| Quarter 4 | 77,966 | 67,531 | 58,563 | 52,780 | 46,386 | |||||||||||
| Total | 320,960 | 274,621 | 238,280 | 221,348 | 202,918 | |||||||||||
| Adjusted Average Net Sales Per Case | ||||||||||||||||
| Quarter 1 | $ | 9.36 | $ | 10.85 | $ | 10.32 | $ | 10.14 | $ | 10.24 | ||||||
| Quarter 2 | 9.37 | 10.20 | 10.48 | 10.24 | 10.30 | |||||||||||
| Quarter 3 | 9.45 | 9.31 | 10.22 | 9.97 | 9.92 | |||||||||||
| Quarter 4 | 9.61 | 9.56 | 10.34 | 10.25 | 10.17 | |||||||||||
| Total | $ | 9.45 | $ | 9.91 | $ | 10.34 | $ | 10.15 | $ | 10.16 |
1__Excludes Other segment net sales of $6.6 million, $5.7 million and $4.7 million for the three-months ended June 30, 2016, September 30, 2016 and December 31, 2016, respectively, comprised of sales of our AFF Third-Party Products to independent third parties as these sales do not have unit case equivalents.
The following represents case sales by segment for the years ended December 31:
| (In thousands, except average net sales per case) | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||
| Net sales | $ | 3,049,393 | $ | 2,722,564 | $ | 2,464,867 | $ | 2,246,428 | $ | 2,060,702 | ||||||
| Less: AFF third-party sales | (17,011) | - | - | - | - | |||||||||||
| Adjusted net sales¹ | $ | 3,032,382 | $ | 2,722,564 | $ | 2,464,867 | $ | 2,246,428 | $ | 2,060,702 | ||||||
| Case sales by segment: | ||||||||||||||||
| Monster Energy® Drinks | 256,323 | 228,628 | 210,444 | 191,830 | 173,766 | |||||||||||
| Strategic Brands | 64,637 | 34,791 | - | - | - | |||||||||||
| Other | - | 11,202 | 27,836 | 29,518 | 29,152 | |||||||||||
| Total case sales | 320,960 | 274,621 | 238,280 | 221,348 | 202,918 | |||||||||||
| Average net sales per case | $ | 9.45 | $ | 9.91 | $ | 10.34 | $ | 10.15 | $ | 10.16 |
1_Excludes Other segment net sales of $17.0 million for the year ended December 31, 2016, comprised of sales of our AFF Third-Party Products to independent third parties as these sales do not have unit case equivalents._
Inflation
We do not believe that inflation had a significant impact on our results of operations for the years ended December 31, 2016, 2015 or 2014.
Liquidity and Capital Resources
Cash flows provided by operating activities. Cash provided by operating activities was $701.4 million for the year ended December 31, 2016, as compared with cash provided by operating activities of $522.7 million for the year ended December 31, 2015.
For the year ended December 31, 2016, cash provided by operating activities was primarily attributable to net income earned of $712.7 million and adjustments for certain non-cash expenses, consisting of $45.8 million of stock-based compensation and $40.8 million of depreciation and other amortization. For the year ended December 31, 2016, cash provided by operating activities also increased due to a $45.3 million increase in accounts payable, a $20.9 million decrease in inventories, a $13.8 million increase in deferred revenue, an $8.1 million increase in accrued compensation and a $4.4 million increase in income taxes payable. For the year ended December 31, 2016, cash used in operating activities was due to an $86.4 million increase in accounts receivable, a $48.0 million increase in prepaid income taxes, a $20.0 million increase in distributor receivables, a $19.1 million change in deferred income taxes, a $6.7 million increase in prepaid expenses and other current assets, a $3.9 million decrease in accrued promotional allowances, a $3.3 million decrease in accrued distributor terminations and a $2.9 million decrease in accrued liabilities.
For the year ended December 31, 2015, cash provided by operating activities was primarily attributable to net income earned of $546.7 million and adjustments for certain non-cash expenses, consisting of $32.7 million of stock-based compensation and $30.9 million of depreciation and other amortization. For the year ended December 31, 2015, cash provided by operating activities also increased due to a $311.5 million increase in income taxes payable, a $20.9 million increase in accounts payable, a $43.3 million increase in accrued liabilities, a $7.0 million increase in accrued promotional allowances, an $11.2 million increase in accrued distributor terminations and a $4.5 million increase in accrued compensation. For the year ended December 31, 2015, cash used in operating activities was due to a $181.6 million change in deferred income taxes, a $77.3 million increase in accounts receivable, a $38.6 million decrease in deferred revenue, an $11.0 million increase in prepaid income taxes, a $7.1 million increase in inventories and a $9.7 million increase in prepaid expenses and other current assets.
Cash flows (used in) provided by investing activities. Net cash used in investing activities was $256.2 million for the year ended December 31, 2016 as compared to cash provided by investing activities of $400.1 million for the year ended December 31, 2015.
For the year ended December 31, 2016, cash used in investing activities was primarily attributable to the purchase of AFF, purchases of available-for-sale and held-to-maturity investments, purchases of property and equipment, and additions to intangibles. For the year ended December 31, 2015, cash used in investing activities was primarily attributable to purchases of held-to-maturity investments and to purchases of property and equipment. For both the years ended December 31, 2016 and 2015, cash provided by investing activities was attributable to maturities of held-to-maturity investments and sales of available-for-sale investments. For the year ended December 31, 2015, cash provided by investing activities included $198.0 million from the sale of Monster Non-Energy and $179.7 million from the transfer of distribution rights pursuant to the TCCC Transaction. For both the years ended December 31, 2016 and 2015, 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, 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), to develop our brand in international markets and for other corporate purposes. 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 (used in) provided by financing activities. Cash used in financing activities was $2,238.4 million for the year ended December 31, 2016 as compared to cash provided by financing activities of $887.6 million for the year ended December 31, 2015. The increase in cash flows used in financing activities was primarily the result of purchases of our common stock during the year ended December 31, 2016.
Purchases of inventories, increases in accounts receivable and other assets, acquisition of property and equipment (including real property and coolers), leasehold improvements, construction of our new warehouse, build out of our recently purchased offices, 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 use of cash.
Cash and cash equivalents, short-term and long-term investments – As of December 31, 2016, we had $377.6 million in cash and cash equivalents and $222.9 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 $377.6 million of cash and cash equivalents held at December 31, 2016, $207.5 million was held by our foreign subsidiaries. No short-term or long-term investments were held by our foreign subsidiaries at December 31, 2016. 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 (exclusive of common stock repurchases) are likely to be approximately $200.0 million through December 31, 2017. 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, 2016:
| Payments due by period (in thousands) | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||
| Contractual Obligations¹ | $ | 163,273 | $ | 91,003 | $ | 57,390 | $ | 14,880 | $ | - | ||||||
| Capital Leases | 1,105 | 1,105 | - | - | - | |||||||||||
| Operating Leases | 18,782 | 5,677 | 3,008 | 2,085 | 8,012 | |||||||||||
| Purchase Commitments² | 47,033 | 47,033 | - | - | - | |||||||||||
| $ | 230,193 | $ | 144,818 | $ | 60,398 | $ | 16,965 | $ | 8,012 |
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 September 2016, the Company completed its acquisition of approximately 49 acres of land, located in Rialto, CA, for a purchase price of approximately $39.1 million. The Company has begun construction of an approximately 1,000,000 square-foot building, which it hopes to have LEED certified, to replace its current leased warehouse and distribution facilities located in Corona, CA. The Company has entered into an approximately $36.8 million guaranteed maximum price construction contract for the construction of the building of which $33.7 million remained outstanding as of December 31, 2016.
In addition, the recognized tax benefits recorded as liabilities as of December 31, 2016 are immaterial. It is expected that any change in the amount of unrecognized tax benefit within the next 12 months will not be significant.
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:
Business Combinations – Business acquisitions are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 “Business Combinations”. FASB ASC 805 requires the reporting entity to identify the acquirer, determine the acquisition date, recognize and measure the identifiable tangible and intangible assets acquired, the liabilities assumed and any non-controlling interest in the acquired entity, and recognize and measure goodwill or a gain from the purchase. The acquiree’s results are included in the Company’s consolidated financial statements from the date of acquisition. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill. Adjustments to fair value assessments are recorded to goodwill over the measurement period (not longer than twelve months). The acquisition method also requires that acquisition-related transaction and post-acquisition restructuring costs be charged to expense and requires the Company to recognize and measure certain assets and liabilities including those arising from contingencies and contingent consideration in a business combination.
Cash and Cash Equivalents – The Company considers all highly liquid investments with an original maturity of three months or less from date of purchase to be cash equivalents. Throughout the year, the Company has had amounts on deposit at financial institutions that exceed the federally insured limits. The Company has not experienced any loss as a result of these deposits and does not expect to incur any losses in the future.
Investments – The Company’s investments in debt securities are classified as either held-to-maturity, available-for-sale or trading, in accordance with FASB ASC 320. Held-to-maturity securities are those securities that the Company has the positive intent and ability to hold until maturity. Trading securities are those securities that the Company intends 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 loss as a separate component of stockholders’ equity. FASB 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. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. Under FASB 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 loss, net of applicable taxes. The Company evaluates whether the decline in fair value of its 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 – The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s recent loss history and an overall assessment of past due trade accounts receivable outstanding. In accordance with FASB ASC 210-20-45, in its consolidated balance sheets, the Company has presented accounts receivable, net of promotional allowances, only for those customers that it allows net settlement. All other accounts receivable and related promotional allowances are shown on a gross basis.
Inventories – Inventories are valued at the lower of first-in, first-out, cost or market value (net realizable value).
Property and Equipment – Property and equipment are stated at cost. Depreciation of furniture and fixtures, office and computer equipment, computer software, equipment, and vehicles is based on their estimated useful lives (three to ten years) and is calculated using the straight-line method. Amortization of leasehold improvements is based on the lesser of their estimated useful lives or the terms of the related leases and is calculated using the straight-line method. Normal repairs and maintenance costs are expensed as incurred. Expenditures that materially increase values or extend useful lives are capitalized. The related costs and accumulated depreciation of disposed assets are eliminated and any resulting gain or loss on disposition is included in net income.
Goodwill – The Company records goodwill when the consideration paid for an acquisition exceeds the fair value of net tangible and intangible assets acquired, including related tax effects. Goodwill is not amortized; instead goodwill is tested for impairment on an annual basis, or more frequently if the Company believes indicators of impairment exist. The Company first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. If the Company determines that the fair value is less than the carrying value, the Company will use a two-step process to determine the amount of goodwill impairment. The first step requires comparing the fair value of the reporting unit to its net book value, including goodwill. A potential impairment exists if the fair value of the reporting unit is lower than its net book value. The second step of the process, performed only if a potential impairment exists, involves determining the difference between the fair value of the reporting unit’s net assets, other than goodwill, and the fair value of the reporting unit. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. For the fiscal years ended December 31, 2016, 2015 and 2014 there were no impairments recorded.
Other Intangibles – Other Intangibles are comprised of trademarks that represent the Company’s exclusive ownership of the Monster Energy®, 
®, Monster Rehab®, Java Monster®, Unleash the Beast®, Monster Energy Extra Strength Nitrous Technology®, Muscle Monster®, Mega Monster Energy®, Punch Monster®, Juice Monster®, M3®, Ubermonster®, BU®, Nalu®, NOS®, Full Throttle®, Burn®, Mother®, Ultra®, Play® and Power Play®, Gladiator®, Relentless®, Samurai® and BPM® trademarks, all used in connection with the manufacture, sale and distribution of beverages. The Company also owns in its own right a number of other trademarks in the United States, as well as in a number of countries around the world. In addition, as a result of the AFF Transaction, we secured the intellectual property of our most important flavors for certain of our Monster Energy® Brand energy drinks in perpetuity. In accordance with FASB ASC 350, intangible assets with indefinite lives are not amortized but instead are measured for impairment at least annually, or when events indicate that an impairment exists. The Company calculates impairment as the excess of the carrying value of its indefinite-lived assets over their estimated fair value. If the carrying value exceeds the estimate of fair value a write-down is recorded. The Company amortizes its intangibles with finite useful lives over their respective useful lives. For the fiscal years ended December 31, 2016, 2015 and 2014 there were no impairments recorded.
Long-Lived Assets – Management regularly reviews property and equipment and other long-lived assets, including certain definite-lived 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, management then 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 using the present value of the future cash flows discounted at a rate commensurate with management’s estimates of the business risks. Preparation of estimated expected future cash flows is inherently subjective and is based on management’s best estimate of assumptions concerning expected future conditions. For the fiscal years ended December 31, 2016, 2015 and 2014, there were no impairment indicators identified. Long-lived assets held for sale are recorded at the lower of their carrying amount or fair value less cost to sell.
Foreign Currency Translation and Transactions – The accounts of the Company’s foreign subsidiaries are translated in accordance with FASB ASC 830. Foreign currency transaction gains and losses are recognized in other expense, net, at the time they occur. Net foreign currency exchange gains or losses resulting from the translation of assets and liabilities of foreign subsidiaries whose functional currency is not the U.S. dollar are recorded as a part of accumulated other comprehensive loss in stockholders’ equity. Unrealized foreign currency exchange gains and losses on certain intercompany transactions that are of a long-term investment nature (i.e., settlement is not planned or anticipated in the foreseeable future) are also recorded in accumulated other comprehensive loss in stockholders’ equity. During the years ended December 31, 2016, 2015 and 2014, we entered into forward currency exchange contracts with financial institutions to create an economic hedge to specifically manage a portion of the foreign exchange risk exposure associated with certain consolidated subsidiaries non-functional currency denominated assets and liabilities. All foreign currency exchange contracts outstanding as of December 31, 2016 have terms of one month or less. We do not enter into forward currency exchange contracts for speculation or trading purposes.
Revenue Recognition – The Company recognizes 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, the Company’s finished products passes to customers upon delivery of the products to customers. Certain of the Company’s distributors may also perform a separate function as a co-packer on the Company’s behalf. In such cases, ownership of and title to the Company’s products that are co-packed on the Company’s behalf by those co-packers who are also distributors, passes to such distributors when the Company is notified by them that they have taken transfer or possession of the relevant portion of the Company’s finished goods.
Revenue for the Strategic Brands segment is generally recognized when title to the concentrate is transferred to the customer. In particular, title to the concentrate usually passes upon shipment to the customers’ locations, as determined by the specific sales terms of the transactions.
Net sales have been determined after deduction of promotional and other allowances in accordance with FASB 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 the 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 expenses and actual expenses for promotional and other allowance costs 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 the Company’s prior distributors, are accounted for as revenue ratably over the anticipated life of the respective distribution agreement, generally 20 years.
Management believes that adequate provision has been made for cash discounts, returns and spoilage based on the Company’s historical experience.
Cost of Sales – Cost of sales consists of the costs of concentrates and/or beverage bases, 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 the Company’s 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, 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 such costs as payroll costs, travel costs, professional service fees (including legal fees), termination payments made to certain of the Company’s prior distributors, depreciation and other general and administrative costs.
Income Taxes – The Company utilizes the liability method of accounting for income taxes as set forth in FASB 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 the Company considers projected future taxable income and the availability of tax planning strategies. If in the future the Company determines that it would not be able to realize its recorded deferred tax assets, an increase in the valuation allowance would be recorded, decreasing earnings in the period in which such determination is made.
The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon the Company’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, the Company has 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, 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 recognize any and/or all of the benefits from the TCCC Transaction and the AFF Transaction; |
|---|---|
| · | The effect of our extensive commercial arrangements with TCCC on our future performance; |
| · | The effect of TCCC becoming one of our significant shareholders and the potential divergence of TCCC’s interests from those of our other shareholders; |
| · | Our ability to successfully transfer the distribution of our Monster Energy® brand energy drinks in certain existing domestic and international territories to bottlers/distributors within the TCCC distribution system on terms beneficial to us; |
| · | Our ability to successfully enter into new distribution agreements with bottlers/distributors within the TCCC distribution system for new international territories; |
| · | The slowing of and/or decline in the sales growth rates of the energy drink category; |
| · | 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 domestic and/or international markets; |
| · | Unfavorable regulations, including taxation requirements, product registration requirements, tariffs, trade restrictions, container size limitations and/or ingredient restrictions; |
| · | The effect of inquiries from, and/or actions by, state attorneys general, the Federal Trade Commission (the “FTC”), the FDA, municipalities, city attorneys, other government agencies, 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 and/or required changes to our business practices; |
| · | Our ability to achieve profitability from certain of 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 and potentially higher incidence of fraud or corruption and credit risk of foreign customers and/or 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 and/or possibility of future shareholder derivative actions or shareholder securities litigation filed against us and/or against certain of our officers and directors, and the possibility of other private shareholder litigation; |
| · | 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 outcome of any other litigation; |
| · | The current uncertainty and volatility in the national and global economy; |
| · | Our ability to address any significant deficiencies or material weakness in our internal controls 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; |
| · | Changes in demand that are weather related and/or for other reasons, including changes in product category consumption; |
| · | 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 the Strategic Brands acquired 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 restricts 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 and/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, sales and/or other taxes on our products and revised tax law interpretations) and environmental laws, as well as the Federal Food Drug & Cosmetic Act, 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, impose sugar 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, the Bureau of Alcohol, Tobacco and Firearms and Explosives and/or the FTC; |
| · | 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, press, articles, comments and/or media attention; |
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| · | Changes in the cost, quality and availability of containers, packaging materials, aluminum, the Midwest and other premiums, 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; |
| · | Any shortages that may be experienced in the procurement of containers and/or other raw materials; |
| · | The impact of corporate activity among the limited number of suppliers from whom we purchase certain raw materials on our cost of sales; |
| · | Our ability to pass on to our customers all or a portion of any increases in the costs of raw materials, ingredients, commodities and/or other cost inputs affecting our business; |
| · | Our ability to achieve both internal 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; |
| · | The effectiveness of sales and/or marketing efforts by us and/or the distributors of our products, most of whom distribute products that may be regarded as competitive with our products; |
| · | Unilateral decisions by distributors, convenience chains, grocery chains, mass merchandisers, specialty chain stores, club stores and other customers to discontinue carrying all or any of our products that they are carrying at any time, 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; |
| · | The success of our sports marketing endeavors both domestically and internationally; |
| · | 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, the timely replacement of discontinued co-packing arrangements and/or limitations on co-packing availability, including for retort production; |
| · | 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, trade names or designs and/or trade dress 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/or 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, including a breach of cyber security, 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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