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MONSTER BEVERAGE CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Our Business Monster Beverage Corporation was incorporated in Delaware on April 25, 1990. Our principal place of business is located at 1 Monster Way, Corona, California 92879 and our telephone number is (951) 739-6200. When this report uses the words "the Company", "Hansen Natural Corporation" (the Company's former name), "we", "us", and "our", these words refer to Monster Beverage Corporation and its subsidiaries, unless the context otherwise requires. We are a holding company and conduct no operating business except through our consolidated subsidiaries. Acquisitions and Divestitures On August 14, 2014, the Company and The Coca-Cola Company ("Coca-Cola") entered into definitive agreements for a long-term strategic relationship in the global energy drink category (the "Coca-Cola Transaction"). In the Coca-Cola Transaction, the Company, New Laser Corporation, a wholly owned subsidiary of the Company ("NewCo"), New Laser Merger Corp., a wholly owned subsidiary of NewCo ("Merger Sub"), Coca-Cola and European Refreshments, an indirect wholly owned subsidiary of Coca-Cola, entered into a transaction agreement, and the Company, Coca-Cola and NewCo entered into an asset transfer agreement. Pursuant to the agreements, the Company will reorganize into a new holding company by merging Merger Sub into the Company, with the Company surviving as a wholly owned subsidiary of NewCo. In the merger, each outstanding share of the Company's common stock will be converted into one share of NewCo's common stock. Subject to the terms and conditions of the agreements, upon the closing of the Coca-Cola Transaction, (1) NewCo will issue to Coca-Cola newly issued shares of common stock representing approximately 16.7% of the total number of shares of issued and outstanding NewCo common stock (after giving effect to the new issuance) and Coca-Cola will have the right to nominate two (reduced to one in 36 months or if Coca-Cola's equity interest in NewCo exceeds 20%) individuals to NewCo's Board of Directors, (2) Coca-Cola will transfer its global energy drink business (including the NOS®, Full Throttle®, Burn®, Mother®, Play® and Power Play®, and Relentless® brands) to NewCo, and the Company will transfer its non-energy drink business (including the Hansen's® Natural Soda, Peace Tea®, Hubert's® Lemonade and Hansen's® Juice Product brands) to Coca-Cola, (3) the Company and Coca-Cola will amend their current distribution coordination agreements by expanding distribution of the Company's products into additional territories pursuant to long-term commercial agreements with Coca-Cola's network of owned or controlled bottlers/distributors and independent bottling and distribution partners, and (4) Coca-Cola will make a net cash payment of $2.15 billion to the Company ($625.0 million of which will be held in escrow, subject to release upon achievement of milestones relating to the transfer of distribution rights). The closing of the transaction is subject to customary closing conditions and is expected to close in early 2015. Overview We develop, market, sell and distribute "alternative" beverage category beverages primarily under the following brand names: † Monster Energy® † Hansen's® † Monster Rehab® † Hansen's Natural Cane Soda® † Monster Energy Extra Strength Nitrous Technology® † Junior Juice® † Java Monster® † Blue Sky® † X-Presso Monster® † Hubert's® † Muscle Monster® † Worx Energy® † Punch Monster™ † Peace Tea® 30 -------------------------------------------------------------------------------- Table of Contents Our Monster Energy® drinks, which represented 92.9% and 92.7% of our net sales for the three-months ended September 30, 2014 and 2013, respectively, include the following: † Monster Energy® † Java Monster® Kona Blend † Lo-Carb Monster Energy® † Java Monster® Loca Moca® † Monster Assault® † Java Monster® Mean Bean® † Monster Khaos® † Java Monster® Vanilla Light † Monster M-80® (named Ripper® in † Java Monster® Irish certain countries) Blend® † Monster Energy® Absolutely Zero † Java Monster® Toffee † Monster Energy® Import † Java Monster® Kona Cappuccino™ † Monster Energy® Import Light † Monster Energy Extra Strength Nitrous † Punch Monster® Baller's Blend Technology® Super Dry™ (formerly Dub Edition) † Punch Monster® Mad Dog † Monster Energy (formerly Dub Edition) Extra Strength Nitrous Technology® Anti-Gravity® † Monster Rehab® Tea + Lemonade + Energy † Monster Rehab® Rojo Tea + † Monster Energy Energy Extra Strength Nitrous Technology® Black Ice™ † Monster Rehab® Green Tea + Energy † Monster Rehab® Protean + Energy † X-Presso Monster® Hammer † Monster Rehab® Tea + Orangeade † X-Presso Monster® + Energy Midnite † Monster Rehab® Tea + Pink † Monster Cuba-Lima® Lemonade + Energy † Muscle Monster® Vanilla † Monster Energy® Zero Ultra † Muscle Monster® Chocolate † Monster Energy® Ultra Blue™ † Muscle Monster® Coffee † Monster Energy® Ultra Red™ † Muscle Monster® Strawberry † Monster Energy® Ultra Black™ † Muscle Monster® Peanut Butter † Monster Energy® Cup Ultra Sunrise™ † Monster Energy® Valentino Rossi † Monster Energy® Unleaded † M3® Monster Energy® Super † Übermonster® Energy Concentrate Brew We have two operating and reportable segments, namely Direct Store Delivery ("DSD"), whose principal products comprise energy drinks, and Warehouse ("Warehouse"), whose principal products comprise juice-based and soda beverages. The DSD segment develops, markets and sells products primarily through an exclusive distributor network, whereas the Warehouse segment develops, markets and sells products primarily direct to retailers. During the nine-months ended September 30, 2014, we continued to expand our existing product lines and flavors and further developed our markets. In particular, we continued to focus on developing and marketing beverages that fall within the category generally described as the "alternative" beverage category. During the nine-months ended September 30, 2014, we introduced the following products: † Punch Monster® Baller's Blend (formerly Dub Edition) (January 2014). † Punch Monster® Mad Dog (formerly Dub Edition) (January 2014). † Peace Tea Beverage Company™ Viva Mango™, a mango flavored juice drink (February 2014). † Monster Energy® Valentino Rossi, a carbonated energy drink (May 2014). † Monster Energy® Ultra Black™, a carbonated energy drink whichcontains zero calories and zero sugar, launched as a summer promotion with 7-eleven (July 2014). † Monster Energy® Unleaded, a carbonated energy drink which contains no caffeine (August 2014). † Monster Energy® Ultra Sunrise™, a carbonated energy drink which contains zero calories and zero sugar (September 2014). 31 -------------------------------------------------------------------------------- Table of Contents In the normal course of business we discontinue certain products and/or product lines. Those products or product lines discontinued during the nine-months ended September 30, 2014, either individually or in aggregate, did not have a material adverse impact on our financial position, results of operations or liquidity. Our gross sales (as defined below) of $738.1 million for the three-months ended September 30, 2014 represented record sales for our third fiscal quarter. The vast majority of our gross sales are derived from our Monster Energy® brand energy drinks. Gross sales of our Monster Energy® brand energy drinks were $689.8 million for the three-months ended September 30, 2014, an increase of $51.0 million, or 99.1% of our overall increase in gross sales for the three-months ended September 30, 2014. Our DSD segment represented 95.9% and 96.0% of our consolidated net sales for the three-months ended September 30, 2014 and 2013, respectively. Our Warehouse segment represented 4.1% and 4.0% of our consolidated net sales for the three-months ended September 30, 2014 and 2013, respectively. Our DSD segment represented 96.0% and 95.4% of our consolidated net sales for the nine-months ended September 30, 2014 and 2013, respectively. Our Warehouse segment represented 4.0% and 4.6% of our consolidated net sales for the nine-months ended September 30, 2014 and 2013, respectively. Our sales and marketing strategy for all our beverages is to focus our efforts on developing brand awareness through image enhancing programs and product sampling. We use our branded vehicles and other promotional vehicles at events where we offer samples of our products to consumers. We utilize "push-pull" methods to enhance shelf and display space exposure in sales outlets (including racks, coolers and barrel coolers), advertising, in-store promotions and in-store placement of point-of-sale materials to encourage demand from consumers for our products. We also support our brands with prize promotions, price promotions, competitions, endorsements from selected public and sports figures, personality endorsements (including from television and other well-known sports personalities), coupons, sampling and sponsorship of selected causes, events, athletes and teams. In-store posters, outdoor posters, print, radio and television advertising (directly and through our sponsorships and endorsements) and coupons may also be used to promote our brands. We believe that one of the keys to success in the beverage industry is differentiation, making our brands and products visually distinctive from other beverages on the shelves of retailers. We review our products and packaging on an ongoing basis and, where practical, endeavor to make them different, better and unique. The labels and graphics for many of our products are redesigned from time to time to maximize their visibility and identification, wherever they may be placed in stores, which we will continue to reevaluate from time to time. All of our beverage products are manufactured by various third party bottlers and co-packers situated throughout the United States and abroad, under separate arrangements with each party. Our growth strategy includes expanding our international business. Gross sales to customers outside the United States amounted to $173.2 million and $151.6 million for the three-months ended September 30, 2014 and 2013, respectively. Such sales were approximately 24% and 22% of gross sales for the three-months ended September 30, 2014 and 2013, respectively. Gross sales to customers outside the United States amounted to $497.8 million and $442.6 million for the nine-months ended September 30, 2014 and 2013, respectively. Such sales were approximately 23% of gross sales for both the nine-months ended September 30, 2014 and 2013. Our customers are primarily full service beverage distributors, retail grocery and specialty chains, wholesalers, club stores, drug chains, mass merchandisers, convenience chains, health food distributors, food service customers and the military. Gross sales to our various customer types for the three- and nine-months ended September 30, 2014 and 2013 are reflected below. Such information includes sales made by us directly to the customer types concerned, which include our full service beverage distributors in the United States. Such full service beverage distributors in turn sell certain of our products to some of the same customer types listed below. We limit our description of our customer types to include only our sales to our full service distributors without reference to such distributors' sales to their own customers. 32 -------------------------------------------------------------------------------- Table of Contents Three-Months Ended Nine-Months Ended September 30, September 30, 2014 2013 2014 2013 Full service distributors 62% 63% 62% 63% Club stores, drug chains & mass merchandisers 10% 9% 9% 10% Outside the U.S. 24% 22% 23% 23% Retail grocery, specialty chains and wholesalers 3% 4% 4% 3% Other 1% 2% 2% 1% Our customers include Coca-Cola Refreshments USA Inc. ("CCR"), Coca-Cola Enterprises, Coca-Cola Refreshments Canada, Ltd. (formerly known as Coca-Cola Bottling Company), CCBCC Operations, LLC, United Bottling Contracts Company, LLC, certain bottlers of the Coca-Cola Hellenic Bottling Company, Swire Coca-Cola, USA and certain other Coca-Cola Company independent bottlers, Anheuser-Busch, Inc. ("AB"), select independent AB distributors, Asahi, Kalil Bottling Group, Wal-Mart, Inc. (including Sam's Club) and Costco. A decision by any large customer to decrease amounts purchased from us or to cease carrying our products could have a material negative effect on our financial condition and consolidated results of operations. CCR accounted for approximately 28% and 29% of our net sales for the three-months ended September 30, 2014 and 2013, respectively. CCR accounted for approximately 29% of our net sales for both the nine-months ended September 30, 2014 and 2013. 33 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth key statistics for the three- and nine-months ended September 30, 2014 and 2013, respectively. Three-Months Ended Percentage Nine-Months Ended Percentage (In thousands, except per share amounts) September 30, Change September 30, Change 2014 2013 14 vs. 13 2014 2013 14 vs. 13 Gross sales, net of discounts & returns * $ 738,123 $ 686,623 7.5% $ 2,130,802 $ 1,965,461 8.4% Less: Promotional and other allowances** 102,151 96,201 6.2% 271,501 259,882 4.5% Net sales 635,972 590,422 7.7% 1,859,301 1,705,579 9.0% Cost of sales 294,052 282,952 3.9% 851,274 809,809 5.1% Gross profit*** 341,920 307,470 11.2% 1,008,027 895,770 12.5% Gross profit as a percentage of net sales 53.8% 52.1% 54.2% 52.5% Operating expenses 152,013 156,041 (2.6%) 453,443 457,610 (0.9%) Operating expenses as a percentage of net sales 23.9% 26.4% 24.4% 26.8% Operating income 189,907 151,429 25.4% 554,584 438,160 26.6% Operating income as a percentage of net sales 29.9% 25.6% 29.8% 25.7% Other (expense) income: Interest and other (expense) income, net (1,012) (750) 34.9% (668) (8,690) (92.3%) (Loss) gain on investments and put options, net (26) 44 159.1% (39) 2,681 101.5% Total other (expense) income (1,038) (706) 47.0% (707) (6,009) (88.2%) Income before provision for income taxes 188,869 150,723 25.3% 553,877 432,151 28.2% Provision for income taxes 67,269 58,536 14.9% 196,023 169,596 15.6% Income taxes as a percentage of income before taxes 35.6% 38.8% 35.4% 39.2% Net income $ 121,600 $ 92,187 31.9% $ 357,854 $ 262,555 36.3% Net income as a percentage of net sales 19.1% 15.6% 19.2% 15.4% Net income per common share: Basic $0.73 $0.55 32.0% $2.14 $1.58 35.8% Diluted $0.70 $0.53 31.7% $2.06 $1.51 35.8% Case sales (in thousands) (in 192-ounce case equivalents) 62,204 59,204 5.1% 179,717 168,568 6.6% *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 34 -------------------------------------------------------------------------------- Table of Contents considered as an alternative to net sales, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of net sales. Additionally, gross sales may not be comparable to similarly titled measures used by other companies, as gross sales has been defined by our internal reporting practices. In addition, gross sales may not be realized in the form of cash receipts as promotional payments and allowances may be deducted from payments received from certain customers. ** Although the expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the disclosure thereof does not conform with GAAP presentation requirements. Additionally, our definition of promotional and other allowances may not be comparable to similar items presented by other companies. Promotional and other allowances primarily include consideration given to the Company's distributors or retail customers including, but not limited to the following: (i) discounts granted off list prices to support price promotions to end-consumers by retailers; (ii) reimbursements given to the Company's distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products; (iii) the Company's agreed share of fees given to distributors and/or directly to retailers for advertising, in-store marketing and promotional activities; (iv) the Company's agreed share of slotting, shelf space allowances and other fees given directly to retailers; (v) incentives given to the Company's distributors and/or retailers for achieving or exceeding certain predetermined sales goals; (vi) discounted or free products; (vii) contractual fees given to the Company's distributors related to sales made by the Company direct to certain customers that fall within the distributors' sales territories; and (viii) commissions paid to our customers. The presentation of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and the spending levels incurred or correlated with such sales. Promotional and other allowances constitute a material portion of our marketing activities. The Company's promotional allowance programs with its numerous distributors and/or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one week to one year. ***Gross profit may not be comparable to that of other entities since some entities include all costs associated with their distribution process in cost of sales, whereas others exclude certain costs and instead include such costs within another line item such as operating expenses. We include out-bound freight and warehouse costs in operating expenses rather than in cost of sales. Results of Operations for the Three-Months Ended September 30, 2014 Compared to the Three-Months Ended September 30, 2013. Gross Sales. Gross sales were $738.1 million for the three-months ended September 30, 2014, an increase of approximately $51.5 million, or 7.5% higher than gross sales of $686.6 million for the three-months ended September 30, 2013. The increase in the gross sales of our Monster Energy® brand energy drinks represented approximately $51.0 million, or 99.1%, of the overall increase in gross sales. Gross sales of our Monster Energy® brand energy drinks increased primarily due to increased sales by volume as a result of increased domestic and international consumer demand as well as our expansion into new international markets. Price increases on our 24-ounce Monster Energy® brand energy drinks and our Peace Tea® line represented approximately 9% of the overall increase in gross sales. No other individual product line contributed either a material increase or decrease to gross sales for the three-months ended September 30, 2014. Promotional and other allowances, as described in the footnote above, were $102.2 million for the three-months ended September 30, 2014, an increase of $5.9 million, or 6.2% higher than promotional and other allowances of $96.2 million for the three-months ended September 30, 2013. Promotional and other allowances as a percentage of gross sales decreased to 13.8% from 14.0% for the three-months ended September 30, 2014 and 2013, respectively. As a result, the percentage increase in net sales for the three-months ended September 30, 2014 was higher than the percentage increase in gross sales. Net Sales. Net sales were $636.0 million for the three-months ended September 30, 2014, an increase of approximately $45.6 million, or 7.7% higher than net sales of $590.4 million for the three-months ended September 30, 2013. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $43.4 million, or 95.2%, 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 as well as our expansion into new international markets. Price increases on our 24-ounce Monster Energy® brand energy drinks and our Peace Tea® line represented approximately 10% of the overall increase in net sales. No other individual product line contributed either a material increase or decrease to net sales for the three-months ended September 30, 2014. 35 -------------------------------------------------------------------------------- Table of Contents Case sales, in 192-ounce case equivalents, were 62.2 million cases for the three-months ended September 30, 2014, an increase of approximately 3.0 million cases or 5.1% higher than case sales of 59.2 million cases for the three-months ended September 30, 2013. The overall average net sales per case increased to $10.22 for the three-months ended September 30, 2014, which was 2.5% higher than the average net sales per case of $9.97 for the three-months ended September 30, 2013. Net sales for the DSD segment were $609.9 million for the three-months ended September 30, 2014, an increase of approximately $43.2 million, or 7.6% higher than net sales of $566.8 million for the three-months ended September 30, 2013. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $43.4 million, or 100.5%, of the overall increase in net sales for the DSD segment. Net sales for the DSD segment of our Monster Energy® brand energy drinks increased partially due to increased sales by volume as a result of increased domestic and international consumer demand as well as our expansion into new international markets. Price increases on our 24-ounce Monster Energy® brand energy drinks and our Peace Tea® line represented approximately 10% of the overall increase in net sales for the DSD segment. No other individual product line contributed either a material increase or decrease to net sales for the DSD segment for the three-months ended September 30, 2014. Net sales for the Warehouse segment were $26.0 million for the three-months ended September 30, 2014, an increase of approximately $2.4 million, or 10.1% higher than net sales of $23.7 million for the three-months ended September 30, 2013. The increase in net sales for the Warehouse segment was primarily attributable to increased sales by volume of aseptic juices and increased sales by volume of Hubert's® lemonades. Gross Profit. Gross profit was $341.9 million for the three-months ended September 30, 2014, an increase of approximately $34.5 million, or 11.2% higher than the gross profit of $307.5 million for the three-months ended September 30, 2013. Gross profit as a percentage of net sales increased to 53.8% for the three-months ended September 30, 2014 from 52.1% for the three-months ended September 30, 2013. The increase in gross profit dollars was primarily the result of the $51.0 million increase in gross sales of our Monster Energy® brand energy drinks. The increase in gross profit as a percentage of net sales was largely attributable to lower costs of certain sweeteners and other raw materials, price increases on our 24-ounce Monster Energy® brand energy drinks and our Peace Tea® line, changes in product sales mix, an increase in production efficiencies and lower promotional and other allowances as a percentage of gross sales. Operating Expenses. Total operating expenses were $152.0 million for the three-months ended September 30, 2014, a decrease of approximately $4.0 million, or 2.6% lower than total operating expenses of $156.0 million for the three-months ended September 30, 2013. The decrease in operating expenses was partially attributable to decreased expenditures of $2.8 million for allocated trade development, a $2.5 million non-routine indirect tax related provision recorded in the third quarter of 2013, subsequently reversed in the second quarter of 2014 for non-realization, decreased expenditures of $1.7 million for distribution costs, decreased expenditures of $1.6 million for premiums and decreased expenditures of $1.1 million related to regulatory matters and litigation concerning our Monster Energy® brand energy drinks. The decrease in operating expenses was partially offset by increased payroll expenses of $2.8 million (of which $0.2 million was related to an increase in stock-based compensation) and expenditures of $2.6 million for professional service costs related to the Coca-Cola Transaction. Contribution Margin. Contribution margin for the DSD segment was $232.7 million for the three-months ended September 30, 2014, an increase of approximately $37.8 million, or 19.4% higher than contribution margin of $194.9 million for the three-months ended September 30, 2013. The increase in the contribution margin for the DSD segment was primarily the result of the $51.0 million increase in gross sales of our Monster Energy® brand energy drinks. Contribution margin for the Warehouse segment was $0.6 million for the three-months ended September 30, 2014, approximately $2.8 million higher than contribution loss of ($2.2) million for the three-months ended September 30, 2013. 36 -------------------------------------------------------------------------------- Table of Contents Operating Income. Operating income was $189.9 million for the three-months ended September 30, 2014, an increase of approximately $38.5 million, or 25.4% higher than operating income of $151.4 million for the three-months ended September 30, 2013. Operating income as a percentage of net sales increased to 29.9% for the three-months ended September 30, 2014 from 25.6% for the three-months ended September 30, 2013, primarily due to the increase in gross profit as a percentage of net sales as well as the decrease in operating expenses as a percentage of net sales. The increase in operating income in dollars was primarily due to an increase of $34.5 million in gross profit. Operating income (loss) was $9.4 million and ($5.2) million for the three-months ended September 30, 2014 and 2013, respectively, in relation to our operations in Africa, Asia, Australia, Europe, the Middle East and South America. Other (Expense) Income. Other (expense) income was ($1.0) million for the three-months ended September 30, 2014, as compared to other (expense) income of ($0.7) million for the three-months ended September 30, 2013. Foreign currency transaction losses were ($1.5) million and ($1.0) million for the three-months ended September 30, 2014 and 2013, respectively. The increase in foreign currency losses during the three-months ended September 30, 2014 was primarily related to our foreign currency transactions in Australia, Canada, Chile, Japan, Mexico and South Africa. Interest income was $0.4 million and $0.3 million for the three-months ended September 30, 2014 and 2013, respectively. Provision for Income Taxes. Provision for income taxes was $67.3 million for the three-months ended September 30, 2014, an increase of $8.7 million or 14.9% higher than the provision for income taxes of $58.5 million for the three-months ended September 30, 2013. The effective combined federal, state and foreign tax rate decreased to 35.6% from 38.8% for the three-months ended September 30, 2014 and 2013, respectively. The decrease in the effective tax rate was primarily the result of profits earned in certain foreign subsidiaries that have no related income tax expense as a result of the prior establishment of valuation allowances on their deferred tax assets. Net Income. Net income was $121.6 million for the three-months ended September 30, 2014, an increase of $29.4 million or 31.9% higher than net income of $92.2 million for the three-months ended September 30, 2013. The increase in net income was primarily attributable to an increase in gross profit of $34.5 million as well as a decrease in operating expenses of $4.0 million. The increase in net income was partially offset by an increase in the provision for income taxes of $8.7 million. Results of Operations for the Nine-Months Ended September 30, 2014 Compared to the Nine-Months Ended September 30, 2013. Gross Sales. Gross sales were $2,130.8 million for the nine-months ended September 30, 2014, an increase of approximately $165.3 million, or 8.4% higher than gross sales of $1,965.5 million for the nine-months ended September 30, 2013. The increase in the gross sales of our Monster Energy® brand energy drinks represented approximately $162.9 million, or 98.5%, of the overall increase in gross sales. Gross sales of our Monster Energy® brand energy drinks increased primarily due to increased sales by volume as a result of increased domestic and international consumer demand as well as our expansion into new international markets. Price increases on our 24-ounce Monster Energy® brand energy drinks and our Peace Tea® line represented approximately 8% of the overall increase in gross sales. No other individual product line contributed either a material increase or decrease to gross sales for the nine-months ended September 30, 2014. Promotional and other allowances, as described in the footnote above, were $271.5 million for the nine-months ended September 30, 2014, an increase of $11.6 million, or 4.5% higher than promotional and other allowances of $259.9 million for the nine-months ended September 30, 2013. Promotional and other allowances as a percentage of gross sales decreased to 12.7% from 13.2% for the nine-months ended September 30, 2014 and 2013, respectively. As a result, the percentage increase in net sales for the nine-months ended September 30, 2014 was higher than the percentage increase in gross sales. 37 -------------------------------------------------------------------------------- Table of Contents Net Sales. Net sales were $1,859.3 million for the nine-months ended September 30, 2014, an increase of approximately $153.7 million, or 9.0% higher than net sales of $1,705.6 million for the nine-months ended September 30, 2013. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $153.9 million, or 100.1%, of the overall increase in net sales. Net sales of our Monster Energy® brand energy drinks increased primarily due to increased sales by volume as a result of increased domestic and international consumer demand as well as our expansion into new international markets. Price increases on our 24-ounce Monster Energy® brand energy drinks and our Peace Tea® line represented approximately 8% of the overall increase in net sales. No other individual product line contributed either a material increase or decrease to net sales for the nine-months ended September 30, 2014. Case sales, in 192-ounce case equivalents, were 179.7 million cases for the nine-months ended September 30, 2014, an increase of approximately 11.1 million cases or 6.6% higher than case sales of 168.6 million cases for the nine-months ended September 30, 2013. The overall average net sales per case increased to $10.35 for the nine-months ended September 30, 2014, which was 2.2% higher than the average net sales per case of $10.12 for the nine-months ended September 30, 2013. Net sales for the DSD segment were $1,784.4 million for the nine-months ended September 30, 2014, an increase of approximately $156.5 million, or 9.6% higher than net sales of $1,627.9 million for the nine-months ended September 30, 2013. The increase in net sales of our Monster Energy® brand energy drinks represented approximately $153.9 million, or 98.3%, of the overall increase in net sales for the DSD segment. Net sales for the DSD segment of our Monster Energy® brand energy drinks increased primarily due to increased sales by volume as a result of increased domestic and international consumer demand as well as our expansion into new international markets. Price increases on our 24-ounce Monster Energy® brand energy drinks and our Peace Tea® line represented approximately 8% of the overall increase in net sales for the DSD segment. No other individual product line contributed either a material increase or decrease to net sales for the DSD segment for the nine-months ended September 30, 2014. Net sales for the Warehouse segment were $74.9 million for the nine-months ended September 30, 2014, a decrease of approximately $2.7 million, or 3.5% lower than net sales of $77.6 million for the nine-months ended September 30, 2013. The decrease in net sales for the Warehouse segment was primarily attributable to decreased sales by volume of Hubert's® lemonades and apple juice. The decrease in net sales for the Warehouse segment was partially offset by increased sales by volume of aseptic juices. Gross Profit. Gross profit was $1,008.0 million for the nine-months ended September 30, 2014, an increase of approximately $112.3 million, or 12.5% higher than the gross profit of $895.8 million for the nine-months ended September 30, 2013. Gross profit as a percentage of net sales increased to 54.2% for the nine-months ended September 30, 2014 from 52.5% for the nine-months ended September 30, 2013. The increase in gross profit dollars was primarily the result of the $162.9 million increase in gross sales of our Monster Energy® brand energy drinks. The increase in gross profit as a percentage of net sales was largely attributable to lower promotional and other allowances as a percentage of gross sales, price increases on our 24-ounce Monster Energy® brand energy drinks and our Peace Tea® line, changes in product sales mix, lower costs of certain sweeteners and other raw materials as well as an increase in production efficiencies. Operating Expenses. Total operating expenses were $453.4 million for the nine-months ended September 30, 2014, a decrease of approximately $4.2 million, or 0.9% lower than total operating expenses of $457.6 million for the nine-months ended September 30, 2013. The decrease in operating expenses was partially attributable to decreased expenditures of $10.9 million relating to the costs associated with terminating existing distributors, decreased expenditures of $10.3 million for premiums, decreased expenditures of $6.6 million for allocated trade development, a $2.5 million non-routine indirect tax related provision recorded in the third quarter of 2013, subsequently reversed in the second quarter of 2014 for non-realization, and decreased expenditures of $4.3 million for point-of-sale materials. The decrease in operating 38 -------------------------------------------------------------------------------- Table of Contents expenses was partially offset by increased out-bound freight and warehouse costs of $6.7 million, increased expenditures of $6.2 million for sponsorships and endorsements, increased payroll expenses of $6.0 million (of which $0.9 million related to an increase in stock-based compensation), increased expenditures of $4.5 million related to regulatory matters and litigation concerning our Monster Energy® brand energy drinks and expenditures of $3.6 million for professional service costs related to the Coca-Cola Transaction. Contribution Margin. Contribution margin for the DSD segment was $675.3 million for the nine-months ended September 30, 2014, an increase of approximately $126.4 million, or 23.0% higher than contribution margin of $548.9 million for the nine-months ended September 30, 2013. The increase in the contribution margin for the DSD segment was primarily the result of the $162.9 million increase in gross sales of our Monster Energy® brand energy drinks. Contribution margin for the Warehouse segment was $2.2 million for the nine-months ended September 30, 2014, approximately $2.9 million higher than contribution loss of ($0.7) million for the nine-months ended September 30, 2013. Operating Income. Operating income was $554.6 million for the nine-months ended September 30, 2014, an increase of approximately $116.4 million, or 26.6% higher than operating income of $438.2 million for the nine-months ended September 30, 2013. Operating income as a percentage of net sales increased to 29.8% for the nine-months ended September 30, 2014 from 25.7% for the nine-months ended September 30, 2013, primarily due to the increase in gross profit as a percentage of net sales as well as the decrease in operating expenses as a percentage of net sales. The increase in operating income in dollars was primarily due to an increase of $112.3 million in gross profit. Operating income (loss) was $24.0 million and ($9.1) million for the nine-months ended September 30, 2014 and 2013, respectively, in relation to our operations in Africa, Asia, Australia, Europe, the Middle East and South America. Other (Expense) Income. Other (expense) income was ($0.7) million for the nine-months ended September 30, 2014, as compared to other (expense) income of ($6.0) million for the nine-months ended September 30, 2013. Foreign currency transaction losses were ($2.1) million and ($9.3) million for the nine-months ended September 30, 2014 and 2013, respectively. The decrease in foreign currency losses during the nine-months ended September 30, 2014 was primarily related to our foreign currency transactions in Australia, Canada, Japan, Ireland and South Africa. Interest income was $1.2 million and $0.6 million for the nine-months ended September 30, 2014 and 2013, respectively. Provision for Income Taxes. Provision for income taxes was $196.0 million for the nine-months ended September 30, 2014, an increase of $26.4 million or 15.6% higher than the provision for income taxes of $169.6 million for the nine-months ended September 30, 2013. The effective combined federal, state and foreign tax rate decreased to 35.4% from 39.2% for the nine-months ended September 30, 2014 and 2013, respectively. The decrease in the effective tax rate was primarily the result of profits earned in certain foreign subsidiaries that have no related income tax expense, as a result of the prior establishment of valuation allowances on their deferred tax assets. Net Income. Net income was $357.9 million for the nine-months ended September 30, 2014, an increase of $95.3 million or 36.3% higher than net income of $262.6 million for the nine-months ended September 30, 2013. The increase in net income was primarily attributable to an increase in gross profit of $112.3 million. The increase in net income was partially offset by an increase in the provision for income taxes of $26.4 million. Liquidity and Capital Resources Cash flows provided by operating activities. Net cash provided by operating activities was $407.0 million for the nine-months ended September 30, 2014, as compared with net cash provided by operating activities of $275.8 million for the nine-months ended September 30, 2013. For the nine-months ended September 30, 2014, cash provided by operating activities was primarily attributable to net income earned of $357.9 million and adjustments for certain non-cash expenses, consisting of $22.5 million of stock-based 39 -------------------------------------------------------------------------------- Table of Contents compensation and $19.1 million of depreciation and other amortization. For the nine-months ended September 30, 2014, cash provided by operating activities also increased due to a $32.4 million increase in accrued promotional allowances, a $30.0 million increase in accounts payable, a $13.3 million decrease in inventory, a $12.4 million increase in accrued liabilities, a $4.9 million increase in income taxes payable and a $2.0 million decrease in distributor receivables. For the nine-months ended September 30, 2014, cash provided by operating activities was reduced due to a $45.8 million increase in accounts receivable, an $11.5 million tax benefit from the exercise of stock options, a $8.7 million increase in prepaid income taxes, a $7.9 million increase in deferred income taxes, a $5.9 million decrease in deferred revenue, a $4.6 million increase in prepaid expenses and other current assets, and a $2.3 million decrease in distributor terminations. For the nine-months ended September 30, 2013, cash provided by operating activities was primarily attributable to net income earned of $262.6 million and adjustments for certain non-cash expenses consisting of $21.6 million of stock-based compensation and $16.4 million of depreciation and other amortization. For the nine-months ended September 30, 2013, cash provided by operating activities also increased due to a $78.4 million increase in income taxes payable, a $40.2 million increase in accrued promotional allowances, a $33.7 million increase in accounts payable, a $21.2 million increase in accrued liabilities, a $4.8 million increase in deferred revenue and a $3.5 million increase in accrued distributor terminations. For the nine-months ended September 30, 2013, cash provided by operating activities was reduced due to a $104.7 million increase in accounts receivable, a $46.7 million increase in inventory, a $30.3 million increase in tax benefit from the exercise of stock options, a $13.0 million increase in prepaid expenses and other current assets, a $3.4 million increase in distributor receivables, a $4.9 million increase in prepaid income taxes and a $3.1 million gain on investments. Cash flows used in investing activities. Net cash used in investing activities was $223.0 million for the nine-months ended September 30, 2014, as compared to net cash used in investing activities of $246.7 million for the nine-months ended September 30, 2013. For the nine-months ended September 30, 2014, cash used in investing activities was primarily attributable to purchases of held-to-maturity investments, purchases of property and equipment, as well as additions to intangibles. For the nine-months ended September 30, 2013, cash used in investing activities was primarily attributable to purchases of held-to-maturity investments, purchases of property and equipment, and additions to intangibles. For the nine-months ended September 30, 2014, cash provided by investing activities was primarily attributable to maturities of held-to-maturity investments. For the nine-months ended September 30, 2013, cash provided by investing activities was primarily attributable to maturities of held-to-maturity investments and proceeds from the sale of property and equipment, including the sale of real property. For both the nine-months ended September 30, 2014 and 2013, cash used in investing activities also included the acquisitions of fixed assets consisting of vans and promotional vehicles, coolers and other equipment to support our marketing and promotional activities, production equipment, furniture and fixtures, office and computer equipment, computer software, and equipment used for sales and administrative activities, as well as certain leasehold improvements. We expect to continue to use a portion of our cash in excess of our requirements for operations for purchasing short-term and long-term investments, and for other corporate purposes, including the purchase of Coca-Cola's energy drink business, leasehold improvements, the acquisition of capital equipment, specifically, vans, trucks and promotional vehicles, coolers, other promotional equipment, merchandise displays, warehousing racks as well as items of production equipment required to produce certain of our existing and/or new products and to develop our brand in international markets. From time to time, we may also purchase additional real property related to our beverage business and/or acquire compatible businesses as a use of cash in excess of our requirements for operations. Cash flows provided by financing activities. Net cash provided by financing activities was $17.1 million for the nine-months ended September 30, 2014, as compared to net cash provided by financing activities of $33.7 million for the nine-months ended September 30, 2013. For the nine-months ended September 30, 2014, cash provided by financing activities was primarily attributable to $15.1 million received from the issuance of common stock in connection with the exercise of certain stock options and an $11.5 40 -------------------------------------------------------------------------------- Table of Contents million tax benefit from the exercise of stock options. For the nine-months ended September 30, 2014, cash used in financing activities was primarily attributable to $8.1 million of re-purchases of common stock. For the nine-months ended September 30, 2013, cash provided by financing activities was primarily attributable to a $30.3 million tax benefit from the exercise of stock options and $18.2 million received from the issuance of common stock in connection with the exercise of certain stock options. For the nine-months ended September 30, 2013, cash used in financing activities was primarily attributable to $13.4 million of re-purchases of common stock. Purchases of inventories, increases in accounts receivable and other assets, acquisition of property and equipment (including real property and coolers), leasehold improvements, acquisition and maintenance of trademarks, payments of accounts payable, income taxes payable and purchases of our common stock are expected to remain our principal recurring use of cash. Cash and cash equivalents, short-term and long-term investments. At September 30, 2014, we had $408.3 million in cash and cash equivalents and $616.5 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), corporate notes and bonds, commercial paper 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 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 market risks associated with our investment portfolio may have an adverse effect on our future results of operations, liquidity and financial condition. Of our $408.3 million of cash and cash equivalents held at September 30, 2014, $117.1 million was held by our foreign subsidiaries. No short-term or long-term investments were held by our foreign subsidiaries at September 30, 2014. We do not intend, nor do we foresee a need, to repatriate undistributed earnings of our foreign subsidiaries other than to repay certain intercompany debt owed to our U.S. operations. Under current tax laws, if funds in excess of intercompany amounts owed were repatriated to our U.S. operations, we would be required to accrue and pay additional income taxes on such excess funds at the tax rates then in effect. We believe that cash available from operations, including our cash resources and access to 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 any purchases of capital assets, equipment and properties, through at least the next 12 months. Based on our current plans, at this time we estimate that capital expenditures are likely to be less than $120.0 million through September 30, 2015. However, future business opportunities may cause a change in this estimate. 41 -------------------------------------------------------------------------------- Table of Contents The following represents a summary of the Company's contractual commitments and related scheduled maturities as of September 30, 2014: Payments due by period (in thousands) Less than 1-3 3-5 More than Obligations Total 1 year years years 5 years Contractual Obligations¹ $ 70,642 $ 44,414 $ 25,888 $ 340 $ - Capital Leases 657 657 - - - Operating Leases 13,318 5,157 6,353 789 1,019 Purchase Commitments² 37,031 37,031 - - - $ 121,648 $ 87,259 $ 32,241 $ 1,129 $ 1,019 ¹Contractual obligations include our obligations related to sponsorships and other commitments. ²Purchase commitments include obligations made by us and our subsidiaries to various suppliers for raw materials used in the production of our products. These obligations vary in terms, but are generally satisfied within one year. In addition, approximately $0.9 million of unrecognized tax benefits have been recorded as liabilities as of September 30, 2014. It is expected that the amount of unrecognized tax benefits will not significantly change within the next 12 months. We have also recorded a liability for potential penalties and interest of $0.4 million as of September 30, 2014. Sales The table below discloses selected quarterly data regarding sales for the three- and nine-months ended September 30, 2014 and 2013, respectively. Data from any one or more quarters or periods is not necessarily indicative of annual results or continuing trends. Sales of beverages are expressed in unit case volume. A "unit case" means a unit of measurement equal to 192 U.S. fluid ounces of finished beverage (24 eight-ounce servings). Unit case volume means the number of unit cases (or unit case equivalents) of beverages sold by us. Our quarterly results of operations reflect seasonal trends that are primarily the result of increased demand in the warmer months of the year. It has been our experience that beverage sales tend to be lower during the first and fourth quarters of each calendar year. Because the primary historical market for our products is California, which has a year-long temperate climate, the effect of seasonal fluctuations on quarterly results may have been somewhat mitigated; however, such fluctuations may become more pronounced with the expansion of the distribution of our products outside of California. In addition, our experience with our energy drink products suggests they may be 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, customers and distributors, changes in the sales mix of our products and changes in advertising and promotional expenses. (In thousands, except average Three-Months Ended Nine-Months Ended net sales per case) September 30, September 30, 2014 2013 2014 2013 Net sales $ 635,972 $ 590,422 $ 1,859,301 $ 1,705,579 Case sales (192-ounce case equivalents) 62,204 59,204 179,717 168,568 Average net sales per case $ 10.22 $ 9.97 $ 10.35 $ 10.12 42 -------------------------------------------------------------------------------- Table of Contents See Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Our Business" for additional information related to the increase in sales. Critical Accounting Policies There have been no material changes to our critical accounting policies from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in our Form 10-K for the fiscal year ended December 31, 2013. Recent Accounting Pronouncements In September 2014, the Company elected to early adopt FASB ASU No. 2014-08, "Presentation of Financial Statements and Property, Plant, and Equipment - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity". ASU 2014-08 provides new guidance related to the definition of a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The adoption of ASU 2014-08 did not have a material impact on the Company's financial position, results of operations or liquidity. In June 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2014-12, "Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force)". ASU 2014-12 clarifies that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. ASU 2014-12 is effective for annual periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. ASU 2014-12 may be applied either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of ASU 2014-12 is not expected to have a material impact on the Company's financial position, results of operations or liquidity. In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers", which supersedes previous revenue recognition guidance. ASU 2014-09 requires that a company recognize revenue at an amount that reflects the consideration to which the company expects to be entitled in exchange for transferring goods or services to a customer. In applying the new guidance, a company will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract's performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016 and can be adopted using either a full retrospective or modified approach. The Company is currently evaluating the impact of ASU 2014-09 on its financial position, results of operations and liquidity. Inflation We believe inflation did not have a significant impact on our results of operations for the periods presented. 43 -------------------------------------------------------------------------------- Table of Contents 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 Securities Exchange Act of 1934, as amended) (the "Exchange Act") regarding the expectations of management 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," 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, involve a number of risks, uncertainties and other factors, that could cause actual results and events to differ materially from the statements made including, but not limited to, the following: † Our ability to consummate the Coca-Cola Transaction or recognize any benefits from the Coca-Cola Transaction; † Disruption in distribution or sales and/or decline in sales due to the termination and/or appointment of existing and/or new domestic and/or international distributors; † Lack of anticipated demand for our products in international markets; † Unfavorable regulations, including taxation requirements, product registration requirements, tariffs and/or trade restrictions; † The effect of inquiries from and/or actions by state attorneys general, the Federal Trade Commission (the "FTC"), the FDA, municipalities or city attorneys and/or other government agencies and/or quasi-government agencies and/or government officials, including members of Congress, into the advertising, marketing, promotion, ingredients, sale and/or consumption of our energy drink products, including voluntary changes to our business practices; † Our ability to achieve profitability from our operations outside the United States; † Our ability to manage legal and regulatory requirements in foreign jurisdictions, potential difficulties in staffing and managing foreign operations, potentially higher incidence of fraud or corruption and credit risk of foreign customers and distributors; † Our ability to produce our products in international markets in which they are sold, thereby reducing freight costs and/or product damages; † Our ability to effectively manage our inventories and/or our accounts receivables; † Our foreign currency exchange rate risk with respect to our sales, expenses, profits, assets and liabilities denominated in currencies other than the U.S. dollar, which will continue to increase as foreign sales increase; † Changes in accounting standards may affect our reported profitability; † Any proceedings which may be brought against us by the Securities and Exchange Commission (the "SEC"), the FDA, the FTC or other governmental agencies or bodies; † The outcome of shareholder securities litigation and/or shareholder derivative actions filed against us and/or against certain of our officers and directors, and the possibility of other private shareholder litigation; † The possibility of future shareholder derivative actions or shareholder securities litigation filed against us; † The outcome of product liability litigation and/or class action litigation regarding the safety of our products and/or the ingredients in and/or claims made in connection with our products and/or alleging false advertising, marketing and/or promotion, and the possibility of future product liability and/or class action lawsuits; 44 -------------------------------------------------------------------------------- Table of Contents † The current uncertainty and volatility in the national and global economy; † Our ability to address any significant deficiencies or material weakness in our internal control over financial reporting; † Our ability to continue to generate sufficient cash flows to support capital expansion plans and general operating activities; † Decreased demand for our products resulting from changes in consumer preferences and/or from decreased consumer discretionary spending power and/or from higher gasoline prices; † Changes in demand that are weather related, particularly in areas outside of California; † Competitive products and pricing pressures and our ability to gain or maintain our share of sales in the marketplace as a result of actions by competitors; † Our ability to introduce new products; † An inability to achieve volume growth through product and packaging initiatives; † Our ability to sustain the current level of sales and/or increase the sales of our Monster Energy® brand energy drinks and/or our Peace Tea® iced teas and/or our other products, including, following the Coca-Cola Transaction, the energy drinks acquired from Coca-Cola; † The impact of criticism of our energy drink products and/or the energy drink market generally and/or legislation enacted, whether as a result of such criticism or otherwise, that restrict the sale of energy drinks (including prohibiting the sale of energy drinks at certain establishments or pursuant to certain governmental programs), limit caffeine content in beverages, require certain product labeling disclosures and/or warnings, impose excise and/or sales taxes, limit product sizes or impose age restrictions for the sale of energy drinks; † Our ability to comply with and/or resulting lower consumer demand for energy drinks due to proposed and/or future U.S. federal, state and local laws and regulations and/or proposed or existing laws and regulations in certain foreign jurisdictions and/or any changes therein, including changes in taxation requirements (including tax rate changes, new tax laws, new and/or increased excise and/or sales and/or other taxes on our products and revised tax law interpretations) and environmental laws, as well as the FFDC Act, including as amended by the Dietary Supplement Health and Education Act, and regulations made thereunder or in connection therewith, as well as changes in any other food, drug or similar laws in the United States and internationally, especially those that may restrict the sale of energy drinks (including prohibiting the sale of energy drinks at certain establishments or pursuant to certain governmental programs), limit caffeine content in beverages, require certain product labeling disclosures and/or warnings, impose excise taxes, limit product sizes, or impose age restrictions for the sale of energy drinks, as well as laws and regulations or rules made or enforced by the FDA, and/or the Bureau of Alcohol, Tobacco and Firearms and Explosives, and/or the Federal Trade Commission; † Our ability to satisfy all criteria set forth in any model energy drink guidelines, including, without limitation, those adopted by the American Beverage Association, of which the Company is a member, and the impact on the Company of such guidelines; † The effect of unfavorable press and/or articles, comments and/or media attention; † Changes in the cost, quality and availability of containers, packaging materials, raw materials, other ingredients and juice concentrates, and our ability to obtain and/or maintain favorable supply arrangements and relationships and procure timely and/or sufficient production of all or any of our products to meet customer demand; † Our ability to pass on to our customers all or a portion of any increases in the costs of fuel and/or raw materials and/or ingredients and/or commodities affecting our business; † Our ability to achieve both domestic and international forecasts, which may be based on projected volumes and sales of many product types and/or new products, certain of which are more profitable than others; there can be no assurance that we will achieve projected levels of sales as well as forecasted product and/or geographic mixes; † Our ability to penetrate new domestic and/or international markets and/or gain approval or mitigate the delay in securing approval for the sale of our products in various countries; † Economic or political instability in one or more of our international markets; 45 -------------------------------------------------------------------------------- Table of Contents † Our ability to secure and/or retain competent and/or effective distributors internationally; † The effectiveness of sales and/or marketing efforts of distributors of our products, most of which distribute products that are competitive with our products; † Unilateral decisions by distributors, convenience chains, grocery chains, specialty chain stores, club stores and other customers to discontinue carrying all or any of our products that they are carrying at any time and/or restrict the range of our products they carry and/or devote less resources to the sale of our products; † The costs and/or effectiveness, now or in the future, of our advertising, marketing and promotional strategies; † Changes in product category consumption; † Unforeseen economic and political changes; † Possible recalls of our products and/or defective production; † Our ability to make suitable arrangements for the co-packing of any of our products both domestically and internationally and/or the timely replacement of discontinued co-packing arrangements; † Our ability to make suitable arrangements for the procurement of non-defective raw materials; † Our inability to protect and/or the loss of our intellectual property rights and/or our inability to use our trademarks and/or trade names or designs in certain countries; † Volatility of stock prices which may restrict stock sales, stock purchases or other opportunities; † Provisions in our organizational documents and/or control by insiders which may prevent changes in control even if such changes would be beneficial to other stockholders; † The failure of our bottlers and contract packers to manufacture our products on a timely basis or at all; † Exposure to significant liabilities due to litigation, legal or regulatory proceedings; † Any disruption in and/or lack of effectiveness of our information technology systems that disrupts our business or negatively impacts customer relationships; and † Recruitment and retention of senior management, other key employees and our employee base in general. The foregoing list of important factors and other risks detailed from time to time in our reports filed with the SEC is not exhaustive. See the section entitled "Risk Factors" in our Form 10-K for the fiscal year ended December 31, 2013, 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. |