Skullcandy Announces Second Quarter 2013 Financial Results

Skullcandy Announces Second Quarter 2013 Financial Results

PARK CITY, Utah, Aug. 1, 2013 (GLOBE NEWSWIRE) -- Skullcandy, Inc.
(Nasdaq:SKUL) today announced financial results for the second quarter ended
June 30, 2013.

Second Quarter Results

  *Net sales were $50.8 million
  *Net loss was $(0.02) per diluted share
  *Non-GAAP adjusted net income was break even

"The second quarter was about taking the initial steps toward getting our
house in order to drive positive, long-term transformation at Skullcandy,"
stated Hoby Darling, President and Chief Executive Officer. "We had to reduce
expenses and recalibrate our operating platform to better align with our
current sales trajectory. Our decisive actions during the quarter allowed us
to break even on the bottom line despite ongoing sales headwinds. With our
product, marketing and sales teams now consolidated in Park City we are in a
much better position to build momentum and establish Skullcandy as the world's
leading lifestyle and performance audio company driven by the creativity and
irreverence of youth culture. I am excited about the future and I am confident
that we are assembling the right team to successfully execute our strategic
plan and deliver significant shareholder value."

Net sales in the second quarter of 2013 decreased 29.9% to $50.8 million from
$72.4 million in the same quarter of the prior year. North America net sales
decreased 39.1% to $39.0 million from $64.1 million in the same quarter of the
prior year. The Company experienced lower sell-in at a key customer and a
decline in sales to several of its specialty retailers. Consistent with its
strategy, the Company purposefully scaled back its sales to the off-price
channel which were down approximately 52% compared with the second quarter of
2012. In addition, the second quarter of 2012 included increased sales from a
significant packaging change. International net sales increased 40.6% to $11.8
million from $8.4 million in the same quarter of the prior year. Included in
the North America segment in second quarter 2013 and second quarter 2012 are
net sales of $1.8 million and $7.8 million, respectively, of products that
were sold from the United States to customers with a "ship to" location
outside of the United States. Including these sales in the international
segment, international net sales decreased 15.9%, and North America net sales
decreased 33.9%, compared to the same quarter in the prior year. The decrease
in adjusted international net sales is primarily due to a $2.4 million
negative impact of winding down the Company's relationship with its former
Canadian distributor in anticipation of going to a direct model in that
country.

Gross profit in the second quarter of 2013 decreased 35.3% to $22.8 million
from $35.2 million in the same quarter of the prior year. Gross margin was
44.9% in the second quarter of 2013 compared to 48.6% in the second quarter of
2012. The decrease in gross margin is primarily due to the impact of the
gaming category carrying lower gross margins, coupled with higher sales
allowances on gaming products in the retail channel which was not in place a
year ago.In addition, gross margin was negatively impacted by certain sales
allowances associated with the transition to a direct sales model in Canada
and slightly higher raw material costs.

Certain reclassifications have been made to the Company's 2012 results to
conform to the 2013 presentation to better reflect where certain costs should
be presented in the statement of operations. For this reason, tooling
depreciation and warranty related expenses are being included in cost of goods
sold for all comparable periods.

Selling, general and administrative (SG&A) expenses in the second quarter of
2013 increased 2.0% to $24.0 million from $23.5 million in the same quarter of
the prior year. As a percentage of net sales, SG&A expenses increased to 47.2%
from 32.4% in the same quarter of the prior year. SG&A expenses in the second
quarter of 2013 include $1.1 million in costs related to the closure of the
San Clemente, California office which was announced on June 18, 2013.These
costs include certain termination benefits and the relocation of the
marketing, creative, business development and legal departments, as well as
certain sales and international personnel to the Company's headquarters in
Park City, Utah.Even as the Company implements cost control initiatives, the
Company continues to invest in marketing and demand creation with an increase
in expenses of $0.6 million compared to the same quarter of the prior year.

Net loss attributable to the Company in the second quarter of 2013 was $(0.6)
million, or $(0.02) per diluted share, based on 27.7 million diluted weighted
average common shares outstanding. Net income attributable to the Company in
the same quarter of the prior year was $6.8 million, or $0.24 per diluted
share, based on 28.0 million diluted weighted average common shares
outstanding. Excluding costs associated with the closure of the San Clemente
office including certain severance expenses, non-GAAP adjusted net income in
the second quarter of 2013 was $0.1 million, or break even per diluted share
based on 27.8 million diluted weighted average common shares outstanding. In
the second quarter of 2012, non-GAAP adjusted net income was equal to GAAP net
income.For a reconciliation of non-GAAP adjusted net income (loss) to net
income (loss), see the accompanying tables at the end of this release.

Balance Sheet Highlights

As of June30, 2013, cash and cash equivalents totaled $29.7 million compared
to $7.0 million as of June30, 2012 and the Company had no debt outstanding,
compared to $5.1 million as of June 30, 2012.As of June30, 2013, the Company
had $28.5 million of availability under its credit facility. Accounts
receivable decreased 16.9% to $42.0 million as of June30, 2013 from $50.5
million as of June30, 2012 and were down $34.3 million from December31,
2012. Inventory decreased 7.4% to $51.1 million as of June30, 2013 from $55.2
million as of June30, 2012.

Call Information

A conference call to discuss the second quarter of 2013 results is scheduled
for today, August 1, 2013, at 4:30 PM Eastern Time / 2:30 PM Mountain Time. A
broadcast of the call will be available on the Company's website,
www.skullcandy.com. Analysts and investors can participate in the live call by
dialing (877)705-6003 or (201)493-6725. In addition, a replay of the call
will be available shortly after the conclusion of the call and remain
available through August8, 2013. To access the telephone replay, listeners
should dial (877)870-5176 or (858)384-5517 and enter ID #417887.

About Skullcandy, Inc.

Skullcandy is the leading global lifestyle and performance audio brand driven
by the creativity and irreverence of youth culture. Skullcandy designs,
markets and distributes audio and gaming headphones and other related products
under the Skullcandy, Astro Gaming and 2XL by Skullcandy brands. Skullcandy
was launched in 2003 and quickly became one of the world's most distinct audio
brands by bringing unique technology, color, character and performance to an
otherwise monochromatic space; helping to revolutionize the audio arena by
introducing headphones, earbuds and other audio and wireless lifestyle
products that possess unmistakable style and exceptional performance. The
Company's products are sold and distributed through a variety of channels in
the U.S. and approximately 80 countries worldwide. Visit skullcandy.com, or
join us at facebook.com/skullcandy or on Twitter @skullcandy.

Forward-Looking Statements

Certain statements in this press release and oral statements made from time to
time by representatives of the Company are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. In
particular, statements regarding the Company's anticipated future financial
and operating results and any other statements about the Company's future
expectations, beliefs or prospects expressed by management are forward-looking
statements. These forward-looking statements are based on management's current
expectations and beliefs, but they involve a number of risks and uncertainties
that could cause actual results or events to differ materially from those
indicated by such forward-looking statements. Important factors that could
cause actual results to differ materially from expectations are disclosed
under the "Risk Factors" section of the 2012 10-K filed with the Securities
and Exchange Commission ("SEC") on March 13, 2013 and in any subsequent
reports we file with the SEC. Readers are urged not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company does not undertake any obligation to update or alter any
forward-looking statements, whether as a result of new information, future
events or otherwise

Non-GAAP Measures

Non-GAAP adjusted net income and non-GAAP adjusted fully diluted earnings per
share, for the periods presented, represents diluted net income per share
excluding the impact of severance expenses associated with the departure of
the Company's former Chief Executive Officer, exit costs associated with the
office closure and the settlement of litigation. Management does not believe
these expenses correlate to the underlying performance of the business. As a
result, the Company believes that non-GAAP adjusted net income and non-GAAP
adjusted fully diluted earnings per share provides important additional
information for measuring its performance, provides consistency and
comparability with the Company's past financial performance, facilitates
period to period comparisons of the Company's operations, and facilitates
comparisons with other peer companies, many of which use similar non-GAAP
financial measures to supplement their GAAP results. The Company's management
team uses these metrics to evaluate the Company's business and believes they
are a measure used frequently by securities analysts and investors. Non-GAAP
adjusted net income and adjusted fully diluted earnings per share do not
represent, and should not be used as a substitute for net income and diluted
earnings per share, as determined in accordance with GAAP. The Company's
method of calculating non-GAAP adjusted net income and adjusted fully diluted
earnings per share may differ from that of other companies.

SKULLCANDY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of dollars, except share and per share information)
(unaudited)
                                                              
                        Three Months Ended June 30, Six Months Ended June 30,
                        2013          2012          2013         2012
Net sales                $50,789     $72,436     $87,839    $125,716
Cost of goods sold       28,004        37,228        48,568       64,893
Gross profit             22,785        35,208        39,271       60,823
Selling, general and     23,951        23,491        50,262       47,622
administrative expenses
Income (loss) from       (1,166)       11,717        (10,991)     13,201
operations
Other expense (income)   (249)         421           290          373
Interest expense         111           147           214          271
Income (loss) before
income taxes and         (1,028)       11,149        (11,495)     12,557
noncontrolling interests
Income tax expense       (339)         4,342         (3,726)      4,609
(benefit)
Net income (loss)        (689)         6,807         (7,769)      7,948
Net loss (income)
attributable to          54            —             87           (24)
noncontrolling interests
Net income (loss)
attributable to          $ (635)       $6,807      $ (7,682)    $7,924
Skullcandy, Inc.
Net income (loss) per
common share                                                   
attributable to
Skullcandy, Inc.
Basic                    $(0.02)     $0.25       $(0.28)    $0.29
Diluted                  (0.02)        0.24          (0.28)       0.28
Weighted average common                                        
shares outstanding
Basic                    27,719,081    27,339,599    27,709,974   27,310,701
Diluted                  27,719,081    28,005,190    27,709,974   27,983,521


SKULLCANDY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
(unaudited)
                                                               
                                            As of    As of     As of
                                           June 30,  June 30,  December 31,
                                            2013       2012       2012
Assets                                                          
Current assets:                                                 
Cash and cash equivalents                   $29,708  $6,971   $19,345
Accounts receivable, net                    41,990     50,544     76,307
Inventories                                 51,135     55,244     41,567
Prepaid expenses and other current assets   3,205      6,135      5,604
Deferred taxes                              3,273      3,229      2,943
Total current assets                        129,311    122,123    145,766
Property and equipment, net                 12,285     12,424     16,000
Intangibles                                 11,736     13,130     12,481
Goodwill                                    13,867     13,867     13,867
Deferred financing fees                     40         281        161
Total assets                                $167,239 $161,825 $188,275
Liabilities and stockholders' equity                            
Current liabilities:                                            
Accounts payable                            $15,963  $18,118  $22,887
Accrued liabilities                         12,859     17,886     21,047
Bank line of credit                         —          5,063      —
Total current liabilities                   28,822     41,067     43,934
Deferred taxes                              1,553      1,689      2,219
Stockholders' equity:                                           
Common stock                                3          3          3
Treasury stock                              (43,294)   (43,294)   (43,294)
Additional paid-in capital                  130,856    122,968    128,676
Accumulated other comprehensive income      308        501        (22)
(loss)
Retained earnings                           48,536     38,263     56,218
Total Skullcandy stockholders' equity       136,409    118,441    141,581
Noncontrolling interests                    455        628        541
Total stockholders' equity                  136,864    119,069    142,122
Total liabilities and stockholders' equity  $167,239 $161,825 $188,275


SKULLCANDY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
                                                                    
                                                          Six Months Ended
                                                           June 30,
                                                          2013       2012
Operating activities                                                 
Net income (loss)                                          $(7,769) $7,948
Adjustments to reconcile net income (loss) to net cash               
provided by (used in) operating activities:
Depreciation and amortization                              4,394      2,590
Loss on disposal of property and equipment                 1,979      —
Provision for doubtful accounts                            1,076      106
Deferred income taxes                                      (995)      (1,170)
Noncash interest expense                                   120        119
Stock-based compensation expense                           2,059      3,436
Changes in operating assets and liabilities:                         
Accounts receivable                                        33,257     (30)
Inventories                                                (9,555)    (11,266)
Prepaid expenses and other current assets                  2,681      2,685
Accounts payable                                           (6,933)    (5,093)
Income taxes payable                                       —          (2,714)
Accrued liabilities                                        (8,200)    (4,493)
Net cash provided by (used in) operating activities        12,114     (7,882)
Investing activities                                                 
Purchase of property and equipment                         (1,890)    (4,041)
Purchase of intangible assets                              (17)       (131)
Net cash used in investing activities                      (1,907)    (4,172)
Financing activities                                                 
Net borrowings (repayments) on bank line of credit         —          (4,821)
Proceeds from exercise of stock options                    115        484
Income tax benefit from stock option exercises             5          —
Net cash provided by (used in) financing activities        120        (4,337)
Effect of exchange rate changes on cash and cash           36         60
equivalents
Net increase (decrease) in cash and cash equivalents       10,363     (16,331)
Cash and cash equivalents, beginning of period             19,345     23,302
Cash and cash equivalents, end of period                   $29,708  $6,971
Supplemental cash flow information:                                  
Cash paid for interest                                     1          58
Cash paid for income tax                                   5,803      8,555

                               SKULLCANDY, INC.
                             SEGMENT INFORMATION
                                 (unaudited)

The North America segment primarily consists of Skullcandy and Astro Gaming
product sales to customers in the United States and Mexico (through the
Company's joint venture). The international segment primarily includes
Skullcandy product sales to customers in Europe and Asia that are served by
the Company's European and Asian operations. Included in the North America
segment for the three and six months ended June30, 2013 are net sales of $1.8
million and $3.9 million, respectively, that represent products that were sold
from the United States with a "ship to" location outside of the United
States.Included in the North America segment for the three and six months
ended June30, 2012 are net sales of $7.8 million and $11.2 million,
respectively, that represent products that were sold from United States with a
"ship to" location outside of the United States.

                             Three Months Ended   Six Months Ended
                              June 30,            June 30,
                             2013       2012      2013        2012
Net sales                                                   
North America                 $39,006  $64,056 $67,671   $110,202
International                 11,783     8,380     20,168      15,514
Consolidated                  50,789     72,436    87,839      125,716
Gross profit                                                
North America                 17,290     31,096    29,745      52,832
International                 5,495      4,112     9,526       7,991
Consolidated                  22,785     35,208    39,271      60,823
Income (loss) from operations                               
North America                 (2,400)    10,375    (11,767)    10,272
International                 1,234      1,342     776         2,929
Consolidated                  $(1,166) $11,717 $(10,991) $13,201


SKULLCANDY, INC.
RECONCILIATION OF NET INCOME (LOSS) TO NON-GAAP ADJUSTED NET INCOME (LOSS)
(in thousands of dollars)
(unaudited)
                                                                 
                            Three Months Ended        Six Months Ended
                             June 30,                   June 30,
                            2013          2012         2013         2012
Net income (loss)            $(689)      $6,807     $(7,769)   $7,948
Net loss (income)
attributable to              54            —            87           (24)
noncontrolling interests
Severance-related expenses,  —             —            776          —
net of tax benefit (1)
Legal and settlement
expenses associated with     —             —            —            418
litigation, net of tax
benefit (2)
Exit costs associated with   706           —            706          —
office closure (3)
Non-GAAP adjusted net income $71         $6,807     $(6,200)   $8,342
(loss)
                                                                 
(1) This item is recorded in selling, general and administrative expenses in
the Condensed Consolidated Statements of Operations. It is reflected in the
schedule above net of tax benefit of $446 thousand for the six months ended
June 30, 2013.
(2) This item is recorded in selling, general and administrative expenses in
the Condensed Consolidated Statements of Operations. It is reflected in the
schedule above net of tax benefit of $249 thousand for the six months ended
June 30, 2012.
(3) This item is recorded in selling, general and administrative expenses in
the Condensed Consolidated Statements of Operations. It is reflected in the
schedule above net of tax benefit of $403 thousand for the three and six
months ended June 30, 2013.


SKULLCANDY, INC.
RECONCILIATION OF DILUTED EARNINGS (LOSS) PER SHARE – GAAP TO DILUTED EARNINGS
(LOSS) PER SHARE – NON-GAAP
(unaudited)
                                                                   
                                         Three Months Ended Six Months Ended
                                          June 30,          June 30,
                                         2013       2012    2013      2012
Diluted earnings (loss) per share - GAAP  $(0.02)  $0.24 $(0.28) $0.28
Severance-related expenses, net of tax    —          —       0.03      —
benefit
Legal and settlement expenses associated  —          —       —         0.02
with litigation, net of tax benefit
Exit costs associated with office closure 0.02       —       0.03      —
Diluted earnings (loss) per share –       $ 0.00   $0.24 $(0.22) $0.30
non-GAAP

CONTACT: ICR
         Brendon Frey / Joe Teklits
         203-682-8200
         Brendon.Frey@icrinc.com
         Joseph.Teklits@icrinc.com