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
Skullcandy Announces Second Quarter 2013 Financial Results
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