Skullcandy Announces Third Quarter 2013 Financial Results

Skullcandy Announces Third Quarter 2013 Financial Results

PARK CITY, Utah, Oct. 30, 2013 (GLOBE NEWSWIRE) -- Skullcandy, Inc.
(Nasdaq:SKUL) today announced financial results for the third quarter ended
September 30, 2013.

Third Quarter Results

  *Net sales were $50.0 million
  *Gross margin was 44.9%
  *Net income was $0.04 per diluted share
  *Non-GAAP adjusted net income was $0.06 per diluted share

"The third quarter was a productive period as we continued to execute against
the key pillars we have established that will put Skullcandy on a path towards
long-term growth and shareholder value creation," said Hoby Darling, President
and Chief Executive Officer of Skullcandy. "We have a good deal of work to go,
however, we made important progress in fine tuning our distribution model,
which over time should improve full price selling and strengthen our premium
brand positioning. We also broadened awareness of our enhanced innovation
platform through increased availability of Crusher. Our corporate culture is
getting stronger and our level of execution continues to improve, helping us
achieve our profitability target even as we purposefully reduced sales intra
quarter to certain retailers as part of our ongoing Edit, Amplify and Add
marketplace transformation strategy and continued to invest in in-store demand
creation and innovation. There is tremendous opportunity to drive further
improvements across our organization and I am very encouraged by the initial
advancements and feel strongly that we are set up to deliver improved results
beginning next year."

Net sales in the third quarter of 2013 decreased 29.6% to $50.0 million from
$71.0 million in the same quarter of the prior year. North America net sales
decreased 39.4% to $34.8 million from $57.4 million in the same quarter of the
prior year. Consistent with the strategy stated in previous quarters, the
Company continued to scale back its sales to the off-price channel, which were
down approximately $4.4 million, or 74.6%, compared with the third quarter of
2012. In addition, there was a decrease in net sales of $2.2 million as a
result of the transition to a direct distribution model in Canada.
International net sales increased 11.9% to $15.2 million from $13.6 million in
the same quarter of the prior year. Included in the North America segment in
third quarter 2013 and third quarter 2012 are net sales of $0.9 million and
$3.0 million, respectively, of products that were sold from the United States
to customers with a "ship to" location outside of North America. Including
these sales in the international segment, international net sales decreased
2.5%, and North America net sales decreased 37.8%, compared to the same
quarter in the prior year.

Gross profit in the third quarter of 2013 decreased 33.4% to $22.4 million
from $33.7 million in the same quarter of the prior year. Gross margin was
44.9% in the third quarter of 2013 compared to 47.4% in the same quarter of
the prior year. The decrease in gross margin was primarily attributable to
increased allowances to the Company's retail customers and a shift to a lower
margin product mix.

Selling, general and administrative (SG&A) expenses in the third quarter of
2013 decreased 5.0% to $21.9 million from $23.1 million in the same quarter of
the prior year. SG&A expenses in the third quarter of 2013 include $1.0
million in costs related to the closure of the San Clemente, California
office. These costs include certain termination benefits, charges associated
with subleasing the former office space, 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.
As a percentage of net sales, SG&A expenses were 43.8% compared to 32.5% in
the same quarter of the prior year. The Company continues to invest in
marketing and demand creation efforts with an increase in expenses of $0.3
million compared to the same quarter of the prior year.

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.

Net income attributable to the Company in the third quarter of 2013 was $1.1
million, or $0.04 per diluted share, based on 27.9 million diluted weighted
average common shares outstanding and included a $1.0 million one-time tax
benefit related to the retirement of certain incentive stock options as part
of the employee stock option exchange that was completed in September 2013.
Net income attributable to the Company in the same quarter of the prior year
was $6.5 million, or $0.23 per diluted share, based on 28.1 million diluted
weighted average common shares outstanding. Excluding costs associated with
the closure of the San Clemente office, non-GAAP adjusted net income in the
third quarter of 2013 was $1.7 million, or $0.06 per diluted share based on
27.9 million diluted weighted average common shares outstanding. In the third
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 September 30, 2013, cash and cash equivalents totaled $34.7 million
compared to $1.9 million as of September 30, 2012 and the Company had no
outstanding debt, compared to $5.2 million of outstanding debt as of September
30, 2012. As of September 30, 2013, the Company had $50.0 million of
availability under its new credit facility. Accounts receivable decreased
31.3% to $41.2 million as of September 30, 2013 from $60.0 million as of
September 30, 2012, which is consistent with the decline in net sales for the
comparable period. Inventory decreased 12.0% to $48.7 million as of September
30, 2013 from $55.4 million as of September 30, 2012. Inventory as of
September 30, 2013 included approximately $2.5 million associated with the
transition to a direct distribution model in Canada at the start of the third
quarter 2013.

Call Information

A conference call to discuss the third quarter of 2013 results is scheduled
for today, October 30, 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 November 6, 2013. To access the telephone replay, listeners
should dial(877) 870-5176 or (858) 384-5517 and entering conference ID number
10000701.

About Skullcandy, Inc.

Skullcandy is the original lifestyle and performance audio brand inspired by
the creativity and irreverence of youth culture. Skullcandy designs, markets
and distributes audio and gaming headphones and other accessory 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 the Company files 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 in San Clemente, California 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.

                          -Financial Tables Follow-



SKULLCANDY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of dollars, except share and per share information)
(unaudited)


                     Three Months Ended September Nine Months Ended September
                      30,                          30,
                     2013           2012          2013          2012
Net sales             $ 50,004       $ 71,000      $ 137,843     $ 196,716
Cost of goods sold    27,573         37,315        76,141        102,208
Gross profit          22,431         33,685        61,702        94,508
Selling, general and
administrative        21,917         23,065        72,179        70,687
expenses
Income (loss) from    514            10,620        (10,477)      23,821
operations
Other expense         153            219           443           592
Interest expense      125            184           339           455
Income (loss) before
income taxes and      236            10,217        (11,259)      22,774
noncontrolling
interests
Income tax expense    (842)          3,782         (4,568)       8,391
(benefit)
Net income (loss)     1,078          6,435         (6,691)       14,383
Net income (loss)
attributable to       1              (57)          (86)          (33)
noncontrolling
interests
Net income (loss)
attributable to       $ 1,077        $ 6,492       $(6,605)     $ 14,416
Skullcandy, Inc.
Net income (loss) per
common share                                                  
attributable to
Skullcandy, Inc.
Basic                 $ 0.04         $ 0.24        $(0.24)      $ 0.53
Diluted               0.04           0.23          (0.24)        0.51
Weighted average
common shares                                                 
outstanding
Basic                 27,764,914     27,461,021    27,728,489    27,361,173
Diluted               27,879,842     28,130,470    27,728,489    28,031,085



SKULLCANDY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
(unaudited)


                                As of          As of          As of
                               September 30, September 30, December 31,
                                2013           2012           2012
Assets                                                        
Current assets:                                               
Cash and cash equivalents       $ 34,697        $ 1,898         $ 19,345
Accounts receivable, net        41,222          60,022          76,307
Inventories                     48,744          55,387          41,567
Prepaid expenses and other      3,628           6,126           5,604
current assets
Deferred taxes                  3,399           3,164           2,943
Total current assets            131,690         126,597         145,766
Property and equipment, net     11,628          14,637          16,000
Intangibles                     11,361          12,854          12,481
Goodwill                        13,867          13,867          13,867
Deferred financing fees         211             221             161
Total assets                    $ 168,757       $ 168,176       $ 188,275
Liabilities and stockholders'                                 
equity
Current liabilities:                                          
Accounts payable                $ 16,858        $ 14,211        $ 22,887
Accrued liabilities             13,629          18,774          21,047
Bank line of credit             —               5,176           —
Total current liabilities       30,487          38,161          43,934
Deferred taxes                  2,133           1,128           2,219
Stockholders' equity:                                         
Common stock                    3               3               3
Treasury stock                  (43,294)        (43,294)        (43,294)
Additional paid-in capital      129,736         126,454         128,676
Accumulated other comprehensive (377)           398             (22)
income (loss)
Retained earnings               49,613          44,755          56,218
Total Skullcandy stockholders'  135,681         128,316         141,581
equity
Noncontrolling interests        456             571             541
Total stockholders' equity      136,137         128,887         142,122
Total liabilities and           $ 168,757       $ 168,176       $ 188,275
stockholders' equity



SKULLCANDY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)


                                                           Nine Months Ended
                                                            September 30,
                                                           2013      2012
Operating activities                                                 
Net income (loss)                                           $(6,691) $ 14,383
Adjustments to reconcile net income (loss) to net cash               
provided by (used in) operating activities:
Depreciation and amortization                               6,933     4,287
Loss on disposal of property and equipment                  1,991     —
Provision for doubtful accounts                             853       1,546
Deferred income taxes                                       (2,505)   (1,666)
Noncash interest expense                                    164       180
Stock-based compensation expense                            2,945     5,101
Changes in operating assets and liabilities:                         
Accounts receivable                                         34,220    (10,914)
Inventories                                                 (7,196)   (11,378)
Prepaid expenses and other current assets                   1,556     2,542
Accounts payable                                            (6,056)   (9,039)
Accrued liabilities                                         (7,441)   (6,320)
Net cash provided by (used in) operating activities         18,773    (11,278)
Investing activities                                                 
Purchase of property and equipment                          (3,434)   (7,796)
Net cash used in investing activities                       (3,434)   (7,796)
Financing activities                                                 
Net borrowings (repayments) on bank line of credit          —         (4,708)
Debt issuance costs                                         (214)     —
Proceeds from exercise of stock options                     167       1,758
Income tax benefit from stock option exercises              (87)      546
Net cash used in financing activities                       (134)     (2,404)
Effect of exchange rate changes on cash and cash            147       74
equivalents
Net increase (decrease) in cash and cash equivalents        15,352    (21,404)
Cash and cash equivalents, beginning of period              19,345    23,302
Cash and cash equivalents, end of period                    $ 34,697  $ 1,898
Supplemental cash flow information:                                  
Cash paid for interest                                      175       113
Cash paid for income tax                                    7,028     10,718
                                                                    

                               SKULLCANDY, INC.
                             SEGMENT INFORMATION
                                 (unaudited)

The North America segment primarily consists of Skullcandy and Astro Gaming
product sales to customers in the United States, Canada 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 months ended September30, 2013 and 2012, are $0.9
million and $3.0 million, respectively, that represent products that were sold
from the United States with a "ship to" location outside of North
America.Included in the North America segment for the nine months ended
September30, 2013 and 2012, are $4.9 million and $11.2 million, respectively,
that represent products that were sold from the United States with a "ship to"
location outside of North America.

                             Three Months Ended Nine Months Ended
                              September 30,      September 30,
                             2013      2012      2013       2012
Net sales                                                 
North America                 $ 34,793  $ 57,412  $ 102,464  $ 167,613
International                 15,211    13,588    35,379     29,103
Consolidated                  50,004    71,000    137,843    196,716
Gross profit                                              
North America                 15,108    26,753    44,853     79,585
International                 7,323     6,932     16,849     14,923
Consolidated                  22,431    33,685    61,702     94,508
Income (loss) from operations                             
North America                 (2,202)   7,426     (13,969)   17,698
International                 2,716     3,194     3,492      6,123
Consolidated                  $ 514     $ 10,620  $(10,477) $ 23,821



SKULLCANDY, INC.
RECONCILIATION OF NET INCOME (LOSS) TO NON-GAAP ADJUSTED NET INCOME (LOSS)
(in thousands of dollars)
(unaudited)


                                Three Months Ended     Nine Months Ended
                                 September 30,          September 30,
                                2013         2012       2013        2012
Net income (loss)                $ 1,078      $ 6,435    $(6,691)   $ 14,383
Net income (loss) attributable   1            (57)       (86)        (33)
to noncontrolling interests
Severance-related expenses, net  —            —          776         —
of tax benefit (1)
Legal and settlement expenses
associated with litigation, net  —            —          —           418
of tax benefit (2)
Exit costs associated with       613          —          1,319       —
office closure (3)
Non-GAAP adjusted net income     $ 1,690      $ 6,492    $(4,510)   $ 14,834
(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 nine months ended
September 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 nine months ended
September 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 $360 thousand and $763 thousand for the
three and nine months ended September 30, 2013, respectively.



SKULLCANDY, INC.
RECONCILIATION OF DILUTED EARNINGS (LOSS) PER SHARE – GAAP TO DILUTED EARNINGS
(LOSS)
PER SHARE – NON-GAAP
(unaudited)


                                       Three Months Ended Nine Months Ended
                                        September 30,      September 30,
                                       2013      2012      2013       2012
Diluted earnings (loss) per share -     $ 0.04    $ 0.23    $(0.24)   $ 0.51
GAAP
Severance-related expenses, net of tax  —         —         0.03       —
benefit
Legal and settlement expenses
associated with litigation, net of tax  —         —         —          0.02
benefit
Exit costs associated with office       0.02      —         0.05       —
closure
Diluted earnings (loss) per share –     $ 0.06    $ 0.23    $(0.16)   $ 0.53
non-GAAP

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