Skullcandy, Inc., the maker of headphones, earbuds and gaming headsets targeting the action sports and outdoor space, reported fourth quarter net sales increased 29.0 percent to $83.4 million, with domestic net sales increasing 27.0 percent, international net sales increasing 18.8 percent and online net sales increasing 73.0 percent.

Fourth quarter GAAP net income increased to $12.3 million, or 44 cents per diluted share. Fourth quarter adjusted net income increased 22.5 percent to $13.2 million, or 47 cents per share. Adjusted net income excludes $831 thousand of after tax expenses related to a lawsuit and settlement with Monster Cable Products, Inc.

Annual net sales increased 44.8 percent to $232.5 million, with domestic net sales increasing 34.0 percent, international net sales increasing 54.2 percent and online net sales increasing 163.2 percent

Annual GAAP net income increased to $18.6 million, or 79 cents per diluted share

Annual adjusted net income increased 27.7 percent to $23.5 million, or $1.00 per diluted share. Adjusted net income excludes $3.6 million of one-time charges related to a previously disclosed 2008 capital transaction and $1.3 million of after tax expenses related to a lawsuit and settlement with Monster Cable Products, Inc.

Jeremy Andrus, Skullcandy's President and CEO, stated, “We are pleased with our fourth quarter results and momentum heading into 2012. We ended the best year in Skullcandy's history with strong net sales growth and sequential margin improvement. We made key acquisitions during the year and continue to make investments in critical areas of the business to support long-term growth, including product development, international expansion, interactive media and point of sale merchandising.”

Andrus continued, “We are very excited about the evolution of our products and brand going into 2012. We continue to evolve the Skullcandy brand around aspirational design and audio performance. New headphone models will feature refined styling and our new proprietary sound profile dubbed Supreme Sound. We unveiled the brand's updated product collection, packaging, and positioning at nine tradeshows around the world over the past two months, and the response has been extremely positive. More than ever before, Skullcandy is uniquely positioned in the market as a true performance lifestyle audio brand.”

Fourth Quarter Results

Net sales in the fourth quarter of 2011 increased 29.0 percent to $83.4 million from $64.6 million in the same quarter of the prior year. In the fourth quarter of 2011, domestic net sales increased 27.0 percent to $59.1 million, international net sales increased 18.8 percent to $15.3 million, and online net sales increased 73.0 percent to $9.0 million.

Gross profit in the fourth quarter of 2011 increased 15.0 percent to $41.6 million from $36.2 million in the same quarter of the prior year. Gross margin was 49.9 percent in the fourth quarter of 2011 compared to 47.5 percent in the third quarter of 2011 and 56.0 percent in the fourth quarter of 2010. The decline in gross margin in the fourth quarter 2011 from the fourth quarter of 2010 was the result of a shift in sales mix to certain products that carry temporarily lower gross margins and inventory acquired at a higher cost basis in the acquisition of Kungsbacka 57 AB and the transition to a direct model in Europe. The Company anticipates gross margin increasing on a full-year basis in 2012, as new sourcing initiatives and a higher mix of direct international sales are expected to benefit gross margin.

Selling, general and administrative expenses in the fourth quarter 2011 decreased 43.4 percent to $21.2 million and included $1.3 million of legal and settlement expenses related to a lawsuit with Monster Cable Products, Inc. (“Monster”). The expenses in 2010 included $17.5 million in compensation expense related to management incentive bonuses and $2.9 million in compensation expense as additional consideration to certain employee stockholders pursuant to the securities purchase and redemption agreement. The 2008 securities purchase and redemption transaction was finalized upon completion of our initial public offering.

GAAP net income in the fourth quarter of 2011 was $12.3 million, or 44 cents per diluted share, based on 28.0 million diluted weighted average common shares outstanding. Net loss in the same quarter of the prior year was $9.7 million, or $(0.69) per diluted share, based on 14.1 million diluted weighted average common shares outstanding.

Adjusted net income in the fourth quarter of 2011 which excludes $831 thousand, net of tax benefit, of legal and settlement expenses related to Monster was $13.2 million, or 47 cents per diluted share, based on 28.0 million diluted weighted average common shares outstanding. Adjusted net income in the same quarter of the prior year, which excludes $20.5 million in expenses related to the 2008 securities purchase and redemption agreement, was $10.7 million, or 54 cents per diluted share, based on 19.7 million diluted weighted average common shares outstanding.

EBITDA in the fourth quarter of 2011 increased to $21.4 million from $(8.0) million in the same quarter of the prior year. Adjusted EBITDA increased 16.9 percent to $22.7 million from $19.4 million in the same quarter of the prior year. For a reconciliation of EBITDA and adjusted EBITDA to net income, see the accompanying tables at the end of this release.

Recent Developments

On Nov. 23, 2010, Monster filed a lawsuit in Utah state court against Skullcandy and one of our newly hired employees alleging, among other things, misappropriation of trade secrets and unfair competition. On February 15, 2012, the parties reached a full settlement. In connection with the settlement, Skullcandy incurred legal and settlement expenses, net of tax benefit, of $1.3 million in 2011 and expects to incur an additional estimated $800 thousand in legal expenses in the first quarter of 2012 associated with the matter. These represent one-time expenses associated with the settlement and the company does not expect any additional expenses associated with this matter after the first quarter of 2012.

Outlook

For the full year 2012, the company expects net sales of $275 million to $295 million and adjusted diluted earnings per share of $1.10 to $1.20. The adjusted diluted earnings per share excludes estimated first quarter legal expenses of approximately $800 thousand related to Monster that will be recorded in the first quarter of 2012. The 2012 adjusted diluted earnings per share range assumes a tax rate of approximately 35 percent and diluted weighted average shares outstanding of approximately 28.7 million.