Skullcandy Files It’s 10-Q in the Middle of Going Private

Skull filed its 10-Q for the June 30 quarter on August 9^th.   As you are probably aware, there are a couple of dueling offers to take the company private out there.  At this point, I’d be surprised if they didn’t end up private- I’m just not sure of the price or who the owner will be.

Because, I assume, of that pending and probable transaction, there was no conference call.  So my comments here are based on the 10-Q and press release.

As they are busily negotiating a deal, I imagine they would have liked their results to be better.  Revenue, at $57.3 million for the quarter ended June 30 was essentially unchanged from the same quarter last year.  Domestic sales were up 3.9% from $40.7 to $42.3 million.  That was “…primarily due to increased sales of gaming products.”  Wonder how headphones are doing.  International sales fell 10.2% from $16.7 to $15 million “…primarily due to decreased sales in China.” and represented 26.1% of total revenue in this year’s June 30 quarter.

The gross profit margin fell from 42.7% to 41.1%.  The decline was explained in the press release as the result of the continuing cleanup of Skull’s operation in China.  In the 10-Q they provide a more nuanced explanation that’s less China focused.

“This decrease reflects product mix shifts to lower margin wireless audio products as percentage of net sales, increased gaming product sales, increased warehousing costs as a percentage of net sales, together with higher retailer promotional credits and returns in the U.S. and China. Wireless audio and gaming products typically have lower margins which are partially driven by higher third party technology and licensing costs.”

That doesn’t sound like just a China issue.

SG&A expense rose 8.6% from $23.5 to $25.5 million.  As a percent of sales it was up from 40.9% to 44.6%.

“The increase in SG&A expenses is primarily due to certain transaction costs related to our pending sale, customer bankruptcies, litigation, personnel related expenses, demand creation, and research and innovation expenses. These increases are partially offset by decreases in administrative costs.”

There was an operating loss of $2 million compared to an operating profit of $1 million in last year’s quarter.  Domestically, they had an operating loss of $97,000 compared to a loss of $1,000 in last year’s quarter.  Internationally, they had an operating loss of $1.875 million in this year’s quarter compared to a profit of $1.026 million last year.

The net loss was $1.57 million compared to a profit last year of $1.15 million.  They note in the press release that, “…our overall results were hampered by some temporary headwinds including the ongoing clean-up of our China region and several retailer bankruptcies around the world…”

It never ceases to amaze me how most companies have “temporary” or “one time charges” most quarters and years which somehow, it’s implied, we shouldn’t be all that worried about because we’re past it and it won’t happen again.  Yet, there’s always a new and somehow unexpected one next quarter or year.  You know, it’s just the nature of business in a highly competitive, fast paced environment that stuff happens.  It’s going to continue to happen.  It’s not going to be seen coming.  Companies seem to want us to evaluate them as though that wasn’t true.  Drives me nuts.

I suppose I could spend some time on the balance sheet, but with the deal very likely, it doesn’t seem worthwhile.  I’ll just note that cash doubled to $41 million and inventory fell from $61.2 to $44.5 million.  Shareholders’ equity rose about $5 million to $156 million.

I hope Skull gets the deal done.  Regular readers know I’m a big believer on focusing on the bottom line, rather than sales growth right now.  You also know I think it’s damn hard for a company like Skull to be public because getting the growth they need may not be compatible with building their brand, which they have to do.  I’ll miss seeing Skull’s financials, but I think they are more likely to be successful as a private company.