Skullcandy’s IPO; What’s New?
I guess it was around the time of the SIA show in Denver that Skullcandy announced they were going to do an initial public offering. They came out with the draft of the prospectus, and I took a pretty detailed look at it.
Typically, the “quiet period” after you file with the SEC lasts 40 to 90 days while they review your prospectus (known as a form S-1). When 90 days passed and I hadn’t heard anything, I got a bit curious. The company isn’t allowed to tell me anything so I went to the Security and Exchange Commission web site and searched for Skullcandy documents. Guess what? I found a revised S-1 dated April 28th.
The original S-1 had an income statement for the nine months ended September 30, 2010 that showed (in millions of dollars):
Net Sales $95,940
Cost of Goods Sold $46,629
Gross Profit $49,311
Selling, General and
Admin. Expenses $30,206
Operating Income $19,105
Other (Income) Expense $14
Interest Expense $6,559
Net Income $7,645
The amended S-1 shows the income statement for the whole year ended December 31, 2010 and the picture is a bit different.
Net Sales $160,583
Cost of Goods Sold $75,078
Gross Profit $85,505
Selling, General and
Admin. Expenses $67,602
Operating Income $17,903
Other (Income) Expense $14,556
Interest Expense $8,387
Net Income (Loss) $(9,723)
If you look back at the sales numbers for the 2009 complete year, you see that sales in 2010 grew nearly 36%. The gross profit margin was 48.6% in 2009. It was 53.2% in 2010. That’s a good improvement. So how did they turn a nine month profit of $7.6 million into a loss of $9.7 million for the year and $17.3 million for the final quarter of 2010?
For the whole 2010 year, compared to 2009, Selling, General and Administrative Expenses rose from $27 million to $67 million. This included, in the fourth quarter, “…one-time charges of $17.5 million in management incentive bonuses and $2.9 million payable as additional consideration to certain employee stockholders pursuant to the securities purchase and redemption agreement.”
The “Other” expense of $14.6 million in the fourth quarter “…consisted primarily of $14.6 million resulting from recording the fair value of amounts payable to non-employee stockholders as additional consideration pursuant to the securities purchase and redemption agreement.”
They also disclosed that “Additionally during the quarters ended March 31, June 30, September 30 and December 31, 2010, we recognized other expense of $1.5 million, $2.2 million, $3.7 million and $7.2 million, respectively, which represents the changes in the fair value of amounts payable as additional consideration to non-employee stockholders pursuant to the securities purchase and redemption agreement.”
Meanwhile, over on the year-end balance sheet, there’s a stockholders’ equity deficit of $22.7 million, up from $18.8 million a year ago. Next to that is an unaudited pro-forma balance sheet for the same date that “… gives effect to the conversion of all outstanding shares of preferred stock into 321,980 shares of common stock, the conversion of the convertible note into 275,866 shares of common stock, the payment of accrued interest on the convertible note and the reduction of deferred debt issuance and debt discounts related to the convertible note, as if an initial public offering occurred on December 31, 2010.”
Doing all this gets their stockholders’ equity up to $6.4 million. Against that, the pro forma balance sheet shows total liabilities of $77 million. That’s a debt to equity ratio of 12 times and that’s high. The current ratio, at 2 to 1 is fine.
Here’s how I read this. Skullcandy is counting on the success of its IPO to reduce its leverage and give it the working capital it needs to execute on its plan. Shareholders and executives have taken a bunch of cash out of the company in the fourth quarter, resulting in a big loss. They were entitled to do that under existing agreements, but how does it look to a potential stock purchaser? Those potential investors also see a company whose 2008 net income of $13 million fell to $3.5 million in 2009 even as sales grew 47% to $118 million. Now, on sales of $160 million, there’s a loss of almost $10 million.
It can be explained as I did above. But if you have to explain, you have a problem. I’m not quite sure people are in a hurry to invest in companies that lose money, even with a valid explanation. It will be interesting to see if this deal happens and what the pricing is. It may be even more interesting to see what Skullcandy does if it doesn’t happen.
In the short term–they may be able to continue to grow. Looking at their S-1, the company wants to mimick its U.S. marketing strategy to other countries outside of the US (less competitive–at least right now). This seems to be working (low hanging fruit). They’ve hired guys that know international markets, trying to get new distributors, etc. Much larger market outside the U.S., especially with the increased competition in the U.S.: Nixon, Monster, etc.
But I think investors might ignore the long-term prospect and issues and buy in, executives will get rich, and investors will questions their decision to buy. We see this over and over again.
Differences of opinion are what make markets. Look at the recent IPO of Fusion 1-0 (FIO). There’s one that has little or no earnings at present but is holding on to its huge post IPO gains.
I still believe the IPO road show will likely be launched this week.
Frank
Me too.
J.
The announcement is out. $17-19 price range, Target date July 19 for pricing.
Frank
Hi Frank,
I saw the amended S-1 yesterday and posted a short article on the numbers.
J.
We’ll see if they price tomorrow–interesting to see what happens.
Maybe we’ll see their smiling faces opening the market tomorrow! They certainly picked a good day to be pricing.
J.
I think they will price it tonight. Apparently road show has gone well, and they are well over subsribed .