Iconix Brand Group, as expected, posted a steep loss in the third quarter due to an impairment charge and indicated it will likely not be able to repay its convertible notes due March 2018.
• 3Q 2017 revenue of $53.2 million, a 12 percent decline from prior year quarter
• 3Q 2017 revenue excluding divested brands and deconsolidated territories down 7 percent
• Managing expenses, SG&A down 28 percent
• Trademark and goodwill impairment charge of $625.5 million
• 3Q 2017 operating loss of $595.9 million
• 3Q 2017 adjusted operating income of $31.6 million, a 10 percent increase from prior year quarter
John Haugh, CEO of Iconix commented, “While our revenue was down in the quarter, we are still tracking to be within our previously issued guidance, and have been able to successfully manage expenses. We firmly believe that in today’s environment brands are more important than ever. We remain keenly focused on actively managing our brands in an effort to expand our market reach with both our existing distribution partners and into new partners. The balance sheet also remains a top priority, and we are working towards a solution.”
Third Quarter 2017 Financial Results
For the third quarter of 2017, licensing revenue was $53.2 million, a 12 percent decline as compared to $60.5 million in the prior year quarter. Revenue in the prior year’s third quarter included approximately $2.3 million of licensing revenue from the Sharper Image brand which was sold in the fourth quarter of 2016 and approximately $1.3 million of revenue from the company’s Southeast Asia joint venture which was deconsolidated in the second quarter of 2017. As a result, there was no comparable revenue for these items in the third quarter of 2017. Excluding Sharper Image and Southeast Asia, revenue declined approximately 7 percent in the third quarter of 2017.
Total SG&A expenses in the third quarter of 2017 were $21.5 million, a 28 percent decrease as compared to approximately $29.9 million in the third quarter of 2016. The decline was primarily related to lower compensation expense and lower advertising expense some of which will shift into the fourth quarter.
Trademark and Goodwill Impairment:
In the third quarter of 2017, the company recorded a non-cash trademark impairment charge of approximately $521.8 million, which is comprised of $227.6 million in the women’s segment, $135.9 million in the men’s segment, $69.5 million in the home segment and $88.7 million in the international segment to reduce various trademarks in those segments to fair value. The company also recorded a non-cash goodwill impairment charge of $103.9 million due to impairment of goodwill in the women’s segment, men’s segment and home segment of $73.9 million, $1.5 million and $28.4 million respectively.
On December 6, Iconix issued preliminary third-quarter results sand said it would recognize a non-cash intangible asset impairment charge of approximately $500 million to $750 million primarily related to the women’s segment.
Operating Income for the third quarter of 2017 was a loss of approximately $595.9 million, as compared to earnings of $31.1 million in the third quarter of 2016.
Operating Income in the third quarter of 2017 included a trademark and goodwill impairment of $625.5 million, a loss on termination of licenses of $2.8 million and a gain on sale of trademarks of $0.9 million. Excluding these items Adjusted Operating Income for the third quarter of 2017 was approximately $31.6 million. Operating Income in the third quarter of 2016 included approximately $2.1 million of income related to the Sharper Image brand, which the company sold in the fourth quarter of 2016, as a result there is no comparable income in the current period. Adjusting for the items above, Operating Income in the third quarter of 2017 increased approximately 10 percent.
Interest expense in the third quarter of 2017 was $16.9 million, an 8 percent decline as compared to interest expense of $18.3 million in the third quarter of 2016. The company’s reported interest expense includes non-cash interest related to its outstanding convertible notes of $4.0 millionin the third quarter of 2017 and $4.2 million in the third quarter of 2016. Excluding the non-cash interest related to the company’s outstanding convertible notes, interest expense was $12.9 million in the third quarter of 2017, as compared to $14.1 million in the third quarter of 2016.
In the third quarter of 2017, the company recognized a $2.7 million gain related to a payment received from the sale of its minority interest in Complex Media last year. This compares to a gain of $10.2 million in the third quarter of 2016 at the time of sale. In the third quarter of 2017, the company recognized a loss of $1.5 million related to the repurchase of a portion of the company’s 2018 convertible notes, as compared to a gain of $4.2 million in third quarter of 2016. The company has excluded these items from its non-GAAP results.
Provision for Income Taxes:
The effective income tax rate for the third quarter of 2017 is approximately 4.9 percent which resulted in a $29.6 million income tax benefit, as compared to an effective income tax rate of 35.6 percent in the prior year quarter which resulted in the $9.4 million income tax expense. The decrease in the effective tax rate is primarily a result of the establishment of a $170 millionvaluation allowance on the company’s deferred tax assets, which had the effect of reducing the tax benefit on the pretax loss which lowers the effective tax rate.
GAAP Net Income and GAAP Diluted EPS:
GAAP net income from continuing operations for the third quarter of 2017 was a loss of $550.6 million as compared to earnings of $14.2 million in the third quarter of 2016. GAAP diluted EPS from continuing operations for the third quarter of 2017 was a loss of $9.64 as compared to diluted earnings per share of approximately $0.25 in the third quarter of 2016.
Non-GAAP Net Income and Non-GAAP Diluted EPS:
Non-GAAP net income from continuing operations for the third quarter of 2017 was $13.9 million, a 35 percent increase as compared to $10.3 million in the third quarter of 2016.
Non-GAAP diluted EPS from continuing operations for the third quarter of 2017 was $0.24, a 35 percent increase as compared to $0.18 in the third quarter of 2016.
Balance Sheet and Liquidity:
The company ended the third quarter of 2017 with approximately $28.9 million of unrestricted domestic cash, $12.4 million of unrestricted domestic cash in consolidated JV’s, $9.7 million of unrestricted international cash, $280 million of restricted cash, and $1.0 billion of debt.
Subsequent to the end of the third quarter, the company amended its senior secured term loan and reduced the size of the credit facility by $75 million to $225 million. Prior to the amendment, the company already used $59 million of the escrow proceeds made available under the original term loan facility to repay a portion of the 2018 convertible notes. As part of the amendment, the remaining term loan balance of $165.7 million was restructured as a delayed draw term loan to be utilized to refinance the company’s 2018 convertible notes when they come due in March 2018, subject to satisfaction of certain conditions precedent.
Currently the company has approximately $44.7 million of unrestricted domestic cash, $16.6 million of unrestricted domestic cash in consolidated JV’s, $12.7 million of unrestricted international cash and $47.7 million of restricted cash, and $827 million of debt.
At this time, management said it does not believe that cash from future operations and its currently available cash and capacity for additional financings under its Senior Secured Notes facility (to the extent available) will be sufficient to allow for the repayment of its 1.50 percent Convertible Notes’ upon maturity in March of 2018. While the First Amendment provided for the availability of the Delayed Draw Term Loan Facility, due to various conditions prerequisite (many of which are related to its financial performance) to the company being able to draw down on amounts available, the company said it may not be able to utilize the Delayed Draw Term Loan in order to repay the 1.50 percent Convertible Notes when they become due.
In order to seek to satisfy these requirements, we continue to actively evaluate various capital raising options to repay debt and add additional liquidity to the company’s balance sheet as well as strategic alternatives, which could include the sale of certain assets or of the entire company.
Free Cash Flow
The company generated approximately $1.4 million of free cash flow in the third quarter of 2017, as compared to approximately $27.9 million in the third quarter of 2016. The decline in free cash flow is partially related to a $7 million state and local income tax audit assessment that the company paid in the third quarter of 2017. The company’s reported free cash flow, is adjusted to deduct expenses associated with the sale of the entertainment segment, including a US federal income tax payment of $15 million paid in the third quarter resulting from the tax related to the gain on the sale of the entertainment business.
The company is updating its guidance for 2017 as follows:
• The company expects revenue to be at the low end of its guidance range of $225 million to $235 million.
• The company is adjusting it 2017 GAAP EPS guidance to reflect the impairment charge and now expects 2017 GAAP EPS, to be in a range of a loss of ($9.89) to ($9.79). Previously, it expected EPS between ($0.06) to ($0.01).
• The company expects 2017 non-GAAP EPS to be slightly above its guidance range of $0.65 to $0.70.
• The company expects full year 2017 free cash flow to be at the low end of its guidance range of $65 million to $82 million, the same as previous guidance.