Iconix Brand Group Inc. reported licensing revenue in the first quarter was $58.7 million, a 13 percent decline as compared to $67.7 million in the prior year quarter.
Revenue in the prior year’s first quarter included approximately $1.4 million of licensing revenue from the Sharper Image brand and $0.2 million of licensing revenue from the Badgley Mischka brand, both of which were sold in 2016. As a result, there was no comparable revenue in the first quarter of 2017. Excluding revenue from the Sharper Image and Badgley Mischka brands, revenue declined approximately 11 percent in the first quarter of 2017.
Total SG&A expenses in the first quarter of 2017 were $25.4 million, a 22 percent decrease as compared to approximately $32.6 million in the first quarter of 2016. The largest driver of the decline was related to lower compensation expense in the first quarter of 2017.
Special charges which are related to professional fees associated with the correspondence with the Staff of the SEC which was completed in November 2016, the SEC investigation, the class action and derivative litigations, and costs related to the transition of Iconix management were down approximately $3.3 million in the first quarter of 2017. SG&A in the first quarter of 2017 included approximately $2.2 million of special charges as compared to approximately $5.5 million in the first quarter of 2016. These special charges are excluded from the company’s non-GAAP net income and non-GAAP EPS. Excluding special charges, SG&A expenses were down approximately 14 percent in the first quarter of 2017.
Operating Income
Operating Income in the first quarter of 2017 was $33.6 million, a 27 percent decline from $46.3 million in the first quarter of 2016. Operating income in the first quarter of 2016, included $11 million in gains on sales of trademarks primarily related to the sale of the Badgley Mischka brand and approximately $1.3 million of operating income related to the Sharper Image brand for which there was no comparable operating income in 2017. Excluding these items, operating income in the first quarter of 2017 was down approximately 2 percent.
Interest Expense
Interest expense in the first quarter of 2017 was $15 million, as compared to interest expense of $19.5 million in the first quarter of 2016. The company’s reported interest expense included non-cash interest related to its outstanding convertible notes of $4 million in the first quarter of 2017 and $7.3 million in the first quarter of 2016. Excluding the non-cash interest related to the company’s outstanding convertible notes, non-GAAP interest expense was $11 million in the first quarter of 2017, as compared to $12.2 million in the first quarter of 2016.
Other Income
In the first quarter of 2017, the company recognized a $5.5 million loss related to the early extinguishment of a portion of the company’s term loan that was paid with the proceeds from the sale of the Sharper Image brand. The company has excluded this loss from its non-GAAP results.
GAAP Net Income And GAAP Diluted EPS
GAAP net income from continuing operations for the first quarter of 2017 was $4.4 million as compared to $14.6 million in the first quarter of 2016. GAAP diluted EPS from continuing operations for the first quarter of 2017 was 6 cents as compared to approximately 29 cents in the first quarter of 2016.
Non-GAAP Net Income And Non-GAAP Diluted EPS
Non-GAAP net income from continuing operations for the first quarter of 2017 was $12.3 million, as compared to $23.5 million in the first quarter of 2016.
Non-GAAP diluted EPS from continuing operations for the first quarter of 2017 was 21 cents as compared to 47 cents in the first quarter of 2016. First quarter 2016 results include approximately 14 cents of EPS related to gains on sales of trademarks, for which there are no comparable earnings in 2017.
Going forward, the company will also report non-GAAP net income and non-GAAP EPS adjusted for non-cash taxes related to the amortization of wholly-owned intangible assets amortizable for U.S. income tax purposes. In the first quarter of 2017, the cash benefit from the amortization was $7.3 million, as compared to $7.5 million in the first quarter of 2016. Including this tax adjustment, non-GAAP net income in the first quarter of 2017 was $19.6 million as compared to $31 million in the first quarter of 2016; and non-GAAP EPS for the first quarter of 2017 was 34 cents as compared to 62 cents in the first quarter of 2016.
Discontinued Operations
Today, the company announced that it has signed a definitive agreement to sell its entertainment segment, which includes the Peanuts and Strawberry Shortcake brands. As a result, the company has reported the results of the entertainment segment as a discontinued operation.
In the first quarter of 2017, the company reported a net loss from discontinued operations of $8.7 million or 15 cents per share. This includes an interest expense allocation of approximately $6.1 million related to the mandatory debt payment that will be made as a result of the sale of the entertainment segment, and a $15.7 million loss related to the early extinguishment of the portion of the Term Loan that will be paid down with the proceeds from such sale.
Excluding the loss from the early extinguishment of debt and a small foreign currency translation impact related to the entertainment segment, which the company deducts for non-GAAP reporting, non-GAAP net income from discontinued operations for the first quarter of 2017 was $1.4 million or 2 cents per diluted share.
Balance Sheet And Liquidity
The company ended the first quarter of 2017 with approximately $208 million of total cash and $1.2 billion face value of debt. Over the past 12-months, the company has reduced debt by approximately $300 million. The company expects to pay down an additional $362 million of debt with proceeds from the sale of the company’s entertainment segment and cash on the balance sheet. Following this transaction, the company expects to have a total cash balance of approximately $105 million, and a total debt balance of approximately $840 million.
Free Cash Flow
The Company generated approximately $13 million of free cash flow from continuing operations in the first quarter of 2017, as compared to approximately $36 million in the first quarter of 2016. In the first quarter of 2016, the Company’s free cash flow included approximately $17.3 million of cash from the sale of the Badgley Mischka brand and the Company’s equity interest in the BBC and Ice Cream brands.
John Haugh, CEO of Iconix commented, “Over the past year, we have been focused on two key priorities- improving the balance sheet and driving organic growth. I am pleased to say that with the strategic sale of our entertainment segment, we can significantly reduce our debt and pay down a term loan that is expensive and highly restrictive. Further, we believe we can generate the most value and growth for our company with a portfolio that is focused on businesses where we believe we have a leadership position- fashion, active and home.
As it pertains to organic growth, there have been some challenges, but we are working on initiatives that should drive improved revenue performance in the back half of the year. In addition, we have the right expense controls in place to be able to mitigate revenue risk, giving us further confidence in our full year outlook.”
The following guidance is presented on a continuing operations basis and has been updated to reflect the sale of the company’s entertainment segment, which is being reported as discontinued operations.
2017 Guidance
The company expects full year 2017 revenue to be in a range of approximately $235 million to $245 million. This compares to revenue of approximately $245 million in 2016, when excluding $113 million of revenue from the entertainment segment, and $ 9.9 million of revenue from other divested brands including Sharper Image.
The company is revising its 2017 GAAP EPS to 29 cents to 44 cents from 43 cents to 58 cents to reflect an additional anticipated loss related to the early extinguisment of debt with existing cash on the balance sheet. This loss is excluded from the company’s non-GAAP metrics.
The company is maintaining its 2017 non-GAAP EPS guidance of 70 cents to 85 cents. The company expects the elimination of earnings related to the entertainment segment to be largely offset by the interest expense reduction associated with paying down debt.
Non-GAAP EPS adjusted for wholly owned U.S. intangibles tax amortization: In 2017, the company expects to realize $28 million or 51 cents of earnings per diluted share of tax savings related to the amortization of the company’s wholly owned intangible assets amortizable for U.S. income tax purposes. Adjusting for this tax benefit, the company expects non-GAAP EPS for 2017 to be in a range of $1.21 to $1.36. This tax amortization is an ongoing benefit of the business model that the company believes is useful in evaluating the business. In 2016, the company recognized $28 million or 53 cents per diluted share of tax savings related to the amortization of intangible assets.
The company is maintaining its 2017 free cash flow guidance of $105 million to $125 million.
Photo courtesy Starter