Iconix Brand Group reported a profit in the third quarter ended September 30 against a loss a year ago, due to fewer non-recurring charges in the latest period and a stabilization of sales across its portfolio of brands.

John Haugh, CEO of Iconix, commented, “I am pleased to report that Iconix delivered another solid quarter. Performance across the brands was mixed, but with our balanced portfolio of brands and the company’s attractive margins, we were able to achieve stable revenue, increased profits and healthy free cash flow. We look forward to sharing details about our vision and our growth plan at our upcoming investor day next Tuesday, November 15.”

Third Quarter 2016 Financial Results
Licensing Revenue: For the third quarter of 2016, licensing revenue was approximately $90.9 million, flat to the prior-year quarter. Revenue in the prior year’s third quarter included approximately $1.2 million of licensing revenue from the Badgley Mischka brand, for which there was no comparable revenue in the third quarter of 2016, due to its sale in the first quarter of 2016. The third quarter of 2016 benefitted from a $1.6 million favorable impact from foreign currency exchange rates primarily related to the Yen.

SG&A Expenses:  Total SG&A expenses were $50.6 million in the third quarter of 2016, a 19 percent decline as compared to $62.8 million in the third quarter of 2015.  The largest component of the decline is related to lower bad debt expense. In the third quarter of 2015, the company recognized approximately $12.2 million of accounts receivable reserves and write-offs related to a comprehensive review of the company’s license agreements, as compared to $1.8 million in the third quarter of 2016. In the third quarter of 2016, SG&A included approximately $3.1 million of special charges related to professional fees associated with the correspondence with the staff of the SEC, the SEC investigation, the previously disclosed class action and derivative litigations, and costs related to the transition of Iconix management, as compared to approximately $7.1 million in the third quarter of 2015. These special charges are excluded from the company’s non-GAAP results. Stock based compensation was approximately $1.2 million in the third quarter of 2016 as compared to approximately $3.9 million in the third quarter of 2015.

Operating Income: Operating income in the third quarter of 2016 was approximately $40.7 million, a 46 percent increase as compared to $27.8 million in the third quarter of 2015. The increase was largely related to 1) the men’s segment, which had a large write-off of bad debt in the prior-year quarter and 2) fewer special charges in the third quarter of this year.

Interest Expense: Interest expense in the third quarter of 2016 was approximately $24.9 million, as compared to interest expense of approximately $22.3 million in the third quarter of 2015. The increase is related to the new $300 million senior secured term loan that the company consummated in April. The company’s reported interest expense includes non-cash interest related to its outstanding convertible notes and amortization of deferred financing costs. Cash interest paid in the third quarter of 2016 was approximately $19.5 million as compared to approximately $11.9 million in the prior-year quarter.

Other Income: In the third quarter of 2016, the company recognized a gain of approximately $10.2 million related to the sale of its minority interest in Complex Media, and a gain of approximately $4.2 million related to the repurchase of a portion of the company’s 2018 convertible notes at a discount, both of which are excluded from the company’s non-GAAP results.

GAAP Net Income And GAAP Diluted EPS:  GAAP net income was approximately $15.2 million in the third quarter of 2016, as compared to a loss of approximately $5.4 million in the third quarter of 2015. GAAP diluted EPS in the third quarter of 2016 was approximately 27 cents as compared to a loss of 11 cents in the third quarter of 2015.

Non-GAAP net income was approximately $11.1 million in the third quarter of 2016, a 114 percent increase as compared to $5.2 million in the third quarter of 2015. Non-GAAP diluted EPS was approximately 19 cents as compared to 11 cents in the third quarter of 2015.

Balance Sheet And Liquidity
The company ended the quarter with $239.9 million of total cash (including restricted cash of approximately $117.8 million) and $1.35 billion face value of debt. In April 2016, the company closed on a new $300 million senior secured term loan credit facility, the proceeds of which generally were used to repay the company’s previously outstanding convertible notes due June 2016. In the second and third quarters of 2016, the company opportunistically repurchased approximately $105 million of its 2018 convertible notes at a discount for approximately $35 million of cash and 7,408,334 shares of the company’s common stock .

Free Cash Flow
The company generated approximately $24.8 million of free cash flow in the third quarter of 2016, as compared to approximately $40 million in the third quarter of 2015. The decline partially reflects timing of certain royalty payments, which have since been collected in the fourth quarter and higher interest costs in 2016 as compared to 2015. As it relates to full-year guidance, in the fourth quarter we expect a majority of free cash flow to come from cash flow from operations, which includes a tax benefit similar to last year, and an additional $20 million from past trademark sales, JV formations, and cash received from notes receivable from licensees.

2016 Guidance
• The company expects full-year 2016 revenue to be $3 million to $5 million below its previously expected estimate, which was at the low end of its $370 million to $390 million guidance. This reflects delayed timing for some new men’s programs, macro conditions in Europe and some retail resets.
• The company continues to expect to achieve 2016 non-GAAP EPS in the range of $1.06 to $1.21, but is trending toward the low-end of the range.
• The company expects GAAP EPS to be approximately 4 cents below its previous guidance range of 93 cents to $1.08 to reflect higher than expected professional fees associated with the previously disclosed SEC investigation, which are excluded from the company’s non-GAAP results.
• The company expects to continue to generate significant free cash flow and is maintaining its 2016 free cash flow guidance of $169 million to $184 million.

Completion Of SEC Review
On November 4, 2016, the company received a letter from the staff of the U.S. Securities and Exchange Commission – Division of Corporate Finance, formally communicating that the staff has completed its review of the company’s forms 10-K for the years ending December 31, 2013 through 2015.

Iconix Brand Group’s brands include: Candie’s, Bongo, Joe Boxer, Rampage, Mudd, Mossimo, London Fog, Ocean Pacific, Danskin, Rocawear, Cannon, Royal Velvet, Fieldcrest, Charisma, Starter, Waverly, Zoo York, Sharper Image, Umbro, Lee Cooper, Ecko Unltd., Marc Ecko Artful Dodger and Strawberry Shortcake. In Addition, Iconix owns interests in The Material Girl, Peanuts, Ed Hardy, Truth Or Dare, Modern Amusement, Buffalo, Nick Graham, Hydraulic and Pony.

Photo courtesy Starter