Iconix Brand Group Inc. reported earnings in 2017 declined, but results were in line with guidance and the company repaid a current debt offering.

John Haugh, CEO of Iconix, commented, “2017 continued to be a year of change as we refinanced our balance sheet and refined our business model. Importantly, we enter 2018 better-positioned to leverage our brand portfolio anchored on our strategic focus to actively manage brands with our existing partners, while exploring new opportunities to expand our reach.”

Haugh noted, “The launch of Starter with Amazon in 2017 and our recently announced multiyear agreement with Target for the Umbro brand demonstrates our ability to position our brands with the right long-term partners to maximize market presence and contribution to Iconix.

With our near-term debt obligations satisfied today, we are now able to apply renewed attention to our business initiatives and lay the foundation for sustained, organic growth.”

2018 Guidance:

  • Previously-announced full-year revenue guidance of $190 million to $220 million
  • On track to deliver approximately $12 million of full-year cost-savings aligning expenses with revenue base
  • GAAP net income guidance of $7 million to $17 million, and $20 million to $30 million on a Non-GAAP basis
  • Full year free cash flow of approximately $50 million to $70 million

Non-GAAP net income and free cash flow are non-GAAP metrics, and reconciliation tables for each are included.

Unless otherwise noted, the following represents financial results for continuing operations only.

Fourth Quarter & Full Year 2017 Financial Results

Licensing Revenue:

For the fourth quarter of 2017, licensing revenue was $52.3 million, an 11 percent decline as compared to $58.8 million in the prior year quarter. Revenue in the fourth quarter of 2016 included approximately $4.0 million of licensing revenue from the Sharper Image brand, which was sold in the fourth quarter of 2016, and $1.3 million of licensing revenue from the company’s Southeast Asia joint venture, which was de-consolidated in the second quarter of 2017. As a result, there was no comparable revenue for these items in the fourth quarter of 2017. Excluding Sharper Image and Southeast Asia, revenue declined approximately 2 percent for the fourth quarter of 2017.

For the full year 2017, licensing revenue was $225.8 million, an 11 percent decline as compared to $255.1 million in 2016. Revenue in 2016 included approximately $9.3 million of licensing revenue from the Sharper Image brand, $0.2 million of licensing revenue from the Badgley Mischka brand and $2.6 million of licensing revenue from the Southeast Asia joint venture, for which there was no comparable revenue in 2017. Excluding Sharper Image, Badgley Mischka and Southeast Asia, revenue declined approximately 7 percentfor the full year 2017.

Segment Data (non-GAAP for exclusion of divested brands and deconsolidated territories):
($, 000’s)

Adjusted Revenue by Segment Three Months ended Dec. 31,   Year ended Dec. 31,
($, 000’s) 2017 2016* % Change 2017 2016* % Change
Womens 20,013 18,763 7% 96,833 106,299 -9%
Mens 8,212 11,807 -30% 39,780 48,635 -18%
Home 6,132 6,547 -6% 28,807 29,096 -1%
International 17,942 16,358 10% 60,413 59,036 2%
Total Adjusted Revenue 52,299 53,475 -2%   225,833 243,066 -7%
*Revenue is adjusted for revenue from Sharper Image, Badgley Mischka and the Southeast Asia joint venture

SG&A Expenses:

Total SG&A expenses in the fourth quarter of 2017 were $40.9 million, an 11 percent increase compared to $36.8 million in the fourth quarter of 2016. In the fourth quarter of 2017, SG&A included $2.5 million of special charges related to professional fees associated with the SEC investigation, the class action and derivative litigations, continuing correspondence with the Staff of the SEC and costs related to the transition of Iconix management, as compared to approximately $3.9 million in the fourth quarter of 2016. These special charges are excluded from the company’s non-GAAP net income and EPS. Excluding special charges, SG&A expenses were up 17 percent in the fourth quarter of 2017. The increase was primarily related to greater advertising expense in the fourth quarter versus the prior year due to a shift from third to fourth quarter spending in 2017. Stock-based compensation was $4.9 million in the fourth quarter of 2017, as compared to $2.1 million in the fourth quarter of 2016.

For the full year 2017, total SG&A expenses were $114.6 million, an 11 percent decrease as compared to $128.8 million in 2016. In 2017, SG&A included $9.6 million of special charges related to professional fees associated with the SEC investigation, the class action and derivative litigations, continuing correspondence with the staff of the SEC and costs related to the transition of Iconix management, as compared to $14.3 million in 2016. Excluding special charges, SG&A expenses were down 8% for the full year 2017. Stock-based compensation was $8.7 in 2017, as compared to $6.6 million in 2016.

Trademark, Goodwill and Investment Impairment:

In the fourth quarter of 2017, the company recorded a non-cash trademark impairment charge of $4.1 million in the home segment and a $7.6 million impairment in the international segment, which is included in equity earnings on joint ventures. The company also recorded a non-cash investment impairment charge of $16.8 million related to the MG Icon joint venture, which owns the Material Girl brand.

For the full year 2017, the company recorded a non-cash trademark impairment charge of $525.7 million, comprised of $227.6 million in the women’s segment, $135.9 million in the men’s segment, $73.5 million in the home segment and $88.7 million in the international segment to reduce various trademarks in those segments to fair value. They also recorded an additional trademark impairment of $7.6 million in the international segment, which is included in equity earnings on joint ventures. The company 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. The company also recorded a non-cash investment impairment charge of $16.8 million related to the MG Icon joint venture, which owns the Material Girl brand.

Operating Income:

Adjusted Operating Income by Segment* Three Months ended Dec. 31,   Year ended Dec. 31,
($, 000’s) 2017 2016 % Change 2017 2016 % Change
Womens 16,689 15,108 10% 87,932 94,424 -7%
Mens (957) 7,366 NA 19,043 30,322 -37%
Home 5,110 5,385 -5% 25,271 23,902 6%
International 9,763 8,053 21% 31,430 30,739 2%
Corporate (18,017) (17,189) -5% (50,595) (59,824) 15%
Adjusted Operating Income 12,588 18,723 -33%   113,081 119,563 -5%
Adjusted Operating Margin by Segment* Three Months ended Dec. 31,   Year ended Dec. 31,
2017 2016 Var 2017 2016 Var
Womens 83% 81% 2% 91% 89% 2%
Mens -12% 62% -74% 48% 62% -14%
Home 83% 82% 1% 88% 82% 6%
International 54% 49% 5% 52% 52% 0%
Adjusted Operating Margin 24% 35% -11%   50% 49% 1%
*Excludes trademark & goodwill impairment, loss on termination of licensees, divested brands, gain on deconsolidation
of joint ventures and gain related to sale of trademarks. A reconciliation table can be found at the end of this press release

Operating loss for the fourth quarter of 2017 was $18.3 million, as compared to a loss of $388.2 million in the fourth quarter of 2016. Operating loss for the full year 2017 was $564.7 million, as compared to a loss of $272.8 million in 2016.

Operating loss in the fourth quarter of 2017 included trademark and investment impairments of $28.5 million and a loss on termination of licenses of $2.4 million. Excluding these items, adjusted operating income for the fourth quarter of 2017 was approximately $12.6 million. Operating loss in the fourth quarter of 2016 included trademark, goodwill and investment impairments of $438.1 million, $3.0 million of income related to the Sharper Image brand, as well as a $28.1 million gain on the sale of the Sharper Image trademark, and as a result there is no comparable income in the current period. Noting the items above, adjusted operating income in the fourth quarter of 2017 decreased approximately $6.1 million.

Operating loss for the full year 2017 included trademark, goodwill and investment impairments of $654.0 million, a loss on termination of licenses of $28.4 million, a gain on sale of trademarks of $0.9 million and a gain on deconsolidation of joint ventures of $3.8 million. Excluding these items, adjusted operating income for the full year 2017 was approximately $113.1 million. Operating loss for the full year of 2016 included trademark and goodwill impairments of $438.1 million, $7.6 million of income related to Sharper Image and Badgley Mischka brands as well as a $38.1 million gain on the sale of trademarks. Adjusting for the items above, adjusted operating income for the full year 2017 decreased approximately $6.5 million.

Interest Expense:

Interest expense in the fourth quarter of 2017 was $21.8 million, as compared to interest expense of $17.2 million in the fourth quarter of 2016. The company’s reported interest expense includes non-cash interest related to its outstanding convertible notes of approximately $4.6 million in the fourth quarter of 2017 and approximately $4.1 million in the fourth quarter of 2016.

Interest expense for the full year 2017 was approximately $67.9 million, as compared to interest expense of $76.9 million in 2016. The company’s reported interest expense includes non-cash interest related to its outstanding convertible notes of $16.9 million in 2017 and $22.4 million in 2016.

Other Income:

For the full year 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, as compared to a gain of $17.5 million in 2016, primarily related to the company’s sale of its minority interest in Complex Media and the recoupment of unearned incentive compensation from the company’s former CEO.

For the full year 2017 the company recognized a loss of $20.9 million related to the early extinguishment of a portion of the company’s term loan and the repurchase of a portion of the company’s 2018 convertible notes. This compares to a $5.9 million loss in 2016 related to the early extinguishment of certain debt partially offset by a gain related to the repurchase of a portion of the company’s 2018 convertible notes at a discount.

Provision for Income Taxes:

The effective income tax rate for the fourth quarter of 2017 is approximately 165.5 percent, which resulted in a $66.8 million income tax benefit, as compared to an effective income tax rate of 25.2 percent in the prior year quarter, which resulted in a $103.3 million income tax benefit.  The increase in the effective tax rate for the fourth quarter is related to the reduced U.S. corporate tax rate signed into law in December and the company’s ability to reduce its valuation allowance on deferred tax assets from the third quarter, which generated a large benefit on its pretax loss.

The effective income tax rate for the full year 2017 is approximately 14.7 percent, which resulted in a $96.0 million income tax benefit, as compared to an effective income tax rate of 23.3 percent in 2016, which resulted in a $78.1 million income tax benefit.

The decrease in the full year effective tax rate is primarily a result of the establishment of a $80.8 million valuation allowance on the company’s deferred tax assets, as well as a charge due to the reduction of the U.S. corporate tax rate signed into law in December, which reduced its gross deferred tax assets. Both have the effect of reducing the tax benefit related to the impairment, which lowers the effective tax rate.

GAAP Net Income and GAAP Diluted EPS

GAAP net income from continuing operations for the fourth quarter of 2017 reflects income of $24.7 million as compared to a loss of $293.9 million in the fourth quarter of 2016. GAAP diluted EPS from continuing operations for the fourth quarter of 2017 reflects income of $0.40 as compared to a loss of $5.23 in the fourth quarter of 2016.

For the full year 2017, GAAP net loss from continuing operations is $535.3 million, as compared to a net loss from continuing operations of $254.5 million in 2016. GAAP diluted EPS from continuing operations for 2017 reflects a loss of $9.47, as compared to a loss of $4.86 in 2016.

Non-GAAP Net Income and Non-GAAP Diluted EPS

Non-GAAP net income from continuing operations for the fourth quarter of 2017 was $3.6 million, an 84 percent decrease as compared to $22.1 million in the fourth quarter of 2016. Non-GAAP diluted EPS from continuing operations for the fourth quarter of 2017 was $0.06, as compared to $0.39 in the fourth quarter of 2016.

Non-GAAP net income from continuing operations for the full year 2017 was $45.0 million, a 34 percent decrease as compared to $68.7 million in 2016. Non-GAAP diluted EPS from continuing operations for 2017 was $0.78 as compared to $1.31 in 2016.

When it reported third-quarter results on December 22, Iconix said it expected:

  • Revenue for 2017 to be at the low end of its guidance range of $225 million to $235 million.
  • 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)
  • 2017 non-GAAP EPS to be slightly above its guidance range of $0.65 to $0.70.
  • Full-year 2017 free cash flow to be at the low end of its guidance range of $65 million to $82 million.

Balance Sheet and Liquidity:

($, 000’s) Dec. 31, 2017 Current*
Cash Summary:
Unrestricted Domestic Cash (wholly owned) 38,236 25,907
Unrestricted Domestic Cash (in consolidated JV’s) 14,943 22,462
Unrestricted International Cash 12,748 12,717
Restricted Cash 48,766 37,536
Total Cash $114,693 $98,622
Debt Summary:
Senior Secured Notes 408,174 397,501
1.50% Convertible Notes 236,183 –
5.75% Convertible Notes – 117,248
Variable Funding Note 100,000 100,000
Senior Secured Term Loan 82,837 192,837
Total Debt (Face Value) $827,194 $807,586
* Estimated as of March 7, 2018 and pro forma for the funding of the $110 million
draw from the senior secured term loan, net of original issue discount and fees
and repayment of the 1.50% convertible notes

During the fourth quarter of 2017, the company amended its senior secured term loan and reduced the size of the credit facility by $75 million to $225 million.

As previously disclosed, on February 22, 2018, the company exchanged $125 million aggregate principal amount of 1.50 percent convertible senior subordinated notes due March 15, 2018 (the “1.50 percent Convertible Notes”) for $125 million aggregate principal amount of new 5.75 percent convertible senior subordinated secured second lien notes due 2023 (“5.75 percent Convertible Notes”). The company drew down $110 million under its senior secured term loan and used those proceeds, along with cash on hand, to make a payment to the trustee under the indenture governing the 1.50 percent Convertible Notes in an amount to repay the remaining 1.50 percent Convertible Notes at maturity on March 15, 2018.

Free Cash Flow:

2017 Free Cash Flow Reconciliation: (3)
($, 000’s)
Three Months Ended Dec. 31,    Full Year
  2017 2016 % Change   2017 2016 % Change
Net cash provided by operating activities $9,757 $68,859 -86% $12,854 $134,840 -90%
   Plus: Cash related to Disc Ops sale – – 36,272 –
   Plus: Cash from sale of trademarks and related notes receivable 1,937 8,458 8,864 14,595
   Plus: Cash from notes receivable from licensees – 4,112 1,250 11,962
   Plus: Cash from sale of Nick Graham – – 2,561 –
   Plus: Cash from sale of equity interest in BBC Ice Cream – – – 3,500
   Plus: Cash from sale of Badgley Mischka – – 375 14,000
   Plus: Cash from sale of Sharper Image – 98,250 500 98,250
   Plus: Cash from sale of equity interest in China – – – 15,415
   Less: Capital Expenditures (41) (674) (870) (1,518)
   Less: Distributions to non-controlling interests (1,341) (4,695) (5,191) (14,016)
Free Cash Flow from operations $10,312 $174,310 -94% $56,615 $277,028 -80%

 

The company generated $10.3 million of free cash flow in the fourth quarter of 2017, a 94 percent decrease as compared to $174.3 million in the fourth quarter of 2016. In 2017, the company generated $56.6 million of free cash flow, an 80 percent decrease as compared to $277.0 million in 2016. In 2016 the company received $98.3 million of cash related to the sale of the Sharper Image brand.

In a separate release, Iconix Brand Group announced it has repaid the remaining $236 million 1.50 percent convertible senior subordinated notes due March 15, 2018 (2018 Notes).

As previously disclosed, on February 22, 2018, the company exchanged $125 million aggregate principal amount of 2018 Notes for $125 million aggregate principal amount of new 5.75 percent convertible senior subordinated secured second lien notes due 2023. The company drew down $110 million under its senior secured term loan and used those proceeds, along with cash on hand, to make a payment to the trustee under the indenture governing the 2018 Notes in an amount to repay the remaining 2018 Notes at maturity on March 15, 2018.

John Haugh, CEO of Iconix commented, “We are pleased to announce that by repaying our 1.50 percent notes we have satisfied our near-term debt obligations and significantly improved our balance sheet. This represents a major step forward in our overall strategy to de-lever and achieve an appropriate capital structure.”

Iconix Brand Group, Inc.’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, Umbro, Lee Cooper, Ecko Unltd., Marc Ecko and Artful Dodger. In addition, Iconix owns interests in The Material Girl, Ed Hardy, Truth Or Dare, Modern Amusement, Buffalo and Pony brands.