Add
ICON to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| ICON > SEC Filings for ICON > Form 10-Q on 7-May-2012 | All Recent SEC Filings |
7-May-2012
Quarterly Report
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. The statements that are not historical facts contained in this report are forward looking statements that involve a number of known and unknown risks, uncertainties and other factors, all of which are difficult or impossible to predict and many of which are beyond our control, which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. These risks are detailed our Form 10-K for the fiscal year ended December 31, 2011 and other SEC filings. The words "believe", "anticipate," "expect", "confident", "project", provide "guidance" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date the statement was made.
Executive Summary. We are a brand management company engaged in licensing, marketing and providing trend direction for a diversified and growing consumer brand portfolio. Our brands are sold across every major segment of retail distribution, from luxury to mass. As of March 31, 2012, we owned the following iconic consumer brands: Candie's, Bongo, Badgley Mischka, Joe Boxer, Rampage, Mudd, London Fog, Mossimo, Ocean Pacific/OP, Danskin/Danskin Now, Rocawear, Cannon, Royal Velvet, Fieldcrest, Charisma, Starter, Waverly, Zoo York and Sharper Image. In addition, Scion LLC, a joint venture in which we have a 50% controlling investment, owns the Artful Dodger brand; Hardy Way, a joint venture in which we have an 85% controlling investment, owns the Ed Hardy brands (see Note 3 of Notes to Consolidated Financial Statements); IPH Unltd, a joint venture in which we have a 51% controlling investment, owns the Ecko brands; MG Icon, a joint venture in which we have a 50% investment, owns the Material Girl and Truth or Dare brands; Peanuts Holdings, a joint venture in which we have an 80% controlling investment, owns, through its wholly-owned subsidiary Peanuts Worldwide, the Peanuts brands and characters; and OP Japan, a joint venture in which we have a 55% controlling investment, owns the Ocean Pacific/OP brands for a territory including Japan, Singapore, Malaysia, and Indonesia. We license our brands worldwide through over 1,000 direct-to-retail and wholesale licenses for use across a wide range of product categories, including sportswear, fashion accessories, footwear, entertainment, home products and décor, and beauty and fragrance. Our business model allows us to focus on our core competencies of marketing and managing brands without many of the risks and investment requirements associated with a more traditional operating company. Our licensing agreements with leading retail and wholesale licensees throughout the world provide us with a predictable stream of guaranteed minimum royalties.
Our growth strategy is focused on increasing licensing revenue from our existing portfolio of brands through adding new product categories, expanding the retail penetration of our existing brands and optimizing the sales of our licensees. We will also seek to continue the international expansion of our brands by partnering with leading licensees and/or joint venture partners throughout the world. Finally, we believe we will continue to acquire iconic consumer brands with applicability to a wide range of merchandise categories and an ability to further diversify our brand portfolio.
Results of Operations
The Current Quarter compared to the Prior Year Quarter
Licensing and Other Revenue. Licensing and other revenue for the Current Quarter
totaled $88.5 million compared to $92.4 million for the Prior Year Quarter.
After excluding revenue in the Current Quarter for which there is no comparable
revenue in the Prior Year Quarter (ie. Ed Hardy, which was consolidated
beginning April 2011; and Sharper Image, acquired November 2011), comparable
revenue decreased approximately $9.7 million. This decrease in comparable
revenue was primarily related to the following: (i) weak sales from our men's
brands, specifically Rocawear and Ecko, (ii) the transition of the Royal Velvet
brand to a new direct-to-retail license with J.C. Penney Company, Inc., and
(iii) a decrease in revenue from our Wal-Mart business.
Operating Expenses.
Selling, general and administrative expenses, herein referred to as SG&A, totaled $30.9 million for the Current Quarter compared to $32.0 million for the Prior Year Quarter. After excluding SG&A in the Current Quarter for which there is no comparable SG&A in the Prior Year Quarter (ie. Ed Hardy, which was consolidated beginning April 2011; and Sharper Image, acquired November 2011), comparable SG&A decreased approximately $1.9 million. This decrease in comparable SG&A was primarily driven by (i) a decrease of $1.6 million in advertising and marketing related expenses due to the timing of certain initiatives, and (ii) a decrease of $0.4 million in rent expense due to the closing of satellite office space from prior period acquisitions.
Operating Income.
Operating income for the Current Quarter decreased to $57.6 million, or approximately 65% of total revenue, compared to $60.3 million or approximately 65% of total revenue in the Prior Year Quarter.
Other Expenses - Net. Other expenses - net changed by $3.1 million from approximately $8.7 million in the Prior Year Quarter to approximately $11.8 million in the Current Quarter. An increase of approximately $3.8 million in interest expense is primarily attributable to interest expense of approximately $4.3 million related to the 2.50% Convertible Notes for which there was no comparable expense in the Prior Year Quarter, partially offset by interest expense of $1.2 million in the Prior Year Quarter for our March 2007 term loan facility, herein referred to as our Term Loan Facility, the outstanding balance for which was fully extinguished in May 2011 and for which there was no comparable expense in the Current Quarter. This net increase in interest expense, as described above, was partially offset by an increase of $0.7 million in our equity earnings on joint ventures driven by income from our MG Icon joint venture which owns the Material Girl and Truth or Dare brands.
Provision for Income Taxes.
The effective income tax rate for the Current Quarter is approximately 32.5% resulting in the $14.8 million income tax expense, as compared to an effective income tax rate of 31.9% in the Prior Year Quarter which resulted in the $16.5 million income tax expense.
Net Income.
Our net income was approximately $30.9 million in the Current Quarter, compared to net income of approximately $35.1 million in the Prior Year Quarter, as a result of the factors discussed above.
Liquidity and Capital Resources
Liquidity
Our principal capital requirements have been to fund acquisitions, working capital needs and, to a lesser extent, capital expenditures. We have historically relied on internally generated funds to finance our operations and our primary source of capital needs for acquisition has been the issuance of debt and equity securities. At March 31, 2012 and December 31, 2011, our cash totaled $189.5 million and $181.8 million, respectively, including short-term restricted cash of $26.9 million and $14.1 million, respectively.
In November 2011 we entered into the Revolver with several banks and other financial institutions which provides us a revolving line of credit in an aggregate principal amount of $150.0 million, with a $10.0 million sublimit for the issuance of letters of credit and a $10.0 million swingline facility. Further details of this Revolver can be found in Note 5 of Notes to Unaudited Condensed Consolidated Financial Statements.
We believe that cash from future operations, our currently available cash and our ability to draw down additional funds under our Revolver will be sufficient to satisfy our anticipated working capital requirements for the foreseeable future, which takes into account the repayment of $287.5 million face value of principal outstanding on our 1.875% Convertible Notes due June 2012. We intend to continue financing future brand acquisitions through a combination of cash from operations, bank financing and the issuance of additional equity and/or debt securities. See Note 5 of Notes to Unaudited Condensed Consolidated Financial Statements for a description of certain prior financings consummated by us.
Changes in Working Capital
At both March 31, 2012 and December 31, 2011 the working capital ratio (current assets to current liabilities) was 0.78 to 1. Commentary on components of our cash flows for the Current Quarter as compared to the Prior Year Quarter is set forth below:
Operating Activities
Net cash provided by operating activities decreased approximately $2.1 million, from $54.4 million in the Prior Year Quarter to $52.2 million in the Current Year Quarter. This net decrease in net cash provided by operating activities of approximately $2.1 million is primarily due to an decrease in net income of approximately $4.2 million from $35.1 million in the Prior Year Quarter to approximately $30.9 million in the Current Quarter for the reasons discussed above, as well as the following non-cash components to net income: (i) a decrease in deferred income taxes of approximately $3.7 million from $5.7 million in the Prior Year Quarter to $1.9 million in the Current Quarter; (ii) a decrease of $0.6 million in amortization expense related to the amortization of licensing agreements from certain prior period acquisitions which were fully amortized during the year ended December 31, 2011, and for which there is no comparable amortization expense in the Current Quarter; and (iii) an increase in our equity earnings on joint ventures of $0.7 million, primarily attributable to our MG Icon joint venture which owns our Material Girl and Truth or Dare brands. These decreases to net cash provided by operating activities were partially offset by $2.5 million in the amortization for the convertible notes discount in the Current Quarter related to our 2.50% Convertible Notes, which were issued in May 2011 and for which there is no comparable expense in the Prior Year Quarter, as well as an increase in aggregate net changes in operating assets and liabilities, net of business acquisitions, provided by operating activities of $3.5 million.
Investing Activities
Net cash used in investing activities in the Current Quarter decreased approximately $0.1 million, from $3.5 million in the Prior Year Quarter to $3.4 million in the Current Quarter. This decrease is primarily due to $1.5 million of cash received for our sale to Iconix Latin America of the Ed Hardy and Zoo York trademarks (see Note 3), as well as capital expenditures in the Prior Year Quarter related to the build-out of our corporate office as we closed office space from prior period acquisitions and incorporated employees working in satellite offices into our corporate offices. These items were partially offset by an increase of $2.8 million in the Current Quarter as compared to the Prior Year Quarter of aggregate net distributions to our equity partners in our consolidated joint ventures as compared to the Prior Year Quarter.
Financing Activities
Net cash used in financing activities decreased $19.5 million, from $73.5 million of net cash used in financing activities in the Prior Year Quarter to net cash used in financing activities of $54.0 million in the Current Quarter. The main driver of this net decrease of cash used in financing activities was as a result of a decrease in aggregate principal payments of $59.4 million, from $68.9 million in the Prior Year Quarter to $9.5 million in the Current Quarter, primarily related to a $60.0 million principal payment on our Term Loan Facility in March 2011, which was fully extinguished in May 2011 and for which there are no comparable principal payments in the Current Quarter. This was partially offset by shares repurchased on the open market for $35.7 million in the Current Quarter as part of a stock repurchase plan; there were no repurchases of shares on the open market in the Prior Year Quarter. Further, the change in our total restricted cash was approximately $5.6 million in the Current Quarter, as compared to $0.5 million in the Prior Year Quarter, primarily related to $2.2 million of cash collateral deposited into a restricted cash account during the Current Quarter for financing related to our Scion joint venture, as well as an increase in the Current Quarter as compared to the Prior Year Quarter, due to timing of collections, in our restricted cash collection account associated with the brands collateralized by our Asset-Backed Notes.
Other Matters
New Accounting Standards
In May 2011, FASB issued ASU No. 2011-04, "Fair Value Measurement (Topic 820):
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements
in U.S. GAAP and IFRSs." ASU 2011-04 amends Topic 820 to provide common fair
value measurement and disclosure requirements in U.S. Generally Accepted
Accounting Principles ("U.S. GAAP") and International Financial Reporting
Standards. Consequently, the amendments change the wording used to describe many
of the requirements in U.S. GAAP for measuring fair value and for disclosing
information about fair value measurements, as well as providing guidance on how
fair value should be applied where its use is already required or permitted by
other standards within U.S. GAAP. ASU No. 2011-04 is to be applied
prospectively, and early adoption is not permitted. For public entities, the
amendments are effective during interim and annual periods beginning after
December 15, 2011. The adoption of ASU No. 2011-04 has not had a material impact
on our results of operations or our financial position.
In June 2011, FASB issued ASU 2011-05, "Comprehensive Income (Topic 220):
Presentation of Comprehensive Income." ASU 2011-05 eliminates the option that
permits the presentation of other comprehensive income in the statement of
changes in equity and requires presenting components of net income and
comprehensive income in either a one-statement approach with totals for both net
income and comprehensive income, or a two-statement approach where a statement
presenting the components of net income and total net income must be immediately
followed by a financial statement that presents the components of other
comprehensive income, a total for other comprehensive income, and a total for
comprehensive income. For public companies, the amendments are effective for
fiscal years, and interim periods within those years, beginning after
December 15, 2011 and should be applied retrospectively. Early adoption is
permitted. We have elected early adoption of the two-statement approach as of
December 31, 2011 and retrospectively for all other periods presented.
In September 2011, the FASB issued ASU 2011-08, "Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment." ASU 2011-08 simplifies how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASU No. 2011-08 is not expected to have a material impact on our results of operations or our financial position.
In December 2011, the FASB issued ASU 2011-11, "Balance Sheet (Topic 210):
Disclosures about Offsetting Assets and Liabilities." ASU 2011-11 provides for
additional disclosures of both gross information and net information about both
instruments and transactions eligible for offset in the statement of financial
position and instruments and transactions subject to an agreement similar to a
master netting arrangement. This scope would include derivatives, sale and
repurchase agreements and reverse sale and repurchase agreements, and securities
borrowing and securities lending arrangements. The amendments in this Update are
effective for annual reporting periods beginning on or after January 1, 2013,
and interim periods within those annual periods, and disclosures required by
these amendments should be provided retrospectively for all comparative periods
presented.
In December 2011, the FASB issued ASU 2011-12, "Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05." ASU 2011-12 defers the specific requirement to present items that are reclassified from accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive income. ASU 2011-12 did not defer the requirement to report comprehensive income either in a single continuous statement or in two separate but consecutive financial statements. The amendments are effective at the same time as the amendments in ASU 2011-05.
Critical Accounting Policies
Several of our accounting policies involve management judgments and estimates that could be significant. The policies with the greatest potential effect on our consolidated results of operations and financial position include the estimate of reserves to provide for collectability of accounts receivable. We estimate the collectability considering historical, current and anticipated trends of our licensees related to deductions taken by customers and markdowns provided to retail customers to effectively flow goods through the retail channels, and the possibility of non-collection due to the financial position of our licensees' and their retail customers. Due to our licensing model, we do not have any inventory risk and have reduced our operating risks, and can reasonably forecast revenues and plan expenditures based upon guaranteed royalty minimums and sales projections provided by our retail licensees.
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We review all significant estimates affecting the financial statements on a recurring basis and record the effect of any adjustments when necessary.
In connection with our licensing model, we have entered into various trademark license agreements that provide revenues based on minimum royalties and additional revenues based on a percentage of defined sales. Minimum royalty revenue is recognized on a straight-line basis over each period, as defined, in each license agreement. Royalties exceeding the defined minimum amounts are recognized as income during the period corresponding to the licensee's sales.
In June 2001, the FASB issued guidance under ASC Topic 350 Intangibles Goodwill and Other, which changed the accounting for goodwill from an amortization method to an impairment-only approach. Upon our adoption of this guidance, on February 1, 2002, we ceased amortizing goodwill. As prescribed under this guidance, we had goodwill tested for impairment during the years 2011, 2010 and 2009, and no write-downs from impairments were necessary. Our tests for impairment utilize discounted cash flow models to estimate the fair values of the individual assets. Assumptions critical to our fair value estimates are as follow: (i) discount rates used to derive the present value factors used in determining the fair value of the reporting units and trademarks; (ii) royalty rates used in our trade mark valuations; (iii) projected average revenue growth rates used in the reporting unit and trademark models; and (iv) projected long-term growth rates used in the derivation of terminal year values. These tests factor in economic conditions and expectations of management and may change in the future based on period-specific facts and circumstances.
In December 2007, the FASB issued guidance under ASC Topic 810 "Consolidation" as it relates to non-controlling interests in consolidated financial statements. This guidance establishes accounting and reporting standards for the non-controlling interest (previously referred to as minority interest) in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity, not as a liability, in the consolidated financial statements. It also requires disclosure on the face of the consolidated statement of operations of the amounts of consolidated net income attributable to both the parent and the non-controlling interest. This guidance also establishes a single method of accounting for changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation.
In April 2009, the FASB issued guidance within ASC Topic 805, "Business Combinations." ASC Topic 805 amends the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.
Impairment losses are recognized for long-lived assets, including certain intangibles, used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are not sufficient to recover the assets carrying amount. Impairment losses are measured by comparing the fair value of the assets to their carrying amount. For the years 2011, 2010 and 2009 there was no impairment present for these long-lived assets.
Effective January 1, 2006, we adopted guidance under ASC Topic 718, "Compensation - Stock Compensation", which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. Under this guidance, using the modified prospective method, compensation expense is recognized for all share-based payments granted prior to, but not yet vested as of, January 1, 2006. Prior to the adoption of this guidance, we accounted for our stock-based compensation plans under the recognition and measurement principles of accounting principles board, or APB, Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, the compensation cost for stock options had been measured as the excess, if any, of the quoted market price of our common stock at the date of the grant over the amount the employee must pay to acquire the stock.
We account for income taxes in accordance with guidance under ASC Topic 740, "Income Taxes". Under this guidance, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, management reviews both positive and negative evidence pursuant to the requirements of this guidance, including current and historical results of operations, the annual limitation on utilization of net operating loss carry forwards pursuant to Internal Revenue Code section 382, future income projections and the overall prospects of our business. Based upon management's assessment of all available evidence, including our completed transition into a licensing business, estimates of future profitability based on projected royalty revenues from our licensees, and the overall prospects of our business, management concluded that it is more likely than not that the net deferred income tax asset will be realized.
We adopted guidance under ASC Topic 740, beginning January 1, 2007, as it relates to uncertain tax positions. The implementation of this guidance did not have a significant impact on our financial position or results of operations. The total unrecognized tax benefit was $1.1 million at the date of adoption. At December 31, 2011, the total unrecognized tax benefit was $1.2 million. However, this unrecognized tax benefit is not recognized for accounting purposes because the related deferred tax asset has been fully reserved in prior years. We are continuing our practice of recognizing interest and penalties related to income tax matters in income tax expense. There was no accrual for interest and penalties related to uncertain tax positions for the year ended December 31, 2011. We file federal and state tax returns and we are generally no longer subject to tax examinations for fiscal years prior to 2007.
Marketable securities, which are accounted for as available-for-sale, are stated at fair value in accordance with guidance under ASC Topic 320, "Debt and Equity Securities", and consisted of auction rate securities. Temporary changes in fair market value are recorded as other comprehensive income or loss, whereas other than temporary markdowns were realized through our statement of operations. On January 1, 2008, we adopted guidance under ASC Topic 820, "Fair Value Measurements and Disclosures", which establishes a framework for measuring fair value and requires expanded disclosures about fair value measurement. While this guidance does not require any new fair value measurements in its application to other accounting pronouncements, it does emphasize that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation.
|
|