Iconix Brand Group Inc. Reports Operating Results (10-Q)

Author's Avatar
Aug 05, 2010
Iconix Brand Group Inc. (ICON, Financial) filed Quarterly Report for the period ended 2010-06-30.

Iconix Brand Group Inc. has a market cap of $1.26 billion; its shares were traded at around $17.47 with a P/E ratio of 13.3 and P/S ratio of 5.5. ICON is in the portfolios of Ron Baron of Baron Funds, David Einhorn of Greenlight Capital Inc, George Soros of Soros Fund Management LLC.

Highlight of Business Operations:

Other Expenses - Net – Other expenses - net decreased $0.9 million from approximately $18.6 million in the Prior Year Six Months to approximately $17.7 million in the Current Six Months. An increase of approximately $1.2 million in interest expense was primarily attributed to interest expense of approximately $3.3 million related to the Ecko Note, which was entered into as part of our acquisition of the Ecko assets and for which there was no comparable interest expense in the Prior Year Six months, offset primarily by a decrease in $1.8 million in interest expense from our variable rate debt due to a lower debt balance as a result of our principal payment in March 2010. This aggregate increase in interest expense was offset by an aggregate increase in our equity earnings on joint ventures of approximately $1.4 million primarily due to earnings from our MG Icon joint venture (created in February 2010) for which there was no comparable earnings in the Prior Year Six Months, and from our Hardy Way joint venture (created in May 2009). Further, an increase in interest income of approximately $0.6 million can be attributed to a higher average cash balance during the Current Six Months as compared to the Prior Year Six Months.

As of June 30, 2010, our marketable securities consist of auction rate securities, herein referred to as ARS. Beginning in the third quarter of 2007, $13.0 million of our ARS had failed auctions due to sell orders exceeding buy orders. In December 2008, the insurer of the ARS exercised its put option to replace the underlying securities of the auction rate securities with its preferred securities. Further, although these ARS had paid dividends according to their stated terms, we had received notice from the insurer that the payment of cash dividends will cease after July 31, 2009 and only temporarily reinstated for the 4-week period from December 23, 2009 through January 15, 2010, to be resumed if the board of directors of the insurer declares such cash dividends to be payable at a later date. In January 2010, we commenced a lawsuit against the broker-dealer of these ARS alleging, among other things, fraud, and seeking full recovery of the $13.0 million face value of the ARS, as well as legal costs and punitive damages. These funds will not be available to us until a successful auction occurs, a buyer is found outside the auction process or we realize recovery through settlement or legal judgment. Prior to June 30, 2009, we estimated the fair value of our ARS with a discounted cash flow model where we used the expected rate of cash dividends to be received. As regular cash dividend payments have ceased, we changed our methodology for estimating the fair value of the ARS. Beginning June 30, 2009, we estimated the fair value of our ARS using the present value of the weighted average of several scenarios of recovery based on our assessment of the probability of each scenario. We considered a variety of factors in our analysis including: credit rating of the issuer and insurer, comparable market data (if available), current macroeconomic market conditions, quality of the underlying securities, and the probabilities of several levels of recovery and reinstatement of cash dividend payments. As the aggregate result of our quarterly evaluations, $13.0 million of our ARS have been written down to $7.3 million as a cumulative unrealized pre-tax loss of $5.7 million to reflect a temporary decrease in fair value. As the write-down of $5.7 million has been identified as a temporary decrease in fair value, the write-down has not impacted our earnings and is reflected as an other comprehensive loss in the stockholders equity section of our consolidated balance sheet. We believe this decrease in fair value is temporary due to general macroeconomic market conditions. Further, we have the ability and intent to hold the ARS until an anticipated full redemption. We believe our cash flow from future operations and our existing cash on hand will be sufficient to satisfy our anticipated working capital requirements for the foreseeable future, regardless of the timeliness of the auction process or other recovery.

Net cash provided by operating activities increased approximately $40.6 million, from $41.9 million in the Prior Year Six Months to $82.5 million in the Current Six Months. This increase in net cash provided by operating activities of $40.6 million is primarily due to an increase in net income of approximately $17.6 million from $34.9 million in the Prior Year Six Months to $52.6 million in the Current Six Months for the reasons discussed above, as well as an aggregate increase in net cash provided by changes in operating assets and liabilities (net of acquisitions) of $24.3 million from approximately $19.9 million of net cash used in operating activities in the Prior Year Six Months to approximately $4.4 million of net cash provided by operating activities in the Current Six Months.

Net cash used in investing activities in the Current Six Months increased $158.3 million, from $18.5 million in the Prior Year Six Months to $176.8 million in the Current Six Months. This increase is primarily due to our purchase of Peanuts Worldwide for $172.1 million, as well as $4.0 million paid in connection with our acquisition of a 50% interest in MG Icon. In the Prior Year Six Months we paid cash earn-outs totaling $9.4 million, as compared to $0.8 million in cash earn-outs in the Current Six Months, both of which were related to acquisitions prior to 2009 and were recorded as increases to goodwill. Further, in the Prior Year Six Months we paid $9.0 million in connection with our acquisition of a 50% interest in Hardy Way.

Net cash used in financing activities increased $149.1 million, from $105.2 million of net cash provided by financing activities in the Prior Year Six Months to net cash used in financing activities of $43.9 million in the Current Six Months. The main driver of this net increase of cash used in financing activities of $149.1 million was an increase of $152.8 million cash received in the Prior Year Six Months related to our public offering of our common stock in June 2009, with no comparable transaction in the Current Six Months, and an increase of $14.5 million in principal payments on our long-term debt during the Current Six Months as compared to the Prior Year Six Months. Specifically, our payment in March 2010 of 50% of the excess cash flow from the subsidiaries subject to the term loan facility for the year ended December 31, 2009 was $47.2 million, as compared to our payment in March 2009 of 50% of the excess cash flow from the subsidiaries subject to the term loan facility for the year ended December 31, 2008 was $38.7 million. This was offset by a contribution of $16.5 million from Beagle in connection with our purchase of Peanuts Worldwide through our joint venture Peanuts Holdings, as compared to a contribution of $2.1 million in the Prior Year Six Months related to our investment in our joint venture Scion. See Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements for further information on these joint ventures.

As of June 30, 2010, our unaudited condensed consolidated balance sheet reflects debt of approximately $606.0 million, including secured debt of $338.7 million ($170.7 million under our Term Loan Facility, $83.0 million under Asset-Backed Notes issued by our subsidiary, IP Holdings, and $85.0 million under the Promissory Note issued by IPH Unltd), primarily all of which was incurred in connection with our acquisition activities. In accordance with ASC 820, our Convertible Notes are included in our $606.0 million of consolidated debt at a net debt carrying value of $255.0 million; however, the principal amount owed to the holders of our Convertible Notes is $287.5 million. We may also assume or incur additional debt, including secured debt, in the future in connection with, or to fund, future acquisitions. Our debt obligations:

Read the The complete Report