Gaiam, Inc. — Q3 2012 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2012. Gaiam is a lifestyle media and products company with direct-to-consumer and business segments. In March 2012, it acquired Gaiam Vivendi Entertainment, a media distributor. Real Goods Solar (RSOL) was deconsolidated effective December 31, 2011 and accounted for as an equity-method investment in 2012; this makes reported year-over-year revenue comparisons misleading without adjustment. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance and liquidity
- Revenue: Q3 revenue was $43.0 million versus $73.3 million in 2011; nine-month revenue was $135.8 million versus $178.9 million. Excluding RSOL from the 2011 comparison, revenue increased 3.0% in Q3 ($43.0 million versus $41.7 million) and 23.5% for nine months ($135.8 million versus $109.9 million). Business-segment growth, including the Vivendi acquisition and Target media-aggregator role, was partly offset by weaker direct-to-consumer sales.
- Profitability: Q3 gross profit was $24.1 million (56.0% margin); operating loss was $0.2 million. Nine-month gross profit was $79.2 million (58.3% margin) and operating loss was $3.4 million. Gaiam-attributable net loss was $11.2 million in Q3 ($0.49 per share) and $14.4 million for nine months ($0.64 per share), compared with $1.2 million and $6.4 million, respectively, in the prior-year periods.
- Major unusual charge: Equity-method investment loss was $15.9 million in Q3 and $17.6 million for nine months, largely reflecting Gaiam’s share of RSOL losses and impairment charges. Gaiam reduced the carrying values of its RSOL investment and loan to zero. Related tax benefits were $5.1 million in Q3 and $5.7 million for nine months. Management’s non-GAAP reconciliation, excluding the RSOL investment loss and related tax effects and, for nine months, acquisition costs, showed losses of $0.4 million for Q3 and $1.4 million for nine months. These non-GAAP figures are not substitutes for GAAP results.
- Cash flow: Nine-month operating cash flow was $19.4 million, versus $0.4 million in 2011; investing cash outflow was $16.6 million, including the acquisition, and financing cash inflow was $1.6 million. Cash rose to $19.1 million from $14.5 million at year-end 2011. Operating cash generation benefited from lower receivables and increased payables, partly offset by higher inventory and advances.
- Balance sheet and debt: At September 30, cash was $19.1 million, current assets $121.3 million, and current liabilities $77.5 million. Working capital was approximately $43.8 million. Borrowings under the new secured revolving credit facility were $20.9 million at an average rate of about 3.64%; the facility allows up to $35 million, subject to borrowing-base limits. The company reported $9.8 million reserved for letters of credit and other reserves. Total equity was $116.9 million.
- Margins and segments: On the deconsolidated comparison, Q3 business-segment revenue grew 38.6% to $27.1 million while direct-to-consumer revenue fell 28.4% to $15.9 million. For nine months, business revenue grew 51.9% to $81.3 million and direct-to-consumer revenue declined 3.4% to $54.4 million. Direct-to-consumer contribution losses increased to $2.1 million in Q3 and $7.5 million for nine months; business contribution was positive in both 2012 periods.
Material changes versus the prior comparable period
- Reported revenue fell sharply because 2011 included consolidated RSOL revenue. On a pro forma basis excluding RSOL, revenue rose, particularly for the nine-month period.
- Vivendi acquisition results were included from March 28, 2012; Gaiam reported $4.6 million of Q3 revenue and $11.2 million for nine months from the acquired business. Acquisition-related costs were $1.7 million for nine months.
- Gaiam replaced its Wells Fargo facility with a PNC revolving credit agreement in July 2012, borrowed $20.9 million by quarter-end, and used proceeds in part to fund the acquisition.
- GAAP net loss worsened, primarily because of the RSOL equity-method loss and related accounting and tax effects, despite improved operating loss compared with 2011 on the reported statements.
Outlook, management commentary, risks and contingencies
- Management expects the fourth quarter to be seasonally strongest, reflecting holiday spending and retailer fitness purchases. It estimated 2012 capital expenditures of approximately $4.0 million and stated that available cash, the new credit line, expected operating cash and potential stock-sale proceeds should fund short- and long-term needs; actual needs may change.
- Management described expected Vivendi integration synergies, including lower distribution and post-production costs, and plans to pursue new distribution and licensing contracts and expand digital-provider sales. Integration costs and redundant operating costs were incurred during Q3. Gaiam also reported transitioning its ecommerce platform in October 2012 and continuing investment in Gaiam TV.
- Direct-response marketing spend was deliberately reduced during the Olympic Games and political advertising season to prioritize profitability over revenue. Management cited repositioning ecommerce and catalog offerings toward apparel and fitness.
- Key risks include economic conditions, competition, consumer trends, pricing and brand reputation, merchandise supply and returns, fulfillment and third-party service dependence, shipping costs, information security, legal or regulatory matters, and founder control. A one-percentage-point increase in relevant borrowing rates was estimated to raise annual interest expense by about $0.2 million, assuming debt levels stayed constant. Foreign-exchange exposure was not considered material at quarter-end.
- Future guaranteed media-distribution advances totaled $7.7 million; operating lease commitments totaled $3.8 million. The filing reports ordinary-course legal proceedings and says they are not expected to have a material adverse effect. No material risk-factor changes were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported revenue trends with the RSOL-deconsolidated and acquisition pro forma figures; these comparisons use different bases and are illustrative.
- Assess the significance of RSOL’s $36.5 million of impairment charges and Gaiam’s zeroed carrying values for its investment and loan, and whether any future exposure remains.
- Track Vivendi integration, expected cost synergies, acquired receivable collections and the final purchase-price allocation, which was provisional at quarter-end.
- Review borrowing-base availability, collateral, covenants, letters of credit and reserves under the PNC facility, alongside working-capital needs and committed advances.
- Distinguish management’s non-GAAP adjusted losses from GAAP losses and verify the assumptions and exclusions used in those reconciliations.