GAIAM, INC. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited results; amounts below are in millions of dollars unless stated otherwise. Gaiam describes itself as a lifestyle media and products company, with direct-to-consumer and business segments.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $52.8 | $43.0 | $154.0 | $135.8 |
| Gross profit / margin | $28.7 / 54.3% | $24.1 / 56.0% | $84.5 / 54.9% | $79.2 / 58.3% |
| Operating loss | $(1.3) | $(0.2) | $(5.0) | $(3.4) |
| Net income (loss) attributable to Gaiam | $0.1 | $(11.2) | $7.7 | $(14.4) |
| Diluted earnings (loss) per share | $0.01 | $(0.49) | $0.34 | $(0.64) |
- Q3 revenue rose 22.8%; excluding GVE, it rose 17.7%. Business-segment revenue increased 32.4% (27.3% excluding GVE); direct-to-consumer revenue increased 6.7%.
- Nine-month revenue rose 13.4%, including reported organic growth of 8.8%; excluding GVE, revenue increased 12.0%. Business-segment revenue grew 25.8%, while direct-to-consumer revenue declined 5.2%, mainly due to weaker direct-response television sales.
- Gross margin declined year over year in both reported periods. Management attributed the direct-to-consumer cost-of-goods-sold increase as a percentage of sales primarily to lower direct-response television sales, which have lower associated costs. Q3 selling and operating expense rose 23.4%, partly reflecting digital-subscription investment.
Cash, debt, and liquidity
- At September 30, cash was $10.9; current assets were $124.0 and current liabilities $61.9. The balance sheet showed $15.4 outstanding on a secured revolving credit line, with a $35.0 maximum subject to borrowing-base limits.
- Nine-month operating cash flow was a use of $13.2, versus a source of $19.4 in 2012. The 2012 figure included about $18.7 of acquired Vivendi working capital; excluding that amount, 2012 operating cash flow would have been $0.7. The 2013 use chiefly reflected a $14.2 decrease in participations payable, along with higher advances and inventory.
- Investing activities provided $15.2, including $18.4 of proceeds from sales of Real Goods Solar shares. Financing activities used $0.8, mainly repayment of revolving-credit borrowings. Cash increased $1.0 to $10.9 over the nine months.
- After quarter-end, on October 21, Gaiam paid PNC $19.6, including principal, interest, and fees, terminated the credit agreement, and paid a $0.35 early-termination fee. PNC released its liens.
Material changes, outlook, and unusual items
- On October 21, Gaiam sold GVE, its non-Gaiam-branded entertainment-media business, to Cinedigm for stated consideration of $51.5: $47.5 cash, Cinedigm shares valued at about $1.0, $2.0 of assigned receivables, and a $1.0 assumed payment obligation. Consideration also includes a post-closing cash adjustment based on final working capital. GVE is to be reported as a discontinued operation; Gaiam retained its branded health and fitness media.
- Management said it intends to focus investment on branded yoga, health, wellness, fitness, and Gaiam TV, organically and through acquisitions, and to reduce corporate and other expenses over the remainder of 2013. It planned to increase catalog circulation in Q4 and launch a new Firm infomercial product in Q1 2014. The filing gives no quantitative earnings or revenue guidance.
- Gaiam sold about 7.0 million Real Goods Solar shares during the first nine months and reported an $18.4 gain. After the sales, it no longer had significant influence and changed its investment accounting from the equity method to the cost method; it therefore no longer records its share of RSOL earnings or losses. At September 30, two RSOL loans totaling $2.6 had a carrying value of zero; Gaiam reported collecting $2.3 in cash on November 5, net of an acquisition of leasehold improvements.
- Sales are seasonal, with the strongest revenue and net income generally in Q4. Estimated 2013 capital expenditures, including Gaiam TV investment, were approximately $3.5. Operating lease commitments at September 30 totaled $2.0; Gaiam said it no longer had significant media-distribution payment or advance commitments after the GVE sale.
- Risks identified include competition, economic and consumer trends, pricing and brand reputation, merchandise supply and returns, fulfillment and shipping costs, information systems, reliance on third parties and centralized customer service, acquisitions, and foreign-exchange exposure. Management reported disclosure controls effective and no material risk-factor changes or material internal-control changes during the quarter. It said pending legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Final GVE sale proceeds, including the working-capital adjustment, and the resulting discontinued-operations presentation and continuing-business profitability.
- Post-sale liquidity and funding needs after the PNC facility payoff, including the availability and terms of any replacement credit facility.
- Whether operating cash flow improves after the unusually large participations-payable outflow and how seasonal Q4 working-capital needs affect cash.
- Performance and margins of the direct-to-consumer segment, particularly direct-response television, and the returns from digital-subscription investment.
- Collection and recoverability of the RSOL loan balance and any remaining exposure to Real Goods Solar.