Business Context and Reporting Period
Gaiam, Inc. filed this Form 10-K for the fiscal year ended December 31, 2011. The company sells lifestyle media, products and subscription services through retail, business, catalog, direct-response television and digital channels. Reported 2011 results include Real Goods Solar (RGS) for the full year; Gaiam deconsolidated RGS on December 31, 2011 after its voting ownership fell to 37.5%, and thereafter accounts for it as an equity-method investment.
Financial Performance and Liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $274.8 million | $274.3 million |
| Gross profit / margin | $116.9 million / 42.5% | $135.8 million / 49.5% |
| Operating income (loss) | $(31.3) million | $6.1 million |
| Net income (loss) attributable to Gaiam | $(24.9) million; $(1.08) per diluted share | $4.3 million; $0.18 per diluted share |
| Cash from operating activities | $5.2 million | $(5.0) million |
| Cash at year-end | $14.5 million | $28.8 million |
| Working capital / total liabilities | $60.3 million / $32.1 million | $95.0 million / $38.7 million |
Gaiam reported no borrowings on its revolving credit line at year-end; the facility allowed borrowings up to the lesser of $15 million or the borrowing base, with $0.5 million reserved for letters of credit. The cash-flow statement reports $10.8 million used in investing and $8.6 million used in financing activities in 2011. Year-end cash excludes $11.8 million of RGS cash removed upon deconsolidation.
Material Changes Versus Prior Period
- Revenue was nearly flat, but gross margin fell 7.0 percentage points and the company moved from operating profit to a substantial operating loss.
- Business-segment revenue declined $9.0 million to $88.3 million, affected by Borders’ bankruptcy, retailer inventory issues and an unsuccessful fulfillment arrangement. Direct-to-consumer revenue fell $22.4 million to $77.3 million, mainly due to reduced direct-response advertising. Former solar-segment revenue rose $31.9 million to $109.3 million, including the effect of the Alteris acquisition.
- 2011 included a $22.5 million noncash goodwill impairment, $2.4 million of RGS acquisition-related costs and a $4.5 million noncash loss on deconsolidation. The filing’s non-GAAP reconciliation excludes these items and reports a $3.2 million full-year net loss, or $(0.14) per share, and fourth-quarter non-GAAP income of $1.4 million, or $0.06 per share. These are company-defined non-GAAP measures, not GAAP results.
- For context, unaudited pro forma results assuming RGS had been deconsolidated from January 1, 2010 show revenue of $165.5 million in 2011 versus $196.9 million in 2010; these figures are not the reported GAAP results.
Outlook, Commentary, Risks and Unusual Items
- Management said available cash, expected operating cash generation and borrowing capacity should fund operations in the short and long term, while noting needs could change with acquisitions, product development or operating difficulties. No quantified earnings or revenue guidance is provided.
- Management emphasized digital distribution and subscriptions, Gaiam TV, media aggregation, branded product lines and retail category-management programs. In early 2012, the company reported strong initial sales for Jillian Michaels’ Body Revolution, but provided no quantified outlook.
- On March 13, 2012, Gaiam agreed to acquire Vivendi Entertainment for $13.4 million in cash plus a working-capital adjustment; closing was expected by the end of March, subject to customary conditions. Management anticipated distribution and production synergies.
- Key risks include dependence on major retailers (Target was 14.8% of 2011 revenue; Target and Walmart together represented 68.0% of year-end receivables), shifting consumer demand, competition, inventory and returns, third-party suppliers and fulfillment, media-rights disputes, cybersecurity and systems reliability, shipping costs, and the performance of RGS. RGS reported a 2011 net loss of $1.9 million.
- The fourth quarter is typically the strongest sales period. The quarter ended December 31, 2011 included the goodwill impairment, deconsolidation loss and related tax benefit. The auditor gave an unqualified opinion and concluded internal control over financial reporting was effective. The filing says ordinary-course legal proceedings were not expected to have a material adverse effect.
Most Important Facts to Verify
- How much of 2011’s loss and margin deterioration reflects recurring business performance versus the impairment, acquisition costs and RGS deconsolidation; reconcile GAAP and company-adjusted figures.
- Underlying performance of the business and direct-to-consumer segments, including whether retailer disruption and reduced advertising were temporary and whether digital and aggregator initiatives are generating profitable sales.
- Cash availability and working-capital needs after RGS deconsolidation, including borrowing-base capacity, line-of-credit renewal after its November 2012 expiration, and funding and integration of the Vivendi acquisition.
- Exposure to major retail customers, year-end receivables, inventory and product-return estimates, and the sustainability of reported operating cash flow.
- RGS’s financial condition and the value and risks of Gaiam’s 37.5% equity-method investment; also note that founder Jirka Rysavy controlled approximately 77% of voting power.