Camping World Holdings(CWH) - 2018 Q4 - Annual Report

Part I Business Camping World Holdings is a leading U.S. RV and outdoor lifestyle retailer serving 5.1 million active customers through 227 locations across three segments - The company operates through three business segments: Consumer Services and Plans, Dealership, and Retail, utilizing its iconic brands Good Sam, Camping World, and Gander[18][20] - As of December 31, 2018, the company served a base of 5.1 million Active Customers and operated 227 retail locations across 36 states[18][24] - The company's growth strategy includes expanding its retail footprint through acquisitions (like Gander Mountain) and greenfield openings, targeted marketing, and cross-selling products to its large customer database of over 29.0 million contacts[35][36][39] Business Segments The company operates three segments: Consumer Services and Plans, Dealership, and Retail, offering diverse RV and outdoor lifestyle products and services - The Consumer Services and Plans segment includes offerings such as extended vehicle service contracts, emergency roadside assistance, property and casualty insurance, and membership clubs like the Good Sam Club, which had approximately 2.1 million members as of December 31, 2018[48] - The Dealership segment's offerings include new and used vehicles, repair and maintenance services, collision repair, and finance and insurance products, with approximately 71,500 new and 32,800 used vehicles sold in 2018[52][53][54] - The Retail segment provides a wide array of products including RV supplies, equipment, outdoor gear for camping, hiking, boating, fishing, and hunting, as well as related apparel and footwear[62][63][65] Customers and Markets The company targets 9 million U.S. RV-owning households and 77 million camping households, benefiting from favorable demographic trends - The estimated number of U.S. households owning an RV is approximately 9 million, with the company having about 5.1 million Active Customers[67] - New RV shipments grew at a compounded annual rate of 9.7% from 2012 to 2018, although 2018 saw a decline of 4.1% from the previous year[69] - The total number of camping households in the U.S. is estimated at 77 million, with significant growth among younger and more diverse demographics[72][73] Product Sourcing and Distribution The company sources RVs from major manufacturers and accessories from 2,400 vendors, distributing through eight U.S. fulfillment centers - As of December 31, 2018, key new RV suppliers were Thor Industries, Inc. (73.8%), Forest River, Inc. (15.3%), and Winnebago Industries, Inc. (5.9%)[91] - The company purchased merchandise from approximately 2,400 vendors for its parts, accessories, and outdoor lifestyle products in 2018, with no single vendor accounting for more than 5% of total purchases[97] - The company operates a network of eight distribution and fulfillment centers to support its retail, e-commerce, and catalog businesses[99][100] Seasonality The company's business is seasonal, with peak RV-related demand in Q2 and Q3, impacting revenue and expenses - Demand for RV products and services typically declines in the winter and is highest in the spring and summer[160] - Over the last three years, the second and third quarters generated 30.1% and 28.1% of annual revenues, respectively[160] Risk Factors The company faces significant business risks including economic sensitivity, financing dependence, manufacturer reliance, and integration challenges, alongside structural and internal control weaknesses Risks Related to Business Business risks include RV industry cyclicality, financing dependence, reliance on key manufacturers, acquisition integration challenges, and identified material weaknesses in internal controls - The business is highly dependent on the availability of floor plan financing for inventory and consumer financing for customers' purchases[165][166] - Significant reliance on key manufacturers, with Thor Industries, Inc., Forest River, Inc., and Winnebago Industries, Inc. supplying 73.8%, 15.3%, and 5.9% of new RV inventory, respectively, as of year-end 2018[170] - The integration of Gander Outdoors and Overton's presents risks, including higher-than-expected costs, unfamiliarity with new product lines like firearms, and potential for slower profitability compared to traditional locations[320][321][322] - Material weaknesses in internal control over financial reporting were identified, which could have a significant adverse effect on the business and stock price[395][398][399] Risks Relating to Organizational Structure Organizational risks stem from Marcus Lemonis's substantial voting control, the company's "controlled company" status, and significant payment obligations under the Tax Receivable Agreement - Marcus Lemonis, through his beneficial ownership, has substantial control, casting up to 52% of total votes (47% via Class B stock and 5% via Class C stock), influencing nearly all matters requiring stockholder approval[327] - The company is a "controlled company" under NYSE rules, exempting it from requirements like having a majority of independent directors and fully independent compensation and nominating committees[337][338] - The Tax Receivable Agreement requires the company to make potentially significant cash payments to Continuing Equity Owners, equal to 85% of certain tax benefits realized, which could be accelerated under certain conditions[343][347][348] Properties As of December 31, 2018, the company operated 227 mostly leased retail locations across 36 states, supported by corporate offices and eight distribution centers Company Locations as of December 31, 2018 | Location Type | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Co-habited Dealership and Retail locations | 126 | 116 | 104 | | Stand-alone Dealership locations | 15 | 8 | 1 | | Stand-alone Retail locations | 86 | 29 | 17 | | Total locations | 227 | 153 | 122 | - The company leases substantially all of its operational properties, including 216 of its 227 retail locations and seven of its eight distribution centers as of year-end 2018[255][410] Legal Proceedings The company faces multiple class action and shareholder derivative lawsuits alleging securities law violations and breach of fiduciary duty - The company is a defendant in consolidated putative class action lawsuits (Ronge and Strougo) alleging violations of securities laws based on allegedly misleading statements between March 2017 and August 2018[413][415][416] - A separate class action (IUOE Complaint) alleges violations related to the October 2017 secondary offering, and another (Geis Complaint) relates to the October 2016 IPO[417][418] - A shareholder derivative suit (Hunnewell Complaint) was filed in March 2019 alleging breach of fiduciary duty by certain officers and directors[419] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock trades on the NYSE, with a policy of regular quarterly dividends and potential special dividends - The company's Class A common stock began trading on the NYSE under the symbol "CWH" on October 7, 2016[440] - The company intends to pay a regular quarterly cash dividend of approximately $0.08 per share of Class A common stock and may pay special dividends from excess tax distributions[442][446] Dividends Declared per Class A Share | Year | Dividend per Share | | :--- | :--- | | 2018 | $0.61 | | 2017 | $0.74 | | 2016 | $0.08 | Selected Financial Data This section summarizes five years of financial data, showing $4.8 billion total revenue and $10.4 million net income in 2018, impacted by acquisitions and accounting changes Selected Consolidated Financial Data (in thousands) | Metric | FY 2018 | FY 2017 | | :--- | :--- | :--- | | Total Revenue | $4,792,017 | $4,279,830 | | Gross Profit | $1,362,932 | $1,240,914 | | Operating Income | $201,015 | $355,955 | | Net Income | $65,581 | $230,692 | | Net Income Attributable to CWH | $10,398 | $29,853 | | Adjusted EBITDA | $312,502 | $394,187 | | Total Assets | $2,806,687 | $2,567,026 | | Total Debt | $1,165,865 | $916,902 | Management's Discussion and Analysis of Financial Condition and Results of Operations Total revenue grew to $4.8 billion in 2018, but net income declined significantly due to goodwill impairment, increased SG&A, and higher interest expenses Results of Operations Total revenue increased 12.0% to $4.8 billion in 2018, but operating income fell 43.5% and net income 65.2% due to impairment and higher expenses Results of Operations Comparison: 2018 vs 2017 (in thousands) | Metric | FY 2018 | FY 2017 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $4,792,017 | $4,279,830 | 12.0% | | Gross Profit | $1,362,932 | $1,240,914 | 9.8% | | SG&A Expenses | $1,069,359 | $853,160 | 25.3% | | Goodwill Impairment | $40,046 | $0 | N/A | | Income from Operations | $201,015 | $355,955 | (43.5%) | | Net Income | $65,581 | $230,692 | (71.6%) | - Retail segment revenue surged 65.0% to $669.9 million in 2018, primarily due to the opening of a net 60 Gander Outdoors locations[534] - A goodwill impairment charge of $40.0 million was recorded in the fourth quarter of 2018 related to the Retail reporting unit, reducing its goodwill to zero[540] Non-GAAP Financial Measures Adjusted EBITDA decreased to $312.5 million in 2018, primarily due to lower gross profit and significant SG&A expenses from the Gander Outdoors rollout Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Reconciliation Item | FY 2018 | FY 2017 | FY 2016 | | :--- | :--- | :--- | :--- | | Net income | $65,581 | $230,692 | $198,476 | | Other interest expense, net | $63,329 | $42,959 | $48,318 | | Depreciation and amortization | $49,322 | $31,545 | $24,695 | | Income tax expense | $30,790 | $154,910 | $5,800 | | EBITDA | $209,022 | $460,106 | $277,289 | | Goodwill impairment | $40,046 | $0 | $0 | | Gander Outdoors pre-opening costs | $43,156 | $26,352 | $0 | | Equity-based compensation | $14,088 | $5,109 | $1,597 | | Tax Receivable Agreement liability adj. | $1,324 | ($100,758) | $0 | | Other adjustments | $4,866 | $3,381 | $7,571 | | Adjusted EBITDA | $312,502 | $394,187 | $286,467 | Liquidity and Capital Resources The company's liquidity is supported by $136.3 million in operating cash flow and $2.6 billion in credit facilities, with $583.0 million working capital - As of December 31, 2018, the company had working capital of $583.0 million, including $138.6 million in cash and cash equivalents[624] Key Debt Facilities as of Dec 31, 2018 (in billions) | Facility | Commitment/Size | Outstanding | | :--- | :--- | :--- | | Term Loan Facility | $1.19 | $1.18 | | Floor Plan Facility | $1.415 | $0.886 | Summary of Cash Flows (in millions) | Cash Flow Activity | FY 2018 | FY 2017 | | :--- | :--- | :--- | | Operating Activities | $136.3 | ($16.3) | | Investing Activities | ($292.7) | ($468.5) | | Financing Activities | $70.8 | $594.7 | Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2016-2018, including balance sheets, income statements, and cash flows, with detailed notes on accounting changes and material weaknesses Consolidated Balance Sheet Summary (in thousands) | Account | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Total Current Assets | $1,888,162 | $1,807,324 | | Total Assets | $2,806,687 | $2,567,026 | | Total Current Liabilities | $1,305,118 | $1,331,134 | | Total Liabilities | $2,773,770 | $2,495,263 | | Total Stockholders' Equity | $32,917 | $71,763 | Consolidated Statement of Income Summary (in thousands) | Account | FY 2018 | FY 2017 | FY 2016 | | :--- | :--- | :--- | :--- | | Total Revenue | $4,792,017 | $4,279,830 | $3,516,307 | | Gross Profit | $1,362,932 | $1,240,914 | $993,733 | | Income from Operations | $201,015 | $355,955 | $276,500 | | Net Income | $65,581 | $230,692 | $198,476 | | Net Income Attributable to CWH | $10,398 | $29,853 | $188,885 | - The financial statements for prior periods were revised to correct for immaterial errors, primarily related to the cancellation reserve for certain finance and insurance products and the calculation of the Tax Receivable Agreement liability[748] - A goodwill impairment charge of $40.0 million was recorded in Q4 2018 for the Retail segment, reducing its goodwill balance to zero due to a decline in expected future cash flows[826] Controls and Procedures Management concluded disclosure controls were ineffective due to material weaknesses in internal control over financial reporting, leading to an adverse auditor opinion - Management concluded that disclosure controls and procedures were not effective as of December 31, 2018[1030] - Material weaknesses were identified related to: 1) Insufficient accounting resources for proper review of valuations and estimates, and 2) Ineffective design and operation of controls over the accounting for income taxes[1037][1038][1056][1057] - The independent registered public accounting firm, Deloitte & Touche LLP, issued an adverse opinion on the company's internal control over financial reporting as of December 31, 2018[1039][1048] - A remediation plan is underway, focusing on assessing and hiring additional accounting resources and improving the design of controls around income tax accounting[1040][1043][1044] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2019 Proxy Statement - The information required by this item is incorporated by reference from the registrant's Proxy Statement for its 2019 Annual Meeting of Shareholders[1063] Executive Compensation Executive and director compensation details are incorporated by reference from the 2019 Proxy Statement - The information required by this item is incorporated by reference from the registrant's Proxy Statement for its 2019 Annual Meeting of Shareholders[1064] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details equity compensation plans and security ownership, with further information incorporated from the 2019 Proxy Statement Equity Compensation Plan Information as of December 31, 2018 | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 2,311,624 | $21.85 | 11,964,302 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 2,311,624 | $21.85 | 11,964,302 | - Other information regarding security ownership is incorporated by reference from the registrant's Proxy Statement for its 2019 Annual Meeting of Shareholders[1066] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits included in the Annual Report, with details on key corporate documents - The report includes financial statements as listed in Item 8[1072] - Financial statement schedules filed include Schedule I (Condensed Financial Information of Registrant) and Schedule II (Valuation and Qualifying Accounts)[1073]