Camping World Holdings(US:CWH)2019-11-12 21:04PART I. FINANCIAL INFORMATION Item 1. Financial Statements Unaudited financials for Q3 2019 report a $65.3 million net loss due to impairment and restructuring, a sharp decline from 2018, despite positive operating cash flow Condensed Consolidated Balance Sheet Data | Account | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $1,723,757 | $1,888,162 | | Operating Lease Assets | $823,475 | $— | | Total Assets | $3,441,027 | $2,806,687 | | Total Current Liabilities | $1,253,005 | $1,305,118 | | Operating Lease Liabilities | $850,948 | $— | | Total Liabilities | $3,506,632 | $2,773,770 | | Total Stockholders' Equity (Deficit) | $(65,605) | $32,917 | Condensed Consolidated Statements of Operations Data | Metric | Three Months Ended Sep 30, 2019 (in thousands) | Three Months Ended Sep 30, 2018 (in thousands) | Nine Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $1,387,972 | $1,309,486 | $3,927,088 | $3,809,624 | | Income from Operations | $(32,307) | $80,662 | $74,879 | $244,038 | | Net (Loss) Income | $(65,263) | $46,155 | $(39,447) | $136,835 | | Net (Loss) Income Attributable to CWH | $(30,692) | $14,123 | $(32,070) | $40,726 | | Diluted EPS | $(0.82) | $0.38 | $(0.86) | $1.10 | Condensed Consolidated Statements of Cash Flows Data (Nine Months Ended) | Cash Flow Activity | Sep 30, 2019 (in thousands) | Sep 30, 2018 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $323,141 | $254,073 | | Net cash used in investing activities | $(91,691) | $(289,798) | | Net cash used in financing activities | $(239,773) | $(63,072) | | Decrease in cash and cash equivalents | $(8,323) | $(98,797) | Notes to Unaudited Condensed Consolidated Financial Statements Notes detail segment realignment, the '2019 Strategic Shift' with $50.0 million impairment, ASC 842 adoption adding $800 million in lease assets/liabilities, and ongoing litigation - The company realigned its reportable segments from three (Consumer Services and Plans; Dealership; Retail) to two (Good Sam Services and Plans; RV and Outdoor Retail) during the first quarter of 2019, with prior period information recast to reflect this change48173174 - The '2019 Strategic Shift' approved on September 3, 2019, to exit non-RV locations, resulted in $27.7 million in restructuring costs and a $50.0 million long-lived asset impairment charge in Q3 2019808489 - Adoption of ASC 842 on January 1, 2019, added $809.7 million in operating lease assets and $867.5 million in operating lease liabilities to the balance sheet6566 - The company is involved in several putative class action and shareholder derivative lawsuits alleging securities law violations, breaches of fiduciary duty, and misleading statements123124129 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the challenging RV industry, the '2019 Strategic Shift' leading to $50.0 million impairment and restructuring costs, and Q3 2019 operating loss despite revenue growth Results of Operations Q3 2019 total revenue grew 6.0% to $1.4 billion, but the company swung to a $65.3 million net loss due to impairment, restructuring, and heavy discounting Q3 2019 vs Q3 2018 Performance | Metric | Q3 2019 (in thousands) | Q3 2018 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $1,387,972 | $1,309,486 | 6.0% | | Total Gross Profit | $338,473 | $373,014 | (9.3%) | | Income from Operations | $(32,307) | $80,662 | (140.1%) | | Net (Loss) Income | $(65,263) | $46,155 | (241.4%) | Nine Months 2019 vs 2018 Performance | Metric | YTD 2019 (in thousands) | YTD 2018 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenue | $3,927,088 | $3,809,624 | 3.1% | | Total Gross Profit | $1,046,790 | $1,087,350 | (3.7%) | | Income from Operations | $74,879 | $244,038 | (69.3%) | | Net (Loss) Income | $(39,447) | $136,835 | (128.8%) | - The company recognized a $50.0 million long-lived asset impairment charge in Q3 2019, with $48.3 million related to the 2019 Strategic Shift221266 - Products, service and other gross profit decreased 44.1% in Q3 2019, primarily due to promotions, merchandise markdowns, and $27.3 million in incremental inventory reserve charges related to the 2019 Strategic Shift213 Liquidity and Capital Resources The company's liquidity is supported by operating cash flow and credit facilities, despite reduced working capital and limited revolving credit capacity due to covenant restrictions Working Capital and Cash Position | Metric | Sep 30, 2019 (in millions) | Dec 31, 2018 (in millions) | | :--- | :--- | :--- | | Working Capital | $470.8 | $583.0 | | Cash and Cash Equivalents | $130.2 | $138.6 | - Net cash provided by operating activities increased to $323.1 million for the nine months ended September 30, 2019, up from $254.1 million in the prior-year period309311 - Borrowing capacity under the Revolving Credit Facility was limited to $9.4 million as of September 30, 2019, due to the company not meeting the maximum Total Leverage Ratio covenant if borrowings exceeded a 30% threshold325326 - The company expects future cash expenditures of approximately $15.0 million to $22.0 million related to its 2019 Strategic Shift, covering employee termination, contract termination, and other associated costs301 Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes to the company's market risk disclosures since its 2018 Annual Report on Form 10-K - As of September 30, 2019, there have been no material changes to the company's market risk disclosures from those in the 2018 Annual Report on Form 10-K341 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of September 30, 2019, due to persistent material weaknesses in internal control over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were not effective as of September 30, 2019, due to ongoing material weaknesses343 - Material weaknesses identified in the 2018 annual report persist, relating to reserves for finance and insurance product cancellations, review of asset activity and valuations, and accounting for income taxes344346 - Remediation efforts are underway, including using third-party actuarial analysis for reserves, hiring more accounting staff, and improving the review process for tax calculations347348349350 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is a defendant in multiple consolidated putative class action and shareholder derivative lawsuits alleging securities law violations and breaches of fiduciary duty - The company is defending against a consolidated putative class action lawsuit (Ronge v. Camping World and Strougo v. Camping World) alleging violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 related to statements made between March 2017 and August 2018355356 - Multiple shareholder derivative suits (Hunnewell, LPPF, Janssen, and Sandler) have been filed, naming the company as a nominal defendant and alleging breaches of fiduciary duty, failure of internal controls, and insider trading, currently stayed pending the main class action resolution361362363 Item 1A. Risk Factors The company faces risks from the '2019 Strategic Shift' potentially failing, adverse economic conditions impacting consumer spending, inventory management issues, tariffs, and ongoing litigation costs - The '2019 Strategic Shift' may not be successfully executed or achieve expected benefits, potentially leading to further asset impairment charges, increased costs, and business disruption367368 - The business is sensitive to general economic conditions, and a decline in consumer discretionary spending has adversely affected financial results, particularly through increased competition and promotional pricing369376 - Failure to successfully manage inventory and anticipate changing consumer preferences in a volatile market has led to discounting programs that negatively impacted margins381382 - A portion of products are manufactured abroad, exposing the company to risks from new or increased tariffs, particularly from China, which could increase costs and reduce profitability383384385 Item 5. Other Information The company amended the employment agreement for its Chief Financial Officer, Melvin Flanigan, increasing his annual base salary - Effective October 1, 2019, the annual base salary of CFO Melvin Flanigan was increased from $250,000 to $350,000412