Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our Consolidated Financial Statements and related notes included in Part II, Item 8 of this Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various important factors, including those set forth under “Risk Factors” included in Part I, Item 1A of this Form 10-K, the “Cautionary Note Regarding Forward-Looking Statements” and in other parts of this Form 10-K. Except to the extent that differences among reportable segments are material to an understanding of our business taken as a whole, we present the discussion in Management’s Discussion and Analysis of Financial Condition and Results of Operations on a consolidated basis.
For purposes of this Form 10-K, we define an "Active Customer" as a customer who has transacted with us in any of the eight most recently completed fiscal quarters prior to the date of measurement. Unless otherwise indicated, the date of measurement is December 31, 2020, our most recently completed fiscal quarter.
In this Item 7, we discuss the results of operations for the years ended December 31, 2020 and 2019 and comparisons of the year ended December 31, 2020 to the year ended December 31, 2019. Discussions of the results of operations for the year ended December 31, 2018 and comparisons of the year ended December 31, 2019 to the year ended December 31, 2018 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”) on February 28, 2020.
Overview
Camping World Holdings, Inc. (together with its subsidiaries) is America’s largest retailer of recreational RVs and related products and services. Our vision is to build a long-term legacy business that makes RVing fun and easy, and our Camping World and Good Sam brands have been serving RV consumers since 1966. We strive to build long-term value for our customers, employees, and shareholders by combining a unique and comprehensive assortment of RV products and services with a national network of RV dealerships, service centers and customer support centers along with the industry’s most extensive online presence and a highly-trained and knowledgeable team of associates serving our customers, the RV lifestyle, and the communities in which we operate. We also believe that our Good Sam organization and family of programs and services uniquely enables us to connect with our customers as stewards of the RV lifestyle. On December 31, 2020, we operated a total of 171 retail locations, with 170 of these selling and/or servicing RVs. See Note 1 ─ Summary of Significant Accounting Policies ─ Description of the Business to our consolidated financial statements included in Part II, Item 8 of this Form 10-K.
With the COVID-19 crisis (see “COVID-19” below) causing many state and local governments to issue “stay-at-home” and “shelter-in-place” restrictions in mid-to-late March, sales and traffic levels across the RV industry declined significantly in March 2020. In response to the COVID-19 pandemic, many RV manufacturers, including Thor Industries, Forest River, Inc., and Winnebago Industries, temporarily suspended production from late March to mid-May. This led to a 44.6% decrease in wholesale shipments of new RVs for the three month period of March, April, and May 2020, according to the RV Industry Association’s survey of manufacturers. The Company had taken steps to add new private label lines, expand its relationships with smaller RV manufacturers, and acquire used inventory from distressed sellers to help manage risks in its supply chain. In conjunction with the stay-at-home and shelter-in-place restrictions enacted in many areas, the Company saw significant sequential declines in its overall customer traffic levels and its overall revenues from the mid-March to mid-to-late April 2020 timeframe. In the latter part of April, the Company began to see significant improvements in its online web traffic levels and number of electronic leads, and in early May, the Company began to see improvements in its overall revenue levels. As the stay-at-home restrictions began to ease across certain areas of the country, the Company experienced significant acceleration in its in-store and online traffic, lead generation, and revenue trends in May continuing throughout the remainder of 2020 and early indications appear to show favorable trends continuing into 2021.
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On September 15, 2020 we announced a number of initiatives heading into 2021, including plans to launch a peer-to-peer RV rental service, and a mobile RV technician marketplace, as well as plans to acquire RV dealerships. These initiatives continue to keep RVs as the focal point while expanding our value proposition to the customer and, in particular, to our 2.1 million active Good Sam members.
Segments
We operate two reportable segments: (i) Good Sam Services and Plans, and (ii) RV and Outdoor Retail. We identify our reporting segments based on the organizational units used by management to monitor performance and make operating decisions. The Company previously had three reportable segments: (i) Consumer Services and Plans; (ii) Dealership, and (iii) Retail. In the first quarter of 2019, we realigned the structure of our internal organization in a manner that caused the composition of our reportable segments to change. Our reportable segment financial information has been recast to reflect the updated reportable segment structure for all periods presented. See Note 1 — Summary of Significant Accounting Policies — Description of the Business and Note 22 — Segment Information to our consolidated financial statements included in Part II, Item 8 of this Form 10-K for further information regarding our reportable segments.
For the years ended December 31, 2020, 2019, and 2018, we generated 3.3%, 3.7%, and 3.6% of our total revenue and 6.4%, 7.9%, and 7.1% of our total gross profit from our Good Sam Services and Plans segment, respectively. For the years ended December 31, 2020, 2019, and 2018, we generated 96.7%, 96.3%, and 96.4% of our total revenue and 93.6%, 92.1%, and 92.9% of our total gross profit from our RV and Outdoor Retail segment, respectively.
COVID-19
As discussed in Note 1 ─ Summary of Significant Accounting Policies ─ COVID-19 to our consolidated financial statements included in Part II, Item 8 of this Form 10-K, the COVID-19 pandemic adversely impacted our business from mid-March through much of April 2020, but shifted to a favorable impact beginning primarily in May 2020.
In response to the pandemic, we have implemented preparedness plans to keep our employees and customers safe, which include social distancing, providing employees with face coverings and/or other protective clothing as required, implementing additional cleaning and sanitization routines, and work-from-home orders for a significant portion of our workforce. The majority of our retail locations have continued to operate as essential businesses and consequently have remained open to serve our customers through the pandemic, and we continue to operate our e-commerce business. As of December 31, 2020, we have temporarily closed two of our dealerships as a result of COVID-19 and branding changes. These two dealerships are expected to reopen in 2021. We temporarily reduced salaries and hours throughout the Company, including for our executive officers and implemented headcount and other cost reductions primarily from the middle of March 2020 through the middle of May 2020, in an attempt to better align expenses with the initially expected reduced sales resulting from the impact of COVID-19 on our business. Most of these temporary salary reductions ended in May 2020 as the adverse impacts of the pandemic began to decline and we increased hours for certain employees and reinstated many positions from the initial headcount reductions as the demand for our products increased.
In conjunction with the stay-at-home and shelter-in-place restrictions enacted in many areas, we saw significant sequential declines in overall customer traffic levels and overall revenues from the mid-March to mid-to-late April 2020 timeframe. In the latter part of April, we began to see a significant improvement in online web traffic levels, and in early May, we began to see improvements in overall revenue levels. As the stay-at-home restrictions began to ease across certain areas of the country, we experienced significant acceleration in our in-store traffic and revenue trends in May and continuing throughout the remainder of 2020 and early indications appear to show favorable trends continuing into 2021. We believe that the demand will remain elevated as consumers continue to view RVs as an opportunity to work and school remotely.
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We have been implementing marketing and operational plans to optimize our leadership position through the pandemic, regardless of the ultimate timing and slope of the recovery curve. We have adapted our sales practices to accommodate customers’ safety concerns in this COVID-19 environment, such as offering virtual tours of RVs and providing home delivery options. As a consequence of COVID-19, we held fewer consumer shows and events during 2020 than in 2019 and we debuted our first virtual show in 2020.
If stay-at-home and shelter-in-place restrictions are put back into place or as other modes of transportation and vacation options recover from the impact of COVID-19, the increased demand for our products may not be sustained. We are unable to accurately quantify the future impact that COVID-19 may have on our business, results of operations and liquidity due to numerous uncertainties, including the severity of the disease, the duration of the pandemic, including additional waves of infection and the effectiveness and availability of vaccines, the economic impact of the pandemic, actions that may be taken by governmental authorities and other as yet unanticipated consequences. In addition, there could be weakening demand for items that are not basic goods, and our supply chain could be disrupted in the future as a result of the outbreak, such as if Thor Industries, Inc. were to again close its North American production facilities as it did from late March to early May 2020. Any of these events could have a materially adverse impact on our operating results.
Key Performance Indicators
We evaluate the results of our overall business based on a variety of factors, including the number of Active Customers and Good Sam members, revenue and same store revenue, vehicle units, and same store vehicle units, gross profit and gross profit per vehicle sold, gross margin, finance and insurance per vehicle (“PV”), vehicle inventory turnover, and Adjusted EBITDA and Adjusted EBITDA margin. Sales of new vehicles generally result in a lower gross profit margin than other areas of our business, including used vehicles, repair service and installation work, RV equipment and accessories, outdoor equipment and accessories and finance and insurance products.
Same store revenue. Same store revenue measures the performance of a retail location during the current reporting period against the performance of the same retail location in the corresponding period of the previous year. Our same store revenue calculations for a given period include only those stores that were open both at the end of the corresponding period and at the beginning of the preceding fiscal year. As of December 31, 2020, 2019, and 2018, we had a base of 142, 132, and 118 same stores, respectively. For the years ended December 31, 2020, 2019 and 2018 our aggregate same store revenue was $4.5 billion, $3.7 billion, and $3.9 billion, respectively. With same store revenue driven by the number of transactions and the average transaction price, changes in our mix of new vehicle sales has and will likely continue to negatively impact our new vehicle same store revenue. Over the past several years, we have seen a shift in our overall mix of new RV sales towards travel trailer vehicles, which tend to carry lower average selling prices than other classes of new RV vehicles. From 2015 to 2020, new vehicle travel trailer units have increased from 62% to 74% of total new vehicle unit sales and the average selling price of a new vehicle unit has declined from $39,853 to $36,277. The increased popularity of new travel trailer vehicles and the lower price points of these units compared to other new vehicle classes such as motorhomes and fifth wheels could continue to lower our average selling price of a new vehicle unit and impact our same store revenue.
Gross Profit and Gross Margins . Gross profit is our total revenue less our total costs applicable to revenue. Our total costs applicable to revenue primarily consists of the cost of goods and cost of sales, exclusive of depreciation and amortization. Gross margin is gross profit as a percentage of revenue.
Our gross profit is variable in nature and generally follows changes in our revenue. While gross margins for our RV and Outdoor Retail segment are lower than gross margins for our Good Sam Services and Plans, this segment generates significant gross profit and is our primary means of acquiring new customers, to whom we then cross sell our higher margin products and services with recurring revenue. We believe the overall growth of our RV and Outdoor Retail segments will allow us to continue to drive growth in gross profit due to our ability to cross sell our Good Sam Services and Plans to our increasing Active Customer base. Gross margin in our RV and Outdoor Retail segment was negatively impacted in 2018 and 2017 by the opening of Gander Outdoors locations and in 2019 by the 2019 Strategic Shift.
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Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA and Adjusted EBITDA Margin are some of the primary metrics management uses to evaluate the financial performance of our business. Adjusted EBITDA and Adjusted EBITDA Margin are also frequently used by analysts, investors, and other interested parties to evaluate companies in our industry. Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP metrics. We use Adjusted EBITDA and Adjusted EBITDA Margin to supplement GAAP measures of performance as follows:
•
as a measurement of operating performance to assist us in comparing the operating performance of our business on a consistent basis, and remove the impact of items not directly resulting from our core operations;
•
for planning purposes, including the preparation of our internal annual operating budget and financial projections; and
• to evaluate the performance and effectiveness of our operational strategies.
For the definitions of Adjusted EBITDA and Adjusted EBITDA Margin, a reconciliation of Adjusted EBITDA to net income, a reconciliation of Adjusted EBITDA Margin to net income margin, and a further discussion of how we utilize these non-GAAP financial measures and their limitations, see “Non-GAAP Financial Measures” below.
Industry Trends
After several years of strong growth, the overall RV industry experienced decelerating demand for new vehicles in 2018 and 2019. Along with the decelerating demand trends, wholesale shipments of new RV vehicles declined 16.0% in 2019 according to the RV Industry Association’s survey of manufacturers. In late 2019, the demand for new RVs across the overall RV industry began improving. Wholesale shipments of new RVs increased 13.2% in the first two months of 2020 according to the RV Industry Association’s survey of manufacturers but then there was a six to eight week shutdown by RV manufacturers last spring which resulted in an 18.7% decrease in wholesale shipments for the first half of 2020. Wholesale shipments of RVs for the second half of 2020 increased 34.2% over the comparable period in 2019. For the year ended December 31, 2020 total RV shipments increased 6.0% versus the comparable period in 2019, with the travel trailer group showing the largest increase.
With the COVID-19 crisis causing many state and local governments to issue “stay-at-home” and “shelter-in-place” restrictions in mid-to-late March, sales and traffic levels across the RV industry declined significantly in April 2020. In response to the COVID-19 pandemic, many RV manufacturers, including Thor Industries, Forest River, Inc., and Winnebago Industries, temporarily suspended production from late March to mid-May. This led to a 44.6% decrease in wholesale shipments of new RVs for the three month period of March, April, and May 2020, according to the RV Industry Association’s survey of manufacturers.
Longer term, however, we believe the increase in the number of light-weight towable RV models offered by the manufacturers, the increase in the number of pickup trucks and sport utility vehicles in operation, the ease of towing, the affordability of many of the light-weight RVs, the savings RVs offer on a variety of vacation costs, an increase in the pool of potential RV customers due to an aging baby boomer and millennial demographic, and the increased RV ownership among younger consumers are positive long-term secular trends driving the growth of the RV industry and the installed base of RV owners.
In addition, we believe the growth in the number of U.S. camping households bodes well for the long-term growth of the RV industry. The 2020 North American Camping Report estimated that the total number of camping households in the U.S. has increased by more than 9.7 million over the past six years to 82 million. Campers are increasing the amount of time they camp each year, with the number of campers who camp three times or more each year increasing by 82% since 2014. Over the past six years, an increasing number of campers have said that they use an RV as their primary camping accommodation. From 2014 to 2019, the number of campers using an RV to camp increased from 21% to an estimated 27%.
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Finally, the camping and RV industry are expected to benefit from Baby Boomers reaching retirement age and Generation X and Millennial consumers reaching their prime camping age, which is generally considered between the ages of 30 and 50. According to U. S. Census Bureau data in the 2019 American Community Survey 1-Year Estimates, the population for the ages of 20 and 34 were estimated at 67 million individuals and the population between the ages of 50 and 69 were estimated at 80 million individuals in the United States.
Strategic Shift
In 2019, we made a strategic decision to refocus our business around our core RV competencies. In connection with the 2019 Strategic Shift, we recorded restructuring charges of $27.7 million in the third quarter of 2019 and $19.5 million in the fourth quarter of 2019. In total, we expect to incur costs relating to one-time employee termination benefits of $1.2 million, all of which has been incurred through December 31, 2020, lease termination costs of between $18.0 million and $32.0 million, incremental inventory reserve charges of $42.4 million all of which has been incurred through December 31, 2020, and other associated costs of between $28.0 million and $35.0 million. Through December 31, 2019, we incurred $21.2 million of such other associated costs primarily representing labor, lease, and other operating expenses incurred during the post-close wind-down period for the locations related to the 2019 Strategic Shift. The additional amount of $6.8 million to $13.8 million represents similar costs that may be incurred in the year ending December 31, 2021 for locations that continue in a wind-down period, primarily comprised of lease costs accounted for under ASC No. 842, Leases (“ASC 842”) prior to lease termination. We intend to negotiate terminations of these leases where prudent and pursue sublease arrangements for the remaining leases. Lease costs may continue to be incurred after December 31, 2020 on these leases if we are unable to terminate the leases under acceptable terms or offset the lease costs through sublease arrangements. The foregoing lease termination cost estimate represents the expected cash payments to terminate certain leases, but does not include the gain or loss from derecognition of the related operating lease assets and liabilities, which is dependent on the particular leases that will be terminated. See Note 5 — Restructuring and Long-lived Asset Impairment to our consolidated financial statements included in Part II, Item 8 of this Form 10-K.
The following table details the costs incurred associated with the 2019 Strategic Shift (in thousands):
Year Ended
December 31, 2020
December 31, 2019
Restructuring costs:
One-time termination benefits (1)
$
231
$
1,008
Lease termination costs (2)
4,432
55
Incremental inventory reserve charges (3)
543
41,894
Other associated costs (4)
16,835
4,321
Total restructuring costs
$
22,041
$
47,278
(1)
These costs incurred in 2020 were primarily included in costs applicable to revenues – products, service and other in the consolidated statements of operations. These costs incurred in 2019 were primarily included in selling, general and administrative expenses in the consolidated statements of operations.
(2)
These costs were included in lease termination charges in the consolidated statements of operations. This reflects termination fees paid, net of any gain from derecognition of the related operating lease assets and liabilities.
(3)
These costs were included in costs applicable to revenue – products, service and other in the consolidated statements of operations.
(4)
Other associated costs primarily represent labor, lease, and other operating expenses incurred during the post-close wind-down period for the locations related to the 2019 Strategic Shift. For the year ended December 31, 2020, costs of approximately $0.4 million were included in costs applicable to revenue – products, service and other, and $16.4 million were included in selling, general, and administrative expenses in the consolidated statements of operations.
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Results of Operations
Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
The following tables set forth information comparing the components of net income for the years ended December 31, 2020 and 2019.
Year Ended
December 31, 2020
December 31, 2019
Percent of
Percent of
Favorable/ (Unfavorable)
($ in thousands)
Amount
Revenue
Amount
Revenue
$
%
Revenue:
Good Sam Services and Plans
$
180,977
3.3%
$
179,538
3.7%
$
1,439
0.8%
RV and Outdoor Retail:
New vehicles
2,823,311
51.8%
2,370,321
48.5%
452,990
19.1%
Used vehicles
984,853
18.1%
857,628
17.5%
127,225
14.8%
Products, service and other
948,890
17.4%
1,034,577
21.1%
(85,687)
(8.3)%
Finance and insurance, net
464,261
8.5%
401,302
8.2%
62,959
15.7%
Good Sam Club
44,299
0.8%
48,653
1.0%
(4,354)
(8.9)%
Subtotal
5,265,614
96.7%
4,712,481
96.3%
553,133
11.7%
Total revenue
5,446,591
100.0%
4,892,019
100.0%
554,572
11.3%
Gross profit (exclusive of depreciation and amortization shown separately below):
Good Sam Services and Plans
108,039
2.0%
101,484
2.1%
6,555
6.5%
RV and Outdoor Retail:
New vehicles
502,774
9.2%
296,051
6.1%
206,723
69.8%
Used vehicles
233,824
4.3%
178,988
3.7%
54,836
30.6%
Products, service and other
358,174
6.6%
271,658
5.6%
86,516
31.8%
Finance and insurance, net
464,261
8.5%
401,302
8.2%
62,959
15.7%
Good Sam Club
35,407
0.7%
37,915
0.8%
(2,508)
(6.6)%
Subtotal
1,594,440
29.3%
1,185,914
24.2%
408,526
34.4%
Total gross profit
1,702,479
31.3%
1,287,398
26.3%
415,081
32.2%
Operating expenses:
Selling, general and administrative expenses
1,156,071
21.2%
1,141,643
23.3%
(14,428)
(1.3)%
Depreciation and amortization
51,981
1.0%
59,932
1.2%
7,951
13.3%
Long-lived asset impairment
12,353
0.2%
66,270
1.4%
53,917
81.4%
Lease termination
4,547
0.1%
(686)
(0.0)%
(5,233)
nm
Loss on disposal of assets
1,332
0.0%
11,492
0.2%
10,160
88.4%
Total operating expenses
1,226,284
22.5%
1,278,651
26.1%
(52,367)
(4.1)%
Income from operations
476,195
8.7%
8,747
0.2%
467,448
5344.1%
Other income (expense):
Floor plan interest expense
(19,689)
(0.4)%
(40,108)
(0.8)%
20,419
50.9%
Other interest expense, net
(54,689)
(1.0)%
(69,363)
(1.4)%
14,674
21.2%
Tax Receivable Agreement liability adjustment
141
0.0%
10,005
0.2%
(9,864)
(98.6)%
Total other income (expense)
(74,237)
(1.4)%
(99,466)
(2.0)%
25,229
25.4%
Income (loss) before income taxes
401,958
7.4%
(90,719)
(1.9)%
492,677
nm
Income tax expense
(57,743)
(1.1)%
(29,582)
(0.6)%
(28,161)
(95.2)%
Net income (loss)
344,215
6.3%
(120,301)
(2.5)%
464,516
nm
Less: net (income) loss attributable to non-controlling interests
(221,870)
(4.1)%
59,710
1.2%
(281,580)
nm
Net income (loss) attributable to Camping World Holdings, Inc.
$
122,345
2.2%
$
(60,591)
(1.2)%
$
182,936
nm
nm- not meaningful
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Supplemental Data
Year Ended December 31,
Increase
Percent
2020
2019
(decrease)
Change
Unit sales
New vehicles
77,827
66,111
11,716
17.7%
Used vehicles
37,760
36,213
1,547
4.3%
Total
115,587
102,324
13,263
13.0%
Average selling price
New vehicles
$
36,277
$
35,854
$
423
1.2%
Used vehicles
$
26,082
$
23,683
$
2,399
10.1%
Same store unit sales
New vehicles
70,313
61,390
8,923
14.5%
Used vehicles
34,351
34,477
(126)
(0.4)%
Total
104,664
95,867
8,797
9.2%
Same store revenue ($ in 000's)
New vehicles
$
2,567,103
$
2,223,696
$
343,406
15.4%
Used vehicles
911,315
828,312
83,004
10.0%
Products, service and other
594,060
523,328
70,732
13.5%
Finance and insurance, net
426,229
379,785
46,444
12.2%
Total
$
4,498,708
$
3,955,122
$
543,586
13.7%
Average gross profit per unit
New vehicles
$
6,460
$
4,478
$
1,982
44.3%
Used vehicles
6,192
4,943
1,249
25.3%
Finance and insurance, net per vehicle unit
4,017
3,922
95
2.4%
Total vehicle front-end yield (1)
10,389
8,564
1,825
21.3%
Gross margin
Good Sam Services and Plans
59.7%
56.5%
317
bps
New vehicles
17.8%
12.5%
532
bps
Used vehicles
23.7%
20.9%
287
bps
Products, service and other
37.7%
26.3%
1,149
bps
Finance and insurance, net
100.0%
100.0%
unch.
bps
Good Sam Club
79.9%
77.9%
200
bps
Subtotal RV and Outdoor Retail
30.3%
25.2%
511
bps
Total gross margin
31.3%
26.3%
494
bps
Inventories ($ in 000's)
New vehicles
$
691,114
$
966,134
$
(275,020)
(28.5)%
Used vehicles
178,336
165,927
12,409
7.5%
Products, parts, accessories and misc.
266,786
225,888
40,898
18.1%
Total RV and Outdoor Retail inventories
$
1,136,236
$
1,357,949
$
(221,713)
(16.3)%
Vehicle inventory per location ($ in 000's)
New vehicle inventory per dealer location
$
4,319
$
6,274
$
(1,954)
(31.1)%
Used vehicle inventory per dealer location
1,115
1,077
37
3.4%
Vehicle inventory turnover (2)
New vehicle inventory turnover
3.1
2.1
1.0
44.9%
Used vehicle inventory turnover
5.2
4.8
0.4
9.0%
Retail locations
RV dealerships
160
154
6
3.9%
RV service & retail centers
10
11
(1)
(9.1)%
Subtotal
170
165
5
3.0%
Other retail stores
1
10
(9)
(90.0)%
Total
171
175
(4)
(2.3)%
Other data
Active Customers (3)
5,314,104
5,118,413
195,691
3.8%
Good Sam Club members
2,088,064
2,124,724
(36,660)
(1.7)%
Finance and insurance gross profit as a % of total vehicle revenue
12.2%
12.4%
(24)
bps
n/a
Same store locations
142
n/a
n/a
n/a
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(1) Front end yield is calculated as gross profit from new vehicles, used vehicles and finance and insurance (net), divided by combined new and used retail unit revenue.
(2) Inventory turnover calculated as vehicle costs applicable to revenue divided by the average of beginning and ending vehicle inventory.
(3) An Active Customer is a customer who has transacted with us in any of the eight most recently completed fiscal quarters prior to the date of measurement.
Total revenue was $5.4 billion for 2020, an increase of $554.6 million, or 11.3%, from $4.9 billion for 2019. The increase in total revenue was driven by a $553.1 million, or 11.7%, increase in RV and Outdoor Retail revenue, and a $1.4 million, or 0.8%, increase in Good Sam Services and Plans revenue.
Total gross profit was $1.7 billion for 2020, an increase of $415.1 million, or 32.2%, from $1.3 billion for 2019. The increase in total gross profit was driven by a $408.5 million, or 34.4%, increase in RV and Outdoor Retail gross profit, and a $6.6 million, or 6.5%, increase in Good Sam Services and Plans gross profit.
Income from operations was $476.2 million for 2020, an increase of $467.4 million from $8.7 million for 2019. The increase in income from operations was primarily driven by a $415.1 million increase in gross profit, a $53.9 million decrease in long-lived asset impairment, a decrease of approximately $10.1 million in loss on disposal of assets, and a decrease of approximately $7.9 million in depreciation and amortization, partially offset by an increase of $14.4 million in selling, general and administrative expenses, and a $5.2 million increase in lease termination expense.
Total other expenses were $74.2 million for 2020, a decrease of $25.2 million, or 25.4% from $99.5 billion for 2019. The decrease in other expenses was driven by a $20.4 million decrease in floor plan interest expense, and a $14.7 million decrease in other interest expense, partially offset by a $9.9 million favorable adjustment in Tax Receivable Agreement Liability in 2019, which did not reoccur in 2020.
As a result of the above factors, income before income taxes was $402.0 million for 2020 compared to loss before income taxes of $90.7 million for 2019. Income tax expense was $57.7 million for 2020, an increase of $28.2 million from $29.6 million for 2019. As a result, net income was $344.2 million for 2020 compared to net loss of $120.3 million for 2019.
Good Sam Services and Plans
Good Sam Services and Plans revenue was $181.0 million for 2020, an increase of $1.4 million, or 0.8%, from $179.5 million for 2019. The $1.4 million increase was primarily attributable to $2.4 million from increased contracts in force from our roadside assistance programs, $1.8 million from increased contracts in force for our extended vehicle warranty programs, $1.6 million from increased contracts in force for our vehicle insurance products, and $1.1 million from increased RV financing loan volume, partially offset by a $2.4 million decrease from 13 fewer consumer shows, and decreases in advertising revenue of $1.4 million from the magazine group and $1.7 million for the annual directory.
Good Sam Services and Plans gross profit was $108.0 million for 2020, an increase of $6.6 million, or 6.5%, from $101.5 million for 2019. The increase in gross profit was primarily attributable to $4.2 million from increased policies in force and reduced marketing expenses for our extended vehicle programs, $3.2 million of increased policies in force and reduced program expenses in our roadside assistance programs, and $1.2 million from increased loan volume for our RV financing, partially offset by $1.1 million of reduced gross profit from reduced consumer shows, $0.8 million from the annual directory and $0.1 million from other services and plans.
RV and Outdoor Retail:
New Vehicles
New vehicle revenue was $2.8 billion for 2020, an increase of $453.0 million, or 19.1%, from $2.4 billion for 2019. The increase was primarily due to a 17.7% increase in vehicle units sold and a 1.2% increase in
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average selling price per vehicle, driven by increases in nearly all product types. On a same store basis, new vehicle revenue increased 15.4% to $2.6 billion in 2020 from $2.2 billion in 2019.
New vehicle gross profit increased 69.8%, or $206.7 million, to $502.8 million for 2020 from $296.1 million for 2019. The increase was primarily due to a 44.3% increase in average gross profit per vehicle sold and by a 17.7% increase in vehicle units sold. Gross margin increased 532 basis points to 17.8% in 2020 from 12.5% in 2019. The increase was primarily due to higher towable and motorized gross margins resulting from lower supply from manufacturers and outsized demand from consumers turning to RVing as a vacation alternative.
Used Vehicles
Used vehicle revenue increased 14.8%, or $127.2 million, to $984.9 million for 2020 from $857.6 million for 2019. The increase was primarily due to a 10.1% increase in average selling price per vehicle sold, and a 4.3% increase in vehicle units sold, driven mostly by towable units where a dip in trade-in rates through a portion of the year compressed inventory levels while product demand remained high. On a same store basis, used vehicle revenue increased 10.0% to $911.3 million in 2020 from $828.3 million in 2019.
Used vehicle gross profit increased 30.6%, or $54.8 million, to $223.8 million in 2020 from $179.0 million in 2019. The increase was primarily from a 25.3% increase in average gross profit per vehicle sold and a 4.3% increase in vehicle units sold. Used vehicle gross margin increased 287 basis points to 23.7% in 2020 from 20.9% in 2019. The increase was driven by nearly all types of towable units as a result of strength in the used market.
Products, Service and Other
Products, service and other revenue decreased 8.3%, or $85.7 million, to $948.9 million in 2020 from $1.0 billion in 2019. The decrease was driven by store closures related to the 2019 Strategic Shift, partially offset by improvements in same store sales. On a same store basis, products, service and other revenue increased 13.5% to $594.1 million for 2020 from $523.3 million in 2019.
Products, service and other gross profit increased 31.8%, or $86.5 million, to $358.2 million in 2020 from $271.7 million in 2019. The increase was driven by the 2019 Strategic Shift inventory liquidation charge of $27.3 million in 2019 and improved margin at the remaining locations. Product, service and other gross margin increased to 37.7% in 2020 from 26.3% in 2019. The increase was primarily due to a sales mix shift towards higher margin legacy RV products and the 2019 Strategic Shift inventory liquidation charge of $27.3 million in 2019.
Finance and Insurance, net
Finance and insurance, net revenue increased 15.7%, or $63.0 million to $464.3 million in 2020 from $401.3 million for 2019, primarily due to increased volume of vehicles sold. Finance and insurance, net as a percentage of new and used vehicle revenue decreased to 12.2% for 2020 from 12.4% for 2019. On a same store basis, finance and insurance, net revenue increased 12.2%, or $46.4 million, to $426.2 million in 2020 versus $379.8 million in 2019.
Good Sam Club
Good Sam Club revenue decreased 8.9%, or $4.4 million, to $44.3 million in 2020 from $48.7 million in 2019. The decrease resulted from a reduced number of members and reduced royalty fees from the credit card related to fewer retail locations that resulted from store closures related to the 2019 Strategic Shift.
Good Sam Club gross profit decreased 6.6%, or $2.5 million, to $35.4 million in 2020 from $37.9 million in 2019. The decrease was primarily due to a reduced number of members from the decreased number of stores as a result of the store closures related to the 2019 Strategic Shift. Gross margin increased to 79.9% in 2020 from 77.9% in 2019 primarily due to reduced club marketing expenses.
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Selling, general and administrative
Selling, general and administrative expenses increased 1.3%, or $14.4 million, to $1.2 billion in 2020 from $1.1 billion for 2019. The $14.4 million increase was primarily due to a $46.7 million increase in wage-related expenses attributable in large part to variable pay on increased gross profit, partially offset by an $18.1 million decrease in advertising as the Company shifted towards a more digitally-driven marketing approach, $8.1 million decrease in personal and real property expense primarily due to closed stores as a result of the 2019 Strategic Shift, and a $6.1 million decrease in other store and corporate overhead expenses. Selling, general and administrative expenses as a percentage of total gross profit decreased to 67.9% in 2020 from 88.7% in 2019.
Depreciation and amortization
Depreciation and amortization decreased 13.3%, or $8.0 million, to $52.0 million in 2020 from $59.9 million for 2019 due to reduction in capital expenditures in 2020 and the asset impairment related to the 2019 Strategic Shift in 2019.
Long-lived asset impairment
As discussed in Note 5 – Restructuring and Long-lived Asset Impairment to our consolidated financial statements included in Part II, Item 8 of this Form 10-K, we recognized $12.4 million of long-lived asset impairments in 2020, of which $12.3 million related to the 2019 Strategic Shift discussed above, and $66.3 million of long-lived asset impairments during 2019, of which $57.4 million was related to the 2019 Strategic Shift.
Lease termination
Lease termination expense increased $5.2 million to $4.5 million in 2020 from a lease termination benefit of $0.7 million in 2019, related primarily to lease terminations in connection with the 2019 Strategic Shift discussed above.
Floor plan interest expense
Floor plan interest expense decreased 50.9%, or $20.4 million, to $19.7 million for 2020 from $40.1 million in 2019. The decrease was primarily due to a 169 basis point decrease in the average floor plan borrowing rate, and a 22.3% decrease in average floor plan borrowings driven by lower average inventory levels.
Other interest expense, net
Other interest expense decreased 21.2%, or $14.7 million, to $54.7 million in 2020 from $69.4 million for 2019. The decrease was primarily due to a 113 basis point decrease in the average interest rate.
Tax Receivable Agreement liability adjustment
The Tax Receivable Agreement liability adjustment for 2020 and 2019 was a benefit of $0.1 million and $10.0 million, respectively, which represented an adjustment for lower enacted state income tax rates in both periods.
Income tax expense
Income tax expense increased 95.2%, or $28.2 million, to $57.7 million in 2020 compared to $29.6 million for 2019. The increase was primarily due to higher income generated at CWGS, LLC for which the Company is subject to U.S. federal and state taxes on its allocable share, partially offset by operating losses recorded by Camping World, Inc. (“CW”) for which no tax benefit can be recognized.
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Net income (loss)
Net income increased $464.5 million to a net income of $344.2 million in 2020 from a net loss of $120.3 million in 2019 primarily due to the items mentioned above.
Segment results
The following table sets forth a reconciliation of total segment income to consolidated income from operations before income taxes for the period presented:
Fiscal Year Ended
December 31, 2020
December 31, 2019
Favorable/
Percent of
Percent of
(Unfavorable)
($ in thousands)
Amount
Revenue
Amount
Revenue
$
%
Revenue:
Good Sam Services and Plans
$
182,758
3.4%
$
181,526
3.7%
$
1,232
0.7%
RV and Outdoor Retail
5,285,427
97.0%
4,731,636
96.7%
553,791
11.7%
Elimination of intersegment revenue
(21,594)
(0.4)%
(21,143)
(0.4)%
(451)
(2.1)%
Total consolidated revenue
5,446,591
100.0%
4,892,019
100.0%
554,572
11.3%
Segment income (loss): (1)
Good Sam Services and Plans
88,288
1.6%
83,635
1.7%
4,653
5.6%
RV and Outdoor Retail
429,950
7.9%
(42,609)
(0.9)%
472,559
nm
Total segment income
518,238
9.5%
41,026
0.8%
477,212
1163.2%
Corporate & other
(9,751)
(0.2)%
(12,455)
(0.3)%
2,704
21.7%
Depreciation and amortization
(51,981)
(1.0)%
(59,932)
(1.2)%
7,951
13.3%
Other interest expense, net
(54,689)
(1.0)%
(69,363)
(1.4)%
14,674
21.2%
Tax Receivable Agreement liability adjustment
141
0.0%
10,005
0.2%
(9,864)
98.6%
Income (loss) before income taxes
$
401,958
7.4%
$
(90,719)
(1.9)%
$
492,677
nm
Same store revenue- RV and Outdoor Retail (2)
$
4,498,708
$
3,955,122
$
543,586
13.7%
nm – not meaningful
(1) Segment income represents income for each of our reportable segments and is defined as income from operations before depreciation and amortization, plus floor plan interest expense.
(2) Same store revenue definition not applicable to the Good Sam Services and Plans segment.
Good Sam Services and Plans
Good Sam Services and Plans segment revenue was $182.8 million for 2020, an increase of $1.2 million, or 0.7%, from $181.5 million for 2019. The $1.2 million increase was primarily attributable to $2.4 million from increased contracts in force from our roadside assistance programs, $1.8 million from increased contracts in force for our extended vehicle warranty programs, $1.6 million from increased contracts in force for our vehicle insurance products, and $1.1 million from increased RV financing loan volume, partially offset by a $2.5 million decrease from 13 fewer consumer shows, and decreases in advertising revenue, including a $1.5 million decrease from the magazine group and a $1.7 million decrease for the annual directory.
Good Sam Services and Plans segment income was $88.3 million for 2020, an increase of $4.7 million, or 5.6%, from $83.6 million for 2019. The increase was primarily attributable to a gross profit increase of $6.6 million, which was comprised of $4.2 million from increased policies in force and reduced marketing expenses for our extended vehicle warranty programs, $3.2 million from increased policies in force and reduced program expenses in our roadside assistance programs, and $1.2 million from increased loan volume for our RV financing, partially offset by $1.1 million of reduced gross profit from reduced consumer shows, $0.8 million from the annual directory and $0.1 million from other services and plans; and reduced loss on asset disposals of $0.6 million, partially offset by increased selling, general and administrative expenses of $2.5 million. Segment income margin net of intersegment revenue elimination increased 220 basis points to 48.8% primarily due to increased policies in force and reduced marketing costs for our extended vehicle warranty programs, and increased policies in force reduced program costs in our roadside assistance programs.
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RV and Outdoor Retail segment
RV and Outdoor Retail segment revenue was $5.3 billion for 2020, an increase of $553.8 million, or 11.7%, from $4.7 billion for 2019. The increase was primarily due to a 17.7% increase in new vehicle units sold and a 4.4% increase in average selling price per vehicle, driven by increases in nearly all product types, led by single and double axle travel trailers.
RV and Outdoor Retail segment income was $430.0 million for 2020, an increase of $472.6 million, from segment loss of $42.6 million for 2019. The increase was primarily due to a $408.5 million increase in gross profit primarily from higher towable and motorized gross margins resulting from lower supply from manufacturers and outsized demand from consumers turning to RVing as a vacation alternative and increased strength of the used vehicle market, a $53.9 million reduction in long-lived asset impairment, a $20.4 million decrease in floor plan interest expense, and a $9.5 million reduction in loss on disposal of assets, partially offset by an increase of approximately $14.5 million in selling, general and administrative expenses resulting from commissions on increased revenue partially offset by a reduction resulting from the 2019 Strategic Shift, and a $5.2 million increase in lease termination expense. Segment income margin net of intersegment revenue elimination increased to 8.2% from a segment loss margin of 0.90% in 2019 primarily due to the impact of the 2019 Strategic Shift.
Corporate and other expenses
Corporate and other expenses were $9.8 million for 2020, a decrease of $2.7 million, or 21.7%, from $12.5 million for 2019. The decrease was primarily due to reduced professional fees.
Tax Receivable Agreement liability adjustment
The Tax Receivable Agreement liability adjustment for 2020 and 2019 was a benefit of $0.1 million and $10.0 million, respectively, which represented an adjustment for lower enacted state income tax rates in both periods.
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States (“GAAP”), we use the following non-GAAP financial measures: EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income Attributable to Camping World Holdings, Inc. – Basic, Adjusted Net Income Attributable to Camping World Holdings, Inc. – Diluted, Adjusted Earnings Per Share – Basic, and Adjusted Earnings Per Share – Diluted (collectively the "Non-GAAP Financial Measures"). We believe that these Non-GAAP Financial Measures, when used in conjunction with GAAP financial measures, provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to the key metrics we use in our financial and operational decision making. These Non-GAAP Financial Measures are also frequently used by analysts, investors and other interested parties to evaluate companies in the Company’s industry. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP, and they should not be construed as an inference that the Company’s future results will be unaffected by any items adjusted for in these non-GAAP Financial Measures. In evaluating these non-GAAP Financial Measures, you should be aware that in the future the Company may incur expenses that are the same as or similar to some of those adjusted in this presentation. The Non-GAAP Financial Measures that we use are not necessarily comparable to similarly titled measures used by other companies due to different methods of calculation.
EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin
We define “EBITDA” as net income before other interest expense, net (excluding floor plan interest expense), provision for income tax expense and depreciation and amortization. We define “Adjusted EBITDA” as EBITDA further adjusted for the impact of certain noncash and other items that we do not consider in our evaluation of ongoing operating performance. These items include, among other things, long-lived asset
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impairment, lease termination costs, loss and expense on debt restructure, goodwill impairment, gains and losses on disposal of assets and other expense, net, monitoring fees, equity-based compensation, Tax Receivable Agreement liability adjustment, transaction expenses related to acquisitions, Gander Outdoors pre-opening costs, restructuring costs related to the 2019 Strategic Shift, and other unusual or one-time items. We define “Adjusted EBITDA Margin” as Adjusted EBITDA as a percentage of total revenue. We caution investors that amounts presented in accordance with our definitions of EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin may not be comparable to similar measures disclosed by our competitors, because not all companies and analysts calculate EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin in the same manner. We present EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin because we consider them to be important supplemental measures of our performance and believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Management believes that investors’ understanding of our performance is enhanced by including these Non GAAP Financial Measures as a reasonable basis for comparing our ongoing results of operations.
The following table reconciles EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin to the most directly comparable GAAP financial performance measures, which are net (loss) income, and net (loss) income margin, respectively:
Fiscal Year Ended
December 31,
December 31,
December 31,
December 31,
December 31,
($ in thousands)
2020
2019
2018
2017
2016
EBITDA:
Net income (loss)
$
344,215
$
(120,301)
$
65,581
$
230,692
$
198,476
Other interest expense, net
54,689
69,363
63,329
42,959
48,318
Depreciation and amortization
51,981
59,932
49,322
31,545
24,695
Income tax expense
57,743
29,582
30,790
154,910
5,800
Subtotal EBITDA
508,628
38,576
209,022
460,106
277,289
Loss and expense on debt restructure (a)
—
—
2,056
849
6,270
Goodwill impairment (b)
—
—
40,046
—
—
Long-lived asset impairment (c)
12,353
66,270
—
—
—
Lease termination (d)
4,547
(686)
—
—
—
Loss (gain) on disposal of assets, net (e)
1,332
11,492
2,810
(133)
(564)
Monitoring fee (f)
—
—
—
—
1,875
Equity-based compensation (g)
20,661
13,145
14,088
5,109
1,597
Tax Receivable Agreement liability adjustment (h)
(141)
(10,005)
1,324
(100,758)
—
Acquisitions - transaction expense (i)
—
—
—
2,662
—
Gander Outdoors pre-opening costs (j)
—
—
43,156
26,352
—
Restructuring costs (k)
17,609
47,223
—
—
—
Adjusted EBITDA
$
564,989
$
166,015
$
312,502
$
394,187
$
286,467
Fiscal Year Ended
December 31,
December 31,
December 31,
December 31,
December 31,
(as percentage of total revenue)
2020
2019
2018
2017
2016
EBITDA margin:
Net income (loss) margin
6.3%
(2.5)%
1.4%
5.4%
5.6%
Other interest expense, net
1.0%
1.4%
1.3%
1.0%
1.4%
Depreciation and amortization
1.0%
1.2%
1.0%
0.7%
0.7%
Income tax expense
1.1%
0.6%
0.6%
3.6%
0.2%
Subtotal EBITDA margin
9.3%
0.8%
4.4%
10.8%
7.9%
Loss and expense on debt restructure (a)
—
—
0.0%
0.0%
0.2%
Goodwill impairment (b)
—
—
0.8%
—
—
Long-lived asset impairment (c)
0.2%
1.4%
—
—
—
Lease termination (d)
0.1%
(0.0)%
—
—
—
Loss (gain) on disposal of assets, net (e)
0.0%
0.2%
0.1%
(0.0)%
(0.0)%
Monitoring fee (f)
—
—
—
—
0.1%
Equity-based compensation (g)
0.4%
0.3%
0.3%
0.1%
0.0%
Tax Receivable Agreement liability adjustment (h)
(0.0)%
(0.2)%
—
(2.4)%
—
Acquisitions - transaction expense (i)
—
—
—
0.1%
—
Gander Outdoors pre-opening costs (j)
—
—
0.9%
0.6%
—
Restructuring costs (k)
0.3%
1.0%
—
—
—
Adjusted EBITDA margin
10.4%
3.4%
6.5%
9.2%
8.1%
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(a) Represents the loss and expense incurred on debt restructure and financing expense incurred from the Third Amendment to the Credit Agreement in 2018, the First and Second Amendment to the Senior Credit Facilities in 2017, the write-off of a portion of the original issue discount, capitalized finance costs from the Previous Term Loan Facilities, and rating agency fees and legal expenses related to the Previous Term Loan Facilities in 2016.
(b) Represents a goodwill impairment charge of $40.0 million related to the RV and Outdoor Retail segment in the fourth quarter of 2018. See Note 7 - Goodwill and Intangible Assets to our audited consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information.
(c) Represents long-lived asset impairment charges related to the RV and Outdoor Retail segment, which primarily relate to locations affected by the 2019 Strategic Shift. See Note 5 – Restructuring and Long-lived Asset Impairment to our consolidated financial statements included in Part II, Item 8 of this Form 10-K for additional information.
(d) Represents the loss (gain) on the termination of operating leases relating primarily to the 2019 Strategic Shift, net of lease termination fees. See Note 5 – Restructuring and Long-lived Asset Impairment to our consolidated financial statements included in Part II, Item 8 of this Form 10-K for additional information.
(e) Represents an adjustment to eliminate (i) losses on the disposal or sale of real estate at closed retail locations in 2020 and 2019 and (ii) the gains and losses on disposal and sales of various assets.
(f) Represents monitoring fees paid pursuant to a monitoring agreement to Crestview and Stephen Adams. The monitoring agreement was terminated on October 6, 2016 in connection with our IPO.
(g) Represents non-cash equity-based compensation expense relating to employees, directors, and consultants of the Company.
(h) Represents an adjustment to eliminate the gains on remeasurement of the Tax Receivable Agreement primarily due to changes in our effective income tax rate and the transfer of certain assets from GSS Enterprises LLC (“GSS”) to Camping World, Inc. (“CW”).
(i) Represent transaction expenses, primarily legal costs, associated with acquisitions into new or complementary markets, including the Gander Mountain acquisition. This amount excludes transaction expenses related to the acquisition of RV dealerships, consumer shows, and other RV and Outdoor Retail segment business acquisitions which are considered recurring in nature.
(j) Represents pre-opening store costs associated with the Gander Outdoors store openings, which is comprised of 1) Gander Outdoors-specific corporate and retail overhead, 2) distribution center expenses, and 3) store-level startup expenses. As discussed in Note 15 - Acquisitions to our consolidated financial statements included in Part II, Item 8 of this Form 10-K, the Company incurred significant costs related to the initial rollout of Gander Outdoors locations. Based on the nature of the acquisition through a bankruptcy auction and the large quantity of retail locations opened and to be opened in a very compressed timeframe, the Company does not deem the pre-opening store costs for the initial rollout of Gander Outdoors locations to be normal, recurring charges. The Company does not intend to adjust for pre-opening store costs other than for the initial rollout of Gander Outdoors.
(k) Represents restructuring costs relating to our 2019 Strategic Shift. These restructuring costs include one-time employee termination benefits relating to retail store or distribution center closures/divestitures, incremental inventory reserve charges, and other associated costs. These costs exclude lease termination costs, which are presented separately (see (d) above). See Note 5 – Restructuring and Long-lived Asset Impairment to our consolidated financial statements included in Part II, Item 8 of this Form 10-K for additional information.
Adjusted Net Income Attributable to Camping World Holdings, Inc. and Adjusted Earnings Per Share
We define “Adjusted Net Income Attributable to Camping World Holdings, Inc. – Basic” as net income attributable to Camping World Holdings, Inc. adjusted for the impact of certain non-cash and other items that we do not consider in our evaluation of ongoing operating performance. These items include, among other things, long-lived asset impairment, lease termination costs, loss and expense on debt restructure, goodwill impairment, gains and losses on disposal of assets and other expense, net, equity-based compensation, Tax Receivable Agreement liability adjustment, transaction expenses related to acquisitions, Gander Outdoors pre-opening costs, restructuring costs related to the 2019 Strategic Shift, other unusual or one-time items, the income tax expense effect of these adjustments, and the effect of net income attributable to non-controlling interests from these adjustments.
We define “Adjusted Net Income Attributable to Camping World Holdings, Inc. – Diluted” as Adjusted Net Income Attributable to Camping World Holdings, Inc. – Basic adjusted for the reallocation of net income attributable to non-controlling interests from stock options and restricted stock units, if dilutive, or the assumed exchange, if dilutive, of all outstanding common units in CWGS, LLC for shares of newly-issued Class A common stock of Camping World Holdings, Inc.
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We define “Adjusted Earnings Per Share – Basic” as Adjusted Net Income Attributable to Camping World Holdings, Inc. - Basic divided by the weighted-average shares of Class A common stock outstanding. We define “Adjusted Earnings Per Share – Diluted” as Adjusted Net Income Attributable to Camping World Holdings, Inc. – Diluted divided by the weighted-average shares of Class A common stock outstanding, assuming (i) the exchange of all outstanding common units in CWGS, LLC for newly-issued shares of Class A common stock of Camping World Holdings, Inc., if dilutive, and (ii) the dilutive effect of stock options and restricted stock units, if any. We present Adjusted Net Income Attributable to Camping World Holdings, Inc. – Basic, Adjusted Net Income Attributable to Camping World Holdings, Inc. – Diluted, Adjusted Earnings Per Share – Basic, and Adjusted Earnings Per Share – Diluted because we consider them to be important supplemental measures of our performance and we believe that investors’ understanding of our performance is enhanced by including these Non GAAP financial measures as a reasonable basis for comparing our ongoing results of operations.
Consistent with the GAAP basic and diluted earnings per share of Class A common stock, Adjusted Earnings Per Share – Basic and Adjusted Earnings Per Share – Diluted cannot be presented for periods prior to the Company’s IPO on October 6, 2016. Prior to the IPO, the CWGS, LLC membership structure included membership units, preferred units, and profits units. During the period of September 30, 2014 to October 6, 2016, there were 70,000 preferred units outstanding that received a total preferred return of $2.1 million per quarter in addition to their proportionate share of distributions made to all members of CWGS, LLC. The Company analyzed the calculation of earnings per unit for periods prior to the IPO using the two-class method and determined that it resulted in values that would not be meaningful to the users of these consolidated financial statements. Therefore, earnings per share information has not been presented for periods prior to the IPO on October 6, 2016. The Adjusted Earnings Per Share – Basic and Adjusted Earnings Per Share – Diluted for the year ended December 31, 2016 represents only the period of October 6, 2016 to December 31, 2016.
The following table reconciles Adjusted Net Income Attributable to Camping World Holdings, Inc. – Basic, Adjusted Net Income Attributable to Camping World Holdings, Inc. – Diluted, Adjusted Earnings Per Share – Basic, and Adjusted Earnings Per Share – Diluted to the most directly comparable GAAP financial performance measure, which is net income attributable to Camping World Holdings, Inc., in the case of the Adjusted Net Income non-GAAP financial measures, and weighted-average shares of Class A common stock outstanding – basic, in the case of the Adjusted Earnings Per Share non-GAAP financial measures:
Fiscal Year Ended
December 31,
December 31,
December 31,
December 31,
December 31,
(In thousands except per share amounts)
2020
2019
2018
2017
2016
Numerator:
Net income (loss) attributable to Camping World Holdings, Inc.
$
122,345
$
(60,591)
$
10,398
$
29,853
$
1,522
Adjustments related to basic calculation:
Loss and expense on debt restructure (a):
Gross adjustment
—
—
2,056
849
6,270
Income tax expense for above adjustment (b)
—
—
(217)
(129)
(542)
Goodwill impairment (c):
Gross adjustment
—
—
40,046
—
—
Income tax (expense) benefit for above adjustment (b)
—
—
—
—
Long-lived asset impairment (d):
Gross adjustment
12,353
66,270
—
—
—
Income tax expense for above adjustment (b)
(13)
(220)
—
—
Lease termination (e):
Gross adjustment
4,547
(686)
—
—
—
Income tax expense for above adjustment (b)
(36)
32
—
—
(Gain) loss on disposal of assets and other expense, net (f):
Gross adjustment
1,332
11,492
2,810
(133)
(339)
Income tax (expense) benefit for above adjustment (b)
(1)
(750)
(17)
(3)
33
Equity-based compensation (g):
Gross adjustment
20,661
13,145
14,088
5,109
1,537
Income tax expense for above adjustment (b)
(2,023)
(1,138)
(1,201)
(526)
(124)
Tax Receivable Agreement liability adjustment (h):
Gross adjustment
(141)
(10,005)
1,324
(100,758)
—
Income tax benefit for above adjustment (b)
35
2,525
(338)
38,783
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Fiscal Year Ended
December 31,
December 31,
December 31,
December 31,
December 31,
(In thousands except per share amounts)
2020
2019
2018
2017
2016
Acquisitions - transaction expense (i):
Gross adjustment
—
—
—
2,662
—
Income tax expense for above adjustment (b)
—
—
—
(38)
Gander Outdoors pre-opening costs (j):
Gross adjustment
—
—
43,156
26,352
—
Income tax (expense) benefit for above adjustment (b)
—
—
—
—
Restructuring costs (k):
Gross adjustment
17,609
47,223
—
—
—
Income tax expense for above adjustment (b)
(84)
—
—
—
Revaluation of deferred tax assets from tax reform (l)
—
—
—
78,222
—
Adjustment to net (income) loss attributable to non-controlling interests resulting from the above adjustments (m)
(31,537)
(79,748)
(59,542)
(22,019)
(5,789)
Adjusted net income (loss) attributable to Camping World Holdings, Inc. – basic
145,047
(12,451)
52,563
58,224
2,568
Adjustments related to diluted calculation:
Reallocation of net income attributable to non-controlling interests from the dilutive effect of stock options and restricted stock units (n)
1,994
(26)
221
648
—
Income tax on reallocation of net income attributable to non-controlling interests from the dilutive effect of stock options and restricted stock units (o)
(494)
(3)
(78)
(256)
—
Reallocation of net income attributable to non-controlling interests from the dilutive exchange of common units in CWGS, LLC (n)
—
—
—
—
15,380
Income tax on reallocation of net income attributable to non-controlling interests from the dilutive exchange of common units in CWGS, LLC (o)
—
—
—
—
(7,822)
Adjusted net income (loss) attributable to Camping World Holdings, Inc. – basic and diluted
$
146,547
$
(12,480)
$
52,706
$
58,616
$
10,126
Denominator:
Weighted-average Class A common shares outstanding – basic
39,383
37,310
36,985
26,622
18,766
Adjustments related to diluted calculation:
Dilutive exchange of common units in CWGS, LLC for shares of Class A common stock (p)
—
—
—
—
64,836
Dilutive options to purchase Class A common stock (p)
79
—
78
200
—
Dilutive restricted stock units (p)
547
40
83
112
26
Adjusted weighted average Class A common shares outstanding – diluted
40,009
37,350
37,146
26,934
83,628
Adjusted earnings (loss) per share - basic
$
3.68
$
(0.33)
$
1.42
$
2.19
$
0.14
Adjusted earnings (loss) per share - diluted
$
3.66
$
(0.33)
$
1.42
$
2.18
$
0.12
Anti-dilutive amounts (q):
Numerator:
Reallocation of net income attributable to non-controlling interests from the anti-dilutive exchange of common units in CWGS, LLC (n)
$
251,412
$
20,064
$
114,503
$
222,210
$
—
Income tax on reallocation of net income attributable to non-controlling interests from the anti-dilutive exchange of common units in CWGS, LLC (o)
$
(64,964)
$
(25,076)
$
(42,865)
$
(85,233)
$
—
Assumed income tax benefit of combining C-corporations with full valuation allowances with the income of other consolidated entities after the anti-dilutive exchange of common units in CWGS, LLC (r)
$
6,430
$
35,326
$
25,284
$
—
$
—
Denominator:
Anti-dilutive exchange of common units in CWGS, LLC for shares of Class A common stock (p)
49,916
51,670
51,732
59,995
—
(a) Represents the loss and expense incurred on debt restructure and financing expense incurred from the Third Amendment to the Credit Agreement in 2018, the First and Second Amendment to the Senior Credit Facilities in 2017, the write-off of a portion of the
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original issue discount, capitalized finance costs from the Previous Term Loan Facilities, and rating agency fees and legal expenses related to the Previous Term Loan Facilities in 2016.
(b) Represents the current and deferred income tax expense or benefit effect of the above adjustments, many of which are related to entities with full valuation allowances for which no tax benefit can be currently recognized. This assumption uses effective tax rates between 25.0% and 25.5% for the adjustments for 2020, 2019 and 2018 and 38.5% for the adjustments in 2017 and 2016, which represents the estimated tax rate that would apply had the above adjustments been included in the determination of our non-GAAP metric.
(c) Represents a goodwill impairment charge of $40.0 million related to the RV and Outdoor Retail segment in the fourth quarter of 2018. See Note 7 - Goodwill and Intangible Assets to our audited consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information.
(d) Represents long-lived asset impairment charges related to the RV and Outdoor Retail segment, which primarily relate to locations affected by the 2019 Strategic Shift. See Note 5 – Restructuring and Long-lived Asset Impairment to our consolidated financial statements included in Part II, Item 8 of this Form 10-K for additional information.
(e) Represents the loss (gain) on the termination of operating leases relating primarily to the 2019 Strategic Shift, net of lease termination costs. See Note 5 – Restructuring and Long-lived Asset Impairment to our consolidated financial statements included in Part II, Item 8 of this Form 10-K for additional information.
(f) Represents an adjustment to eliminate (i) losses on the disposal or sale of real estate at closed retail locations in 2020 and 2019 and (ii) the gains and losses on disposal and sales of various assets.
(g) Represents non-cash equity-based compensation expense relating to employees, directors, and consultants of the Company.
(h) Represents an adjustment to eliminate the gains on remeasurement of the Tax Receivable Agreement primarily due to changes in our effective income tax rate and the transfer of certain assets from GSS to CW. See Note 11 – Income Taxes to our consolidated financial statements included in Part II, Item 8 of this Form 10-K for additional information.
(i) Represents transaction expenses, primarily legal costs, associated with acquisitions into new or complementary markets, including the Gander Mountain acquisition. This amount excludes transaction expenses related to the acquisition of RV dealerships, and other RV and Outdoor Retail segment business acquisitions.
(j) Represents pre-opening store costs associated with the Gander Outdoors store openings, which is comprised of 1) Gander Outdoors-specific corporate and retail overhead, 2) distribution center expenses, and 3) store-level startup expenses. The Company incurred significant costs related to the initial rollout of Gander Outdoors locations. Based on the nature of the acquisition through a bankruptcy auction and the large quantity of retail locations opened and to be opened in a very compressed timeframe, the Company does not deem the pre-opening store costs for the initial rollout of Gander Outdoors locations to be normal, recurring charges. The Company does not intend to adjust for pre-opening store costs other than for the initial rollout of Gander Outdoors.
(k) Represents restructuring costs relating to our 2019 Strategic Shift. These restructuring costs include one-time employee termination benefits relating to retail store or distribution center closures/divestitures, incremental inventory reserve charges, and other associated costs. These costs exclude lease termination costs, which are presented separately (see (e) above). See Note 5 – Restructuring and Long-lived Asset Impairment to our consolidated financial statements included in Part II, Item 8 of this Form 10-K for additional information.
(l) This amount relates to the remeasurement of federal net deferred tax assets resulting from the permanent reduction in the U.S. statutory corporate tax rate to 21% from 35% under the U.S. Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”).
(m) Represents the adjustment to net (income) loss attributable to non-controlling interests resulting from the above adjustments that impact the net income of CWGS, LLC. This adjustment uses the non-controlling interest’s weighted average ownership of CWGS, LLC of 55.9%, 58.1%, 58.3% and 69.3% for the years ended December 31, 2020, 2019, 2018 and 2017, respectively, and 77.6% for the post-IPO period of 2016.
(n) Represents the reallocation of net income attributable to non-controlling interests from the impact of the assumed change in ownership of CWGS, LLC from stock options, restricted stock units, and/or common units of CWGS, LLC.
(o) Represents the income tax expense effect of the above adjustment for reallocation of net income attributable to non-controlling interests. This assumption uses effective tax rates between 25.0% and 25.5% for the adjustments for 2020, 2019 and 2018 and 38.5% for the adjustments in 2017 and 2016, which represents the estimated tax rate that would apply had the above adjustments been included in the determination of our non-GAAP metric.
(p) Represents the impact to the denominator for stock options, restricted stock units, and/or common units of CWGS, LLC.
(q) The below amounts have not been considered in our adjusted earnings per share – diluted amounts as the effect of these items are anti-dilutive.
(r) Represents adjustments to reflect the income tax benefit of losses of consolidated C-corporations that under the Company’s current equity structure cannot be used against the income of other consolidated subsidiaries of CWGS, LLC. Subsequent to the exchange of all common units in CWGS, LLC, the Company believes certain actions could be taken such that the C-corporations’ losses could offset income of other consolidated subsidiaries. The adjustment reflects the income tax benefit assuming effective tax rates between 25.0% and 25.5% for the adjustments for 2020, 2019 and 2018 for the losses experienced by the consolidated C-corporations for which valuation allowances have been recorded. No assumed release of valuation allowance established for previous periods are included in these amounts. Prior to 2018, the Company did not consider the losses of these C-corporations with valuation allowances to be significant and the Company did not retroactively adjust 2017 or 2016 for these amounts, which were $4.4 million for the year ended December 31, 2017 and $2.4 million for the post-IPO period of 2016.
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Uses and Limitations of Non-GAAP Financial Measures
Management and our board of directors use the Non-GAAP Financial Measures:
● as a measurement of operating performance because they assist us in comparing the operating performance of our business on a consistent basis, as they remove the impact of items not directly resulting from our core operations;
● for planning purposes, including the preparation of our internal annual operating budget and financial projections;
● to evaluate the performance and effectiveness of our operational strategies; and
● to evaluate our capacity to fund capital expenditures and expand our business.
By providing these Non-GAAP Financial Measures, together with reconciliations, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. In addition, our Senior Secured Credit Facilities use EBITDA to measure our compliance with covenants such as the consolidated leverage ratio. The Non-GAAP Financial Measures have limitations as analytical tools, and should not be considered in isolation, or as an alternative to, or a substitute for net income or other financial statement data presented in our consolidated financial statements included elsewhere in this Form 10-K as indicators of financial performance. Some of the limitations are:
● such measures do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;
● such measures do not reflect changes in, or cash requirements for, our working capital needs;
● some of such measures do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt;
● some of such measures do not reflect our tax expense or the cash requirements to pay our taxes;
● although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and
● other companies in our industry may calculate such measures differently than we do, limiting their usefulness as comparative measures.
Due to these limitations, the Non-GAAP Financial Measures should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using these Non GAAP Financial Measures only supplementally. As noted in the tables above, certain of the Non-GAAP Financial Measures include adjustments for long-lived asset impairment, lease termination costs, loss and expense on debt restructure, goodwill impairment, gains and losses on disposal of assets and other expense, net, equity-based compensation, Tax Receivable Agreement liability, transaction expenses related to acquisitions, Gander Outdoors pre-opening costs, restructuring costs relating to the 2019 Strategic Shift, other unusual or one-time items, and the income tax expense effect described above, as applicable. It is reasonable to expect that certain of these items will occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our business and complicate comparisons of our internal operating results and operating results of other companies over time. In addition, these certain Non-GAAP Financial Measures adjust for other items that we do not expect to regularly record in periods after the IPO, including monitoring fees. Each of the normal recurring adjustments and other adjustments described in this paragraph and in the reconciliation tables above help management with a
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measure of our core operating performance over time by removing items that are not related to day to day operations.
Liquidity and Capital Resources
General
Our primary requirements for liquidity and capital have been working capital, inventory management, acquiring and building new retail locations, the improvement and expansion of existing retail locations, debt service, distributions to holders of equity interests in CWGS, LLC and our Class A common stock, and general corporate needs. These cash requirements have historically been met through cash provided by operating activities, cash and cash equivalents, proceeds from registered offerings of our Class A common stock, borrowings under our Senior Secured Credit Facilities (as defined below), borrowings under our Floor Plan Facility (as defined below) and borrowings under our Real Estate Facility (as defined below).
As a public company, our additional liquidity needs include public company costs, payment of regular and special cash dividends, any exercise of the redemption right by the Continuing Equity Owners from time to time (should we elect to exchange common units for a cash payment), our stock repurchase program as described below, payments under the Tax Receivable Agreement, and state and federal taxes to the extent not reduced as a result of the Tax Receivable Agreement. The Continuing Equity Owners may exercise such redemption right for as long as their common units remain outstanding. Although the actual timing and amount of any payments that may be made under the Tax Receivable Agreement will vary, we expect that the payments that we will be required to make to the Continuing Equity Owners, Former Profits Unit Holders, and Crestview Partners II GP, L.P. will be significant. Any payments made by us to Continuing Equity Owners, Former Profits Unit Holders, and Crestview Partners II GP, L.P. under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise been available to us or to CWGS, LLC and, to the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, the unpaid amounts generally will be deferred and will accrue interest until paid by us; provided, however, that nonpayment for a specified period may constitute a material breach of a material obligation under the Tax Receivable Agreement and therefore may accelerate payments due under the Tax Receivable Agreement. For a discussion of the Tax Receivable Agreement, see Note 11 — Income Taxes to our audited consolidated financial statements included in Part II, Item 8 of this Form 10-K.
On October 30, 2020, our board of directors authorized a stock repurchase program for the repurchase of up to $100.0 million of our Class A common stock, expiring on October 31, 2022. Repurchases under the program are subject to any applicable limitations on the availability of funds to be distributed to the Company by CWGS, LLC to fund repurchase and may be made in the open market, in privately negotiated transactions or otherwise, with the amount and timing of repurchases to be determined at our discretion, depending on market conditions and corporate needs. Open market repurchases will be structured to occur in accordance with applicable federal securities laws, including within the pricing and volume requirements of Rule 10b-18 under the Securities Exchange Act of 1934, as amended. We may also, from time to time, enter into Rule 10b5-1 plans to facilitate repurchases of our shares under this authorization. This program does not obligate us to acquire any particular amount of Class A common stock and the program may be extended, modified, suspended or discontinued at any time at the Board’s discretion. We expect to fund the repurchases using cash on hand. During the year ended December 31, 2020, we repurchased 811,223 shares of our Class A common stock for $21.5 million, including broker commissions. As of December 31, 2020, $78.5 million is available under the stock repurchase program to repurchase additional shares of our Class A common stock.
CWGS, LLC intends to make a regular quarterly cash distribution to its common unit holders, including us, and we intend to use all of the proceeds from such distribution on our common units to pay a regular quarterly cash dividend on our Class A common stock, subject to our discretion as the sole managing member of CWGS, LLC and the discretion of our board of directors. During each of the three month periods during the year ended December 31, 2019 and the three months ended March 31, 2020, and June 30, 2020, we paid a regular quarterly cash dividend of $0.08 per share of our Class A common stock. On July 20, 2020, our board of directors approved the increase of the quarterly dividend to $0.09 per share of Class A common stock from $0.08 per share. Accordingly, during each of the three months ended September 30, 2020 and December 31, 2020, we paid a regular quarterly cash dividend of $0.09 per share of our Class A common stock. CWGS, LLC
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is required to make cash distributions in accordance with the CWGS LLC Agreement in an amount sufficient for us to pay any expenses incurred by us in connection with the regular quarterly cash dividend, along with any of our other operating expenses and other obligations.
In addition, we currently intend to pay a special cash dividend of all or a portion of the Excess Tax Distribution (as defined under “Dividend Policy” included in Part II, Item 5 of this Form 10-K) to the holders of our Class A common stock from time to time subject to the discretion of our board of directors as described under “Dividend Policy” included in Part II, Item 5 of this Form 10-K. During each of the three month periods during the year ended December 31, 2019 and the three months ended March 31, 2020 and June 30, 2020, we paid a special cash dividend of $0.0732 per share of our Class A common stock. Additionally, on July 20, 2020, our board of directors increased the quarterly special cash dividend to $0.08 per share of Class A common stock from $0.0732 per share. Accordingly, during the three months ended September 30, 2020, we paid a special dividend of $0.08 per share of our Class A common stock. Moreover, on September 17, 2020, our board of directors increased the quarterly special cash dividend to $0.14 per share of Class A common stock from $0.08 per share beginning with the three months ended December 31, 2020. Additionally, on November 18, 2020, our board of directors approved a $0.77 per share of Class A common stock one-time special cash dividend. These special dividends are typically funded by the accumulated tax distributions received by CWH from CWGS, LLC that are in excess of the corporate income taxes payable by CWH and current payment obligations under the TRA liability. In December 2020, CWGS, LLC paid an additional $0.20 per common unit distribution to partially fund the $0.77 per share of Class A common stock one-time special cash dividend discussed above. Our dividend policy has certain risks and limitations particularly with respect to liquidity, and we may not pay future dividends according to our policy, or at all. See “Dividend Policy” included in Part II, Item 5 of this Form 10-K and “Risk Factors ─ Risks Relating to Ownership of Our Class A Common Stock ─ “Our ability to pay regular and special dividends on our Class A common stock is subject to the discretion of our board of directors and may be limited by our structure and statutory restrictions” included in Part I, Item 1A of this Form 10-K.
We have currently identified over 20 markets that would be attractive for both acquisition and greenfield opportunities in 2021. This expansion could require in excess of $150.0 million for a combination of business acquisitions and capital expenditures relating to land, buildings, and improvements. Factors that could impact the quantity of locations or the cost to acquire or open those locations include, but are not limited to, our ability to locate potential acquisition targets or greenfield locations in a geographic area and at a cost that meet our success criteria; continued strong cash flow generation from our operations to fund these acquisitions and new locations; and availability of financing on our Floor Plan Facility.
During the year ended December 31, 2020, we incurred long-lived asset impairment charges of $12.4 million, including $12.3 million primarily in connection with the 2019 Strategic Shift. We expect that none of the foregoing charges will result in future cash expenditures. Additionally, in connection with the 2019 Strategic Shift, we have incurred or expect to incur costs relating to one-time employee termination benefits as outlined in Note 5 ─ Restructuring and Long-Lived Asset Impairment to our consolidated financial statements included in Part II, Item 8 of this Form 10-K.
There is significant uncertainty surrounding the impact of the COVID-19 pandemic on our results of operations and cash flows. As a result, we initially took proactive steps to increase cash available on-hand, including, but not limited to, reducing cash expenditures, including wage reductions through a combination of temporary salary reductions, layoffs, and furloughs; negotiating payment deferrals with lessors, reducing marketing and promotional expenses; and delaying strategic capital expenditures. We had negotiated lease payment deferrals with numerous landlords amounting to approximately $14.0 million from 2020 into 2021. As demand for our products accelerated and our cash position improved, we repaid these deferred lease payment amounts in full prior to June 30, 2020 and most of the temporary salary reductions ended in May 2020. Additionally, as a result of our improved cash position, we made voluntary principal payments in June 2020 of $9.6 million on our Term Loan Facility and $20.0 million on our Revolving Credit Facility. We are continually monitoring the COVID-19 pandemic and its potential impacts on our business. If stay-at-home and shelter-in-place restrictions are put back into place, we may choose to re-implement cost reduction measures.
We believe that our sources of liquidity and capital including cash provided by operating activities, additional borrowings under our Floor Plan Facility, and borrowings under our Revolving Credit Facility will be
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sufficient to finance our continued operations, growth strategy, including the opening of any additional retail locations, regular and special quarterly cash dividends (as described above), required payments for our obligations under the Tax Receivable Agreement, and additional expenses we expect to incur for at least the next twelve months. However, we cannot assure you that our cash provided by operating activities, cash and cash equivalents or cash available under our Revolving Credit Facility or our Floor Plan Facility, including the potential additional borrowings noted above, will be sufficient to meet our future needs. If we are unable to generate sufficient cash flows from operations in the future, including as a result of the impact of the COVID-19 pandemic on our business and if availability under our Revolving Credit Facility or our Floor Plan Facility is not sufficient, we may have to obtain additional financing. If we obtain additional capital by issuing equity, the interests of our existing stockholders will be diluted. If we incur additional indebtedness, that indebtedness may impose significant financial and other covenants that may significantly restrict our operations. We cannot assure you that we could obtain refinancing or additional financing on favorable terms or at all, including the expected additional borrowings noted above and particularly in light of the economic uncertainty due to the COVID-19 pandemic. See “Risk Factors — Risks Related to our Business — Our ability to operate and expand our business and to respond to changing business and economic conditions will depend on the availability of adequate capital” included in Part I, Item 1A of this Form 10-K.
As of December 31, 2020, we had working capital of $458.7 million, including $166.1 million of cash and cash equivalents. Our working capital reflects the cash provided by deferred revenue reported under current liabilities of $88.2 million as of December 31, 2020, which reduces working capital. Deferred revenue primarily consists of cash collected for club memberships in advance of services to be provided, which is deferred and recognized as revenue over the life of the membership, and deferred revenue for the annual guide. We use net proceeds from this deferred membership revenue to lower our long-term borrowings and finance our working capital needs. Our Floor Plan Facility includes a flooring line aggregate interest reduction (“FLAIR”) offset account that allows us to transfer cash as an offset to the payable under the Floor Plan Facility. The FLAIR offset account at December 31, 2020 was $133.6 million, $124.4 million of which could have been withdrawn while remaining in compliance with the financial covenants of the Floor Plan Facility.
Seasonality
We have experienced, and expect to continue to experience, variability in revenue, net income, and cash flows as a result of annual seasonality in our business. Because RVs are used primarily by vacationers and campers, demand for services, protection plans, products, and resources generally declines during the winter season, while sales and profits are generally highest during the spring and summer months. In addition, unusually severe weather conditions in some geographic areas may impact demand.
We generate a disproportionately higher amount of our annual revenue in our second and third fiscal quarters, respectively, which include the spring and summer months. We incur additional expenses in the second and third fiscal quarters due to higher purchase volumes, increased staffing in our retail locations and program costs. If, for any reason, we miscalculate the demand for our products or our product mix during the second and third fiscal quarters, our sales in these quarters could decline, resulting in higher labor costs as a percentage of sales, lower margins and excess inventory, which could cause our annual results of operations to suffer and our stock price to decline.
Additionally, SG&A expenses as a percentage of gross profit tend to be higher in the first and fourth quarters due to the timing of acquisitions and the seasonality of our business. We prefer to acquire new retail locations in the first and fourth quarters of each year in order to provide time for the location to be re-modeled and to ramp up operations ahead of the spring and summer months. The timing of our acquisitions in the first and fourth quarters, coupled with generally lower revenue in these quarters has historically resulted in SG&A expenses as a percentage of gross profit being higher in these quarters.
Due to our seasonality, the possible adverse impact from other risks associated with our business, including atypical weather, consumer spending levels and general business conditions, is potentially greater if any such risks occur during our peak sales seasons. See “Risk Factors — Risks Related to our Business — Our business is seasonal and this leads to fluctuations in sales and revenues ” included in Part I, Item 1A of this Form 10-K.
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Cash Flow
The following table shows summary cash flows information for the years ended December 31, 2020 and 2019, respectively:
Fiscal Year Ended
December 31,
December 31,
(In thousands)
2020
2019
Net cash provided by operating activities
$
747,669
$
251,934
Net cash used in investing activities
(125,935)
(104,537)
Net cash used in financing activities
(603,183)
(138,433)
Net increase in cash and cash equivalents
$
18,551
$
8,964
Operating activities. Our cash flows from operating activities are primarily collections from contracts in transit and customers following the sale of new and used vehicles, as well as from the sale of retail parts, service and other. Contracts in transit represent amounts due from third-party lenders from whom pre-arranged agreements have been determined, and to whom the retail installment sales contracts have been assigned. Our primary uses of cash from operating activities are repayments of vehicle floor plan payables, payments to retail product suppliers, personnel-related expenditures, payments related to leased property, advertising, and various consumer services program costs.
Net cash provided by operating activities was $747.7 million for the year ended December 31, 2020, an increase of $495.7 million from $251.9 million of net cash provided in operating activities in the year ended December 31, 2019. The increase was primarily due to a $464.5 million increase in net income, $55.2 million of increased accounts payable and other accrued expenses, a $29.2 million accrual for FICA deferral related to The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and $0.7 million of other increases, partially offset by a $53.9 million reduction in long-lived asset impairment.
Investing activities. Our investment in business activities primarily consists of expanding our operations through organic growth and the acquisition of retail locations. Substantially all of our new retail location acquisitions and capital expenditures have been financed using cash provided by operating activities and borrowings under our Senior Secured Credit Facilities, as applicable.
Our capital expenditures consist primarily of investing in acquired and greenfield retail and RV dealership locations, existing retail locations, information technology, hardware and software. There were no material commitments for capital expenditures as of December 31, 2020. Additionally, during 2020, we entered into the non-cash activity for new finance leases for $6.5 million for IT hardware and $25.4 million for real estate. The table below summarizes our capital expenditures for the years ended December 31, 2020 and 2019, respectively:
Fiscal Year Ended
December 31,
December 31,
(In thousands)
2020
2019
IT hardware and software
$
4,437
$
11,668
Greenfield and acquired retail locations
9,865
28,445
Existing retail locations
13,700
14,455
Corporate and other
3,843
2,221
Total capital expenditures
$
31,845
$
56,789
Net cash used in investing activities was $125.9 million for the year ended December 31, 2020. The $125.9 million of cash used in investing activities was comprised of $53.1 million for the purchase of real property, $47.6 million for the purchase of RV and Outdoor Retail businesses, $31.8 million of capital expenditures primarily related to retail locations, $2.5 million for investment in businesses, and $0.2 million for the purchase of intangible assets, partially offset by $7.5 million from the sale of real property, and proceeds of $1.8 million from the sale of property and equipment.
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Net cash used in investing activities was $104.5 million for year ended December 31, 2019. The $104.5 million of cash used in investing activities included capital expenditures of $56.8 million, acquisition of retail locations of $48.4 million, and purchases of real property of $31.6 million, partially offset by proceeds from the sale and leaseback of real property and the sale of property and equipment of $28.2 million and $4.1 million, respectively.
Financing activities. Our financing activities primarily consist of proceeds from the issuance of debt and the repayment of principal and debt issuance costs.
Our net cash used in financing activities was $603.2 million for the year ended December 31, 2020. The $603.2 million of cash used in financing activities was primarily due to $324.5 million of payments under the Floor Plan Facility, $137.0 million of distributions to CWGS, LLC common unit holders, $61.0 million of dividends paid on Class A common stock, $39.1 million of payments on long-term debt, $21.5 million for repurchases of Class A common stock to treasury stock, $20.0 million of payments on credit facilities, and $4.7 million of payments related to RSU shares withheld for taxes, partially offset by proceeds from exercise of stock options of $4.6 million.
Our net cash used in financing activities was $138.4 million for the year ended December 31, 2019. The $138.4 million of cash used in financing activities was primarily due to distributions to CWGS, LLC common unit holders of $70.2 million, net payments under the Floor Plan Facility of $44.0 million, dividends paid on Class A common stock of $22.9 million, and net payment of debt of $13.7 million, partially offset by proceeds from long-term debt of $11.7 million, and other financing sources of $0.7 million.
Description of Senior Secured Credit Facilities, Floor Plan Facility and Real Estate Facility
As of December 31, 2020 and 2019, we had outstanding debt in the form of our Senior Secured Credit Facilities (as defined below), our Floor Plan Facility (as defined below), and our Real Estate Facility (as defined below). We may from time to time seek to refinance, retire or exchange our outstanding debt. Such refinancings, repayments or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. For additional information regarding our interest rate risk and interest rate hedging instruments, see “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of this Form 10-K.
Senior Secured Credit Facilities
As of December 31, 2020 and 2019, CWGS Group, LLC (the “Borrower”), an indirect subsidiary of the Company, was party to a credit agreement (as amended from time to time, the “Credit Agreement”) for a senior secured credit facility (the “Senior Secured Credit Facilities”). The Senior Secured Credit Facilities consist of a $1.19 billion term loan facility (the “Term Loan Facility”) and a $35.0 million revolving credit facility (the “Revolving Credit Facility”). The Term Loan Facility requires mandatory principal payments in equal quarterly installments of $3.0 million. The Revolving Credit Facility matures on November 8, 2021, and the Term Loan Facility matures on November 8, 2023. As of December 31, 2020, the average interest rate on the Term Loan Facility was 3.5%.
The Credit Agreement for our Senior Secured Credit Facilities requires the “Borrower” and its subsidiaries to comply on a quarterly basis with a maximum Total Leverage Ratio (as defined in the Credit Agreement), which covenant is in effect only if, as of the end of each calendar quarter, the aggregate amount of borrowings under the revolving credit facility (including swingline loans), letters of credit and unreimbursed letter of credit disbursements outstanding at such time (minus the lesser of (a) $5.0 million and (b) letters of credit outstanding) is greater than 30% of the aggregate amount of the Revolving Lenders’ Revolving Commitments (minus the lesser of (a) $5.0 million and (b) letters of credit outstanding), as defined in the Credit Agreement. As of December 31, 2020, we were not subject to this covenant as borrowings under the Revolving Credit Facility did not exceed the 30% threshold. To the extent that we are unable to comply with the maximum Total Leverage Ratio in the future, we would be unable to borrow under the Revolving Credit Facility and may need to seek alternative sources of financing in order to operate and finance our business as we deem appropriate. The Company’s borrowing capacity under the Revolving Credit Facility at December 31, 2020 was limited to $29.1 million of borrowings. We were in compliance with all applicable debt covenants at December
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31, 2020 and 2019. On June 30, 2020, the Borrower made a $9.6 million voluntary principal payment on the Term Loan Facility. Additionally, the Borrower is required to prepay the term loan borrowings in an aggregate amount up to 50% of excess cash flow, as defined in the Credit Agreement, for such fiscal year depending on the Total Leverage Ratio. As of December 31, 2020, we were not required to make an additional excess cash flow payment.
See Note 9 — Long-Term Debt to our consolidated financial statements included in Part II, Item 8 of this Form 10-K for a further discussion of the terms of the Senior Secured Credit Facilities.
Floor Plan Facility
As of December 31, 2020 and 2019, FreedomRoads, LLC (“FR”), an indirect subsidiary of the Company, maintained floor plan financing through the Seventh Amended and Restated Credit Agreement (as amended, the “Floor Plan Facility”). On October 8, 2019, FR entered into a Second Amendment to the Seventh Amended and Restated Credit Agreement, (the “Second Amendment’). The applicable borrowing rate margin on LIBOR and base rate loans ranges from 2.05% to 2.50% and 0.55% and 1.00%, respectively, based on the consolidated current ratio at FR. At December 31, 2020, the Floor Plan Facility allowed FR to borrow (a) up to $1.38 billion under a floor plan facility, (b) up to $15.0 million under a letter of credit facility and (c) up to a maximum amount outstanding of $48.0 million under the revolving line of credit, which maximum amount outstanding decreases by $3.0 million on the last day of each fiscal quarter. The maturity date of the Floor Plan Facility is March 15, 2023.
On May 12, 2020, FR entered into a Third Amendment to the Seventh Amended and Restated Credit Agreement (“Third Amendment”) that provides FR with a one-time option to request a temporary four-month reduction (“Current Ratio Reduction Period”) of the minimum Consolidated Current Ratio (as defined in the Floor Plan Facility) at any time during 2020 and the first seven days of 2021. FR did not exercise that option. During the Current Ratio Reduction Period, the applicable borrowing rate margin on LIBOR and base rate loans ranges from 2.05% to 3.00% and 0.55% and 1.50%, respectively, based on the Consolidated Current Ratio at FR. From May 12, 2020 through July 31, 2020, FR was not allowed to draw further Revolving Credit Loans (as defined in the Floor Plan Facility). On June 29, 2020, FR made a voluntary $20.0 million principal payment on the revolving line of credit. The borrowings under the floor plan credit agreement bear interest at one-month LIBOR plus 2.05% as of December 31, 2020 and at one-month LIBOR plus 2.15% for the years ended December 31, 2019 and December 31, 2018. LIBOR was 0.15%, 1.71% and 2.35% as of December 31, 2020, 2019, and 2018, respectively.
The credit agreement governing the Floor Plan Facility contains certain financial covenants, which we were in compliance with at December 31, 2020 and 2019.
See Note 4 – Inventories, net and Notes Payable — Floor Plan, net to our consolidated financial statements included in Part II, Item 8 of this Form 10-K for a further discussion of the terms of the Floor Plan Facility.
Real Estate Facility
As of December 31, 2020 and 2019, Camping World Property, Inc. (the ‘‘Real Estate Borrower’’), an indirect wholly-owned subsidiary of CWGS, LLC, and CIBC Bank USA (“Lender”), was party to a loan and security agreement for a real estate credit facility with an aggregate maximum principal amount of $21.5 million (“Real Estate Facility”).
The Real Estate Facility is subject to certain cross default provisions, a debt service coverage ratio, and other customary covenants which we were in compliance with at December 31, 2020 and 2019.
The outstanding principal of the Real Estate Facility was $4.5 million and $19.7 million as of December 31, 2020 and 2019, respectively. As of December 31, 2020, the interest rate on the Real Estate Facility was 3.00% with a commitment fee of 0.50% of the aggregate unused principal amount of the Real Estate Facility. As of December 31, 2020, the Company had zero additional capacity under the Real Estate Facility.
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In August 2020, we entered into an agreement to lease an owned property for a former distribution center in Greenville, North Carolina to a third party. By entering into this lease, we were required to pay down $10.3 million of the Real Estate Facility, which we paid in August 2020. Additionally, in September 2020, the Company sold an owned property relating to the other former distribution center in Greenville, North Carolina to a third party. By selling this property, the Company was required to pay down $3.4 million of the Real Estate Facility in September 2020.
See Note 9 — Long-Term Debt to our consolidated financial statements included in Part II, Item 8 of this Form 10-K for a further discussion of the terms of the Real Estate Facility.
Sale/Leaseback Arrangements
We have in the past and may in the future enter into sale-leaseback transactions to finance certain property acquisitions and capital expenditures, pursuant to which we sell property and/or leasehold improvements to third parties and agree to lease those assets back for a certain period of time. Such sales generate proceeds which vary from period to period.
Deferred Revenue
Deferred revenue consists of sales for products and services not yet recognized as revenue at the end of a given period. Our deferred revenue as of December 31, 2020 was $149.7 million. Deferred revenue is expected to be recognized as revenue as set forth in the following table (in thousands):
2021
$
88,213
2022
29,472
2023
15,797
2024
7,707
2025
4,083
Thereafter
4,460
Total
$
149,732
Contractual Obligations
The following table sets forth our contractual obligations and commercial commitments as of December 31, 2020 (in thousands):
2021
2022
2023
2024
2025
Thereafter
Total
Long-term debt (1)
$
12,174
$
12,176
$
1,121,697
$
—
$
—
$
—
$
1,146,047
Interest on long-term debt (2)
40,481
40,050
34,632
—
—
—
115,163
Finance lease obligations (3)
3,977
4,011
2,777
2,494
2,376
33,776
49,411
Floor plan notes payable, net (4)
522,455
—
—
—
—
—
522,455
Floor plan revolving line of credit
—
—
20,885
—
—
—
20,885
Interest on revolving line of credit
534
534
133
—
—
—
1,201
Operating lease obligations
121,420
118,658
116,345
111,418
103,721
765,838
1,337,400
Purchase obligations (5)
39,121
—
—
—
—
—
39,121
Tax Receivable Agreement liability (6)
8,089
9,113
9,316
9,537
9,788
100,091
145,934
Service agreements (7)
5,004
—
—
—
—
—
5,004
Marketing sponsorships (8)
11,646
14,533
5,617
4,500
—
—
36,296
Total
$
764,901
$
199,075
$
1,311,402
$
127,949
$
115,885
$
899,705
$
3,418,917
(1) Amounts exclude finance lease obligations.
(2) We estimated interest payments through the maturity of our Senior Secured Credit Facilities by applying the interest rate in effect as of December 31, 2020. See Note 9 — Long-Term Debt to our audited consolidated financial statements included in Part II, Item 8 of this Form 10-K for additional information.
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(3) Amounts represent undiscounted cash flows for property and equipment finance leases. See Note 10 — Lease Obligations to our audited consolidated financial statements included in Part II, Item 8 of this Form 10-K for additional information.
(4) Floor plan notes payable, net are revolving financing arrangements and the Floor Plan Facility matures on March 15, 2023. Payments are generally made as required pursuant to the Floor Plan Facility discussed above under “— Description of Senior Secured Credit Facilities and Floor Plan Facility — Floor Plan Facility.”
(5) Amounts primarily represent purchase commitments relating to the procurement of RV inventories that have been approved by the Floor Plan Facility. See Note 4 — Inventories, net and Notes Payable — Floorplan to our audited consolidated financial statements included in Part II, Item 8 of this Form 10-K for additional information.
(6) Amounts represent the estimated payments under the Tax Receivable Agreement. See Note 11 — Income Taxes to our audited consolidated financial statements included in Part II, Item 8 of this Form 10-K for additional information.
(7) Service agreements are multi-year agreements for services at agreed upon amounts for each year. See Note 13 — Commitments and Contingencies to our audited consolidated financial statements included in Part II, Item 8 of this Form 10-K for additional information.
(8) Marketing sponsorship agreements are multi-year sponsorship agreements at agreed upon amounts each year per the agreements. See Note 13 — Commitments and Contingencies to our audited consolidated financial statements included in Part II, Item 8 of this Form 10-K for additional information.
Off-Balance Sheet Arrangements
As of December 31, 2020, we did not have any off-balance sheet arrangements other than short-term leases not included in our lease obligation. We do not have transactions with unconsolidated entities, such as entities often referred to as structured finance or special purpose entities, whereby we have financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to us.
Recent Accounting Pronouncements
See discussion of recently adopted and recently issued accounting pronouncements in Note 1 — Summary of Significant Accounting Policies to our consolidated financial statements in Part II, Item 8 of this Form 10-K.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Critical accounting policies are those that management believes are both most important to the portrayal of our financial condition and operating results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We base our estimates on historical experience, outside advice from parties believed to be experts in such matters, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. Our significant accounting policies can be found in Note 1 — Summary of Significant Accounting Policies to our consolidated financial statements included in Part II, Item 8 of this Form 10-K. We consider the following policies to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements.
Revenue Recognition
Revenues are recognized by the Company when control of the promised goods or services is transferred to its customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Sales and other taxes collected from the customer concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. The Company’s contracts with customers may include multiple
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performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative stand-alone selling price. The Company generally determines stand-alone selling prices based on the prices charged to customers or using the adjusted market assessment approach. The Company presents disaggregated revenue on its consolidated statements of operations.
Good Sam Services and Plans revenue consists of revenue from publications, consumer shows, and marketing fees from various consumer services and plans. Roadside Assistance (“RA”) revenues are deferred and recognized over the contractual life of the membership. RA claim expenses are recognized when incurred. Marketing fees for finance, insurance, extended service and other similar products are recognized as variable consideration, net of estimated cancellations, if applicable, when a product is sold or financing has been arranged. These marketing fees are recorded net as we are acting as an agent in the transaction. The related estimate for cancellations on the marketing fees for multi-year finance and insurance products utilize actuarial analysis to estimate the exposure. Promotional expenses consist primarily of direct mail advertising expenses and renewal expenses and are expensed at the time related materials are mailed. Newsstand sales of publications and related expenses are recorded as variable consideration at the time of delivery, net of estimated returns. Subscription sales of publications are reflected in income over the lives of the subscriptions. The related selling expenses are expensed as incurred. Advertising revenues and related expenses are recorded at the time of delivery. Revenue and related expenses for consumer shows are recognized when the show occurs.
RV and Outdoor Retail revenue consists of sales of new and used RVs, sales of RV products, parts and service and other products, distribution of RV furniture, and commissions on the related finance and insurance contracts. Revenue from the sale of recreational vehicles is recognized upon completion of the sale to the customer. Conditions to completing a sale include having an agreement with the customer, including pricing, whereby the sales price must be reasonably expected to be collected and having control transferred to the customer.
RV and Outdoor Retail revenue from parts, service and other products sales is recognized over time as work is completed and when parts are delivered to our customers. For these service and parts revenues recorded over time, the Company utilizes a method that considers total costs incurred to date and the applicable margin in relation to total expected efforts to complete our performance obligation in order to determine the appropriate amount of revenue to recognize over time.
Finance and insurance revenue is recorded net, since the Company is acting as an agent in the transaction, and is recognized when a finance and insurance product contract payment has been received or financing has been arranged. The proceeds the Company receives for arranging financing contracts, and selling insurance and service contracts, are subject to chargebacks if the customer terminates the respective contract earlier than a stated period. In the case of insurance and service contracts, the stated period typically extends from one to five years with the refundable commission balance declining over the contract term. These proceeds are recorded as variable consideration, net of estimated chargebacks. Chargebacks are estimated based on ultimate future cancellation rates by product type and year sold using a combination of actuarial methods and leveraging our historical experience from the past eight years, adjusted for new consumer trends. The chargeback liabilities included in the estimate of variable consideration totaled $58.9 million and $48.3 million as of December 31, 2020 and December 31, 2019, respectively.
Good Sam Club revenue consists of revenue club membership fees and royalty fees from co-branded credit cards. Membership revenue is generated from annual, multiyear and lifetime memberships. The revenue and expenses associated with these memberships are deferred and amortized over the membership period. Unearned revenue and profit are subject to revisions as the membership progresses to completion. Revisions to membership period estimates would change the amount of income and expense amortized in future accounting periods. For lifetime memberships, an 18-year period is used, which is the actuarially determined estimated fulfillment period. Royalty revenue is earned under the terms of an arrangement with a third-party credit card provider based on a percentage of the Company’s co-branded credit card portfolio retail spending with such third-party credit card provider and for acquiring new cardholders.
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Contracts in Transit
Contracts in transit consist of amounts due from non-affiliated financing institutions on retail finance contracts from vehicle sales for the portion of the vehicle sales price financed by our customers. These retail installment sales contracts are typically funded within ten days of the initial approval of the retail installment sales contract by the third-party lender. Contracts in transit are included in current assets in our consolidated financial statements and totaled $48.2 million and $44.9 million as of December 31, 2020, and December 31, 2019, respectively.
Inventories, net
Dealership inventories consist primarily of new and used vehicles held for sale valued using the specific-identification method and valued at the lower of cost or net realizable value. Cost includes purchase costs, reconditioning costs, dealer-installed accessories, and freight. For vehicles accepted in trades, the cost is the fair value of such used vehicles at the time of the trade-in. Dealership parts and accessories are valued at the lower of cost or net realizable value. Retail parts, accessories and other inventories primarily consist of retail travel and leisure specialty merchandise and are stated at lower of cost or net realizable value. RV furniture for distribution are stated at lower of cost or net realizable value.
In assessing lower of cost or net realizable value for inventory, we typically consider (i) the aging of the inventory item, (ii) historical sales experience of the inventory item, and (iii) current market conditions and trends for the inventory item. We also review and consider the following metrics related to sales of inventory items (both on a recent and longer-term historical basis): (i) days of supply in our inventory, and (ii) average selling price if sold at less than original cost. We then determine the appropriate level of reserve required to reduce our inventory to the lower of cost or market and record the resulting adjustment in the period in which we determine a loss has occurred. If future demand or market conditions for our products are less favorable than forecasted or if unforeseen circumstances negatively impact the utility of inventory, we may be required to record additional write-downs, which would negatively affect the results of operations in the period when the write-downs are recorded.
Goodwill and Other Intangible Assets
Goodwill is reviewed at least annually for impairment, and more often when impairment indicators are present. We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its net book value. The qualitative analysis used contains inherent uncertainties, including significant estimates and assumptions related to growth rates, projected earnings and cost of capital. We are subject to financial risk to the extent that our assets and goodwill become impaired due to deterioration of the underlying businesses. The risk of an asset impairment loss may increase to the extent the underlying businesses’ earnings or projected earnings decline. During the fourth quarter of 2020, we performed our annual impairment assessment of the carrying value of our goodwill. The fair value of our reporting units significantly exceeded the carrying value of its net assets. As a result, we were not required to record an impairment of goodwill relating to our reporting units. See Note 7 — Goodwill and Intangible Assets to our consolidated financial statements included in Part II, Item 8 of this Form 10-K. Finite-lived intangibles are recorded at cost, net of accumulated amortization and, if applicable, impairment charges. Finite-lived intangible assets consist of membership and customer lists with weighted average useful lives of approximately 5.3 years, trademarks and trade names with weighted average useful lives of approximately 15.0 years, supplier lists with weighted-average useful lives of 5.0 years, and websites with weighted-average useful lives of approximately 8.3 years. The weighted-average useful life of all our finite-lived intangible assists is approximately 12.8 years.
Long-Lived Assets
Long lived assets are included in property and equipment, which also includes capitalized software costs to be held and used. For our major software systems, such as our accounting and membership systems, our capitalized costs may include some internal or external costs to configure, install and test the software during the application development stage. We do not capitalize preliminary project costs, nor do we capitalize training, data conversion costs, maintenance or post development stage costs. Our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an
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asset may not be recoverable. Our long-lived asset groups exist predominantly at the individual location level and the associated impairment analysis involves the comparison of an asset group’s estimated future undiscounted cash flows over its remaining useful life to its respective carrying value, which primarily includes furniture, equipment, leasehold improvements, and operating lease assets. For long-lived asset groups identified with carrying values not recoverable by future undiscounted cash flows, impairment charges are recognized to the extent the sum of the discounted future cash flows from the use of the asset group is less than the carrying value. The impairment charge is allocated to the individual long-lived assets within an asset group; however, an individual long-lived asset is not impaired below its individual fair value, if readily determinable. The measurement of any impairment loss includes estimation of the fair value of the asset group’s respective operating lease assets, which includes estimates of market rental rates based on comparable lease transactions.
Income Taxes
We apply the provisions of ASC No. 740, “Income Taxes” (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including our operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. In accordance with ASC 740, we recognize, in our consolidated financial statements, the impact of our tax positions that are more likely than not to be sustained upon examination based on the technical merits of the positions. The Company recognizes interest and penalties for uncertain tax positions in income tax expense.
We are subject to federal and state income taxes. Tax laws, regulations, and administrative practices in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. In addition, a number of jurisdictions in which we are subject to tax have pursued or are actively pursuing changes to their tax laws applicable to corporate taxpayers, such as the 2017 Tax Act. The 2017 Tax Act was signed into law on December 22, 2017. The 2017 Tax Act significantly revised the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21% and eliminating certain deductions. For the year ended December 31, 2020, there were no significant impacts on estimated values of the Tax Receivable Agreement liability and the Company’s deferred tax assets as a result of any recent tax law changes.
We are subject to U.S. federal, state and local income taxes with respect to our allocable share of any taxable income of CWGS, LLC and are taxed at the prevailing corporate tax rates. CWGS, LLC is currently treated as a partnership for U.S. federal and most applicable state and local income tax purposes and, as such is generally not subject to any U.S. federal entity-level income taxes with the exception of certain subsidiaries, which are Subchapter C corporations. Taxable income or loss of a partnership is passed through to and included in the taxable income of its owners for U.S. federal income tax purposes. However, CWGS, LLC may be liable for various other state and local taxes. Pursuant to the CWGS LLC Agreement, CWGS, LLC will generally make pro rata tax distributions to holders of common units in an amount sufficient to fund all or part of their tax obligations with respect to the taxable income of CWGS, LLC that is allocated to them.
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Tax Receivable Agreement Liability
As described in Note 11 — Income Taxes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K, we are a party to the Tax Receivable Agreement under which we are contractually committed to pay the Continuing Equity Owners 85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of certain transactions (the “TRA Payments”). Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related TRA Payments. Therefore, we would only recognize a liability for TRA Payments if we determine if it is probable that we will generate sufficient future taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including projected retail location openings, revenue growth, and operating margins, among others. As of December 31, 2020, our Tax Receivable Agreement liability was recorded at $145.9 million after decreasing the liability by $0.1 million in the year ended December 31, 2020 to reflect our future tax benefit primarily as a result of the reduction in enacted state income tax rates. During the year ended December 31, 2020, the Tax Receivable Agreement liability was further adjusted to reflect new transactions, net of cash payments made. We concluded it is probable that we would have sufficient future taxable income to utilize the related tax benefits of the liability recorded. If we determine in the future that we will not be able to fully utilize all or part of the related tax benefits, we would derecognize the portion of the liability related the benefits not expected to be utilized.
Additionally, we estimate the amount of TRA Payments expected to be paid within the next 12 months and classify this amount as current on our Consolidated Balance Sheets. This determination is based on our estimate of taxable income for the next fiscal year. To the extent our estimate differs from actual results, we may be required reclassify portions of our liabilities under the Tax Receivable Agreement between current and non-current.