UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________to ______________
Commission file number: 001-37534
PLANET FITNESS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
38-3942097
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
4 Liberty Lane West, Hampton, NH 03842
(Address of Principal Executive Offices and Zip Code)
(603) 750-0001
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
☐ (Do not check if a small reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of November 1, 2017 there were 85,783,274 shares of the Registrant’s Class A Common Stock, par value $0.0001 per share, outstanding and 12,580,088 shares of the Registrant’s Class B Common Stock, par value $0.0001 per share, outstanding.
1
TABLE OF CONTENTS
Page
Cautionary Note Regarding Forward-Looking Statements
3
PART I – FINANCIAL INFORMATION
4
ITEM 1.
Financial Statements
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
37
ITEM 4.
Controls and Procedures
38
PART II – OTHER INFORMATION
39
Legal Proceedings
ITEM 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
ITEM 5.
Other Information
ITEM 6.
Exhibits
Signatures
40
2
This Quarterly Report on Form 10-Q, as well as information included in oral statements or other written statements made or to be made by us, contain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, and other future conditions. Forward-looking statements can be identified by words such as “anticipate,” “believe,” “envision,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “ongoing,” “contemplate” and other similar expressions, although not all forward-looking statements contain these identifying words. Examples of forward-looking statements include, among others, statements we make regarding:
•
future financial position;
business strategy;
budgets, projected costs and plans;
future industry growth;
financing sources;
the impact of litigation, government inquiries and investigations; and
all other statements regarding our intent, plans, beliefs or expectations or those of our directors or officers.
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Important factors that could cause actual results and events to differ materially from those indicated in the forward-looking statements include, among others, the following:
our dependence on the operational and financial results of, and our relationships with, our franchisees and the success of their new and existing stores;
risks relating to damage to our brand and reputation;
our ability to successfully implement our growth strategy;
technical, operational and regulatory risks related to our third-party providers’ systems and our own information systems;
our and our franchisees’ ability to attract and retain members;
the high level of competition in the health club industry generally;
our reliance on a limited number of vendors, suppliers and other third-party service providers;
the substantial indebtedness of our subsidiary, Planet Fitness Holdings, LLC;
risks relating to our corporate structure and tax receivable agreements; and
the other factors identified under the heading “Risk Factors” in our annual report on Form 10-K for the fiscal year ended December 31, 2016 filed with the Securities and Exchange Commission.
The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Report. We undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future developments or otherwise.
PART I-FINANCIAL INFORMATION
ITEM 1. Financial Statements
Planet Fitness, Inc. and subsidiaries
Condensed consolidated balance sheets
(Unaudited)
(Amounts in thousands, except per share amounts)
September 30,
December 31,
2017
2016
Assets
Current assets:
Cash and cash equivalents
$
93,267
40,393
Accounts receivable, net of allowance for bad debts of $95 and $687 at
September 30, 2017 and December 31, 2016, respectively
16,358
26,873
Due from related parties
2,984
2,864
Inventory
550
1,802
Restricted assets – national advertising fund
3,014
3,074
Other receivables
10,768
7,935
Other current assets
8,623
8,284
Total current assets
135,564
91,225
Property and equipment, net of accumulated depreciation of $33,546 as of
September 30, 2017 and $30,987 as of December 31, 2016
72,426
61,238
Intangible assets, net
239,741
253,862
Goodwill
176,981
Deferred income taxes
731,131
410,407
Other assets, net
10,177
7,729
Total assets
1,366,020
1,001,442
Liabilities and stockholders' equity (deficit)
Current liabilities:
Current maturities of long-term debt
7,185
Accounts payable
12,826
28,507
Accrued expenses
13,357
19,190
Equipment deposits
8,121
2,170
Restricted liabilities – national advertising fund
3,008
134
Deferred revenue, current
17,124
17,780
Payable to related parties pursuant to tax benefit arrangements, current
24,487
8,072
Other current liabilities
438
235
Total current liabilities
86,546
83,273
Long-term debt, net of current maturities
697,876
702,003
Deferred rent, net of current portion
5,289
5,108
Deferred revenue, net of current portion
8,180
8,351
Deferred tax liabilities
751
1,238
Payable to related parties pursuant to tax benefit arrangements, net of current portion
702,906
410,999
Other liabilities
4,111
5,225
Total noncurrent liabilities
1,419,113
1,132,924
Commitments and contingencies (note 11)
Stockholders' equity (deficit):
Class A common stock, $.0001 par value - 300,000 shares authorized, 85,682 and 61,314
shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
9
6
Class B common stock, $.0001 par value - 100,000 shares authorized, 12,682 and 37,185
Accumulated other comprehensive loss
(1,013
)
(1,174
Additional paid in capital
11,693
34,467
Accumulated deficit
(127,513
(164,062
Total stockholders' deficit attributable to Planet Fitness Inc.
(116,823
(130,759
Non-controlling interests
(22,816
(83,996
Total stockholders' deficit
(139,639
(214,755
Total liabilities and stockholders' deficit
See accompanying notes to condensed consolidated financial statements.
Condensed consolidated statements of operations
For the three months ended
For the nine months ended
Revenue:
Franchise
31,413
23,046
94,485
70,042
Commission income
4,149
4,179
15,668
14,338
Corporate-owned stores
28,560
26,675
83,886
78,756
Equipment
33,374
33,107
101,875
98,686
Total revenue
97,496
87,007
295,914
261,822
Operating costs and expenses:
Cost of revenue
25,819
25,925
78,395
77,365
Store operations
15,551
15,181
45,339
45,673
Selling, general and administrative
14,071
12,244
42,659
36,470
Depreciation and amortization
8,137
7,745
23,982
23,127
Other loss (gain)
(36
(241
280
(406
Total operating costs and expenses
63,542
60,854
190,655
182,229
Income from operations
33,954
26,153
105,259
79,593
Other expense, net:
Interest expense, net
(8,920
(6,291
(26,711
(18,819
Other (expense) income
408
(204
157
30
Total other expense, net
(8,512
(6,495
(26,554
(18,789
Income before income taxes
25,442
19,658
78,705
60,804
Provision for income taxes
6,540
4,795
23,933
11,504
Net income
18,902
14,863
54,772
49,300
Less net income attributable to non-controlling interests
3,557
11,438
18,173
38,374
Net income attributable to Planet Fitness, Inc.
15,345
3,425
36,599
10,926
Net income per share of Class A common stock:
Basic
0.18
0.08
0.48
0.28
Diluted
Weighted-average shares of Class A common stock outstanding:
85,663
44,669
76,391
39,394
85,734
44,686
76,435
39,397
5
Condensed consolidated statements of comprehensive income (loss)
(Amounts in thousands)
Net income including non-controlling interests
Other comprehensive income (loss), net:
Unrealized gain (loss) on interest rate caps, net of tax
374
193
730
(469
Foreign currency translation adjustments
20
11
25
(84
Total other comprehensive income (loss), net
394
204
755
(553
Total comprehensive income including non-controlling
interests
19,296
15,067
55,527
48,747
Less: total comprehensive income attributable to non-controlling
3,631
11,572
18,384
37,964
Total comprehensive income attributable to Planet
Fitness, Inc.
15,665
3,495
37,143
10,783
Condensed consolidated statements of cash flows
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred financing costs
1,439
1,114
Amortization of favorable leases and asset retirement obligations
260
297
Amortization of interest rate caps
1,552
459
Deferred tax expense
21,344
11,062
Loss on extinguishment of debt
79
—
Third party debt refinancing expense
1,021
Gain on re-measurement of tax benefit arrangement
(541
Provision for bad debts
44
Gain on disposal of property and equipment
(357
(347
Equity-based compensation
1,800
1,373
Changes in operating assets and liabilities, excluding effects of acquisitions:
Accounts receivable
11,099
4,898
Due to and due from related parties
(580
8,494
1,253
3,798
Other assets and other current assets
(2,413
(1,635
Accounts payable and accrued expenses
(16,985
(10,172
Other liabilities and other current liabilities
(724
(30
Income taxes
(1,462
(7,543
Payable to related parties pursuant to tax benefit arrangements
(7,909
(6,007
5,951
(1,609
Deferred revenue
(958
(1,264
Deferred rent
361
379
Net cash provided by operating activities
93,028
75,738
Cash flows from investing activities:
Additions to property and equipment
(23,229
(9,266
Proceeds from sale of property and equipment
166
402
Net cash used in investing activities
(23,063
(8,864
Cash flows from financing activities:
Principal payments on capital lease obligations
(37
Repayment of long-term debt
(5,388
(3,825
Payment of deferred financing and other debt-related costs
(1,278
Premiums paid for interest rate caps
(366
Proceeds from issuance of Class A common stock
172
Repurchase and retirement of Class B common stock
(1,583
Dividend equivalent payments
(1,322
Distributions to Continuing LLC Members
(9,308
(27,071
Net cash used in financing activities
(17,490
(32,437
Effects of exchange rate changes on cash and cash equivalents
399
87
Net increase in cash and cash equivalents
52,874
34,524
Cash and cash equivalents, beginning of period
31,430
Cash and cash equivalents, end of period
65,954
Supplemental cash flow information:
Net cash paid for income taxes
3,769
Cash paid for interest
23,637
17,187
Non-cash investing activities:
Non-cash additions to property and equipment
482
127
7
Condensed consolidated statements of changes in equity (deficit)
Class A common stock
Class B common stock
Accumulated
other
comprehensive
Additional paid-
Non-controlling
Total (deficit)
Shares
Amount
(loss) income
in capital
deficit
equity
Balance at December 31, 2016
61,314
37,185
Equity-based compensation expense
1,834
(34
Exchanges of Class B common stock
24,353
(24,353
(3
(383
(50,870
51,253
Retirement of Class B common stock
(150
Exercise of stock options
15
173
Tax benefit arrangement liability and
deferred taxes arising from secondary
offerings and other exchanges
26,089
Forfeiture of dividend equivalents
32
417
449
Distributions paid to members
of Pla-Fit Holdings
(48
(8,874
(8,922
Other comprehensive income
544
211
Balance at September 30, 2017
85,682
12,682
8
Notes to Condensed Consolidated financial statements
(Amounts in thousands, except share and per share amounts)
(1) Business organization
Planet Fitness, Inc. (the “Company”), through its subsidiaries, is a franchisor and operator of fitness centers, with more than 10.5 million members and 1,432 owned and franchised locations (referred to as stores) in 49 states, the District of Columbia, Puerto Rico, Canada and the Dominican Republic as of September 30, 2017.
The Company serves as the reporting entity for its various subsidiaries that operate three distinct lines of business:
Licensing and selling franchises under the Planet Fitness trade name.
Owning and operating fitness centers under the Planet Fitness trade name.
Selling fitness-related equipment to franchisee-owned stores.
The Company was formed as a Delaware corporation on March 16, 2015 for the purpose of facilitating an initial public offering (the “IPO”) which was completed on August 11, 2015 and related transactions in order to carry on the business of Pla-Fit Holdings, LLC and its subsidiaries (“Pla-Fit Holdings”). As of August 5, 2015, in connection with the recapitalization transactions that occurred prior to the IPO, the Company became the sole managing member and holder of 100% of the voting power of Pla-Fit Holdings. Pla-Fit Holdings owns 100% of Planet Intermediate, LLC which has no operations but is the 100% owner of Planet Fitness Holdings, LLC, a franchisor and operator of fitness centers. With respect to the Company, Pla-Fit Holdings and Planet Intermediate, LLC, each entity owns nothing other than the respective entity below it in the corporate structure and each entity has no other material operations.
Subsequent to the IPO and the related recapitalization transactions, the Company is a holding company whose principal asset is a controlling equity interest in Pla-Fit Holdings. As the sole managing member of Pla-Fit Holdings, the Company operates and controls all of the business and affairs of Pla-Fit Holdings, and through Pla-Fit Holdings, conducts its business. As a result, the Company consolidates Pla-Fit Holdings’ financial results and reports a non-controlling interest related to the portion of limited liability company units of Pla-Fit Holdings (“Holdings Units”) not owned by the Company. Unless otherwise specified, “the Company” refers to both Planet Fitness, Inc. and Pla-Fit Holdings throughout the remainder of these notes.
In March 2017, the Company completed a secondary offering (“March Secondary Offering”) of 15,000,000 shares of its Class A common stock at a price of $20.44 per share. All of the shares sold in the March Secondary Offering were offered by certain existing holders of Holdings Units and TSG AIV II-A L.P and TSG PF Co-Investors A L.P. (“Direct TSG Investors”), funds affiliated with TSG Consumer Partners, LLC (“TSG”). The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the participating holders of Holdings Units. The shares sold in the March Secondary Offering consisted of (i) 4,790,758 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 10,209,242 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the holders of Holdings Units that participated in the March Secondary Offering. Simultaneously, and in connection with the exchange, 10,209,242 shares of Class B common stock were surrendered by the holders of Holdings Units that participated in the March Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 10,209,242 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.
In May 2017, the Company completed a secondary offering (“May Secondary Offering”) of 16,085,510 shares of its Class A common stock at a price of $20.28 per share. All of the shares sold in the May Secondary Offering were offered by certain existing holders of Holdings Units and the Direct TSG Investors, funds affiliated with TSG. The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the participating holders of Holdings Units. The shares sold in the May Secondary Offering consisted of (i) 5,215,691 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 10,869,819 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the holders of Holdings Units that participated in the May Secondary Offering. Simultaneously, and in connection with the exchange, 10,869,819 shares of Class B common stock were surrendered by the holders of Holdings Units that participated in the May Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 10,869,819 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.
In addition to the March Secondary Offering and May Secondary Offering, during the nine months ended September 30, 2017, certain existing holders of Holdings Units have exercised their exchange rights and exchanged 3,273,955 Holdings Units for 3,273,955 newly-issued shares of Class A common stock. Simultaneously, and in connection with these exchanges, 3,273,955 shares of Class B common stock were surrendered by the holders of Holdings Units that exercised their exchange rights and canceled. Additionally, in connection with these exchanges, Planet Fitness, Inc. received 3,273,955 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.
Following the completion of the March Secondary Offering, May Secondary Offering and other exchanges described above, and as of September 30, 2017, Planet Fitness, Inc. held 100% of the voting interest and 87.1% of the economic interest of Pla-Fit Holdings and the holders of Holdings Units of Pla-Fit Holdings (the “Continuing LLC Owners”) held the remaining 12.9% economic interest in Pla-Fit Holdings. As future exchanges of Holdings Units occur, Planet Fitness, Inc.’s economic interest in Pla-Fit Holdings will increase.
(2) Summary of significant accounting policies
(a) Basis of presentation and consolidation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, these interim financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented have been reflected. All significant intercompany balances and transactions have been eliminated in consolidation.
The condensed consolidated financial statements as of and for the three and nine months ended September 30, 2017 and 2016 are unaudited. The condensed consolidated balance sheet as of December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the disclosures required by U.S. GAAP. These interim condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “Annual Report”) filed with the SEC on March 6, 2017. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.
As discussed in Note 1, as a result of the recapitalization transactions, Planet Fitness, Inc. consolidates Pla-Fit Holdings. The Company also consolidates entities in which it has a controlling financial interest, the usual condition of which is ownership of a majority voting interest. The Company also considers for consolidation certain interests where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary of a VIE is considered to possess the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the rights to receive benefits from the VIE that are significant to it. The principal entities in which the Company possesses a variable interest include franchise entities and certain other entities. The Company is not deemed to be the primary beneficiary for Planet Fitness franchise entities. Therefore, these entities are not consolidated.
The results of the Company have been consolidated with Matthew Michael Realty LLC (“MMR”) and PF Melville LLC (“PF Melville”) based on the determination that the Company is the primary beneficiary with respect to these VIEs. These entities are real estate holding companies that derive a majority of their financial support from the Company through lease agreements for corporate stores. See Note 3 for further information related to the Company’s VIEs.
(b) Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results. Significant areas where estimates and judgments are relied upon by management in the preparation of the consolidated financial statements include revenue recognition, valuation of assets and liabilities in connection with acquisitions, valuation of equity-based compensation awards, the evaluation of the recoverability of goodwill and long-lived assets, including intangible assets, income taxes, including deferred tax assets and liabilities and reserves for unrecognized tax benefits, and the liability for the Company’s tax benefit arrangements.
(c) Fair Value
ASC 820, Fair Value Measurements and Disclosures, establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
Level 1—Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
10
Level 3—Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The table below presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016:
Quoted
Significant
Total fair
prices
value at
in active
observable
unobservable
markets
inputs
(Level 1)
(Level 2)
(Level 3)
Interest rate caps
194
306
(d) Recent accounting pronouncements
The FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, in September 2014. This guidance requires that an entity recognize revenue to depict the transfer of a promised good or service to its customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for such transfer. This guidance also specifies accounting for certain costs incurred by an entity to obtain or fulfill a contract with a customer and provides for enhancements to revenue specific disclosures intended to allow users of the financial statements to clearly understand the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with its customers. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 for public companies. The Company expects to adopt this new guidance in fiscal year 2018 utilizing the cumulative effect method. The Company expects the adoption of the new guidance to change the timing of recognition of area development agreement and initial franchise fees. Currently, these fees are generally recognized upfront upon either a store opening or upon execution of the property lease for an area development agreement, and upon execution of a lease and delivery of training for franchise fees. The new guidance will generally require these fees to be recognized over the contractual terms of the related franchise license. The Company does not currently expect this new guidance to materially impact the recognition of royalty income. The Company also expects the adoption of this new guidance to change the reporting of national advertising fund contributions from franchisees and the related national advertising fund expenditures, which are not currently included in the consolidated statements of operations. The Company expects the new guidance to require these advertising fund contributions and expenditures to be reported on a gross basis in the consolidated statements of operations. We expect this change to have a material impact to our total revenues and expenses. However, we expect such contributions and expenditures to be largely offsetting and are continuing to evaluate the impact on our reported net income. The Company is continuing to evaluate the impact the adoption of this new guidance will have on all revenue transactions.
The FASB issued ASU No. 2016-02, Leases, in February 2016. This guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public companies. Early application of the amendments in this update is permitted for all entities. The Company anticipates that adoption of this guidance will bring all current operating leases onto the statement of financial position as a right of use asset and related rent liability, and is currently evaluating the effect that implementation of this guidance will have on its consolidated statement of operations.
The FASB issued ASU No. 2016-09, Stock Compensation, in March 2016. This guidance is intended to simplify several aspects of the accounting for share-based payment award transactions. This guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within that year. The Company has adopted the guidance as of January 1, 2017 on a modified retrospective basis, noting no material impact to the consolidated financial statements.
The FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, in August 2016. This guidance is intended to reduce diversity in practice of the classification of certain cash receipts and cash payments. This guidance will be effective for fiscal years beginning after December 15, 2017, including interim periods within that year. The Company does not expect the adoption of the standard to have a material impact on its consolidated financial statements.
The FASB issued ASU No. 2017-04, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, in January 2017. This guidance eliminates the requirement to calculate the implied fair value, essentially eliminating step two from the goodwill impairment test. The new standard requires goodwill impairment to be based upon the results of step one of the impairment test, which is defined as the excess of the carrying value of a reporting unit over its fair value. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. This guidance will be effective for fiscal years beginning after December 15, 2019, including interim periods within that year. This new guidance is not expected to have a material impact on the Company’s consolidated financial statements.
The FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, in August 2017. The guidance simplifies the application of hedge accounting in certain situations and amends the hedge accounting model to enable entities to better portray the economics of their risk management activities in the financial statements. This guidance will be effective for fiscal years beginning after December 15, 2018, including interim periods within that year. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
(3) Variable interest entities
The carrying values of VIEs included in the consolidated financial statements as of September 30, 2017 and December 31, 2016 are as follows:
September 30, 2017
December 31, 2016
Liabilities
PF Melville
4,333
4,071
MMR
3,309
3,156
Total
7,642
7,227
The Company also has variable interests in certain franchisees mainly through the guarantee of certain debt and lease agreements by the Company and by certain related parties to franchisees. The Company’s maximum obligation, as a result of its guarantees of leases and debt, is approximately $1,039 and $1,350 as of September 30, 2017 and December 31, 2016, respectively.
The amount of the Company’s maximum obligation represents a loss that the Company could incur from the variability in credit exposure without consideration of possible recoveries through insurance or other means. In addition, the amount bears no relation to the ultimate settlement anticipated to be incurred from the Company’s involvement with these entities, which is estimated at $0.
(4) Goodwill and intangible assets
A summary of goodwill and intangible assets at September 30, 2017 and December 31, 2016 is as follows:
Weighted
average
Gross
amortization
carrying
Net carrying
period (years)
amount
Customer relationships
11.1
171,782
(83,179
88,603
Noncompete agreements
5.0
14,500
(14,201
299
Favorable leases
7.5
2,935
(1,898
1,037
Order backlog
0.4
3,400
(3,400
Reacquired franchise rights
5.8
8,950
(5,448
3,502
201,567
(108,126
93,441
Indefinite-lived intangible:
Trade and brand names
N/A
146,300
Total intangible assets
347,867
12
(72,655
99,127
(12,027
2,473
(1,643
1,292
(4,280
4,670
(94,005
107,562
The Company determined that no impairment charges were required during any periods presented.
Amortization expense related to the intangible assets totaled $4,697 and $4,940 for the three months ended September 30, 2017 and 2016, respectively, and $14,122 and $14,820 for the nine months ended September 30, 2017 and 2016, respectively. Included within these total amortization expense amounts are $75 and $97 related to amortization of favorable and unfavorable leases for the three months ended September 30, 2017 and 2016, respectively, and $255 and $292 for the nine months ended September 30, 2017 and 2016, respectively. Amortization of favorable and unfavorable leases is recorded within store operations as a component of rent expense in the consolidated statements of operations. The anticipated annual amortization expense to be recognized in future years as of September 30, 2017 is as follows:
Remainder of 2017
4,093
2018
14,583
2019
14,215
2020
12,517
2021
12,422
Thereafter
35,611
(5) Long-term debt
Long-term debt as of September 30, 2017 and December 31, 2016 consists of the following:
Term loan B requires quarterly installments plus interest
through the term of the loan, maturing March 31, 2021.
Outstanding borrowings bear interest at LIBOR or base
rate (as defined) plus a margin at the election of the borrower
(4.26% at September 30, 2017 and 4.33% at December 31, 2016)
711,266
716,654
Revolving credit line, requires interest only payments
through the term of the loan, maturing March 31, 2019.
Outstanding borrowings bear interest at LIBOR or base rate
(as defined) plus a margin at the election of the borrower
(6.00% at both September 30, 2017 and December 31, 2016)
Total debt, excluding deferred financing costs
Deferred financing costs, net of accumulated amortization
(6,205
(7,466
Total debt
705,061
709,188
Current portion of long-term debt and line of credit
Long-term debt, net of current portion
13
On May 26, 2017, the Company amended the credit agreement governing its senior secured credit facility to reduce the applicable interest rate margin for term loan borrowings by 50 basis points, with an additional 25 basis point reduction in applicable interest rate possible in the future so long as the Total Net Leverage Ratio (as defined in the credit agreement) is less than 3.50 to 1.00. The amendment to the credit agreement also reduced the interest rate margin for revolving loan borrowings by 25 basis points. In connection with the amendment to the credit agreement, during the three months ended June 30, 2017, the Company capitalized deferred financing costs of $257, recorded expense of $1,021 related to certain third party fees included in other expense on the consolidated statement of operations, and a loss on extinguishment of debt of $79 included in interest expense on the consolidated statement of operations. Term loan B payments are payable in quarterly installments with the final scheduled principal payment on the outstanding term loan borrowings due on March 31, 2021.
Future annual principal payments of long-term debt as of September 30, 2017 are as follows:
1,796
687,915
(6) Derivative instruments and hedging activities
The Company utilizes interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on its variable-rate debt instruments. The Company does not enter into derivative instruments for any purpose other than cash flow hedging. The Company does not speculate using derivative instruments.
By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is an asset, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is a liability, the Company owes the counterparty and, therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties whose credit rating is higher than A1/A+ at the inception of the derivative transaction. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features.
Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
The Company assesses interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company monitors interest rate risk attributable to both the Company’s outstanding or forecasted debt obligations as well as the Company’s offsetting hedge positions.
In order to manage the market risk arising from the outstanding term loans, the Company has entered into a series of interest rate caps. The Company entered into two additional interest rate caps effective March 31, 2017 and terminating on March 31, 2019 with variable notional amounts in order to hedge one month LIBOR greater than 2.5%. As of September 30, 2017, the Company had interest rate cap agreements with notional amounts of $175,000 outstanding that were entered into in order to hedge three month LIBOR greater than 1.5%, and interest rate cap agreements with notional amounts of $181,531 that were entered into in order to hedge one month LIBOR greater than 2.5%.
The interest rate cap balances of $194 and $306 were recorded within other assets in the condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016, respectively. These amounts have been measured at fair value and are considered to be a Level 2 fair value measurement. The Company recorded an increase to the value of its interest rate caps of $356, net of tax of $145 and $193, net of tax of $45, within other comprehensive income (loss) during the three months ended September 30, 2017 and 2016, respectively, and an increase to the value of its interest rate caps of $730, net of tax of $344 and a reduction to the value of its interest rate caps of $469, net of tax of $83, within other comprehensive income (loss) during the nine months ended September 30, 2017 and 2016, respectively.
14
As of September 30, 2017, the Company does not expect to reclassify any amounts included in accumulated other comprehensive income (loss) into earnings during the next 12 months. Transactions and events expected to occur over the next 12 months that could necessitate reclassifying these derivatives’ loss to earnings include the re-pricing of variable-rate debt.
(7) Related party transactions
Amounts due from related parties of $2,984 and $2,864 as of September 30, 2017 and December 31, 2016, respectively, primarily relate to currently due or potential reimbursements for certain taxes accrued or paid by the Company (see Note 10).
Activity with entities considered to be related parties is summarized below:
Franchise revenue
344
359
1,174
Equipment revenue
577
770
Total revenue from related parties
348
362
1,751
1,944
Additionally, the Company had deferred area development agreement revenue from related parties of $257 and $422 as of September 30, 2017 and December 31, 2016, respectively.
As of September 30, 2017, the Company had $727,393 payable to related parties pursuant to tax benefit arrangements (see Note 10).
The Company provides administrative services to the Planet Fitness NAF, LLC (“NAF”) and charges NAF a fee for providing those services. These services include accounting services, information technology, data processing, product development, legal and administrative support, and other operating expenses, which amounted to $643 and $438 for the three months ended September 30, 2017 and 2016, respectively, and $1,645 and $1,313 for the nine months ended September 30, 2017 and 2016, respectively.
(8) Stockholder’s equity
Pursuant to the exchange agreement between the Company and the Continuing LLC Owners, the Continuing LLC Owners (or certain permitted transferees thereof) have the right, from time to time and subject to the terms of the exchange agreement, to exchange their Holdings Units, along with a corresponding number of shares of Class B common stock, for shares of Class A common stock (or cash at the option of the Company) on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends, reclassifications and similar transactions. In connection with any exchange by a Continuing LLC Owner of Holdings Units for shares of Class A common stock, the number of Holdings Units held by the Company is correspondingly increased as it acquires the exchanged Holdings Units, and a corresponding number of shares of Class B common stock are cancelled.
In March 2017, the Company completed the March Secondary Offering of 15,000,000 shares of its Class A common stock at a price of $20.44 per share. All of the shares sold in the March Secondary Offering were offered by certain existing holders of Holdings Units and the Direct TSG Investors. The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the participating holders of Holdings Units. The shares sold in the March Secondary Offering consisted of (i) 4,790,758 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 10,209,242 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the holders of Holdings Units that participated in the March Secondary Offering. Simultaneously, and in connection with the exchange, 10,209,242 shares of Class B common stock were surrendered by the holders of Holdings Units that participated in the March Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 10,209,242 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.
In May 2017, the Company completed the May Secondary Offering of 16,085,510 shares of its Class A common stock at a price of $20.28 per share. All of the shares sold in the May Secondary Offering were offered by certain existing holders of Holdings Units and the Direct TSG Investors. The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the participating holders of Holdings Units. The shares sold in the May Secondary Offering consisted of (i) 5,215,691 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 10,869,819 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the holders of Holdings Units that participated in the May Secondary Offering. Simultaneously, and in connection with the exchange, 10,869,819 shares of Class B common stock were surrendered by the holders of Holdings Units that participated in the May Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 10,869,819 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.
In addition to the March Secondary Offering and May Secondary Offering, during the nine months ended September 30, 2017, certain existing holders of Holdings Units exercised their exchange rights and exchanged 3,273,955 Holdings Units for 3,273,955 newly-issued shares of Class A common stock. Simultaneously, and in connection with these exchanges, 3,273,955 shares of Class B common stock were surrendered by the holders of Holdings Units that exercised their exchange rights and canceled. Additionally, in connection with these exchanges, Planet Fitness, Inc. received 3,273,955 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.
As a result of these transactions, as of September 30, 2017:
Holders of our Class A common stock owned 85,681,634 shares of our Class A common stock, representing 87.1% of the voting power in the Company and, through the Company, 85,681,634 Holdings Units representing 87.1% of the economic interest in Pla-Fit Holdings;
the Continuing LLC Owners collectively owned 12,681,728 Holdings Units, representing 12.9% of the economic interest in Pla-Fit Holdings and 12,681,728 shares of our Class B common stock, representing 12.9% of the voting power in the Company.
(9) Earnings per share
Basic earnings per share of Class A common stock is computed by dividing net income attributable to Planet Fitness, Inc. by the weighted-average number of shares of Class A common stock outstanding during the same period. Diluted earnings per share of Class A common stock is computed by dividing net income attributable to Planet Fitness, Inc. by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities.
Shares of the Company’s Class B common stock do not share in the earnings or losses attributable to Planet Fitness, Inc. and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented. Shares of the Company’s Class B common stock are, however, considered potentially dilutive shares of Class A common stock because shares of Class B common stock, together with the related Holdings Units, are exchangeable into shares of Class A common stock on a one-for-one basis.
The following table sets forth reconciliations used to compute basic and diluted earnings per share of Class A common stock:
Three months ended September 30,
Nine months ended September 30,
Numerator
Less: net income attributable to non-controlling interests
Denominator
Weighted-average shares of Class A common stock outstanding - basic
85,662,650
44,668,875
76,391,277
39,394,318
Effect of dilutive securities:
Stock options
66,610
12,539
38,524
138
Restricted stock units
5,196
4,282
5,018
3,030
Weighted-average shares of Class A common stock outstanding - diluted
85,734,456
44,685,696
76,434,819
39,397,486
Earnings per share of Class A common stock - basic
Earnings per share of Class A common stock - diluted
Weighted average shares of Class B common stock of 12,693,076 and 53,902,808 for the three months ended September 30, 2017 and 2016, respectively, and 22,010,095 and 59,221,157 for the nine months ended September 30, 2017 and 2016, respectively, were evaluated under the if-converted method for potential dilutive effects and were not determined to be dilutive. Weighted average stock options outstanding of 466,278 and 250,141 for the three months ended September 30, 2017 and 2016, respectively, and 423,870 and 230,633 for the nine months ended September 30, 2017 and 2016, respectively, were evaluated under the treasury stock method for potential dilutive effects and were determined to be anti-dilutive. Weighted average RSUs outstanding of 2,924 and 0 for the three months ended September 30, 2017 and 2016, respectively, and 985 and 518 for the nine months ended September 30, 2017 and 2016, respectively, were evaluated under the treasury stock method for potential dilutive effects and were determined to be anti-dilutive.
16
(10) Income taxes
The Company is the sole managing member of Pla-Fit Holdings, which is treated as a partnership for U.S. federal and certain state and local income taxes. As a partnership, Pla-Fit Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Pla-Fit Holdings is passed through to and included in the taxable income or loss of its members, including the Company, on a pro rata basis. Planet Fitness, Inc. is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income of Pla-Fit Holdings. The Company is also subject to taxes in foreign jurisdictions.
The Company incurs U.S. federal and state income taxes on its pro rata share of income flowed through from Pla-Fit Holdings. Our effective tax rate on such income was approximately 39.5% for the three and nine months ended September 30, 2017 and 2016. The provision for income taxes also reflects an effective state tax rate of 2.1% for the three and nine months ended September 30, 2017 and 2016, applied to non-controlling interests, representing the remaining percentage of income before taxes, excluding income from variable interest entities, related to Pla-Fit Holdings. Undistributed earnings of foreign operations were not material for the three and nine months ended September 30, 2017 and 2016.
Net deferred tax assets of $731,131 and $410,407 as of September 30, 2017 and December 31, 2016, respectively, relate primarily to the tax effects of temporary differences in the book basis as compared to the tax basis of our investment in Pla-Fit Holdings as a result of the secondary offerings, other exchanges, recapitalization transactions and IPO. As of September 30, 2017, the Company does not have any material net operating loss carryforwards.
As of September 30, 2017 and December 31, 2016, the total liability related to uncertain tax positions was $2,608. The Company recognizes interest accrued and penalties, if applicable, related to unrecognized tax benefits in income tax expense. As of September 30, 2017, the Company anticipates that the liability for unrecognized tax benefits could decrease by up to $2,608 within the next 12 months due to the expiration of certain statutes of limitation or the settlement of examinations or issues with tax authorities. Interest and penalties for the three and nine months ended September 30, 2017 and 2016 were not material.
17
Tax benefit arrangements
The Company’s acquisition of Holdings Units in connection with the IPO and future and certain past exchanges of Holdings Units for shares of the Company’s Class A common stock (or cash at the option of the Company) are expected to produce and have produced favorable tax attributes. In connection with the IPO, the Company entered into two tax receivable agreements. Under the first of those agreements, the Company generally is required to pay to certain existing and previous equity owners of Pla-Fit Holdings (the “TRA Holders”) 85% of the applicable tax savings, if any, in U.S. federal and state income tax that the Company is deemed to realize as a result of certain tax attributes of their Holdings Units sold to the Company (or exchanged in a taxable sale) and that are created as a result of (i) the sales of their Holdings Units for shares of Class A common stock and (ii) tax benefits attributable to payments made under the tax receivable agreement (including imputed interest). Under the second tax receivable agreement, the Company generally is required to pay to the Direct TSG Investors 85% of the amount of tax savings, if any, that the Company is deemed to realize as a result of the tax attributes of the Holdings Units held in respect of the Direct TSG Investors’ interest in the Company, which resulted from the Direct TSG Investors’ purchase of interests in Pla-Fit Holdings in 2012, and certain other tax benefits. Under both agreements, the Company generally retains the benefit of the remaining 15% of the applicable tax savings.
In connection with the March Secondary Offering, May Secondary Offering, and related and other exchanges during the nine months ended September 30, 2017, 24,353,016 Holdings Units were redeemed by the TRA Holders for newly issued shares of Class A common stock, resulting in an increase in the tax basis of the net assets of Pla-Fit Holdings subject to the provisions of the tax receivable agreements. As a result of the change in Planet Fitness, Inc.’s ownership percentage of Pla-Fit Holdings that occurred in conjunction with the exchanges, we recorded a decrease to our net deferred tax assets of $22,538 during the nine months ended September 30, 2017. As a result of these exchanges, during the nine months ended September 30, 2017, we also recognized deferred tax assets in the amount of $365,399, and corresponding tax benefit arrangement liabilities of $316,772, representing 85% of the tax benefits due to the TRA Holders. The offset to the entries recorded in connection with exchanges was to equity.
As of September 30, 2017 and December 31, 2016, the Company had a liability of $727,393 and $419,071, respectively, related to its projected obligations under the tax benefit arrangements. Projected future payments under the tax benefit arrangements are as follows:
3,507
29,972
35,740
35,503
36,548
586,123
727,393
(11) Commitments and contingencies
From time to time, and in the ordinary course of business, the Company is subject to various claims, charges, and litigation, such as employment-related claims and slip and fall cases. The Company is not currently aware of any legal proceedings or claims that the Company believes will have, individually or in the aggregate, a material adverse effect on the Company’s financial position or result of operations.
(12) Segments
The Company has three reportable segments: (i) Franchise; (ii) Corporate-owned stores; and (iii) Equipment.
The Company’s operations are organized and managed by type of products and services and segment information is reported accordingly. The Company’s chief operating decision maker (the “CODM”) is its Chief Executive Officer. The CODM reviews financial performance and allocates resources by reportable segment. There have been no operating segments aggregated to arrive at the Company’s reportable segments.
The Franchise segment includes operations related to the Company’s franchising business in the United States, Puerto Rico, Canada and the Dominican Republic. The Corporate-owned stores segment includes operations with respect to all Corporate-owned stores throughout the United States and Canada. The Equipment segment includes the sale of equipment to franchisee-owned stores.
The accounting policies of the reportable segments are the same as those described in Note 2. The Company evaluates the performance of its segments and allocates resources to them based on revenue and earnings before interest, taxes, depreciation, and amortization, referred to as
18
Segment EBITDA. Revenues for all operating segments include only transactions with unaffiliated customers and include no intersegment revenues.
The tables below summarize the financial information for the Company’s reportable segments for the three and nine months ended September 30, 2017 and 2016. The “Corporate and other” category, as it relates to Segment EBITDA, primarily includes corporate overhead costs, such as payroll and related benefit costs and professional services which are not directly attributable to any individual segment.
Revenue
Franchise segment revenue - U.S.
35,025
26,940
108,470
83,312
Franchise segment revenue - International
537
285
1,683
1,068
Franchise segment total
35,562
27,225
110,153
84,380
Corporate-owned stores - U.S.
27,414
25,591
80,597
75,595
Corporate-owned stores - International
1,146
1,084
3,289
3,161
Corporate-owned stores total
Equipment segment - U.S.
Equipment segment total
Franchise segment revenue includes franchise revenue and commission income.
Franchise revenue includes revenue generated from placement services of $2,433 and $2,224 for the three months ended September 30, 2017 and 2016, respectively, and $7,410 and $6,952 for the nine months ended September 30, 2017 and 2016, respectively.
Segment EBITDA
29,925
22,814
94,444
71,308
12,046
10,550
35,579
30,259
7,683
7,153
23,587
21,330
Corporate and other
(7,155
(6,823
(24,212
(20,147
Total Segment EBITDA
42,499
33,694
129,398
102,750
The following table reconciles total Segment EBITDA to income before taxes:
Less:
Other (income) expense
19
The following table summarizes the Company’s assets by reportable segment:
237,682
202,580
155,533
153,761
184,012
208,809
Unallocated
788,793
436,292
Total consolidated assets
The table above includes $2,638 and $2,795 of long-lived assets located in the Company’s corporate-owned stores in Canada as of September 30, 2017 and December 31, 2016, respectively. All other assets are located in the U.S.
The following table summarizes the Company’s goodwill by reportable segment:
16,938
67,377
92,666
Consolidated goodwill
(13) Corporate-owned and franchisee-owned stores
The following table shows changes in our corporate-owned and franchisee-owned stores for the three and nine months ended September 30, 2017 and 2016:
Franchisee-owned stores:
Stores operated at beginning of period
1,345
1,148
1,255
1,066
New stores opened
31
122
121
Stores debranded or consolidated(1)
(2
(1
Stores operated at end of period
1,374
1,184
Corporate-owned stores:
58
Total stores:
1,403
1,206
1,313
1,124
1,432
1,242
(1)
The term “debrand” refers to a franchisee-owned store whose right to use the Planet Fitness brand and marks has been terminated in accordance with the franchise agreement. We retain the right to prevent debranded stores from continuing to operate as fitness centers. The term “consolidated” refers to the combination of a franchisee’s store with another store located in close proximity with our prior approval. This often coincides with an enlargement, re-equipment and/or refurbishment of the remaining store.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context requires otherwise, references in this report to the “Company,” “we,” “us” and “our” refer to Planet Fitness, Inc. and its consolidated subsidiaries.
Overview
We are one of the largest and fastest-growing franchisors and operators of fitness centers in the United States by number of members and locations, with a highly recognized national brand. Our mission is to enhance people’s lives by providing a high-quality fitness experience in a welcoming, non-intimidating environment, which we call the Judgement Free Zone, where anyone—and we mean anyone—can feel they belong. Our bright, clean stores are typically 20,000 square feet, with a large selection of high-quality, purple and yellow Planet Fitness-branded cardio, circuit- and weight-training equipment and friendly staff trainers who offer unlimited free fitness instruction to all our members in small groups through our PE@PF program. We offer this differentiated fitness experience at only $10 per month for our standard membership. This exceptional value proposition is designed to appeal to a broad population, including occasional gym users and the approximately 80% of the U.S. and Canadian populations over age 14 who are not gym members, particularly those who find the traditional fitness club setting intimidating and expensive. We and our franchisees fiercely protect Planet Fitness’ community atmosphere—a place where you do not need to be fit before joining and where progress toward achieving your fitness goals (big or small) is supported and applauded by our staff and fellow members.
As of September 30, 2017, we had more than 10.5 million members and 1,432 stores in 49 states, the District of Columbia, Puerto Rico, Canada and the Dominican Republic. Of our 1,432 stores, 1,374 are franchised and 58 are corporate-owned. As of September 30, 2017, we had commitments to open more than 1,000 new stores under existing area development agreements.
Our segments
We operate and manage our business in three business segments: Franchise, Corporate-owned stores and Equipment. Our Franchise segment includes operations related to our franchising business in the United States, Puerto Rico, Canada and the Dominican Republic. Our Corporate-owned stores segment includes operations with respect to all corporate-owned stores throughout the United States and Canada. The Equipment segment includes the sale of equipment to our United States franchisee-owned stores. We evaluate the performance of our segments and allocate resources to them based on revenue and earnings before interest, taxes, depreciation and amortization, referred to as Segment EBITDA. Revenue and Segment EBITDA for all operating segments include only transactions with unaffiliated customers and do not include intersegment transactions. The tables below summarize the financial information for our segments for the three and nine months ended September 30, 2017 and 2016. “Corporate and other,” as it relates to Segment EBITDA, primarily includes corporate overhead costs, such as payroll and related benefit costs and professional services that are not directly attributable to any individual segment.
(in thousands)
Franchise segment
Corporate-owned stores segment
Equipment segment
Total Segment EBITDA(1)
Total Segment EBITDA is equal to EBITDA, which is a metric that is not presented in accordance with U.S. GAAP. Refer to “—Non-GAAP financial measures” for a definition of EBITDA and a reconciliation to net income, the most directly comparable U.S. GAAP measure.
A reconciliation of income from operations to Segment EBITDA is set forth below:
Corporate-owned
stores
Corporate and
Three months ended September 30, 2017:
27,801
6,024
(7,600
2,140
4,038
407
Other income (expense)
(16
279
107
Segment EBITDA(1)
Three months ended September 30, 2016:
20,662
6,715
5,602
(6,826
2,142
3,913
1,551
139
(78
-
(136
Nine months ended September 30, 2017:
88,045
23,358
18,826
(24,970
6,424
11,722
4,654
1,182
(25
499
(424
Nine months ended September 30, 2016:
64,951
18,313
16,678
(20,349
6,395
11,667
4,652
413
(38
(211
Total Segment EBITDA is equal to EBITDA, which is a metric that is not presented in accordance with U.S. GAAP. Refer to “—Non-GAAP Financial Measures” for a definition of EBITDA and a reconciliation to net income, the most directly comparable U.S. GAAP measure.
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How we assess the performance of our business
In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how our business is performing include the number of new store openings, same store sales for both corporate-owned and franchisee-owned stores, EBITDA, Adjusted EBITDA, Segment EBITDA, Adjusted net income, and Adjusted net income per share, diluted. See “—Non-GAAP financial measures” below for our definition of EBITDA, Adjusted EBITDA, Adjusted net income, and Adjusted net income per share, diluted and why we present EBITDA, Adjusted EBITDA, Adjusted net income, and Adjusted net income per share, diluted, and for a reconciliation of our EBITDA, Adjusted EBITDA, and Adjusted net income to net income, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, and a reconciliation of Adjusted net income per share, diluted to net income per share, diluted, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP.
Number of new store openings
The number of new store openings reflects stores opened during a particular reporting period for both corporate-owned and franchisee-owned stores. Opening new stores is an important part of our growth strategy and we expect the majority of our future new stores will be franchisee-owned. Before we obtain the certificate of occupancy or report any revenue for new corporate-owned stores, we incur pre-opening costs, such as rent expense, labor expense and other operating expenses. Some of our stores open with an initial start-up period of higher than normal marketing and operating expenses, particularly as a percentage of monthly revenue. New stores may not be profitable and their revenue may not follow historical patterns. The following table shows the change in our corporate-owned and franchisee-owned store base for the three and nine months ended September 30, 2017 and 2016:
23
Same store sales
Same store sales refers to year-over-year sales comparisons for the same store sales base of both corporate-owned and franchisee-owned stores. We define the same store sales base to include those stores that have been open and for which monthly membership dues have been billed for longer than 12 months. We measure same store sales based solely upon monthly dues billed to members of our corporate-owned and franchisee-owned stores.
Several factors affect our same store sales in any given period, including the following:
the number of stores that have been in operation for more than 12 months;
the percentage mix of PF Black Card and standard memberships in any period;
growth in total memberships per store;
consumer recognition of our brand and our ability to respond to changing consumer preferences;
overall economic trends, particularly those related to consumer spending;
our and our franchisees’ ability to operate stores effectively and efficiently to meet consumer expectations;
marketing and promotional efforts;
local competition;
trade area dynamics; and
opening of new stores in the vicinity of existing locations.
Consistent with common industry practice, we present same store sales as compared to the same period in the prior year for all stores that have been open and for which monthly membership dues have been billed for longer than 12 months, beginning with the 13th month and thereafter, as applicable. Same store sales of our international stores are calculated on a constant currency basis, meaning that we translate the current year’s same store sales of our international stores at the same exchange rates used in the prior year. Since opening new stores will be a significant component of our revenue growth, same store sales is only one measure of how we evaluate our performance.
Stores acquired from or sold to franchisees are removed from the franchisee-owned or corporate-owned same store sales base, as applicable, upon the ownership change and for the 12 months following the date of the ownership change. These stores are included in the corporate-owned or franchisee-owned same store sales base, as applicable, following the 12th month after the acquisition or sale. These stores remain in the system-wide same store sales base in all periods.
The following table shows our same store sales for the three and nine months ended September 30, 2017 and 2016:
Same store sales data
Same store sales growth:
Franchisee-owned stores
9.6
%
10.3
10.1
8.4
5.1
5.4
4.6
Total stores
9.3
10.0
9.8
8.2
Number of stores in same store sales base:
1,170
975
1,228
1,033
24
Non-GAAP financial measures
We refer to EBITDA and Adjusted EBITDA as we use these measures to evaluate our operating performance and we believe these measures provide useful information to investors in evaluating our performance. EBITDA and Adjusted EBITDA as presented in this Quarterly Report on Form 10-Q are supplemental measures of our performance that are neither required by, nor presented in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA should not be considered as substitutes for U.S. GAAP metrics such as net income or any other performance measures derived in accordance with U.S. GAAP. Also, in the future we may incur expenses or charges such as those used to calculate Adjusted EBITDA. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. We have also disclosed Segment EBITDA as an important financial metric utilized by the Company to evaluate performance and allocate resources to segments in accordance with ASC 280, Segment Reporting. As part of such disclosure in “Our Segments” within Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Company has provided a reconciliation from income from operations to Total Segment EBITDA, which is equal to the Non-GAAP financial metric EBITDA.
We define EBITDA as net income before interest, taxes, depreciation and amortization. We believe that EBITDA, which eliminates the impact of certain expenses that we do not believe reflect our underlying business performance, provides useful information to investors to assess the performance of our segments as well as the business as a whole. Our Board of Directors also uses EBITDA as a key metric to assess the performance of management. We define Adjusted EBITDA as net income before interest, taxes, depreciation and amortization, adjusted for the impact of certain additional non-cash and other items that we do not consider in our evaluation of ongoing performance of the Company’s core operations. These items include certain purchase accounting adjustments, stock offering-related costs, severance costs, and certain other charges and gains. We believe that Adjusted EBITDA is an appropriate measure of operating performance in addition to EBITDA because it eliminates the impact of other items that we believe reduce the comparability of our underlying core business performance from period to period and is therefore useful to our investors in comparing the core performance of our business from period to period. Four-wall EBITDA is an assessment of store-level profitability for stores included in the same-store-sales base, which adjusts for certain administrative and other items that we do not consider in our evaluation of individual store-level performance.
A reconciliation of net income to EBITDA and Adjusted EBITDA is set forth below for the three and nine months ended September 30, 2017 and 2016:
8,920
6,291
26,711
18,819
EBITDA
Purchase accounting adjustments-revenue(1)
336
450
1,116
458
Purchase accounting adjustments-rent(2)
174
202
561
664
Transaction fees(3)
Stock offering-related costs(4)
41
1,078
977
2,105
Severance costs(5)
423
Pre-opening costs(6)
421
Equipment discount(7)
(107
Early lease termination costs(8)
719
Other(9)
(573
72
Adjusted EBITDA
43,364
35,424
133,533
106,472
Represents the impact of revenue-related purchase accounting adjustments associated with the acquisition of Pla-Fit Holdings on November 8, 2012 by TSG (the “2012 Acquisition”). At the time of the 2012 Acquisition, the Company maintained a deferred revenue account, which consisted of deferred area development agreement fees, deferred franchise fees, and deferred enrollment fees that the Company billed and collected up front but recognizes for U.S. GAAP purposes at a later date. In connection with the 2012 Acquisition, it was determined that the carrying amount of deferred revenue was greater than the fair value assessed in accordance with ASC 805—Business Combinations, which resulted in a write-down of the carrying value of the deferred revenue balance upon application of acquisition push-down accounting under ASC 805. These amounts represent the additional revenue that would have been recognized in these periods if the write-down to deferred revenue had not occurred in connection with the application of acquisition pushdown accounting.
(2)
Represents the impact of rent-related purchase accounting adjustments. In accordance with guidance in ASC 805 – Business Combinations, in connection with the 2012 Acquisition, the Company’s deferred rent liability was required to be written off as of the acquisition date and rent was recorded on a straight-line basis from the acquisition date through the end of the lease term. This resulted in higher overall recorded rent expense each period than would have otherwise been recorded had the deferred rent liability not been written off as a result of the acquisition push down accounting applied in accordance with ASC 805. Adjustments of $100, $105, $306, and $372 in the three and nine months ended September 30, 2017 and 2016, respectively, reflect the difference between the higher rent expense recorded in accordance with U.S. GAAP since the acquisition and the rent expense that would have been recorded had the 2012 Acquisition not occurred. Adjustments of $75, $97, $255, and $292 for the three and nine months ended September 30, 2017 and 2016, respectively, are due to the amortization of favorable and unfavorable lease intangible assets which were recorded in connection with the 2012 Acquisition and the acquisition of eight franchisee-owned stores on March 31, 2014. All of the rent related purchase accounting adjustments are adjustments to rent expense which is included in store operations on our consolidated statements of operations.
(3)
Represents transaction fees and expenses related to the amendment of our credit facility in May of 2017.
(4)
Represents legal, accounting and other costs incurred in connection with offerings of the Company’s Class A common stock.
(5)
Represents severance expense recorded in connection with an equity award modification.
(6)
Represents costs associated with new corporate-owned stores incurred prior to the store opening, including payroll-related costs, rent and occupancy expenses, marketing and other store operating supply expenses.
(7)
Represents a gain recorded in connection with the write-off of a previously accrued deferred equipment discount that is no longer expected to be utilized. This amount was originally recognized through purchase accounting in connection with the acquisition of eight franchisee-owned stores on March 31, 2014.
(8)
Represents charges and expenses incurred in connection with the early termination of the lease for our previous headquarters.
(9)
Represents certain other charges and gains that we do not believe reflect our underlying business performance. In the nine months ended September 30, 2017, this amount includes a gain of $541 related to the adjustment of our tax benefit arrangements primarily due to changes in our effective tax rate.
As a result of the recapitalization transactions that occurred prior to our IPO, the limited liability company agreement of Pla-Fit Holdings was amended and restated (the “New LLC Agreement”) to, among other things, designate Planet Fitness, Inc. as the sole managing member of Pla-Fit Holdings. As sole managing member, Planet Fitness, Inc. exclusively operates and controls the business and affairs of Pla-Fit Holdings. As a result of the recapitalization transactions and the New LLC Agreement, Planet Fitness, Inc. now consolidates Pla-Fit Holdings, and Pla-Fit Holdings is considered the predecessor to Planet Fitness, Inc. for accounting purposes. Our presentation of Adjusted net income and Adjusted net income per share, diluted, gives effect to the consolidation of Pla-Fit Holdings with Planet Fitness, Inc. resulting from the recapitalization transactions and the New LLC Agreement as if they had occurred on January 1, 2016. In addition, Adjusted net income assumes that all net income is attributable to Planet Fitness, Inc., which assumes the full exchange of all outstanding Holdings Units for shares of Class A common stock of Planet Fitness, Inc., adjusted for certain non-recurring items that we do not believe directly reflect our core operations. Adjusted net income per share, diluted, is calculated by dividing Adjusted net income by the total shares of Class A common stock outstanding plus any dilutive options and restricted stock units as calculated in accordance with U.S. GAAP and assuming the full exchange of all outstanding Holdings Units and corresponding Class B common stock as of the beginning of each period presented. Adjusted net income and Adjusted net income per share, diluted, are supplemental measures of operating performance that do not represent, and should not be considered, alternatives to net income and earnings per share, as calculated in accordance with U.S. GAAP. We believe Adjusted net income and Adjusted net income per share, diluted, supplement U.S. GAAP measures and enable us to more effectively evaluate our performance period-over-period. A reconciliation of Adjusted net income to net income, the most directly comparable U.S. GAAP measure, and the computation of Adjusted net income per share, diluted, are set forth below.
26
(in thousands, except per share amounts)
Provision for income taxes, as reported
1,143
Purchase accounting amortization(10)
4,622
4,843
13,867
14,528
Adjusted income before income taxes
30,929
26,231
97,131
79,054
Adjusted income taxes(11)
12,217
10,361
38,367
31,226
Adjusted net income
18,712
15,870
58,764
47,828
Adjusted net income per share, diluted
0.19
0.16
0.60
Adjusted weighted-average shares outstanding(12)
98,428
98,572
98,445
98,615
Represents the impact of revenue-related purchase accounting adjustments associated with the 2012 Acquisition. At the time of the 2012 Acquisition, the Company maintained a deferred revenue account, which consisted of deferred area development agreement fees, deferred franchise fees, and deferred enrollment fees that the Company billed and collected up front but recognizes for U.S. GAAP purposes at a later date. In connection with the 2012 Acquisition, it was determined that the carrying amount of deferred revenue was greater than the fair value assessed in accordance with ASC 805—Business Combinations, which resulted in a write-down of the carrying value of the deferred revenue balance upon application of acquisition push-down accounting under ASC 805. These amounts represent the additional revenue that would have been recognized in these periods if the write-down to deferred revenue had not occurred in connection with the application of acquisition pushdown accounting.
27
(10)
Includes $4,086, $4,218, $12,258 and $12,655 of amortization of intangible assets, other than favorable leases, for the three and nine months ended September 30, 2017 and 2016, respectively, recorded in connection with the 2012 Acquisition, and $536, $624, $1,609 and $1,873 of amortization of intangible assets for the three and nine months ended September 30, 2017 and 2016, respectively, recorded in connection with the acquisition of eight franchisee-owned stores on March 31, 2014. The adjustment represents the amount of actual non-cash amortization expense recorded, in accordance with U.S. GAAP, in each period.
(11)
Represents corporate income taxes at an assumed effective tax rate of 39.5% for the three and nine months ended September 30, 2017 and 2016 applied to adjusted income before income taxes.
(12)
Assumes the full exchange of all outstanding Holdings Units and corresponding shares of Class B common stock for shares of Class A common stock of Planet Fitness, Inc.
A reconciliation of net income per share, diluted, to Adjusted net income per share, diluted is set forth below for three and nine months ended September 30, 2017 and 2016:
September 30, 2016
Weighted Average Shares
Net income per share, diluted
Net income attributable to Planet Fitness, Inc.(1)
Assumed exchange of shares(2)
12,694
53,903
Net Income
Adjustments to arrive at adjusted income
before income taxes(3)
12,027
11,368
Adjusted income taxes(4)
Adjusted Net Income
Represents net income attributable to Planet Fitness, Inc. and the associated weighted average shares, diluted of Class A common stock outstanding.
Assumes the full exchange of all outstanding Holdings Units and corresponding shares of Class B common stock for shares of Class A common stock of Planet Fitness, Inc. Also assumes the addition of net income attributable to non-controlling interests corresponding with the assumed exchange of Holdings Units and Class B common shares for shares of Class A common stock.
Represents the total impact of all adjustments identified in the adjusted net income table above to arrive at adjusted income before income taxes.
Represents corporate income taxes at an assumed effective tax rate of 39.5% for the three months ended September 30, 2017 and 2016, respectively, applied to adjusted income before income taxes.
22,010
59,221
42,359
29,754
Represents corporate income taxes at an assumed effective tax rate of 39.5% for the nine months ended September 30, 2017 and 2016, respectively, applied to adjusted income before income taxes.
28
Results of operations
The following table sets forth our condensed consolidated statements of operations as a percentage of total revenue for the three and nine months ended September 30, 2017 and 2016:
32.2
26.5
31.9
26.7
4.3
4.8
5.3
5.5
36.5
31.3
37.2
29.3
30.6
28.4
30.1
34.2
38.1
34.4
37.7
100.0
29.8
29.5
16.0
17.4
15.3
14.4
14.1
13.9
8.3
8.9
8.1
8.8
0.0
(0.3
%)
0.1
(0.2
65.2
69.9
64.4
69.4
34.8
35.6
Other income (expense), net:
(9.1
(7.2
(9.0
(8.7
(7.4
(8.9
26.1
22.7
23.4
6.7
4.4
19.4
17.2
18.6
19.0
3.6
13.1
6.1
14.7
15.8
4.1
12.5
29
The following table sets forth a comparison of our condensed consolidated statements of operations for the three months ended September 30, 2017 and 2016:
Comparison of the three months ended September 30, 2017 and three months ended September 30, 2016
Total revenues were $97.5 million in the three months ended September 30, 2017, compared to $87.0 million in the three months ended September 30, 2016, an increase of $10.5 million, or 12.1%.
Franchise segment revenue was $35.6 million in the three months ended September 30, 2017, compared to $27.2 million in the three months ended September 30, 2016, an increase of $8.3 million, or 30.6%.
Franchise revenue was $31.4 million in the three months ended September 30, 2017 compared to $23.0 million in the three months ended September 30, 2016, an increase of $8.4 million or 36.3%. Included in franchise revenue is royalty revenue of $22.0 million, franchise and other fees of $7.0 million, and placement revenue of $2.4 million for the three months ended September 30, 2017, compared to royalty revenue of $15.1 million, franchise and other fees of $5.8 million, and placement revenue of $2.2 million for the three months ended September 30, 2016. The $7.0 million increase in royalty revenue was primarily driven by $3.1 million attributable to a same store sales increase of 9.6% in franchisee-owned stores, $2.2 million attributable to royalties from new stores in 2017 as well as stores that opened in 2016 that were not included in the same store sales base, and $1.6 million attributable to higher royalties on annual fees, including stores not included in the same store sales base. The $1.2 million increase in franchise and other fees was primarily driven by higher fees associated with increased store and member count, and higher franchise and transfer fees in the three months ended September 30, 2017 as compared to the three months ended September 30, 2016.
Commission income, which is included in our franchise segment, was $4.1 million in the three months ended September 30, 2017 compared to $4.2 million in the three months ended September 30, 2016.
Revenue from our corporate-owned stores segment was $28.6 million in the three months ended September 30, 2017, compared to $26.7 million in the three months ended September 30, 2016, an increase of $1.9 million, or 7.1%. The increase was due to higher revenue
from annual fees of $1.0 million and same store sales from corporate-owned stores which increased 5.1% in the three months ended September 30, 2017 and contributed incremental revenues of $0.9 million.
Equipment segment revenue was $33.4 million in the three months ended September 30, 2017, compared to $33.1 million in the three months ended September 30, 2016, an increase of $0.3 million, or 0.8%. The increase was driven by an increase in replacement equipment sales to existing franchisee-owned stores in the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, partially offset by lower equipment sales to new franchisee-owned stores related to nine fewer new equipment sales in the three months ended September 30, 2017 compared to the three months ended September 30, 2016.
Cost of revenue was $25.8 million in the three months ended September 30, 2017 compared to $25.9 million in the three months ended September 30, 2016, a decrease of $0.1 million, or 0.4%. Cost of revenue, which relates to our equipment segment, decreased due to nine fewer equipment sales to new franchisee-owned stores, partially offset by an increase in replacement equipment sales to existing franchisee-owned stores in the three months ended September 30, 2017, as compared to the three months ended September 30, 2016.
Store operation expenses, which relate to our corporate-owned stores segment, were $15.6 million in the three months ended September 30, 2017 compared to $15.2 million in the three months ended September 30, 2016, an increase of $0.4 million, or 2.4%.
Selling, general and administrative expenses were $14.1 million in the three months ended September 30, 2017 compared to $12.2 million in the three months ended September 30, 2016, an increase of $1.8 million, or 14.9%. The $1.8 million increase was primarily due to additional expenses incurred during the three months ended September 30, 2017 to support our growing operations, including additional headcount, infrastructure, and public company expenses. Partially offsetting this increase was $1.0 million of lower costs incurred in connection with secondary offerings in the three months ended September 30, 2017 as compared to the three months ended September 30, 2016. With respect to our growing operations, we anticipate that our selling, general and administrative expenses will continue to increase as our franchisee-owned store count grows.
Depreciation and amortization expense consists of the depreciation of property and equipment, including leasehold and building improvements and equipment. Amortization expense consists of amortization related to our intangible assets, including customer relationships and non-compete agreements.
Depreciation and amortization expense was $8.1 million in the three months ended September 30, 2017 compared to $7.7 million in the three months ended September 30, 2016, an increase of $0.4 million, or 5.1%.
Other (gain)
Other gain was $0 in the three months ended September 30, 2017 compared to $0.2 million in the three months ended September 30, 2016.
Interest expense primarily consists of interest on long-term debt as well as the amortization of deferred financing costs.
Interest expense, net was $8.9 million in the three months ended September 30, 2017 compared to $6.3 million in the three months ended September 30, 2016, an increase of $2.6 million, or 41.8%. The increase in interest expense is a result of the additional $230.0 million in borrowings which occurred in November 2016 as a result of the amendment of our senior secured credit facility.
Other income was $0.4 million in the three months ended September 30, 2017 compared to expense of $0.2 million in the three months ended September 30, 2016, an increase of $0.6 million. In the three months ended September 30, 2017, other income includes foreign currency gains of $0.3 million.
Income tax expense was $6.5 million in the three months ended September 30, 2017, compared to $4.8 million in the three months ended September 30, 2016, an increase of $1.7 million. The increase in the provision for income taxes is primarily attributable to the increased economic interest in Pla-Fit Holdings held by Planet Fitness, Inc. in the three months ended September 30, 2017 compared to the three months ended September 30, 2016 as a result of the exchanges by Continuing LLC Owners of Holdings Units for shares of Class A common stock.
The Company is subject to U.S. federal income taxes, in addition to state and local taxes, with respect to our allocable share of any net taxable income of Pla-Fit Holdings. Our effective tax rate of 39.5% for the three months ended September 30, 2017 and 2016, was calculated using the U.S. federal income tax rate and the statutory rates applied to income apportioned to each state and local jurisdiction. This tax rate has been applied to the portion of income before taxes that represents the economic interest in Pla-Fit Holdings held by Planet Fitness, Inc. The provision for income taxes also reflects an effective state tax rate of 2.1% for the three months ended September 30, 2017 and 2016, applied to non-controlling interests, excluding income from variable interest entities, related to Pla-Fit Holdings.
Segment results
Segment EBITDA for the franchise segment was $29.9 million in the three months ended September 30, 2017 compared to $22.8 million in the three months ended September 30, 2016, an increase of $7.1 million, or 31.2%. This increase was primarily the result of growth in our franchise segment revenue of $3.1 million attributable to a same store sales increase of 9.6% in franchisee-owned stores, $2.2 million due to higher royalties received from additional franchisee-owned stores not included in the same store sales base, $1.6 million attributable to higher royalties on annual fees, including stores not included in the same store sales base, and $1.2 million of higher franchise and other fees. The increase in revenue was partially offset by $1.2 million of higher franchise-related selling, general, and administrative expense to support our growing franchise operations. Depreciation and amortization was $2.1 million for both periods.
Segment EBITDA for the corporate-owned stores segment was $12.0 million in the three months ended September 30, 2017 compared to $10.6 million in the three months ended September 30, 2016, an increase of $1.5 million, or 14.2%. Of this increase, $1.0 million was attributable to higher annual fee revenue, and $0.9 million was the result of an increase in revenue related to our same store sales increase of 5.1% in the three months ended September 30, 2017, compared to the three months ended September 30, 2016. Depreciation and amortization was $4.0 million and $3.9 million for the three months ended September 30, 2017 and 2016, respectively.
Segment EBITDA for the equipment segment was $7.7 million in the three months ended September 30, 2017 compared to $7.2 million in the three months ended September 30, 2016, an increase of $0.5 million, or 7.4%, primarily driven by an increase in replacement equipment sales to existing franchisee-owned stores in the three months ended September 30, 2017 compared to the three months ended September 30, 2016, partially offset by nine fewer equipment sales to new franchisee-owned stores in the three months ended September 30, 2017 compared to the three months ended September 30, 2016. Depreciation and amortization was $1.6 million for both periods.
Comparison of the nine months ended September 30, 2017 and nine months ended September 30, 2016
Total revenues were $295.9 million in the nine months ended September 30, 2017, compared to $261.8 million in the nine months ended September 30, 2016, an increase of $34.1 million, or 13.0%.
Franchise segment revenue was $110.2 million in the nine months ended September 30, 2017, compared to $84.4 million in the nine months ended September 30, 2016, an increase of $25.8 million, or 30.5%.
Franchise revenue was $94.5 million in the nine months ended September 30, 2017 compared to $70.0 million in the nine months ended September 30, 2016, an increase of $24.4 million or 34.9%. Included in franchise revenue is royalty revenue of $66.5 million, franchise and other fees of $20.6 million, and placement revenue of $7.4 million for the nine months ended September 30, 2017, compared to royalty revenue of $47.0 million, franchise and other fees of $16.1 million, and placement revenue of $7.0 million for the nine months ended September 30, 2016. The $ 19.5 million increase in royalty revenue was primarily driven by $8.3 million attributable to a same store sales increase of 10.1% in franchisee-owned stores, $6.3 million attributable to royalties from new stores opened in 2017 as well as stores that opened in 2016 that were not included in the same store sales base, and $4.9 million attributable to higher royalties on annual fees, including stores not included in the same store sales base. The $4.5 million increase in franchise and other fees was primarily driven by higher fees associated with increased store and member count in the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.
Commission income, which is included in our franchise segment, was $15.7 million in the nine months ended September 30, 2017 compared to $14.3 million in the nine months ended September 30, 2016, an increase of $1.3 million or 9.3%. The increase was primarily due to a higher volume of franchisee purchases from vendors due to more franchise stores open during the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.
Revenue from our corporate-owned stores segment was $83.9 million in the nine months ended September 30, 2017, compared to $78.8 million in the nine months ended September 30, 2016, an increase of $5.1 million, or 6.5%. Same store sales from corporate-owned stores increased 4.6% in the nine months ended September 30, 2017, which contributed incremental revenues of $2.8 million, and annual fee revenue contributed incremental revenues of $2.6 million in the nine months ended September 30, 2017.
Equipment segment revenue was $101.9 million in the nine months ended September 30, 2017, compared to $98.7 million in the nine months ended September 30, 2016, an increase of $3.2 million, or 3.2%. This increase was primarily driven by an increase in replacement equipment sales to existing franchisee-owned stores in the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, partially offset by lower equipment sales to new franchisee-owned stores related to 18 fewer new equipment sales in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.
Cost of revenue was $78.4 million in the nine months ended September 30, 2017 compared to $77.4 million in the nine months ended September 30, 2016, an increase of $1.0 million, or 1.3%. Cost of revenue, which relates to our equipment segment, increased due to an increase in replacement equipment sales to existing franchisee-owned stores in the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, partially offset by lower equipment sales to new franchisee-owned stores.
Store operation expenses, which relates to our corporate-owned stores segment, were $45.3 million in the nine months ended September 30, 2017 compared to $45.7 million in the nine months ended September 30, 2016, a decrease of $0.3 million, or 0.7%.
Selling, general and administrative expenses were $42.7 million in the nine months ended September 30, 2017 compared to $36.5 million in the nine months ended September 30, 2016, an increase of $6.2 million, or 17.0%. The $6.2 million increase was primarily due to additional expenses incurred during the nine months ended September 30, 2017 to support our growing operations, including additional headcount, infrastructure, and public company expenses. Partially offsetting this increase was $1.1 million of lower costs incurred in connection with secondary offerings in the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016. With respect to our growing operations, we anticipate that our selling, general and administrative expenses will continue to increase as our franchisee-owned store count grows.
Depreciation and amortization expense was $24.0 million in the nine months ended September 30, 2017 compared to $23.1 million in the nine months ended September 30, 2016, an increase of $0.9 million, or 3.7%.
Other (gain) loss
Other loss was $0.3 in the nine months ended September 30, 2017 compared to a gain of $0.4 in the nine months ended September 30, 2016.
Interest expense, net was $26.7 million in the nine months ended September 30, 2017 compared to $18.8 million in the nine months ended September 30, 2016, an increase of $7.9 million, or 41.9%. The increase in interest expense is a result of the additional $230.0 million in borrowings which occurred in November 2016 as a result of the amendment of our senior secured credit facility.
33
Other income (expense) was an expense of $0.2 million in the nine months ended September 30, 2017 compared to $0.0 in the nine months ended September 30, 2016. In the nine months ended September 30, 2017, other expense includes $1.0 million of third party fees recorded in connection with the May 2017 amendment of our credit facility, partially offset by a gain of $0.5 million related to the adjustment of our tax benefit arrangements primarily due to changes in our effective tax rate, and $0.5 million of foreign currency gains.
Income tax expense was $23.9 million in the nine months ended September 30, 2017, compared to $11.5 million in the nine months ended September 30, 2016, an increase of $12.4 million. The increase in the provision for income taxes is primarily attributable to the increased economic interest in Pla-Fit Holdings held by Planet Fitness, Inc. in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 as a result of the exchanges by Continuing LLC Owners of Holdings Units for shares of Class A common stock.
The Company is subject to U.S. federal income taxes, in addition to state and local taxes, with respect to our allocable share of any net taxable income of Pla-Fit Holdings. Our effective tax rate of 39.5% for the nine months ended September 30, 2017 and 2016, was calculated using the U.S. federal income tax rate and the statutory rates applied to income apportioned to each state and local jurisdiction. This tax rate has been applied to the portion of income before taxes that represents the economic interest in Pla-Fit Holdings held by Planet Fitness, Inc. The provision for income taxes also reflects an effective state tax rate of 2.1% for the nine months ended September 30, 2017 and 2016, applied to non-controlling interests, excluding income from variable interest entities, related to Pla-Fit Holdings.
Segment EBITDA for the franchise segment was $94.4 million in the nine months ended September 30, 2017 compared to $71.3 million in the nine months ended September 30, 2016, an increase of $23.1 million, or 32.4%. This increase was primarily the result of growth in our franchise segment revenue of $8.3 million attributable to a same store sales increase of 10.1% in franchisee-owned stores, $6.3 million due to higher royalties received from additional franchisee-owned stores not included in the same store sales base, $4.9 million attributable to higher royalties on annual fees, including stores not included in the same store sales base, $4.5 million of higher franchise and other fees, and $1.3 million of higher commission income, partially offset by a $2.6 million increase in franchise-related selling, general, and administrative expense to support our growing franchise operations. Depreciation and amortization was $6.4 million for both periods.
Segment EBITDA for the corporate-owned stores segment was $35.6 million in the nine months ended September 30, 2017 compared to $30.3 million in the nine months ended September 30, 2016, an increase of $5.3 million, or 17.6%. This increase was primarily the result of a $2.8 million increase in revenue related to our same store sales increase of 4.6% and an increase of $2.6 million in annual fee revenue in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. Depreciation and amortization was $11.7 million for both periods.
Segment EBITDA for the equipment segment was $23.6 million in the nine months ended September 30, 2017 compared to $21.3 million in the nine months ended September 30, 2016, an increase of $2.3 million, or 10.6%, primarily driven by an increase in replacement equipment sales to existing franchisee-owned stores in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, partially offset by lower equipment sales to 18 fewer new franchisee-owned stores the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Depreciation and amortization was $4.7 million for both periods.
Liquidity and capital resources
As of September 30, 2017, we had $93.3 million of cash and cash equivalents. In addition, as of September 30, 2017, we had borrowing capacity of $75.0 million under our revolving credit facility.
We require cash principally to fund day-to-day operations, to finance capital investments, to service our outstanding debt and tax benefit arrangements and to address our working capital needs. Based on our current level of operations and anticipated growth, we believe that with the available cash balance, the cash generated from our operations, and amounts available under our revolving credit facility will be adequate to meet our anticipated debt service requirements and obligations under the tax benefit arrangements, capital expenditures and working capital needs for at least the next 12 months. We believe that we will be able to meet these obligations even if we experience no growth in sales or profits. Our ability to continue to fund these items and continue to reduce debt could be adversely affected by the occurrence of any of the events described under “Risk factors” in the Annual Report. There can be no assurance, however, that our business will generate sufficient
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cash flows from operations or that future borrowings will be available under our revolving credit facility or otherwise to enable us to service our indebtedness, including our senior secured credit facility, or to make anticipated capital expenditures. Our future operating performance and our ability to service, extend or refinance the senior secured credit facility will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.
The following table presents summary cash flow information for the nine months ended September 30, 2017 and 2016:
Net cash (used in) provided by:
Operating activities
Investing activities
Financing activities
Effect of foreign exchange rates on cash
Net increase in cash
For the nine months ended September 30, 2017, net cash provided by operating activities was $93.0 million compared to $75.7 million in the nine months ended September 30, 2016, an increase of $17.3 million. Of the increase, $18.4 million was due to higher net income after adjustments to reconcile net income to net cash provided by operating activities, partially offset by $1.1 million of higher cash used for working capital in the nine months ended September 30, 2017.
Cash flow used in investing activities related to the following capital expenditures for the nine months ended September 30, 2017 and 2016:
New corporate-owned stores and corporate-owned stores not
yet opened
Existing corporate-owned stores
14,651
8,308
Information systems
1,070
533
Corporate and all other
6,195
425
Total capital expenditures
23,229
9,266
For the nine months ended September 30, 2017, net cash used in investing activities was $23.1 million compared to $8.9 million in the nine months ended September 30, 2016, an increase of $14.2 million, and was primarily related to higher capital expenditures on existing corporate-owned stores and costs incurred with our headquarters relocation.
For the nine months ended September 30, 2017, net cash used in financing activities was $17.5 million compared to $32.4 million in the nine months ended September 30, 2016, a decrease of $14.9 million. Continuing LLC Owner distributions were $9.3 million in the nine months ended September 30, 2017 compared to $27.1 million in the nine months ended September 30, 2016.
Credit facility
Our senior secured credit facility consists of term loans and a revolving credit facility. Borrowings under the term loans bear interest, payable at least semi-annually. The term loans require principal payments equal to approximately $7.2 million per calendar year, payable in quarterly installments with the final scheduled principal payment on the outstanding term loan borrowings due on March 31, 2021.
The senior secured credit facility also provides for borrowings of up to $75.0 million under the revolving credit facility, of which up to $9.4 million is available for letter of credit advances. Borrowings under the revolving credit facility (excluding letters of credit) bear interest, payable at least semi-annually. We also pay a 0.40% commitment fee per annum on the unused portion of the revolver. The revolving credit facility expires on March 31, 2019.
The credit agreement governing our senior secured credit facility requires us to comply on a quarterly basis with one financial covenant which is a maximum ratio of debt to Credit Facility Adjusted EBITDA (the “leverage ratio”) that becomes more restrictive over time. This covenant
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is only for the benefit of the revolving credit facility. At September 30, 2017, the terms of the senior secured credit facility require that we maintain a leverage ratio of no more than 5.75 to 1.0. The leverage ratio financial covenant will become more restrictive over time and will require us to maintain a leverage ratio of no more than 4.25 to 1.0 by June 30, 2020.
Failure to comply with this covenant would result in an event of default under our senior secured credit facility unless waived by our senior secured credit facility lenders. An event of default under our senior secured credit facility can result in the acceleration of our indebtedness under the facility, which in turn can result in an event of default and possible acceleration of our other indebtedness, if any.
As of September 30, 2017, we were in compliance with our senior secured credit facility financial covenant with a leverage ratio of 3.6 to 1.0 which was calculated for the 12 months ended September 30, 2017 based upon certain adjustments to EBITDA, as provided for under the terms of our senior secured credit facility.
On November 10, 2016, we amended our credit agreement governing our senior secured credit facility primarily to provide for an increase of $230.0 million in term loan borrowings for a total of $718.5 million, decrease the interest rate spread on our term loan by 25 basis points, and increase our revolving credit facility to $75.0 million. The full incremental borrowing of $230.0 million and approximately $41.0 million of cash on hand was used to pay a dividend of $169.3 million to shareholders of our Class A common stock and make cash dividend equivalent payments of $101.7 million to Continuing LLC Owners. The incremental term loan borrowings bear a variable rate of interest of the greater of LIBOR or 0.75% in respect of the term loans plus the applicable margin of 3.50%. In connection with the increased borrowings under the term loans, the contractually required leverage ratios under the covenants were adjusted. All other terms and conditions remained unchanged under the senior secured credit facility.
On May 26, 2017, we further amended our credit agreement governing our senior secured credit facility to reduce the applicable interest rate margin for term loan borrowings by 50 basis points, with an additional 25 basis point reduction in applicable interest rate possible in the future so long as the Total Net Leverage Ratio (as defined in the credit agreement) is less than 3.50 to 1.00. The amendment also reduced the interest rate margin for revolving loan borrowings by 25 basis points.
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Off-balance sheet arrangements
As of September 30, 2017, our off-balance sheet arrangements consisted of operating leases and certain guarantees. In a limited number of cases, we have guaranteed certain leases and debt agreements of entities related through common ownership. These guarantees relate to leases for operating space, equipment and other operating costs of franchises operated by the related entities. Our maximum total commitment under these agreements is approximately $1.0 million and would only require payment upon default by the primary obligor. The estimated fair value of these guarantees at September 30, 2017 was not material, and no accrual has been recorded for our potential obligation under these arrangements.
Critical accounting policies and use of estimates
There have been no material changes to our critical accounting policies and use of estimates from those described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report.
JOBS Act
We qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the Jumpstart Our Business Startups (“JOBS”) Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.
Subject to certain conditions set forth in the JOBS Act, we are also eligible for and intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We may take advantage of these exemptions until we are no longer an emerging growth company. We will continue to be an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which the market value of our Class A common stock that is held by non-affiliates exceeds $700 million as of June 30 of that fiscal year, (ii) the last day of the fiscal year in which we had total annual gross revenue of $1 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which we have issued more than $1 billion in non-convertible debt in the prior three-year period or (iv) the last day of the fiscal year following the fifth anniversary of the date of the first sale of Class A common stock under our registration statement. As of June 30, 2017, the market value of our Class A common stock held by non-affiliates exceeded $700 million. As a result, we anticipate that we will no longer be an emerging growth company beginning January 1, 2018.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
Interest rate risk
We are exposed to market risk from changes in interest rates on our senior secured credit facility, which bears interest at variable rates and has a U.S. dollar LIBOR floor of 0.75% in respect of the term loans. As of September 30, 2017, we had outstanding borrowings of $713.1 million. An increase in the effective interest rate applied to these borrowings of 100 basis points would result in a $7.1 million increase in pre-tax interest expense on an annualized basis. We manage our interest rate risk through normal operating and financing activities and, when determined appropriate, through the use of derivative financial instruments. To mitigate exposure to fluctuations in interest rates, we entered into a series of interest rate caps as discussed in Note 6 to our unaudited condensed consolidated interim financial statements elsewhere in this Quarterly Report on Form 10-Q.
Foreign exchange risk
We are exposed to fluctuations in exchange rates between the U.S. and Canadian dollar, which is the functional currency of our Canadian entities. Our sales, costs and expenses of our Canadian subsidiaries, when translated into U.S. dollars, can fluctuate due to exchange rate movement. As of September 30, 2017, a 10% increase or decrease in the exchange rate of the U.S. and Canadian dollar would increase or decrease net income by a negligible amount.
Inflation risk
Although we do not believe that inflation has had a material effect on our income from continuing operations, we have a substantial number of hourly employees in our corporate-owned stores that are paid wage rates at or based on the applicable federal or state minimum wage. Any increases in these minimum wages will subsequently increase our labor costs. We may or may not be able to offset cost increases in the future.
ITEM 4. Controls and Procedures
Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2017, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting
There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II-OTHER INFORMATION
ITEM 1. Legal Proceedings
We are currently involved in various claims and legal actions that arise in the ordinary course of business, most of which are covered by insurance. We do not believe that the ultimate resolution of these actions will have a material adverse effect on our business, financial condition, results of operations, liquidity or capital resources nor do we believe that there is a reasonable possibility that we will incur material loss as a result of such actions. However, a significant increase in the number of these claims or an increase in amounts owing under successful claims could have a material adverse effect on our business, financial condition and results of operations.
ITEM 1A. Risk Factors.
For a discussion of our potential risks and uncertainties, see the information under the heading "Risk Factors" in the Annual Report.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of equity securities by the Company during the three months ended September 30, 2017.
In connection with our IPO, we and the existing holders of Holdings Units entered into an exchange agreement under which they (or certain permitted transferees) have the right, from time to time and subject to the terms of the exchange agreement, to exchange their Holdings Units, together with a corresponding number of shares of Class B common stock, for shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends, reclassifications and other similar transactions. As an existing holder of Holdings Units exchanges Holdings Units for shares of Class A common stock, the number of Holdings Units held by Planet Fitness, Inc. is correspondingly increased, and a corresponding number of shares of Class B common stock are cancelled.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Mine Safety Disclosures.
ITEM 5. Other Information.
ITEM 6. Exhibits
Description of Exhibit Incorporated
Herein by Reference
Exhibit
Filed
Number
Exhibit Description
Form
File No.
Filing Date
Herewith
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
Interactive Data Files pursuant to Rule 405 of regulation S-T (XBRL)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Planet Fitness, Inc.
(Registrant)
Date: November 8, 2017
/s/ Dorvin Lively
Dorvin Lively
President and Chief Financial Officer
(On behalf of the Registrant and as Principal Financial Officer)