Planet Fitness, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. Planet Fitness operates as a franchisor and fitness-center operator and sells equipment to franchisees. At June 30, 2016, it had more than 8.6 million members and 1,206 locations, including 1,148 franchised and 58 corporate-owned stores, across 47 states, the District of Columbia, Puerto Rico, Canada and the Dominican Republic. The company also had commitments to open more than 1,000 additional stores under existing area development agreements.
Financial performance and key metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Total revenue | $91.5 million | $79.0 million | $174.8 million | $155.9 million |
| Income from operations | $27.8 million | $18.7 million | $53.4 million | $33.0 million |
| Operating margin | 30.5% | 23.8% | 30.6% | 21.1% |
| Net income | $18.1 million | $11.6 million | $34.4 million | $20.2 million |
| Net income attributable to Planet Fitness, Inc. | $4.1 million | $11.5 million | $7.5 million | $19.9 million |
| EBITDA | $35.3 million | $26.6 million | $69.1 million | $48.3 million |
| Adjusted EBITDA | $36.8 million | $31.0 million | $71.0 million | $59.5 million |
- Revenue increased 15.9% in the quarter and 12.2% year to date. Six-month segment revenue growth was led by Franchise, up 31.0%, followed by Corporate-owned stores, up 7.3%, and Equipment, up 2.9%.
- Quarterly and year-to-date EBITDA margins were approximately 38.6% and 39.5%, respectively. Adjusted EBITDA margins were approximately 40.2% and 40.6%, respectively.
- Same-store sales growth was 7.6% system-wide in the quarter and 7.2% year to date; franchisee-owned stores grew 7.8% and 7.4%, respectively, while corporate-owned stores grew 4.7% and 4.8%.
- Net cash provided by operating activities was $50.1 million for the six months, compared with $36.6 million in 2015. Capital expenditures were $4.5 million, and cash used in financing activities was $21.6 million.
- Cash and cash equivalents were $55.7 million at June 30, 2016. The company reported $40.0 million of available borrowing capacity under its revolving credit facility.
- Total debt, net of deferred financing costs, was $483.1 million, including $489.7 million of gross term borrowings. The term loan matures March 31, 2021; the revolver matures March 31, 2019.
- The company was in compliance with its leverage covenant, reporting a 3.2-to-1.0 leverage ratio versus a maximum permitted ratio of 5.75-to-1.0 at June 30, 2016.
Material changes versus the prior comparable period
- Franchise growth reflected additional stores, higher royalties, higher annual fees, increased commission income and positive same-store sales. Franchise Segment EBITDA rose 39.4% in the quarter and 55.0% year to date.
- Operating margin improved substantially because revenue growth exceeded cost growth, while selling, general and administrative expenses declined year to date.
- Interest expense increased $1.2 million year to date because of the $120.0 million incremental term borrowing completed in March 2015, although quarterly interest expense declined 6.1%.
- Net income attributable to Planet Fitness, Inc. declined despite higher consolidated net income because non-controlling interests increased substantially. Following the June 2016 secondary offering exchange, Planet Fitness, Inc.’s economic interest in Pla-Fit Holdings increased from 37.1% to 45.1%, with continuing LLC owners retaining 54.9%.
- In June 2016, existing holders sold 11.5 million Class A shares at $16.50 per share. The company received no proceeds. The transaction issued 7.9 million Class A shares in exchange for Holdings Units and canceled an equal number of Class B shares.
- The secondary offering generated a $89.9 million deferred tax asset and a $78.2 million related tax benefit arrangement liability. Total projected tax benefit arrangement obligations were $212.3 million at June 30, 2016.
- Cash flow from operations increased, while capital expenditures and member distributions were lower than in 2015. Six-month distributions to Continuing LLC Members were $17.5 million versus $155.1 million in 2015.
Guidance, outlook, risks and unusual items
- The filing does not provide formal quantitative revenue, earnings or store-opening guidance. Management expects most future store growth to be franchisee-owned and anticipates selling, general and administrative expenses will increase as the franchise network expands.
- Management stated that available cash, operating cash flow and revolver capacity should be adequate for at least the next twelve months to fund operations, debt service, tax benefit arrangements, capital expenditures and working capital, even assuming no sales or profit growth. It cautioned that future cash flow and borrowing availability are not assured.
- The company expects changes to its point-of-sale and billing practices to negatively affect same-store-sales metrics through the remainder of 2016 because delinquent accounts are terminated earlier, although it does not expect a material long-term royalty impact.
- Key risks include dependence on franchisees, brand and reputational damage, competition, member acquisition and retention, third-party systems and vendors, substantial indebtedness, variable interest rates, tax receivable arrangements, regulatory matters and execution of the growth strategy.
- A 100-basis-point increase in the effective interest rate on outstanding borrowings would increase annualized pretax interest expense by approximately $4.9 million. Interest-rate caps with $219.0 million of notional value were outstanding at June 30, 2016.
- The company reported no material pending litigation, no defaults under senior securities and no required accrual for its approximately $1.6 million maximum exposure under certain franchisee lease and debt guarantees.
- Management concluded that disclosure controls were effective and that a material weakness related to authorization and invoice processing for IT hardware purchases had been remediated as of March 31, 2016.
- Unusual or non-GAAP adjustments included public offering costs, purchase-accounting amortization, severance, purchase-accounting rent and revenue adjustments, and other tax benefit arrangement adjustments. EBITDA and Adjusted EBITDA are not GAAP measures.
Important facts for investors to verify
- Reconcile consolidated earnings with the much smaller earnings attributable to Planet Fitness, Inc., given the 54.9% non-controlling economic interest.
- Assess debt-service capacity, variable-rate exposure, the 2021 term-loan maturity and the leverage covenant’s progressively stricter limits.
- Review the $212.3 million projected tax benefit arrangement liability and associated future payments.
- Validate the sustainability of franchise growth, the more than 1,000-store development pipeline and same-store-sales performance after the billing-system changes.
- Distinguish GAAP earnings and cash flow from EBITDA, Adjusted EBITDA and other adjusted measures.
- Monitor the effects of the secondary offering and future Holdings Unit exchanges on ownership, non-controlling interests, share count and tax liabilities.