Planet Fitness, Inc. 2017 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2017; it is an annual Form 10-K rather than a standalone fourth-quarter filing. Planet Fitness is a franchisor and operator of fitness centers and a supplier of fitness equipment. At year-end, the system had approximately 10.6 million members and 1,518 stores, including 1,456 franchised and 62 corporate-owned locations across the United States, Canada, Puerto Rico, the Dominican Republic and Panama.
The company generated revenue from franchise royalties and fees, corporate-owned stores, commissions and equipment sales. Franchisees opened 206 stores during 2017, and signed area development agreements covered more than 1,000 additional stores.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $429.9 million | $378.2 million | Up 13.7% |
| Franchise segment revenue | $150.2 million | $116.5 million | Up 28.9% |
| Corporate-owned store revenue | $112.1 million | $104.7 million | Up 7.1% |
| Equipment revenue | $167.7 million | $157.0 million | Up 6.8% |
| Income from operations | $147.5 million | $115.7 million | Up 27.6% |
| Operating margin | 34.3% | 30.6% | Expanded |
| Net income | $55.6 million | $71.2 million | Down 21.9% |
| Net income attributable to Planet Fitness, Inc. | $33.1 million | $21.5 million | Up 54.2% |
| Adjusted EBITDA | $184.7 million | $150.6 million | Up 22.7% |
| Adjusted net income | $82.3 million | $67.6 million | Up 21.8% |
| Net cash provided by operating activities | $131.0 million | $108.8 million | Up 20.4% |
| Cash and cash equivalents | $113.1 million | $40.4 million | Up $72.7 million |
| Total debt, gross of deferred financing costs | $709.5 million | $716.7 million | Down $7.2 million |
Reported net margin was 12.9%; net income attributable to Planet Fitness, Inc. represented 7.7% of revenue. Adjusted EBITDA was approximately 43.0% of revenue, but this is a non-GAAP measure and should not be compared with operating margin without reviewing the reconciliation.
System-wide same-store sales increased 10.2%, including 10.5% at franchisee-owned stores and 4.9% at corporate-owned stores. PF Black Card members represented 60% of total membership, compared with 38% in 2013. Corporate-owned stores reported a 41.8% Segment EBITDA margin and approximately 46.3% four-wall EBITDA margin before the royalty adjustment.
Material changes versus the prior comparable period
- Revenue growth was led by the franchise segment, with royalty revenue increasing to $93.6 million from $64.6 million. Growth reflected new stores, same-store sales, annual fees and higher franchise-related fees.
- Average royalty rates increased over time; the current franchise agreement rate is 7%, while the 2017 system-wide average was 4.25%, compared with 2.54% in 2013. Certain commissions and rebates were eliminated as part of the royalty-rate change.
- Franchise Segment EBITDA increased 30.0% to $126.5 million, corporate-owned store Segment EBITDA increased 14.7% to $46.9 million, and Equipment Segment EBITDA increased 5.8% to $38.5 million.
- SG&A increased 20.7% to $60.4 million because of additional headcount, infrastructure and public-company costs. Capital expenditures increased to $37.7 million from $15.4 million, primarily for new and existing corporate-owned stores and headquarters-related spending.
- Operating cash flow increased by $22.2 million, while investing cash outflows increased by $22.3 million. Financing cash outflows decreased substantially because 2016 included a large special dividend and related dividend-equivalent payments.
- The company completed March and May 2017 secondary offerings totaling approximately 31.1 million shares. Selling stockholders received the proceeds; the company did not receive proceeds from those offerings. Exchanges increased Planet Fitness, Inc.'s economic interest in Pla-Fit Holdings to approximately 88.6% at year-end.
- The company did not declare or pay a dividend in 2017. It paid a $2.78-per-share special dividend in 2016.
Guidance, outlook, risks and unusual items
Management did not provide formal numerical revenue or earnings guidance in the supplied filing. The stated growth plan is to expand the store base, increase membership and PF Black Card penetration, raise average royalty rates as agreements renew or new stores open, increase brand awareness and grow equipment sales. Management cited more than 1,000 committed future stores under existing development agreements and a potential U.S. store base of more than 4,000 locations.
The 2017 results were materially affected by the Tax Cuts and Jobs Act. The company recorded approximately $334.0 million of additional income tax expense, primarily from remeasuring deferred tax assets, and recorded a tax benefit arrangement remeasurement gain of approximately $316.8 million. These non-operating and largely non-cash items reduced reported net income and caused the 2017 effective tax rate to rise to 87.1%. Management indicated that additional adjustments to provisional tax amounts could be recorded during 2018.
Tax receivable agreement liabilities totaled $431.4 million at December 31, 2017. The agreements generally require payments equal to 85% of applicable tax savings realized from specified tax attributes. Estimated future payments totaled $431.4 million, including $31.1 million due in 2018 and $304.9 million thereafter. Payments may accelerate upon certain breaches, changes of control or early termination.
Total debt was $709.5 million, substantially consisting of variable-rate Term Loan B borrowings maturing in 2021. The company had $75.0 million of unused revolving capacity and reported compliance with its maximum leverage covenant, with a leverage ratio of 3.4 to 1.0 versus a 5.75-to-1.0 limit at year-end. A 100-basis-point increase in the effective interest rate would increase annualized pretax interest expense by approximately $7.1 million.
Management believed cash, operating cash flow and revolver availability were sufficient for at least the next twelve months, including debt service, capital expenditures, tax benefit arrangement obligations, tax distributions and working capital. Key risks include dependence on franchisee performance and financing, competition, member retention, new-store execution, long-term leases, variable-rate debt, payment-processing and cybersecurity disruptions, regulatory requirements for franchises and electronic funds transfers, indoor-tanning regulation, supplier concentration and the ability to realize projected tax benefits.
The company reported no material adverse legal proceedings, no goodwill or indefinite-lived intangible impairment charges, and effective disclosure controls and internal control over financial reporting. KPMG issued unqualified opinions on the financial statements and internal controls.
Subsequent events included a January 1, 2018 acquisition of six franchise stores for approximately $28.6 million and a February 2018 increase in the authorized share repurchase program from $20 million to $100 million, subject to credit agreement compliance and management discretion.
Most important facts for an investor to verify
- Reconcile reported net income with Adjusted EBITDA and Adjusted net income, particularly the $334.0 million tax expense and $316.8 million tax benefit arrangement remeasurement gain.
- Review the maturity, interest-rate exposure, covenant requirements and refinancing needs associated with the $709.5 million of gross debt.
- Assess the timing and cash-flow impact of the $431.4 million tax receivable agreement liability and the assumptions supporting future taxable income.
- Validate whether signed area development commitments for more than 1,000 stores convert into openings at the expected pace and returns.
- Monitor same-store sales, membership growth, PF Black Card penetration and franchisee financial health as the store base expands.
- Evaluate the effect of the 2018 revenue-recognition standard, including approximately $13.5 million of revenue expected to be deferred and approximately $45 million of national advertising fund revenue and expenses expected to be reported.
- Consider the implications of supplier concentration, including one equipment vendor representing 91% of 2017 equipment purchases.