Planet Fitness, Inc. — Q2 2018 Form 10-Q Summary
Business context and reporting period
Planet Fitness is a franchisor and operator of fitness centers and a seller of fitness equipment. For the quarter ended June 30, 2018, the company had more than 12.1 million members and 1,608 locations across the United States and selected international markets, including 1,540 franchised and 68 corporate-owned stores. The company reported three segments: Franchise, Corporate-owned stores, and Equipment.
The filing presents unaudited results for the three and six months ended June 30, 2018, compared with the corresponding 2017 periods. The company adopted ASC 606 revenue recognition on January 1, 2018 using the modified retrospective method, resulting in a $9.2 million cumulative reduction to opening accumulated deficit.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $140.6 million, up 31.0% | $261.9 million, up 32.0% |
| Income from operations | $48.8 million; 34.7% margin | $87.7 million; 33.5% margin |
| Net income | $30.4 million; 21.6% margin | $53.9 million; 20.6% margin |
| Net income attributable to Planet Fitness, Inc. | $25.9 million; 18.4% margin | $45.8 million; 17.5% margin |
| Diluted EPS | $0.29 | $0.52 |
| EBITDA | $56.9 million | $104.5 million |
| Adjusted EBITDA | $58.4 million | $107.2 million |
| Operating cash flow | Not separately provided for the quarter | $78.5 million |
Six-month segment revenue was $112.8 million for Franchise, $67.0 million for Corporate-owned stores, and $82.2 million for Equipment. Six-month same-store sales increased 10.8% for franchisee-owned stores, 5.4% for corporate-owned stores, and 10.6% system-wide. Six-month Segment EBITDA was $76.7 million for Franchise, $26.8 million for Corporate-owned stores, and $18.9 million for Equipment.
Liquidity, debt, and capital resources
- Cash and cash equivalents were $147.8 million at June 30, 2018, compared with $113.1 million at December 31, 2017.
- Six-month cash flow was $78.5 million from operating activities, $(36.5) million from investing activities, and $(6.9) million from financing activities, producing a $34.7 million net increase in cash.
- Outstanding pre-refinancing debt was $705.9 million principal, or $701.1 million net of deferred financing costs. The term loan had a 4.89% weighted-average interest rate and was scheduled to mature in March 2021.
- The company stated that it had $75.0 million of revolving borrowing capacity and expected available cash, operating cash flow, and borrowing capacity to cover debt service, tax benefit arrangements, capital expenditures, and working capital needs for at least the next 12 months.
- The company reported compliance with its existing credit facility covenant at a 3.1-to-1.0 leverage ratio as of June 30, 2018.
Material changes versus the prior comparable period
- Revenue increased 31.0% in the second quarter and 32.0% year to date, driven by higher franchise royalties, store growth, same-store sales, and equipment sales.
- Franchise segment revenue increased 53.9% in the quarter and 51.2% year to date. Royalty revenue benefited from a 1.59% increase in royalty rates under amended franchise agreements, while commission income and franchise and other fee revenue declined due to the related rebate-to-royalty amendment.
- National advertising fund revenue and expense of $11.2 million in the quarter and $21.6 million year to date were newly reported under ASC 606 and substantially offset each other.
- Income attributable to Planet Fitness increased 108.5% in the quarter and 115.3% year to date. The effective tax rate declined to 23.3% from 36.4% in the quarter and to 23.0% from 32.7% year to date, primarily reflecting the lower U.S. statutory tax rate.
- On January 1, 2018, the company acquired six franchisee-owned New York stores for $28.5 million in cash. The acquisition generated $14.1 million of goodwill and a $0.35 million loss on reacquired franchise rights.
- Operating cash flow increased from $63.0 million to $78.5 million year to date, while investing cash use increased substantially because of the six-store acquisition.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide a specific full-year revenue or earnings forecast in the filing. The company reported commitments to open more than 1,000 additional stores under existing area development agreements and stated that selling, general and administrative expenses are expected to increase as the franchise system grows.
On August 1, 2018, after quarter-end, the company refinanced its existing senior secured credit facility through a securitization. It issued $575 million of 4.262% Class A-2-I notes and $625 million of 4.666% Class A-2-II notes, and obtained a $75 million revolving facility that was undrawn at issuance. Proceeds repaid the $705.9 million existing facility. The notes have a legal final maturity in August 2048, with anticipated repayment dates in August 2022 and August 2025. On August 9, 2018, the company increased its share repurchase authorization to $500 million, subject to market conditions and debt-document restrictions.
- Key risks include dependence on franchisee performance, member retention, competition, brand reputation, information systems and third-party providers, and execution of the growth strategy.
- The company had approximately $417.5 million of projected tax benefit arrangement liabilities at June 30, 2018, with $311.4 million projected after 2022.
- The post-quarter securitization places substantially all of certain domestic revenue-generating assets within bankruptcy-remote entities and imposes covenants, reserve requirements, rapid-amortization triggers, and restrictions on additional debt, asset sales, liens, and other transactions.
- The company had substantial leverage and remains exposed to debt-service, refinancing, interest-rate, and cash-flow risks. Before the refinancing, a 100-basis-point increase in the effective rate on outstanding borrowings would have increased annualized pretax interest expense by approximately $7.1 million.
- Ordinary-course litigation was not expected to have a material adverse effect, although an increase in claims or claim costs could affect results.
- Unusual items included the ASC 606 transition, the six-store acquisition, a $0.6 million asset write-off, a $0.35 million reacquired franchise-rights loss, severance and pre-opening costs, and tax indemnification and tax benefit arrangement adjustments.
Important facts for investors to verify
- Reconcile reported revenue and margins across periods after considering ASC 606 and the gross presentation of national advertising fund activity.
- Assess whether same-store sales, franchisee openings, member growth, and the more than 1,000-store development pipeline remain sustainable.
- Review the post-quarter securitization terms, anticipated repayment dates, rapid-amortization triggers, reserve requirements, and restrictions on capital allocation.
- Evaluate the company’s ability to service approximately $1.2 billion of post-refinancing debt and its projected $417.5 million tax benefit arrangement liability.
- Monitor the $500 million repurchase authorization, including actual purchases, funding sources, and compliance with debt covenants.
- Distinguish GAAP net income and EPS from non-GAAP EBITDA, Adjusted EBITDA, and Adjusted net income, which include multiple add-backs and assumed full exchange of noncontrolling interests.