Planet Fitness, Inc. — 2017 Q3 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. As of September 30, 2017, it had more than 10.5 million members and 1,432 locations across 49 states, the District of Columbia, Puerto Rico, Canada and the Dominican Republic. The system included 1,374 franchised stores and 58 corporate-owned stores, with commitments to open more than 1,000 additional stores under existing area development agreements.
The filing covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $97.5 million | $87.0 million | $295.9 million | $261.8 million |
| Income from operations | $34.0 million | $26.2 million | $105.3 million | $79.6 million |
| Net income | $18.9 million | $14.9 million | $54.8 million | $49.3 million |
| Net income attributable to Planet Fitness, Inc. | $15.3 million | $3.4 million | $36.6 million | $10.9 million |
| Diluted EPS | $0.18 | $0.08 | $0.48 | $0.28 |
| EBITDA | $42.5 million | $33.7 million | $129.4 million | $102.8 million |
| Adjusted EBITDA | $43.4 million | $35.4 million | $133.5 million | $106.5 million |
| Operating cash flow | Not separately provided | Not separately provided | $93.0 million | $75.7 million |
Q3 operating margin was approximately 34.8%, net margin was approximately 19.4%, EBITDA margin was approximately 43.6%, and adjusted EBITDA margin was approximately 44.5%. For the nine-month period, operating margin was approximately 35.6%, net margin was approximately 18.5%, EBITDA margin was approximately 43.7%, and adjusted EBITDA margin was approximately 45.1%.
Revenue by segment for Q3 was $35.6 million from franchising, $28.6 million from corporate-owned stores and $33.4 million from equipment. Nine-month segment revenue was $110.2 million, $83.9 million and $101.9 million, respectively.
Liquidity, cash flow and debt
- Cash and cash equivalents were $93.3 million at September 30, 2017, versus $40.4 million at December 31, 2016.
- Net cash provided by operating activities was $93.0 million for the nine months, up from $75.7 million in the prior-year period.
- Capital expenditures were $23.2 million, compared with $9.3 million in the prior-year period, primarily reflecting investment in existing corporate-owned stores, information systems and headquarters relocation costs.
- Net cash used in financing activities was $17.5 million, including $9.3 million of distributions to Continuing LLC Owners and $5.4 million of debt repayment.
- Total debt was $705.1 million net of deferred financing costs, including $711.3 million of outstanding borrowings. The term loan matures in 2021, with $687.9 million of scheduled principal payments due in 2021.
- The revolving credit facility provides $75.0 million of capacity and had no outstanding borrowings at September 30, 2017.
- The company reported compliance with its maximum leverage covenant: a 3.6-to-1.0 leverage ratio versus a permitted 5.75-to-1.0 ratio at September 30, 2017.
- Tax benefit arrangement liabilities totaled $727.4 million, including current and noncurrent amounts, compared with $419.1 million at December 31, 2016.
Management stated that available cash, operating cash flow and revolver capacity should be adequate for at least the next 12 months to fund operations, capital expenditures, debt service, tax benefit arrangements and working capital, even assuming no growth in sales or profits. The filing cautions that future cash flow and borrowing availability are not assured.
Material changes versus the prior comparable period
- Q3 revenue increased 12.1%; nine-month revenue increased 13.0%.
- Franchise segment revenue increased 30.6% in Q3 and 30.5% for nine months, driven by higher royalties, store growth, annual fees and franchise-related fees.
- Q3 franchisee-owned same-store sales increased 9.6%, while corporate-owned same-store sales increased 5.1%. Nine-month increases were 10.1% and 4.6%, respectively.
- Total stores increased to 1,432 from 1,242 at the end of the comparable 2016 period, including 122 net new stores during the first nine months of 2017.
- Income from operations increased 29.8% in Q3 and 32.2% for nine months. EBITDA increased 26.1% in Q3 and 25.9% for nine months.
- Net income attributable to Planet Fitness, Inc. increased substantially, partly because Planet Fitness increased its economic interest in Pla-Fit Holdings through exchanges of Holdings Units.
- Interest expense increased 41.8% in Q3 and 41.9% for nine months, primarily because of $230.0 million of additional borrowings in November 2016.
- SG&A increased 14.9% in Q3 and 17.0% for nine months as the company added headcount, infrastructure and public-company costs.
- Income tax expense increased to $23.9 million from $11.5 million for the nine-month period, primarily reflecting the company’s increased economic interest in Pla-Fit Holdings.
Guidance, outlook, risks and unusual items
The filing does not provide explicit numerical revenue, earnings or store-opening guidance. Management expects continued growth in franchisee-owned stores and stated that SG&A will continue to increase as the franchise network grows.
- In May 2017, the company amended its credit agreement, reducing interest-rate margins on term and revolving borrowings and permitting a further term-loan margin reduction if leverage falls below 3.50-to-1.00.
- The company completed March and May 2017 secondary offerings. These transactions were principally sales by existing holders; the company did not receive proceeds from the shares sold by those holders. Following the related exchanges, Planet Fitness held 87.1% of the economic interest in Pla-Fit Holdings, with Continuing LLC Owners holding 12.9%.
- Adjusted EBITDA included purchase-accounting adjustments, offering costs, credit-facility transaction fees, pre-opening costs, an equipment discount gain and a tax-benefit-arrangement gain. These non-GAAP measures should not be viewed as substitutes for GAAP results.
- The company is exposed to variable interest rates. A 100-basis-point increase in the effective rate on outstanding borrowings would increase annualized pretax interest expense by approximately $7.1 million. Interest-rate caps were in place for portions of the debt.
- Key risks include dependence on franchisees, member retention and new-store performance, competition, brand and reputation risks, third-party systems and vendors, substantial indebtedness, tax receivable arrangements, regulatory matters and litigation.
- The company expects adoption of the new revenue-recognition standard in 2018 to change the timing of recognition for certain franchise and area-development fees and to require gross presentation of national advertising fund contributions and expenditures. The gross presentation is expected to materially increase reported revenue and expenses, with largely offsetting effects; the impact on net income remained under evaluation.
- Operating leases and guarantees comprised the principal off-balance-sheet arrangements. Maximum guarantee exposure was approximately $1.0 million, and no material accrual was recorded.
- Ordinary-course legal claims were disclosed, but management did not believe they would have a material adverse effect. No defaults under senior securities were reported.
Important facts for investors to verify
- Whether franchisee growth, same-store sales and the more than 1,000-store development pipeline continue at the reported pace.
- The company’s ability to reduce or refinance the substantial 2021 term-loan maturity and maintain compliance with progressively tighter leverage covenants.
- The cash-flow impact and timing of the $727.4 million tax benefit arrangement liability.
- The effect of higher interest rates on variable-rate debt after considering the interest-rate caps.
- The impact of the 2018 revenue-recognition adoption on reported revenue, expenses, earnings and key performance ratios.
- The distinction between GAAP net income and non-GAAP EBITDA, adjusted EBITDA and adjusted earnings measures.
- The effect of continuing Holdings Unit exchanges on ownership, non-controlling interests, tax expense and per-share results.