Planet Fitness, Inc. — 2016 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2016, filed November 3, 2016. Planet Fitness is a franchisor and operator of fitness centers and a seller of fitness equipment. At quarter-end, it reported more than 8.7 million members and 1,242 locations across 47 states, the District of Columbia, Puerto Rico, Canada and the Dominican Republic, including 1,184 franchised and 58 corporate-owned stores. The company also had commitments to open more than 1,000 additional stores under existing area development agreements.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $87.0 million | $68.8 million | $261.8 million | $224.7 million |
| Income from operations | $26.2 million | $10.3 million | $79.6 million | $43.3 million |
| Operating margin | 30.1% | 15.0% | 30.4% | 19.3% |
| Net income | $14.9 million | $0.7 million | $49.3 million | $20.9 million |
| Net income attributable to Planet Fitness, Inc. | $3.4 million | $(3.9) million | $10.9 million | $16.0 million |
| Diluted EPS | $0.08 | $0.04 | $0.28 | $0.04 |
| EBITDA | $33.7 million | $16.5 million | $102.8 million | $64.8 million |
| Adjusted EBITDA | $35.4 million | $26.5 million | $106.5 million | $86.0 million |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $75.7 million | $56.6 million |
Q3 revenue increased 26.4%, while nine-month revenue increased 16.5%. Q3 net margin was 17.1% versus 1.1% in the prior-year quarter; nine-month net margin was 18.8% versus 9.3%. Net income attributable to Planet Fitness, Inc. differs materially from consolidated net income because of the non-controlling interest in Pla-Fit Holdings.
Revenue growth was led by the franchise segment, which increased 37.5% in Q3 and 33.0% for the nine-month period, and the equipment segment, which increased 38.7% and 12.7%, respectively. Corporate-owned stores revenue increased 6.1% in Q3 and 6.9% year to date.
- Q3 same-store sales increased 10.3% for franchisee-owned stores, 5.4% for corporate-owned stores and 10.0% system-wide. Nine-month increases were 8.4%, 5.0% and 8.2%, respectively.
- Q3 Segment EBITDA increased 104.2% to $33.7 million; nine-month Segment EBITDA increased 58.5% to $102.8 million.
- Cash and cash equivalents were $66.0 million at September 30, 2016, compared with $31.4 million at December 31, 2015.
- Capital expenditures were $9.3 million for the nine months, compared with $13.8 million in the prior-year period.
- Total debt was $482.2 million, net of deferred financing costs, including $488.5 million of gross borrowings. The term loan matures March 31, 2021; the $40.0 million revolving facility matures March 31, 2019 and had no borrowings outstanding.
Material changes versus the prior comparable period
- Franchise revenue benefited from additional royalties from newer stores, higher same-store sales, higher annual fees and increased franchise and other fees.
- Equipment revenue increased primarily because of higher replacement-equipment sales to existing franchisees and equipment sales to new stores.
- SG&A declined $5.1 million in Q3 and $7.4 million for the nine months, largely because 2015 included IPO-related compensation, offering costs and information-technology upgrade costs. The company stated that SG&A is expected to rise as the franchise network expands.
- Interest expense increased $0.9 million for the nine months because of incremental borrowings added in March 2015, although Q3 interest expense declined modestly year over year.
- Operating cash flow increased $19.2 million year over year to $75.7 million. Financing cash outflows were $32.4 million, including $27.1 million of distributions to continuing LLC members, compared with $171.1 million of such distributions in the prior-year period.
- Secondary offerings in June and September resulted in exchanges of Holdings Units for Class A shares. Following the September offering, Planet Fitness held 50.6% of the economic interest in Pla-Fit Holdings, while continuing LLC owners held 49.4%.
Guidance, outlook, risks and unusual items
The filing does not provide specific quantitative full-year revenue, EBITDA or earnings guidance. Management said available cash, operating cash flow and revolver capacity were expected to be adequate for at least the next twelve months, including debt service, tax benefit arrangements, capital expenditures and working capital, even assuming no growth in sales or profits.
- Tax benefit arrangement liabilities totaled $274.1 million at September 30, 2016, with projected payments extending thereafter; current and noncurrent amounts on the balance sheet totaled approximately $274.1 million.
- The company was in compliance with its senior secured credit facility covenant. Its leverage ratio was 3.0 to 1.0 versus a maximum permitted ratio of 5.75 to 1.0 at September 30, 2016; the covenant becomes more restrictive over time.
- 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 covered $209.0 million of notional debt and hedged LIBOR above 1.5%.
- Management identified dependence on franchisees, brand reputation, member retention, competition, third-party systems and vendors, information security and regulatory matters, substantial indebtedness, tax receivable agreements and execution of the growth strategy as key risks.
- The company noted that changes to its point-of-sale and billing practices may negatively affect reported same-store sales and royalties through 2016 because delinquent accounts are terminated earlier.
- Adjusted EBITDA and adjusted net income exclude or adjust for purchase-accounting items, offering costs, amortization, management fees, IPO-related compensation and other items. These are non-GAAP measures and should not be viewed as substitutes for GAAP results.
- The company reported ordinary-course claims and litigation but did not believe any current matter would have a material adverse effect. It also reported approximately $1.5 million of maximum exposure under guarantees of certain franchisee leases and debt.
- Management stated that the material weakness related to authorization and processing of IT hardware purchases, previously identified in 2015, was remediated as of March 31, 2016. Disclosure controls were considered effective as of September 30, 2016.
Important facts for investors to verify
- Reconcile consolidated net income and EBITDA to net income attributable to Planet Fitness, Inc., considering the 49.4% non-controlling economic interest.
- Assess the sustainability of revenue and EBITDA growth, particularly the contribution from equipment sales, new-store openings and franchise fees versus recurring royalties and same-store sales.
- Review the $482.2 million net debt balance, variable-rate exposure, interest-rate caps and the trajectory of the leverage covenant.
- Evaluate the $274.1 million tax benefit arrangement liability and the effect of future Holdings Unit exchanges on ownership, cash obligations and deferred taxes.
- Monitor the effect of revised delinquent-account billing practices on same-store sales, royalties and reported membership trends.
- Review the assumptions and exclusions used in Adjusted EBITDA and Adjusted net income, including offering-related costs and purchase-accounting amortization.
- Confirm the execution pace and economics of the more than 1,000 additional stores committed under existing development agreements.