Planet Fitness, Inc. 2015 Q2 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended June 30, 2015. Planet Fitness, Inc. was formed on March 16, 2015 to facilitate the IPO and had no operating activity through June 30. The reported operating results are those of predecessor Pla-Fit Holdings, LLC and its subsidiaries, which franchised and operated Planet Fitness gyms and sold fitness equipment.
- At June 30, 2015, the business had more than 7.2 million members and 1,014 locations across 47 states, Puerto Rico and Canada.
- The store base comprised 956 franchised locations and 58 corporate-owned locations; 99 stores opened during the first six months.
- The company 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 | Six months ended June 30 |
|---|---|---|
| Total revenue | $79.0 million, up 25.9% | $155.9 million, up 29.6% |
| Income from operations | $18.7 million; 23.6% margin | $33.0 million; 21.1% margin |
| Net income | $11.6 million; 14.7% margin | $20.2 million; 12.9% margin |
| Net income attributable to predecessor | $11.5 million | $19.9 million |
| Segment EBITDA | $26.6 million; 33.7% margin | $48.3 million; 31.0% margin |
| Adjusted EBITDA | $31.0 million | $59.4 million |
| Operating cash flow | Not separately provided | $36.6 million |
- Q2 revenue consisted of $21.9 million from franchising, $25.0 million from corporate-owned stores and $32.1 million from equipment sales.
- First-half revenue consisted of $43.7 million from franchising, $48.5 million from corporate-owned stores and $63.7 million from equipment sales.
- Q2 same-store sales increased 7.3% system-wide, including 7.8% for franchisee-owned stores and 0.9% for corporate-owned stores. First-half system-wide same-store sales increased 9.0%.
- Cash and cash equivalents were $32.1 million at June 30, 2015. The company had $40.0 million of unused revolving-credit capacity.
- Total debt was $504.8 million, including $499.7 million of long-term debt net of current maturities. The term loan matures in 2021 and bears interest at LIBOR or base rate plus a margin; the reported margin was 4.75% at June 30.
- The company’s leverage ratio was 4.1 to 1.0 versus a covenant limit of 6.5 to 1.0 at June 30. The covenant becomes more restrictive over time, reaching 4.0 to 1.0 by June 30, 2018.
Material changes versus the prior comparable period
- Revenue increased $16.3 million in Q2 and $35.6 million in the first half, driven by additional franchised stores, higher same-store sales and substantially higher equipment sales.
- Equipment revenue rose 47.0% in Q2 and 40.9% in the first half, primarily from replacement equipment and sales to newly opened franchisee-owned stores.
- Selling, general and administrative expense increased 52.6% in Q2 and 80.0% in the first half. The increase reflected infrastructure and staffing for franchise growth, a point-of-sale system rollout and IPO preparation costs.
- Interest expense increased 30.0% in Q2 due to $120.0 million of incremental borrowings completed March 31, 2015. First-half interest expense declined modestly because the 2014 period included a $4.7 million debt-extinguishment charge.
- Operating cash flow increased from $32.2 million to $36.6 million, while investing cash use declined to $8.5 million from $42.4 million because the prior-year period included the $38.6 million acquisition of eight stores.
- Financing activities used $39.3 million in the first half, principally because $155.1 million of distributions to members exceeded debt proceeds after the March 2015 borrowing.
Guidance, outlook, risks and unusual items
- Management stated that existing cash generation and revolver availability were expected to fund debt service, capital expenditures and working capital needs for at least the next twelve months, even assuming no growth in sales or profits. No formal revenue or earnings guidance was provided.
- The company expects selling, general and administrative costs to continue increasing as the franchised store base expands.
- A new billing and point-of-sale system implemented in 2015 discontinued attempted billings of certain delinquent accounts. Management expected this to reduce reported royalties and negatively affect same-store-sales metrics through 2015 and 2016, although it did not expect a material long-term royalty impact.
- The company used interest-rate caps with $194.0 million of notional amounts to hedge variable-rate debt. A 100-basis-point increase in borrowing rates would increase annualized pretax interest expense by approximately $5.0 million.
- As of June 30, management identified a material weakness in internal control over financial reporting involving authorization of IT hardware purchases and related invoice processing. Remediation was underway, but the weakness had not yet been fully remediated.
- The company had approximately $108.9 million of operating lease commitments, $16.2 million of advertising commitments and $11.3 million of open purchase orders. Lease and debt guarantees could require up to approximately $2.3 million upon default by primary obligors.
- The company completed its IPO on August 11, 2015, selling 15.525 million Class A shares at $16.00 per share and receiving net proceeds of approximately $156.9 million. The proceeds were used to purchase Holdings Units from existing owners; the IPO did not provide operating cash to the company.
- Following the IPO and recapitalization, Planet Fitness, Inc. became the controlling managing member and began consolidating the operating company, with continuing LLC owners retaining a substantial noncontrolling economic interest. The company also entered tax receivable agreements generally requiring payments equal to 85% of specified realized tax savings.
Most important facts for investors to verify
- Reconcile future Planet Fitness, Inc. results with the predecessor Pla-Fit Holdings results and account for the post-IPO noncontrolling interest.
- Monitor debt reduction, variable-rate exposure, interest-rate-cap coverage and compliance with the progressively tighter leverage covenant.
- Assess the sustainability of equipment-driven revenue growth separately from recurring franchise royalties and store sales.
- Track the effect of the new billing system on royalties, memberships and same-store-sales comparisons.
- Confirm remediation of the material weakness in IT purchasing and invoice controls.
- Review tax receivable agreement obligations, member distributions and the continuing LLC owners’ exchange rights.