PLANET FITNESS, INC., 10-Q filed on 11/8/2019
Quarterly Report
v3.19.3
Cover Page - shares
9 Months Ended
Sep. 30, 2019
Nov. 01, 2019
Entity Information [Line Items]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Sep. 30, 2019  
Document Transition Report false  
Entity File Number 001-37534  
Entity Registrant Name PLANET FITNESS, INC.  
Entity Incorporation, State or Country Code DE  
Entity Tax Identification Number 38-3942097  
Entity Address, Address Line One 4 Liberty Lane West  
Entity Address, City or Town Hampton  
Entity Address, State or Province NH  
Entity Address, Postal Zip Code 03842  
City Area Code 603  
Local Phone Number 750-0001  
Title of 12(b) Security Class A common stock, $0.0001 Par Value  
Trading Symbol PLNT  
Security Exchange Name NYSE  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Amendment Flag false  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q3  
Entity Central Index Key 0001637207  
Current Fiscal Year End Date --12-31  
Class A Common Stock    
Entity Information [Line Items]    
Entity Common Stock, Shares Outstanding   81,792,537
Class B Common Stock    
Entity Information [Line Items]    
Entity Common Stock, Shares Outstanding   8,561,920
v3.19.3
Condensed consolidated balance sheets (Unaudited) - USD ($)
$ in Thousands
Sep. 30, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 219,752 $ 289,431
Restricted cash 30,499 30,708
Accounts receivable, net of allowance for bad debts of $37 and $84 at September 30, 2019 and December 31, 2018, respectively 29,398 38,960
Inventory 2,612 5,122
Restricted assets – national advertising fund 657 0
Prepaid expenses 8,649 4,947
Other receivables 9,232 12,548
Other current assets 5,471 6,824
Total current assets 306,270 388,540
Property and equipment, net of accumulated depreciation of $70,083, as of September 30, 2019 and $53,086 as of December 31, 2018 131,454 114,367
Right-of-use assets, net 127,746  
Intangible assets, net 227,575 234,330
Goodwill 206,752 199,513
Deferred income taxes 418,745 414,841
Other assets, net 1,690 1,825
Total assets 1,420,232 1,353,416
Current liabilities:    
Current maturities of long-term debt 12,000 12,000
Accounts payable 23,037 30,428
Accrued expenses 25,737 32,384
Equipment deposits 8,566 7,908
Restricted liabilities – national advertising fund 657 0
Deferred revenue, current 24,638 23,488
Payable pursuant to tax benefit arrangements, current 25,506 24,765
Other current liabilities 15,780 430
Total current liabilities 135,921 131,403
Long-term debt, net of current maturities 1,155,049 1,160,127
Deferred rent, net of current portion   10,083
Lease liabilities, net of current portion 127,646  
Deferred revenue, net of current portion 31,532 26,374
Deferred tax liabilities 2,067 2,303
Payable pursuant to tax benefit arrangements, net of current portion 407,884 404,468
Other liabilities 2,250 1,447
Total noncurrent liabilities 1,726,428 1,604,802
Commitments and contingencies (Note 12)
Stockholders’ equity (deficit):    
Accumulated other comprehensive income 189 94
Additional paid in capital 27,240 19,732
Accumulated deficit (466,032) (394,410)
Total stockholders’ deficit attributable to Planet Fitness Inc. (438,594) (374,574)
Non-controlling interests (3,523) (8,215)
Total stockholders’ deficit (442,117) (382,789)
Total liabilities and stockholders’ deficit 1,420,232 1,353,416
Class A Common Stock    
Stockholders’ equity (deficit):    
Common stock, value 8 9
Class B Common Stock    
Stockholders’ equity (deficit):    
Common stock, value $ 1 $ 1
v3.19.3
Condensed consolidated balance sheets (Unaudited) (Parenthetical) - USD ($)
$ in Thousands
Sep. 30, 2019
Dec. 31, 2018
Accounts receivable, allowance for bad debts $ 37 $ 84
Accumulated depreciation $ 70,083 $ 53,086
Class A Common Stock    
Common stock, par value (in dollars per share) $ 0.0001 $ 0.0001
Common stock, shares authorized 300,000,000 300,000,000
Common stock, shares issued 81,773,000 83,584,000
Common stock, shares outstanding 81,773,000 83,584,000
Class B Common Stock    
Common stock, par value (in dollars per share) $ 0.0001 $ 0.0001
Common stock, shares authorized 100,000,000 100,000,000
Common stock, shares issued 8,562,000 9,448,000
Common stock, shares outstanding 8,562,000 9,448,000
v3.19.3
Condensed consolidated statements of operations (Unaudited) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Revenue:        
Revenue $ 166,815 $ 136,656 $ 497,292 $ 398,538
Operating costs and expenses:        
Cost of revenue 46,194 36,871 135,071 100,114
Store operations 22,295 18,751 63,363 55,154
Selling, general and administrative 20,928 17,233 57,944 52,066
National advertising fund expense 12,652 11,377 36,986 32,997
Depreciation and amortization 11,832 8,863 32,316 25,947
Other (gain) loss (147) (12) 99 958
Total operating costs and expenses 113,754 93,083 325,779 267,236
Income from operations 53,061 43,573 171,513 131,302
Other expense, net:        
Interest income 1,808 2,025 5,585 2,480
Interest expense (14,807) (17,909) (44,192) (35,725)
Other expense (61) (27) (4,824) (338)
Total other expense, net (13,060) (15,911) (43,431) (33,583)
Income before income taxes 40,001 27,662 128,082 97,719
Provision for income taxes 10,309 7,190 26,924 23,335
Net income 29,692 20,472 101,158 74,384
Less net income attributable to non-controlling interests 3,915 3,001 13,128 11,158
Net income attributable to Planet Fitness, Inc. $ 25,777 $ 17,471 $ 88,030 $ 63,226
Class A Common Stock        
Net income per share of Class A common stock:        
Basic (in dollars per share) $ 0.31 $ 0.20 $ 1.05 $ 0.72
Diluted (in dollars per share) $ 0.31 $ 0.20 $ 1.04 $ 0.72
Weighted-average shares of Class A common stock outstanding:        
Basic (in shares) 83,157,430 88,047,401 83,699,609 87,727,300
Diluted (in shares) 83,806,906 88,457,804 84,354,172 88,064,051
Franchise        
Revenue:        
Revenue $ 53,443 $ 41,997 $ 164,624 $ 129,575
Commission income        
Revenue:        
Revenue 614 1,448 2,673 5,012
National advertising fund        
Revenue:        
Revenue 12,652 11,377 36,986 32,997
Corporate-owned stores        
Revenue:        
Revenue 40,742 35,406 118,481 102,365
Equipment        
Revenue:        
Revenue $ 59,364 $ 46,428 $ 174,528 $ 128,589
v3.19.3
Condensed consolidated statements of comprehensive income (loss) (Unaudited) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Statement of Comprehensive Income [Abstract]        
Net income including non-controlling interests $ 29,692 $ 20,472 $ 101,158 $ 74,384
Other comprehensive income (loss), net:        
Unrealized gain on interest rate caps, net of tax 0 606 0 989
Foreign currency translation adjustments (62) 40 95 (23)
Total other comprehensive income, net (62) 646 95 966
Total comprehensive income including non-controlling interests 29,630 21,118 101,253 75,350
Less: total comprehensive income attributable to non-controlling interests 3,915 3,007 13,128 11,221
Total comprehensive income attributable to Planet Fitness, Inc. $ 25,715 $ 18,111 $ 88,125 $ 64,129
v3.19.3
Condensed consolidated statements of cash flows (Unaudited) - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Cash flows from operating activities:    
Net income $ 101,158 $ 74,384
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 32,316 25,947
Amortization of deferred financing costs 4,014 2,041
Amortization of favorable leases 0 280
Amortization of asset retirement obligations 178 0
Amortization of interest rate caps 0 1,170
Deferred tax expense 15,666 19,654
Loss on extinguishment of debt 0 4,570
Loss (gain) on re-measurement of tax benefit arrangement 4,638 (354)
Provision for bad debts 13 8
Loss on reacquired franchise rights 0 360
(Gain) loss on disposal of property and equipment (84) 542
Equity-based compensation 3,565 4,137
Changes in operating assets and liabilities, excluding effects of acquisitions:    
Accounts receivable 12,779 10,922
Due to and due from related parties (344) 3,174
Inventory 2,509 (3,450)
Other assets and other current assets (4,628) 4,972
Accounts payable and accrued expenses (12,939) 2,426
Other liabilities and other current liabilities 1,510 (2,869)
Income taxes 3,047 1,028
Payable pursuant to tax benefit arrangements (17,476) (21,706)
Equipment deposits 658 4,950
Deferred revenue 6,103 7,544
Leases and deferred rent 54 4,156
Net cash provided by operating activities 152,737 143,886
Cash flows from investing activities:    
Additions to property and equipment (37,138) (18,601)
Acquisition of franchises (14,801) (45,752)
Proceeds from sale of property and equipment 84 196
Purchase of intellectual property (300) 0
Net cash used in investing activities (52,155) (64,157)
Cash flows from financing activities:    
Principal payments on capital lease obligations (59) (35)
Proceeds from issuance of long-term debt 0 1,200,000
Repayment of long-term debt (9,000) (709,469)
Payment of deferred financing and other debt-related costs 0 (27,191)
Exercise of stock options and ESPP proceeds 1,892 1,106
Repurchase and retirement of Class A common stock (157,945) (42,090)
Dividend equivalent payments (229) (881)
Distributions to Continuing LLC Members (5,499) (5,369)
Net cash (used in) provided by financing activities (170,840) 416,071
Effects of exchange rate changes on cash and cash equivalents 370 (234)
Net (decrease) increase in cash, cash equivalents and restricted cash (69,888) 495,566
Cash, cash equivalents and restricted cash, beginning of period 320,139 113,080
Cash, cash equivalents and restricted cash, end of period 250,251 608,646
Supplemental cash flow information:    
Net cash paid for income taxes 9,061 3,777
Cash paid for interest 40,335 20,015
Non-cash investing activities:    
Non-cash additions to property and equipment $ 4,837 $ 2,217
v3.19.3
Condensed consolidated statement of changes in equity (deficit) (Unaudited) - USD ($)
shares in Thousands, $ in Thousands
Total
Accumulated other comprehensive (loss) income
Additional paid- in capital
Accumulated deficit
Non-controlling interests
Class A Common Stock
Class A Common Stock
Common stock
Class B Common Stock
Class B Common Stock
Common stock
Beginning balance (in shares) at Dec. 31, 2017             87,188   11,193
Beginning balance at Dec. 31, 2017 $ (136,937) $ (648) $ 12,118 $ (130,966) $ (17,451)   $ 9   $ 1
Increase (Decrease) in Stockholders' Equity [Roll Forward]                  
Net income 74,384     63,226 11,158        
Equity-based compensation expense 4,137   4,140 (3)          
Exchanges of Class B common stock, shares issued             1,640   (1,640)
Exchanges of Class B common stock   1 (2,913)   2,912        
Exercise of stock options, vesting of restricted share units and ESPP share purchase (in shares)             81    
Exercise of stock options, vesting of restricted share units and ESPP share purchase 1,106   1,106            
Repurchase/Retirement of common stock (in shares)             (824)   (9)
Repurchase/Retirement of common stock (42,090)     (42,090)          
Tax benefit arrangement liability and deferred taxes arising from exchanges of Class B common stock 2,786   2,786            
Distributions paid to members of Pla-Fit Holdings (5,369)       (5,369)        
Cumulative effect adjustment (9,192)     (9,192)          
Forfeiture of dividend equivalents 61     61          
Other comprehensive income 966 903     63        
Ending balance (in shares) at Sep. 30, 2018             88,085   9,544
Ending balance at Sep. 30, 2018 (110,148) 256 17,237 (118,964) (8,687)   $ 9   $ 1
Beginning balance (in shares) at Jun. 30, 2018             87,932   10,471
Beginning balance at Jun. 30, 2018 (91,248) (385) 14,744 (94,348) (11,269)   $ 9   $ 1
Increase (Decrease) in Stockholders' Equity [Roll Forward]                  
Net income 20,472     17,471 3,001        
Equity-based compensation expense 1,450   1,450            
Exchanges of Class B common stock, shares issued             927   (927)
Exchanges of Class B common stock   1 (1,442)   1,441        
Exercise of stock options, vesting of restricted share units and ESPP share purchase (in shares)             50    
Exercise of stock options, vesting of restricted share units and ESPP share purchase 706   706            
Repurchase/Retirement of common stock (in shares)             (824)    
Repurchase/Retirement of common stock (42,090)     (42,090)          
Tax benefit arrangement liability and deferred taxes arising from exchanges of Class B common stock 1,779   1,779            
Distributions paid to members of Pla-Fit Holdings (1,866)       (1,866)        
Forfeiture of dividend equivalents 3     3          
Other comprehensive income 646 640     6        
Ending balance (in shares) at Sep. 30, 2018             88,085   9,544
Ending balance at Sep. 30, 2018 (110,148) 256 17,237 (118,964) (8,687)   $ 9   $ 1
Beginning balance (in shares) at Dec. 31, 2018           83,584 83,584 9,448 9,448
Beginning balance at Dec. 31, 2018 (382,789) 94 19,732 (394,410) (8,215)   $ 9   $ 1
Increase (Decrease) in Stockholders' Equity [Roll Forward]                  
Net income 101,158     88,030 13,128        
Equity-based compensation expense 3,565   3,565            
Exchanges of Class B common stock, shares issued             886   (886)
Exchanges of Class B common stock     (1,172)   1,172        
Exercise of stock options, vesting of restricted share units and ESPP share purchase (in shares)             99    
Exercise of stock options, vesting of restricted share units and ESPP share purchase 2,035   2,035            
Repurchase/Retirement of common stock (in shares)             (2,796)    
Repurchase/Retirement of common stock (157,946)   273 (157,945) (273)   $ (1)    
Tax benefit arrangement liability and deferred taxes arising from exchanges of Class B common stock 2,807   2,807            
Non-cash adjustments to VIEs (3,836)       (3,836)        
Distributions paid to members of Pla-Fit Holdings (5,499)       (5,499)        
Cumulative effect adjustment (1,713)     (1,713)          
Forfeiture of dividend equivalents 6     6          
Other comprehensive income 95 95              
Ending balance (in shares) at Sep. 30, 2019           81,773 81,773 8,562 8,562
Ending balance at Sep. 30, 2019 (442,117) 189 27,240 (466,032) (3,523)   $ 8   $ 1
Beginning balance (in shares) at Jun. 30, 2019             83,995   8,582
Beginning balance at Jun. 30, 2019 (314,372) 251 24,495 (333,870) (5,257)   $ 8   $ 1
Increase (Decrease) in Stockholders' Equity [Roll Forward]                  
Net income 29,692     25,777 3,915        
Equity-based compensation expense 1,286   1,286            
Exchanges of Class B common stock, shares issued             20   (20)
Exercise of stock options, vesting of restricted share units and ESPP share purchase (in shares)             30    
Exercise of stock options, vesting of restricted share units and ESPP share purchase 826   826            
Repurchase/Retirement of common stock (in shares)             (2,272)    
Repurchase/Retirement of common stock (157,945)   209 (157,945) (209)        
Tax benefit arrangement liability and deferred taxes arising from exchanges of Class B common stock 424   424            
Non-cash adjustments to VIEs (215)       (215)        
Distributions paid to members of Pla-Fit Holdings (1,757)       (1,757)        
Forfeiture of dividend equivalents 6     6          
Other comprehensive income (62) (62)              
Ending balance (in shares) at Sep. 30, 2019           81,773 81,773 8,562 8,562
Ending balance at Sep. 30, 2019 $ (442,117) $ 189 $ 27,240 $ (466,032) $ (3,523)   $ 8   $ 1
v3.19.3
Business Organization
9 Months Ended
Sep. 30, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Business Organization Business Organization
Planet Fitness, Inc. (the “Company”), through its subsidiaries, is a franchisor and operator of fitness centers, with more than 14.1 million members and 1,899 owned and franchised locations (referred to as stores) in 50 states, the District of Columbia, Puerto Rico, Canada, the Dominican Republic, Panama and Mexico as of September 30, 2019.
The Company serves as the reporting entity for its various subsidiaries that operate three distinct lines of business:
Licensing and selling franchises under the Planet Fitness trade name.
Owning and operating fitness centers under the Planet Fitness trade name.
Selling fitness-related equipment to franchisee-owned stores.
The Company was formed as a Delaware corporation on March 16, 2015 for the purpose of facilitating an initial public offering (the “IPO”), which was completed on August 11, 2015 and related transactions in order to carry on the business of Pla-Fit Holdings, LLC and its subsidiaries (“Pla-Fit Holdings”). As of August 5, 2015, in connection with the recapitalization transactions that occurred prior to the IPO, the Company became the sole managing member and holder of 100% of the voting power of Pla-Fit Holdings. Pla-Fit Holdings owns 100% of Planet Intermediate, LLC, which has no operations but is the 100% owner of Planet Fitness Holdings, LLC, a franchisor and operator of fitness centers through its subsidiaries. With respect to the Company, Pla-Fit Holdings and Planet Intermediate, LLC, each entity owns nothing other than the respective entity below it in the corporate structure and each entity has no other material operations.
The Company is a holding company whose principal asset is a controlling equity interest in Pla-Fit Holdings. As the sole managing member of Pla-Fit Holdings, the Company operates and controls all of the business and affairs of Pla-Fit Holdings, and through Pla-Fit Holdings, conducts its business. As a result, the Company consolidates Pla-Fit Holdings’ financial results and reports a non-controlling interest related to the portion of limited liability company units of Pla-Fit Holdings (“Holdings Units”) not owned by the Company. Unless otherwise specified, “the Company” refers to both Planet Fitness, Inc. and Pla-Fit Holdings throughout the remainder of these notes.
As of September 30, 2019, Planet Fitness, Inc. held 100.0% of the voting interest and 90.5% of the economic interest of Pla-Fit Holdings and the holders of Holdings Units of Pla-Fit Holdings (the “Continuing LLC Owners”) held the remaining 9.5% economic interest in Pla-Fit Holdings.
v3.19.3
Summary of Significant Accounting Policies
9 Months Ended
Sep. 30, 2019
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies Summary of Significant Accounting Policies
(a) Basis of presentation and consolidation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, these interim financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented have been reflected. All significant intercompany balances and transactions have been eliminated in consolidation.
The condensed consolidated financial statements as of and for the three and nine months ended September 30, 2019 and 2018 are unaudited. The condensed consolidated balance sheet as of December 31, 2018 has been derived from the audited financial statements at that date but does not include all of the disclosures required by U.S. GAAP. These interim condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the “Annual Report”) filed with the SEC on March 1, 2019. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.
As discussed in Note 1, Planet Fitness, Inc. consolidates Pla-Fit Holdings. The Company also consolidates entities in which it has a controlling financial interest, the usual condition of which is ownership of a majority voting interest. The Company also considers for consolidation certain interests where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary of a VIE is considered to possess the power to direct the activities of the VIE that most significantly
impact its economic performance and has the obligation to absorb losses or the rights to receive benefits from the VIE that are significant to it. The principal entities in which the Company possesses a variable interest include franchise entities and certain other entities. The Company is not deemed to be the primary beneficiary for Planet Fitness franchise entities. Therefore, these entities are not consolidated.
The results of the Company have been consolidated with Matthew Michael Realty LLC (“MMR”), PF Melville LLC (“PF Melville”), and Planet Fitness NAF, LLC (the “NAF”) based on the determination that the Company is the primary beneficiary with respect to these VIEs. MMR and PF Melville are real estate holding companies that derive a majority of their financial support from the Company through lease agreements for corporate stores. See Note 3 for further information related to the Company’s VIEs. The NAF is an advertising fund on behalf of which the Company collects 2% of gross monthly membership dues from franchisees, in accordance with the provisions of the franchise agreements, and uses the amounts received to support our national marketing campaigns, our social media platforms and the development of local advertising materials.
(b) Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results. Significant areas where estimates and judgments are relied upon by management in the preparation of the consolidated financial statements include revenue recognition, valuation of assets and liabilities in connection with acquisitions, valuation of equity-based compensation awards, the evaluation of the recoverability of goodwill and long-lived assets, including intangible assets, income taxes, including deferred tax assets and liabilities and reserves for unrecognized tax benefits, the liability for the Company’s tax benefit arrangements, and the value of the lease liability and related right-of-use asset recorded in accordance with ASC 842 (see Note 2(d) and 16).
(c) Fair Value
ASC 820, Fair Value Measurements and Disclosures, establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
Level 1—Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3—Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
 
The carrying value and estimated fair value of long-term debt as of September 30, 2019 and December 31, 2018 were as follows:
 
 
September 30, 2019
 
December 31, 2018
 
 
Carrying value
 
Estimated fair value(1)
 
Carrying value
 
Estimated fair value(1)
Long-term debt
 
$
1,188,000

 
$
1,230,305

 
$
1,197,000

 
$
1,188,985

(1) The estimated fair value of our long-term debt is estimated primarily based on current bid prices for our long-term debt. Judgment is required to develop these estimates. As such, the fair value of our long-term debt is classified within Level 2, as defined under U.S. GAAP.
(d) Recent accounting pronouncements
In February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02, Leases, in February 2016. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. This guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new guidance requires lessees to recognize the assets and liabilities on the balance sheet for the rights and obligations created by leases with lease terms of more than 12 months, amends various other aspects of accounting for leases by lessees and lessors, and requires enhanced disclosures. Leases will be
classified as finance or operating, with the classification affecting the pattern and classification of expense recognition within the income statement.
The Company adopted the new standard on January 1, 2019 and used the effective date as our date of initial application. Consequently, financial information has not been updated and the disclosures required under the new standard are not provided for dates and periods before January 1, 2019. The new guidance also provides several practical expedients and policies that companies may elect upon transition. The Company has elected the package of practical expedients under which it did not reassess the classification of its existing leases, reevaluate whether any expired or existing contracts are or contain leases or reassess initial direct costs under the new guidance. The Company did not elect the practical expedient pertaining to land easements, as it is not applicable to its leases. Additionally, the Company elected to use the practical expedient that permits a reassessment of lease terms for existing leases using hindsight.
The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption. This means, for those leases that qualify, the Company will not recognize right-of-use (“ROU”) assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company also elected the practical expedient to not separate lease and non-lease components.
Upon transition to the new guidance on January 1, 2019, the Company recognized approximately $130,000 of operating lease liabilities. Additionally, the Company recorded ROU assets in a corresponding amount, net of amounts reclassified from other assets and liabilities, including deferred rent, tenant improvement allowances, and favorable lease assets, as specified by the new lease guidance. In connection with the election of the hindsight practical expedient related to reassessing lease terms for existing leases as of January 1, 2019, the Company recorded a cumulative transition adjustment of $1,713 through retained earnings, net of tax.
The FASB issued ASU No. 2017-4, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, in January 2017. This guidance eliminates the requirement to calculate the implied fair value, essentially eliminating step two from the goodwill impairment test. The new standard requires goodwill impairment to be based upon the results of step one of the impairment test, which is defined as the excess of the carrying value of a reporting unit over its fair value. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. This guidance will be effective for fiscal years beginning after December 15, 2019, including interim periods within that year. This new guidance is not expected to have a material impact on the Company’s consolidated financial statements.
The FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, in August 2018. The guidance helps align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This guidance will be effective for fiscal years beginning after December 15, 2019, including interim periods within that year, but allows for early adoption. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
v3.19.3
Variable Interest Entities
9 Months Ended
Sep. 30, 2019
Variable Interest Entity, Consolidated, Carrying Amount, Assets and Liabilities, Net [Abstract]  
Variable Interest Entities Variable Interest Entities
The carrying values of VIEs included in the consolidated financial statements as of September 30, 2019 and December 31, 2018 are as follows: 
 
 
September 30, 2019
 
December 31, 2018
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
PF Melville
 
$
2,722

 
$

 
$
4,787

 
$

MMR
 
2,233

 

 
3,563

 

Total
 
$
4,955

 
$

 
$
8,350

 
$


 
The Company also has variable interests in certain franchisees mainly through the guarantee of lease agreements. The Company’s maximum obligation, as a result of its guarantees of leases, is approximately $10,376 and $732 as of September 30, 2019 and December 31, 2018, respectively. In 2019, in connection with a real estate partnership, the Company began guaranteeing certain leases of its franchisees up to a maximum period of ten years with earlier expiration dates possible if certain conditions are met.
The amount of the Company’s maximum obligation represents a loss that the Company could incur from the variability in credit exposure without consideration of possible recoveries through insurance or other means. In addition, the amount bears no relation to the ultimate settlement estimated to be incurred from the Company’s involvement with these entities, which is not material.
v3.19.3
Acquisitions
9 Months Ended
Sep. 30, 2019
Business Combinations [Abstract]  
Acquisitions Acquisitions
Maine Acquisition
On May 30, 2019, the Company purchased from one of its franchisees certain assets associated with four franchisee-owned stores in Maine for a cash payment of $14,801. The Company financed the purchase through cash on hand. The acquired stores are included in the Corporate-owned stores segment.
The purchase consideration was allocated as follows:
 
Amount
Fixed assets
$
999

Reacquired franchise rights
6,740

Customer relationships
30

Unfavorable leases, net
(140
)
Other assets
78

Goodwill
7,239

Liabilities assumed, including deferred revenues
(145
)
 
$
14,801


The goodwill created through the purchase is attributable to the assumed future value of the cash flows from the stores acquired. The goodwill is amortizable and deductible for tax purposes over 15 years.
The acquisition was not material to the results of operations of the Company.
Colorado Acquisition
On August 10, 2018, the Company purchased from one of its franchisees certain assets associated with four franchisee-owned stores in Colorado for a cash payment of $17,249. As a result of the transaction, the Company incurred a loss on unfavorable reacquired franchise rights of $10, which has been reflected in other operating costs in the statement of operations. The loss incurred reduced the net purchase price to $17,239. The Company financed the purchase through cash on hand. The acquired stores are included in the Corporate-owned stores segment.
The purchase consideration was allocated as follows:
 
Amount
Fixed assets
$
3,873

Reacquired franchise rights
4,610

Customer relationships
140

Favorable leases, net
80

Other assets
143

Goodwill
8,476

Liabilities assumed, including deferred revenues
(83
)
 
$
17,239


The goodwill created through the purchase is attributable to the assumed future value of the cash flows from the stores acquired. The goodwill is amortizable and deductible for tax purposes over 15 years.
The acquisition was not material to the results of operations of the Company.
Long Island Acquisition
On January 1, 2018, the Company purchased from one of its franchisees certain assets associated with six franchisee-owned stores in New York for a cash payment of $28,503. As a result of the transaction, the Company incurred a loss on unfavorable reacquired franchise rights of $350, which has been reflected in other operating costs in the statement of operations. The loss incurred reduced the net purchase price to $28,153. The Company financed the purchase through cash on hand. The acquired stores are included in the Corporate-owned stores segment.
The purchase consideration was allocated as follows:
 
Amount
Fixed assets
$
4,672

Reacquired franchise rights
7,640

Customer relationships
1,150

Favorable leases, net
520

Reacquired area development rights
150

Other assets
275

Goodwill
14,056

Liabilities assumed, including deferred revenues
(310
)
 
$
28,153


The goodwill created through the purchase is attributable to the assumed future value of the cash flows from the stores acquired. The goodwill is amortizable and deductible for tax purposes over 15 years.
The acquisition was not material to the results of operations of the Company.
v3.19.3
Goodwill and Intangible Assets
9 Months Ended
Sep. 30, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Intangible assets Goodwill and Intangible Assets
A summary of goodwill and intangible assets at September 30, 2019 and December 31, 2018 is as follows: 
September 30, 2019
 
Weighted
average
amortization
period (years)
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net carrying
Amount
Customer relationships
 
11.0
 
$
173,093

 
(108,948
)
 
$
64,145

Noncompete agreements
 
5.0
 
14,500

 
(14,500
)
 

Order backlog
 
0.4
 
3,400

 
(3,400
)
 

Reacquired franchise rights
 
7.7
 
28,089

 
(11,259
)
 
16,830

 
 
 
 
219,082

 
(138,107
)
 
80,975

Indefinite-lived intangible:
 
 
 
 
 
 
 
 
Trade and brand names
 
N/A
 
146,600

 

 
146,600

Total intangible assets
 
 
 
$
365,682

 
$
(138,107
)
 
$
227,575

Goodwill
 
 
 
$
206,752

 
$

 
$
206,752

 
 
December 31, 2018
 
Weighted
average
amortization
period (years)
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net carrying
Amount
Customer relationships
 
11.0
 
$
173,063

 
$
(99,439
)
 
$
73,624

Noncompete agreements
 
5.0
 
14,500

 
(14,500
)
 

Favorable leases
 
8.0
 
4,017

 
(2,345
)
 
1,672

Order backlog
 
0.4
 
3,400

 
(3,400
)
 

Reacquired franchise rights
 
7.0
 
21,349

 
(8,615
)
 
12,734

 
 
 
 
216,329

 
(128,299
)
 
88,030

Indefinite-lived intangible:
 
 
 
 
 
 
 
 
Trade and brand names
 
N/A
 
146,300

 

 
146,300

Total intangible assets
 
 
 
$
362,629

 
$
(128,299
)
 
$
234,330

Goodwill
 
 
 
$
199,513

 
$

 
$
199,513


 
In connection with the adoption of ASC 842, as of January 1, 2019, the Company has derecognized the favorable leases intangible asset, and the favorable leases balance is now included in the ROU asset, net balance (Note 16). The Company determined that no impairment charges were required during any periods presented and the increase to goodwill was due to the acquisition of four franchisee-owned stores on May 30, 2019 (Note 4).
 
Amortization expense related to the intangible assets totaled $4,160 and $4,027 for the three months ended September 30, 2019 and 2018, respectively and $12,186 and $12,052 for the nine months ended September 30, 2019 and 2018, respectively. The anticipated annual amortization expense related to intangible assets to be recognized in future years as of September 30, 2019 is as follows:
 
Amount
Remainder of 2019
$
4,146

2020
14,968

2021
15,053

2022
15,280

2023
15,185

Thereafter
16,343

Total
$
80,975


v3.19.3
Long-Term Debt
9 Months Ended
Sep. 30, 2019
Debt Disclosure [Abstract]  
Long-Term Debt Long-Term Debt
Long-term debt as of September 30, 2019 and December 31, 2018 consists of the following: 
 
 
September 30, 2019
 
December 31, 2018
Class A-2-I notes
 
$
569,250

 
$
573,563

Class A-2-II notes
 
618,750

 
623,437

Total debt, excluding deferred financing costs
 
1,188,000

 
1,197,000

Deferred financing costs, net of accumulated amortization
 
(20,951
)
 
(24,873
)
Total debt
 
1,167,049

 
1,172,127

Current portion of long-term debt and line of credit
 
12,000

 
12,000

Long-term debt, net of current portion
 
$
1,155,049

 
$
1,160,127


 
Future annual principal payments of long-term debt as of September 30, 2019 are as follows: 
 
Amount
Remainder of 2019
$
3,000

2020
12,000

2021
12,000

2022
562,563

2023
6,250

Thereafter
592,187

Total
$
1,188,000



On August 1, 2018, Planet Fitness Master Issuer LLC (the “Master Issuer”), a limited-purpose, bankruptcy remote, wholly-owned indirect subsidiary of Pla-Fit Holdings, LLC, entered into a base indenture and a related supplemental indenture (collectively, the “Indenture”) under which the Master Issuer may issue multiple series of notes. On the same date, the Master Issuer issued Series 2018-1 4.262% Fixed Rate Senior Secured Notes, Class A-2-I (the “Class A-2-I Notes”) with an initial principal amount of $575,000 and Series 2018-1 4.666% Fixed Rate Senior Secured Notes, Class A-2-II (the “Class A-2-II Notes” and, together with the Class A-2-I Notes, the “Class A-2 Notes”) with an initial principal amount of $625,000. In connection with the issuance of the Class A-2 Notes, the Master Issuer also entered into a revolving financing facility that allows for the issuance of up to $75,000 in Series 2018-1 Variable Funding Senior Notes, Class A-1 (the “Variable Funding Notes” and together with the Class A-2 Notes, the “Series 2018-1 Senior Notes”), and certain letters of credit, all of which was undrawn as of both September 30, 2019 and December 31, 2018. The Series 2018-1 Senior Notes were issued in a securitization transaction pursuant to which most of the Company’s domestic revenue-generating assets, consisting principally of franchise-related agreements, certain corporate-owned store assets, equipment supply agreements and intellectual property and license agreements for the use of intellectual property, were assigned to the Master Issuer and certain other limited-purpose, bankruptcy remote, wholly-owned indirect subsidiaries of the Company that act as guarantors of the Series 2018-1 Senior Notes and that have pledged substantially all of their assets to secure the Series 2018-1 Senior Notes.

Interest and principal payments on the Class A-2 Notes are payable on a quarterly basis. The requirement to make such quarterly principal payments on the Class A-2 Notes is subject to certain financial conditions set forth in the Indenture. The legal final maturity date of the Class A-2 Notes is in September 2048, but it is anticipated that, unless earlier prepaid to the extent permitted under the Indenture, the Class A-2-I Notes will be repaid in September 2022 and the Class A-2-II Notes will be repaid in September 2025 (together, the “Anticipated Repayment Dates”). If the Master Issuer has not repaid or refinanced the Class A-2 Notes prior to the respective Anticipated Repayment Dates, additional interest will accrue pursuant to the Indenture.

The Variable Funding Notes will accrue interest at a variable interest rate based on (i) the prime rate, (ii) overnight federal funds rates, (iii) the London interbank offered rate for U.S. Dollars, or (iv) with respect to advances made by conduit investors, the weighted average cost of, or related to, the issuance of commercial paper allocated to fund or maintain such advances, in each case plus any applicable margin and as specified in the Variable Funding Note agreement. There is a commitment fee on the unused portion of the Variable Funding Notes of 0.5% based on utilization. It is anticipated that the principal and interest on the Variable Funding Notes will be repaid in full on or prior to September 2023, subject to two additional one-year extensions. Following the anticipated repayment date (and any extensions thereof) additional interest will accrue on the Variable Funding Notes equal to 5.0% per year.

In connection with the issuance of the Series 2018-1 Senior Notes, the Company incurred debt issuance costs of $27,133. The debt issuance costs are being amortized to “Interest expense” through the Anticipated Repayment Dates of the Class A-2 Notes utilizing the effective interest rate method.

The Series 2018-1 Senior Notes are subject to covenants and restrictions customary for transactions of this type, including (i) that the Master Issuer maintains specified reserve accounts to be used to make required payments in respect of the Series 2018-1 Senior Notes, (ii) provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments in the case of the Class A-2 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the Series 2018-1 Senior Notes are in stated ways defective or ineffective, and (iv) covenants relating to recordkeeping, access to information and similar matters. The Series 2018-1 Senior Notes are also subject to customary rapid amortization events provided for in the Indenture, including events tied to failure
to maintain stated debt service coverage ratios, certain manager termination events, an event of default, and the failure to repay or refinance the Class A-2 Notes on the applicable scheduled Anticipated Repayment Dates. The Series 2018-1 Senior Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal, or other amounts due on or with respect to the Series 2018-1 Senior Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments.

In accordance with the Indenture, certain cash accounts have been established with the Indenture trustee (the “Trustee”) for the benefit of the trustee and the noteholders, and are restricted in their use. The Company holds restricted cash which primarily represents cash collections held by the Trustee, interest, principal, and commitment fee reserves held by the Trustee related to the Company’s Series 2018-1 Senior Notes. As of September 30, 2019, the Company had restricted cash held by the Trustee of $30,499. Restricted cash has been combined with cash and cash equivalents when reconciling the beginning and end of period balances in the consolidated statements of cash flows.

The proceeds from the issuance of the Class A-2 Notes were used to repay all amounts outstanding on the Term Loan B under the Company’s prior credit facility. As a result, the Company recorded a loss on early extinguishment of debt of $4,570 in August 2018, primarily consisting of the write-off of deferred costs related to the prior credit facility. In connection with the repayment of the Term Loan B, the Company terminated the related interest rate caps with notional amounts totaling $219,837, which had been designated as a cash flow hedge. See Note 7 for more information on the interest rate caps.
v3.19.3
Derivative Instruments and Hedging Activities
9 Months Ended
Sep. 30, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities Derivative Instruments and Hedging Activities
Prior to the refinancing transactions described in Note 6, the Company used interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on its variable-rate debt instruments. The Company does not enter into derivative instruments for any purpose other than cash flow hedging. The Company does not speculate using derivative instruments.
In order to manage the market risk arising from the previously outstanding term loans, the Company entered into a series of interest rate caps. As of September 30, 2019 and December 31, 2018, the Company had no interest rate cap agreements outstanding. In connection with the issuance of the Class A-2 Notes, the Company terminated the interest rate caps it had entered into in order to hedge interest expense on its previously outstanding term loans.
v3.19.3
Related Party Transactions
9 Months Ended
Sep. 30, 2019
Related Party Transactions [Abstract]  
Related Party Transactions Related Party Transactions
Amounts due from related parties of $412 as of September 30, 2019 recorded within other receivables on the condensed consolidated balance sheet relate to a potential indemnification reimbursement for an outstanding legal matter, see Note 12.
Activity with entities considered to be related parties is summarized below: 
 
 
For the three months ended
September 30,
 
For the nine months ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Franchise revenue
 
$
505

 
$
897

 
$
1,735

 
$
2,453

Equipment revenue
 
883

 
1,472

 
2,325

 
1,782

Total revenue from related parties
 
$
1,388

 
$
2,369

 
4,060

 
$
4,235


Additionally, the Company had deferred area development agreement revenue from related parties of $260 and $779 as of September 30, 2019 and December 31, 2018, respectively.
The Company had payables to related parties pursuant to tax benefit arrangements of $55,478 and $59,458, as of September 30, 2019 and December 31, 2018, respectively (see Note 11).
The Company provides administrative services to the NAF and charges NAF a fee for providing these services. The services provided include accounting services, information technology, data processing, product development, legal and administrative support, and other operating expenses, which amounted to $402 and $676 for the three months ended September 30, 2019 and 2018, respectively, and $1,771 and $1,872 for the nine months ended September 30, 2019 and 2018, respectively.
v3.19.3
Stockholder's Equity
9 Months Ended
Sep. 30, 2019
Equity [Abstract]  
Stockholder's Equity Stockholder’s Equity
Pursuant to the exchange agreement between the Company and the Continuing LLC Owners, the Continuing LLC Owners (or certain permitted transferees thereof) have the right, from time to time and subject to the terms of the exchange agreement, to exchange their Holdings Units, along with a corresponding number of shares of Class B common stock, for shares of Class A common stock (or cash at the option of the Company) on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends, reclassifications and similar transactions. In connection with any exchange of Holdings Units for shares of Class A common stock by a Continuing LLC Owner, the number of Holdings Units held by the Company is correspondingly increased as it acquires the exchanged Holdings Units, and a corresponding number of shares of Class B common stock are canceled.
During the nine months ended September 30, 2019, certain existing holders of Holdings Units exercised their exchange rights and exchanged 885,810 Holdings Units for 885,810 newly-issued shares of Class A common stock. Simultaneously, and in connection with these exchanges, 885,810 shares of Class B common stock were surrendered by the holders of Holdings Units that exercised their exchange rights and canceled. Additionally, in connection with these exchanges, Planet Fitness, Inc. received 885,810 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.
As a result of the above transactions, as of September 30, 2019:
Holders of our Class A common stock owned 81,773,267 shares of our Class A common stock, representing 90.5% of the voting power in the Company and, through the Company, 81,773,267 Holdings Units representing 90.5% of the economic interest in Pla-Fit Holdings; and
the Continuing LLC Owners collectively owned 8,561,920 Holdings Units, representing 9.5% of the economic interest in Pla-Fit Holdings, and 8,561,920 shares of our Class B common stock, representing 9.5% of the voting power in the Company.
Share repurchase program
On August 3, 2018, our board of directors approved an increase to the total amount of the previously approved share repurchase program to $500,000.
On November 13, 2018, the Company entered into a $300,000 accelerated share repurchase agreement (the “ASR Agreement”) with Citibank, N.A. (“the Bank”). Pursuant to the terms of the ASR Agreement, on November 14, 2018, the Company paid the Bank $300,000 upfront in cash and received 4,607,410 shares of the Company’s Class A common stock, which were retired, and the Company elected to record as a reduction to retained earnings of $240,000. Final settlement of the ASR Agreement occurred on April 30, 2019. At final settlement, the Bank delivered 524,124 additional shares of the Company’s Class A common stock, based on a weighted average cost per share of $58.46 over the term of the ASR agreement, which were retired. This had been evaluated as an unsettled forward contract indexed to our own stock, with $60,000 classified as a reduction to retained earnings at the original date of payment.
During the three months ended September 30, 2019, the Company purchased 2,272,001 shares of its Class A common stock for an average purchase price of $69.51 per share, completing its previously approved $500,000 share repurchase program.
v3.19.3
Earnings Per Share
9 Months Ended
Sep. 30, 2019
Earnings Per Share [Abstract]  
Earnings Per Share Earnings Per Share
Basic earnings per share of Class A common stock is computed by dividing net income attributable to Planet Fitness, Inc. by the weighted-average number of shares of Class A common stock outstanding during the same period. Diluted earnings per share of Class A common stock is computed by dividing net income attributable to Planet Fitness, Inc. by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities.
Shares of the Company’s Class B common stock do not share in the earnings or losses attributable to Planet Fitness, Inc. and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented. Shares of the Company’s Class B common stock are, however, considered potentially dilutive shares of Class A common stock because shares of Class B common stock, together with the related Holdings Units, are exchangeable into shares of Class A common stock on a one-for-one basis.
The following table sets forth reconciliations used to compute basic and diluted earnings per share of Class A common stock:  
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Numerator
 
 

 
 

 
 
 
 
Net income
 
$
29,692

 
$
20,472

 
$
101,158

 
$
74,384

Less: net income attributable to non-controlling interests
 
3,915

 
3,001

 
13,128

 
11,158

Net income attributable to Planet Fitness, Inc.
 
$
25,777

 
$
17,471

 
$
88,030

 
$
63,226

Denominator
 
 
 
 
 
 
 
 
Weighted-average shares of Class A common stock outstanding - basic
 
83,157,430

 
88,047,401

 
83,699,609

 
87,727,300

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options
 
606,888

 
382,499

 
609,788

 
319,610

Restricted stock units
 
42,588

 
27,904

 
44,775

 
17,141

Weighted-average shares of Class A common stock outstanding - diluted
 
83,806,906

 
88,457,804

 
84,354,172

 
88,064,051

Earnings per share of Class A common stock - basic
 
$
0.31

 
$
0.20

 
$
1.05

 
$
0.72

Earnings per share of Class A common stock - diluted
 
$
0.31

 
$
0.20

 
$
1.04

 
$
0.72


Weighted average shares of Class B common stock of 8,579,094 and 10,004,682 for the three months ended September 30, 2019 and 2018, respectively, and 8,798,695 and 10,550,857 for the nine months ended September 30, 2019 and 2018, respectively, were evaluated under the if-converted method for potential dilutive effects and were determined to be anti-dilutive. Weighted average stock options outstanding of 76,455 and 36,342 for the three months ended September 30, 2019 and 2018, respectively, and 50,063 and 114,628 for the nine months ended September 30, 2019 and 2018, respectively, were evaluated under the treasury stock method for potential dilutive effects and were determined to be anti-dilutive. Weighted average restricted stock units outstanding of 713 and 0 for the three months ended September 30, 2019 and 2018, respectively, and 1,688 and 11,245 for the nine months ended September 30, 2019 and 2018, respectively, were evaluated under the treasury stock method for potential dilutive effects and were determined to be anti-dilutive.
v3.19.3
Income Taxes
9 Months Ended
Sep. 30, 2019
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The Company is the sole managing member of Pla-Fit Holdings, which is treated as a partnership for U.S. federal and certain state and local income taxes. As a partnership, Pla-Fit Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Pla-Fit Holdings is passed through to and included in the taxable income or loss of its members, including the Company, on a pro-rata basis.
Planet Fitness, Inc. is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income of Pla-Fit Holdings. The Company’s effective tax rate was 25.8% and 26.0% for the three months ended September 30, 2019 and 2018, respectively and 21.0% and 23.9% for the nine months ended September 30, 2019 and 2018, respectively. The effective tax rate for the three months ended September 30, 2019 differed from the U.S. federal statutory rate of 21% primarily due to state and local taxes, partially offset by income attributable to non-controlling interest. The effective tax rate for the nine months ended September 30, 2019 of 21% included the impact of state and local taxes, offset by income attributable to non-controlling interest. The Company was also subject to taxes in foreign jurisdictions. Undistributed earnings of foreign operations were not material for the three and nine months ended September 30, 2019 and 2018.
Net deferred tax assets of $416,678 and $412,538 as of September 30, 2019 and December 31, 2018, respectively, relate primarily to the tax effects of temporary differences in the book basis as compared to the tax basis of our investment in Pla-Fit Holdings as a result of the secondary offerings, other exchanges, recapitalization transactions and the IPO. As of September 30, 2019, the Company does not have any net operating loss carryforwards.
As of September 30, 2019 and December 31, 2018, the total liability related to uncertain tax positions was $260 and $300, respectively. The Company recognizes interest accrued and penalties, if applicable, related to unrecognized tax benefits in income tax expense. Interest and penalties for the three and nine months ended September 30, 2019 and 2018 were not material.
Tax benefit arrangements
The Company’s acquisition of Holdings Units in connection with the IPO and future and certain past exchanges of Holdings Units for shares of the Company’s Class A common stock (or cash at the option of the Company) are expected to produce and have produced favorable tax attributes. In connection with the IPO, the Company entered into two tax receivable agreements. Under the first of those agreements, the Company generally is required to pay to certain existing and previous equity owners of Pla-Fit Holdings (the “TRA Holders”) 85% of the applicable tax savings, if any, in U.S. federal and state income tax that the Company is deemed to realize as a result of certain tax attributes of their Holdings Units sold to the Company (or exchanged in a taxable sale) and that are created as a result of (i) the exchanges of their Holdings Units for shares of Class A common stock and (ii) tax benefits attributable to payments made under the tax receivable agreement (including imputed interest). Under the second tax receivable agreement, the Company generally is required to pay to TSG AIV II-A L.P and TSG PF Co-Investors A L.P. (the “Direct TSG Investors”) 85% of the amount of tax savings, if any, that the Company is deemed to realize as a result of the tax attributes of the Holdings Units held in respect of the Direct TSG Investors’ interest in the Company, which resulted from the Direct TSG Investors’ purchase of interests in Pla-Fit Holdings in 2012, and certain other tax benefits. Under both agreements, the Company generally retains the benefit of the remaining 15% of the applicable tax savings.
During the nine months ended September 30, 2019, 885,810 Holdings Units were exchanged by the TRA Holders for newly issued shares of Class A common stock, resulting in an increase in the tax basis of the net assets of Pla-Fit Holdings subject to the provisions of the tax receivable agreements. As a result of the change in Planet Fitness, Inc.’s ownership percentage of Pla-Fit Holdings, we recorded a decrease to our net deferred tax assets of $517 during the nine months ended September 30, 2019. As a result of these exchanges, during the nine months ended September 30, 2019, we also recognized deferred tax assets in the amount of $20,340, and corresponding tax benefit arrangement liabilities of $17,016, representing approximately 85% of the tax benefits due to the TRA Holders. The offset to the entries recorded in connection with exchanges was to equity.
As of September 30, 2019 and December 31, 2018, the Company had a liability of $433,390 and $429,233, respectively, related to its projected obligations under the tax benefit arrangements. Projected future payments under the tax benefit arrangements are as follows:
 
Amount
Remainder of 2019
$
7,307

2020
25,965

2021
26,584

2022
27,141

2023
27,679

Thereafter
318,714

Total
$
433,390


v3.19.3
Commitments and contingencies
9 Months Ended
Sep. 30, 2019
Commitments and Contingencies Disclosure [Abstract]  
Commitments and contingencies Commitments and contingencies
From time to time, and in the ordinary course of business, the Company is subject to various claims, charges, and litigation, such as employment-related claims and slip and fall cases.
On May 3, 2019, the Company and other defendants received a joint and several judgment against them in the amount of $6,185, inclusive of accrued interest, in a civil action brought by a former employee. As of September 30, 2019, the Company has estimated its obligation related to this matter to be approximately $1,237, which is included in other current liabilities on the condensed consolidated balance sheet. In connection with 2012 acquisition of Pla-Fit Holdings on November 8, 2012, the sellers are obligated to indemnify the Company related to this specific matter. The Company has therefore recorded an offsetting indemnification receivable of $1,237 in other receivables on the Company’s condensed consolidated balance sheet, of which $412 is due from a related party. As of September 30, there is an additional $4,272 of potential incremental interest being sought by the plaintiff; however, the Company does not currently believe that payment of the incremental interest is probable and therefore has not recorded such amount as of September 30, 2019.
The Company is not currently aware of any other legal proceedings or claims that the Company believes will have, individually or in the aggregate, a material adverse effect on the Company’s financial position or result of operations.
v3.19.3
Segments
9 Months Ended
Sep. 30, 2019
Segment Reporting [Abstract]  
Segments Segments
The Company has three reportable segments: (i) Franchise; (ii) Corporate-owned stores; and (iii) Equipment.  
The Company’s operations are organized and managed by type of products and services and segment information is reported accordingly. The Company’s chief operating decision maker (the “CODM”) is its Chief Executive Officer. The CODM reviews financial performance and allocates resources by reportable segment. There have been no operating segments aggregated to arrive at the Company’s reportable segments.
The Franchise segment includes operations related to the Company’s franchising business in the United States, Puerto Rico, Canada, the Dominican Republic, Panama and Mexico, including revenues and expenses from the NAF beginning on January 1, 2018 (see Note 15). The Corporate-owned stores segment includes operations with respect to all corporate-owned stores throughout the United States and Canada. The Equipment segment includes the sale of equipment to our United States franchisee-owned stores.
The accounting policies of the reportable segments are the same as those described in Note 2. The Company evaluates the performance of its segments and allocates resources to them based on revenue and earnings before interest, taxes, depreciation, and amortization, referred to as Segment EBITDA. Revenues for all operating segments include only transactions with unaffiliated customers and include no intersegment revenues.
The tables below summarize the financial information for the Company’s reportable segments for the three and nine months ended September 30, 2019 and 2018. The “Corporate and other” category, as it relates to Segment EBITDA, primarily includes corporate overhead costs, such as payroll and related benefit costs and professional services which are not directly attributable to any individual segment.
 
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Revenue
 
 

 
 

 
 

 
 

Franchise segment revenue - U.S.
 
$
65,494

 
$
53,528

 
$
200,111

 
$
164,225

Franchise segment revenue - International
 
1,215

 
1,294

 
4,172

 
3,359

Franchise segment total
 
66,709

 
54,822

 
204,283

 
167,584

Corporate-owned stores - U.S.
 
39,637

 
34,323

 
115,178

 
99,020

Corporate-owned stores - International
 
1,105

 
1,083

 
3,303

 
3,345

Corporate-owned stores total
 
40,742

 
35,406

 
118,481

 
102,365

Equipment segment - U.S.
 
59,364

 
46,428

 
174,528

 
128,589

Equipment segment total
 
59,364

 
46,428

 
174,528

 
128,589

Total revenue
 
$
166,815

 
$
136,656

 
$
497,292

 
$
398,538


Franchise segment revenue includes franchise revenue, NAF revenue, and commission income.
Franchise revenue includes revenue generated from placement services of $4,277 and $2,518 for the three months ended September 30, 2019 and 2018, respectively, and $12,112 and $7,694 for the nine months September 30, 2019 and 2018, respectively. 
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Segment EBITDA
 
 

 
 

 
 

 
 

Franchise
 
$
44,328

 
$
37,075

 
$
141,548

 
$
113,793

Corporate-owned stores
 
16,799

 
15,279

 
50,505

 
42,115

Equipment
 
13,741

 
9,654

 
40,920

 
28,579

Corporate and other
 
(10,036
)
 
(9,599
)
 
(33,968
)
 
(27,576
)
Total Segment EBITDA
 
$
64,832

 
$
52,409

 
$
199,005

 
$
156,911


 
The following table reconciles total Segment EBITDA to income before taxes:
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Total Segment EBITDA
 
$
64,832

 
$
52,409

 
$
199,005

 
$
156,911

Less:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
11,832

 
8,863

 
32,316

 
25,947

Other expense
 
(61
)
 
(27
)
 
(4,824
)
 
(338
)
Income from operations
 
53,061

 
43,573

 
171,513

 
131,302

Interest income
 
1,808

 
2,025

 
5,585

 
2,480

Interest expense
 
(14,807
)
 
(17,909
)
 
(44,192
)
 
(35,725
)
Other expense
 
(61
)
 
(27
)
 
(4,824
)
 
(338
)
Income before income taxes
 
$
40,001

 
$
27,662

 
$
128,082

 
$
97,719


The following table summarizes the Company’s assets by reportable segment: 
 
 
September 30, 2019
 
December 31, 2018
Franchise
 
$
189,192

 
$
185,899

Corporate-owned stores
 
390,101

 
243,221

Equipment
 
195,022

 
210,462

Unallocated
 
645,917

 
713,834

Total consolidated assets
 
$
1,420,232

 
$
1,353,416


The table above includes $1,204 and $1,892 of long-lived assets located in the Company’s corporate-owned stores in Canada as of September 30, 2019 and December 31, 2018, respectively. All other assets are located in the U.S.
For the segment footnote disclosure as of December 31, 2018, an immaterial error of $133,523 has been corrected to appropriately classify assets from the franchise segment to the unallocated segment at December 31, 2018. This correction does not impact the Company’s previously reported consolidated balance sheets, consolidated statements of cash flow or statements of operations.
The following table summarizes the Company’s goodwill by reportable segment: 
 
 
September 30, 2019
 
December 31, 2018
Franchise
 
$
16,938

 
$
16,938

Corporate-owned stores
 
97,148

 
89,909

Equipment
 
92,666

 
92,666

Consolidated goodwill
 
$
206,752

 
$
199,513


v3.19.3
Corporate-Owned and Franchisee-Owned Stores
9 Months Ended
Sep. 30, 2019
Franchisors [Abstract]  
Corporate-Owned and Franchisee-Owned Stores Corporate-Owned and Franchisee-Owned Stores

The following table shows changes in our corporate-owned and franchisee-owned stores for the three and nine months ended September 30, 2019 and 2018:
 
 
For the three months ended
September 30,
 
For the nine months ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
Franchisee-owned stores:
 
 
 
 
 
 
 
 
Stores operated at beginning of period
 
1,779

 
1,540

 
1,666

 
1,456

New stores opened
 
39

 
40

 
157

 
131

Stores debranded, sold or consolidated(1)
 
(1
)
 
(7
)
 
(6
)
 
(14
)
Stores operated at end of period
 
1,817

 
1,573

 
1,817

 
1,573

 
 
 
 
 
 
 
 
 
Corporate-owned stores:
 
 
 
 
 
 
 
 
Stores operated at beginning of period
 
80

 
68

 
76

 
62

New stores opened
 
2

 
1

 
2

 
1

Stores acquired from franchisees
 

 
4

 
4

 
10

Stores operated at end of period
 
82

 
73

 
82

 
73

 
 
 
 
 
 
 
 
 
Total stores:
 
 
 
 
 
 
 
 
Stores operated at beginning of period
 
1,859

 
1,608

 
1,742

 
1,518

New stores opened
 
41

 
41

 
159

 
132

Stores acquired, debranded, sold or consolidated(1)
 
(1
)
 
(3
)
 
(2
)
 
(4
)
Stores operated at end of period
 
1,899

 
1,646

 
1,899

 
1,646

 (1)
The term “debrand” refers to a franchisee-owned store whose right to use the Planet Fitness brand and marks has been terminated in accordance with the franchise agreement. We retain the right to prevent debranded stores from continuing to operate as fitness centers. The term “consolidated” refers to the combination of a franchisee’s store with another store located in close proximity with our prior approval. This often coincides with an enlargement, re-equipment and/or refurbishment of the remaining store.
v3.19.3
Revenue recognition
9 Months Ended
Sep. 30, 2019
Revenue from Contract with Customer [Abstract]  
Revenue recognition Revenue recognition
Contract Liabilities
Contract liabilities consist of deferred revenue resulting from initial and renewal franchise fees and area development agreement (“ADA”) fees paid by franchisees, as well as transfer fees, which are generally recognized on a straight-line basis over the term of the underlying franchise agreement. Also included are corporate-owned store enrollment fees, annual fees and monthly fees as well as deferred equipment rebates relating to our equipment business. We classify these contract liabilities as deferred revenue in our condensed consolidated balance sheets. The following table reflects the change in contract liabilities between December 31, 2018 and September 30, 2019.

 
Contract liabilities
Balance at December 31, 2018
$
49,862

Revenue recognized that was included in the contract liability at the beginning of the year
(23,082
)
Increase, excluding amounts recognized as revenue during the period
29,390

Balance at September 30, 2019
$
56,170


The following table illustrates estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2019. The Company has elected to exclude short term contracts, sales and usage based royalties and any other variable consideration recognized on an “as invoiced” basis.
Contract liabilities to be recognized in:
 
Amount
Remainder of 2019
 
$
12,422

2020
 
13,129

2021
 
3,279

2022
 
3,061

2023
 
2,818

Thereafter
 
21,461

Total
 
$
56,170


v3.19.3
Leases
9 Months Ended
Sep. 30, 2019
Leases [Abstract]  
Leases Leases

The Company leases space to operate corporate-owned stores, equipment, office, and warehouse space. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. For leases beginning in 2019 and later, we account for fixed lease and non-lease components together as a single, combined lease component. Variable lease costs, which may include common area maintenance, insurance, and taxes are not included in the lease liability and are expensed in the period incurred.