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(1) Business organization
Planet Fitness, Inc. (the “Company”), through its subsidiaries, is a franchisor and operator of fitness centers, with more than 10.4 million members and 1,403 owned and franchised locations (referred to as stores) in 48 states, the District of Columbia, Puerto Rico, Canada and the Dominican Republic as of June 30, 2017.
The Company serves as the reporting entity for its various subsidiaries that operate three distinct lines of business:
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Licensing and selling franchises under the Planet Fitness trade name. |
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Owning and operating fitness centers under the Planet Fitness trade name. |
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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. 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.
Subsequent to the IPO and the related recapitalization transactions, 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.
In March 2017, the Company completed a secondary offering (“March Secondary Offering”) of 15,000,000 shares of its Class A common stock at a price of $20.44 per share. All of the shares sold in the March Secondary Offering were offered by certain existing holders of Holdings Units and TSG AIV II-A L.P and TSG PF Co-Investors A L.P. (“Direct TSG Investors”), funds affiliated with TSG Consumer Partners, LLC (“TSG”). The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the participating holders of Holdings Units. The shares sold in the March Secondary Offering consisted of (i) 4,790,758 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 10,209,242 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the holders of Holdings Units that participated in the March Secondary Offering. Simultaneously, and in connection with the exchange, 10,209,242 shares of Class B common stock were surrendered by the holders of Holdings Units that participated in the March Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 10,209,242 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.
In May 2017, the Company completed a secondary offering (“May Secondary Offering”) of 16,085,510 shares of its Class A common stock at a price of $20.28 per share. All of the shares sold in the May Secondary Offering were offered by certain existing holders of Holdings Units and the Direct TSG Investors, funds affiliated with TSG. The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the participating holders of Holdings Units. The shares sold in the May Secondary Offering consisted of (i) 5,215,691 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 10,869,819 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the holders of Holdings Units that participated in the May Secondary Offering. Simultaneously, and in connection with the exchange, 10,869,819 shares of Class B common stock were surrendered by the holders of Holdings Units that participated in the May Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 10,869,819 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.
In addition to the March Secondary Offering and May Secondary Offering, during the six months ended June 30, 2017, certain existing holders of Holdings Units have exercised their exchange rights and exchanged 3,254,455 Holdings Units for 3,254,455 newly-issued shares of Class A common stock. Simultaneously, and in connection with these exchanges, 3,254,455 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 3,254,455 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.
Following the completion of the March Secondary Offering, May Secondary Offering and other exchanges described above, and as of June 30, 2017, Planet Fitness, Inc. held 100% of the voting interest and 87.1% 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 12.9% economic interest in Pla-Fit Holdings. As future exchanges of Holdings Units occur, Planet Fitness, Inc.’s economic interest in Pla-Fit Holdings will increase.
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(2) 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 six months ended June 30, 2017 and 2016 are unaudited. The condensed consolidated balance sheet as of December 31, 2016 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, 2016 (the “Annual Report”) filed with the SEC on March 6, 2017. 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, as a result of the recapitalization transactions, 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”) and PF Melville LLC (“PF Melville”) based on the determination that the Company is the primary beneficiary with respect to these VIEs. These entities 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.
(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, and the liability for the Company’s tax benefit arrangements.
(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 table below presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016:
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Quoted |
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Significant |
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Total fair |
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prices |
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other |
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Significant |
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value at |
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in active |
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observable |
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unobservable |
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June 30, |
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markets |
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inputs |
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inputs |
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2017 |
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(Level 1) |
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(Level 2) |
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(Level 3) |
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Interest rate caps |
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$ |
220 |
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$ |
— |
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$ |
220 |
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$ |
— |
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Quoted |
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Significant |
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Total fair |
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prices |
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other |
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Significant |
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value at |
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in active |
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observable |
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unobservable |
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December 31, |
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markets |
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inputs |
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inputs |
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2016 |
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(Level 1) |
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(Level 2) |
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(Level 3) |
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Interest rate caps |
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$ |
306 |
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$ |
— |
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$ |
306 |
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$ |
— |
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(d) Recent accounting pronouncements
The FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, in September 2014. This guidance requires that an entity recognize revenue to depict the transfer of a promised good or service to its customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for such transfer. This guidance also specifies accounting for certain costs incurred by an entity to obtain or fulfill a contract with a customer and provides for enhancements to revenue specific disclosures intended to allow users of the financial statements to clearly understand the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with its customers. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 for public companies. The Company expects to adopt this new guidance in fiscal year 2018 and is still evaluating the most appropriate transition method to be utilized. The Company expects the adoption of the new guidance to change the timing of recognition of area development agreement and initial franchise fees. Currently, these fees are generally recognized upfront upon either a store opening or upon execution of the property lease for an area development agreement, and upon execution of a lease and delivery of training for franchise fees. The new guidance will generally require these fees to be recognized over the contractual terms of the related franchise license. The Company does not currently expect this new guidance to materially impact the recognition of royalty income. The Company also expects the adoption of this new guidance to change the reporting of national advertising fund contributions from franchisees and the related national advertising fund expenditures, which are not currently included in the consolidated statements of operations. The Company expects the new guidance to require these advertising fund contributions and expenditures to be reported on a gross basis in the consolidated statements of operations. We expect this change to have a material impact to our total revenues and expenses. However, we expect such contributions and expenditures to be largely offsetting and are continuing to evaluate the impact on our reported net income. The Company is continuing to evaluate the impact the adoption of this new guidance will have on all revenue transactions.
The FASB issued ASU No. 2016-02, Leases, in February 2016. 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. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public companies. Early application of the amendments in this update is permitted for all entities. The Company anticipates that adoption of this guidance will bring all current operating leases onto the statement of financial position as a right of use asset and related rent liability, and is currently evaluating the effect that implementation of this guidance will have on its consolidated statement of operations.
The FASB issued ASU No. 2016-09, Stock Compensation, in March 2016. This guidance is intended to simplify several aspects of the accounting for share-based payment award transactions. This guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within that year. The Company has adopted the guidance as of January 1, 2017 on a modified retrospective basis, noting no material impact to the consolidated financial statements.
The FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, in August 2016. This guidance is intended to reduce diversity in practice of the classification of certain cash receipts and cash payments. This guidance will be effective for fiscal years beginning after December 15, 2017, including interim periods within that year. The Company does not expect the adoption of the standard to have a material impact on its consolidated financial statements.
The FASB issued ASU No. 2017-04, 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.
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(3) Variable interest entities
The carrying values of VIEs included in the consolidated financial statements as of June 30, 2017 and December 31, 2016 are as follows:
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June 30, 2017 |
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December 31, 2016 |
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Assets |
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Liabilities |
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Assets |
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Liabilities |
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PF Melville |
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$ |
4,245 |
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$ |
— |
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$ |
4,071 |
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$ |
— |
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MMR |
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3,258 |
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— |
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3,156 |
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— |
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Total |
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$ |
7,503 |
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$ |
— |
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$ |
7,227 |
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$ |
— |
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The Company also has variable interests in certain franchisees mainly through the guarantee of certain debt and lease agreements as well as financing provided by the Company and by certain related parties to franchisees. The Company’s maximum obligation, as a result of its guarantees of leases and debt, is approximately $1,132 and $1,350 as of June 30, 2017 and December 31, 2016, respectively.
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 anticipated to be incurred from the Company’s involvement with these entities, which is estimated at $0.
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(4) Goodwill and intangible assets
A summary of goodwill and intangible assets at June 30, 2017 and December 31, 2016 is as follows:
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Weighted |
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average |
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Gross |
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amortization |
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carrying |
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Accumulated |
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Net carrying |
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June 30, 2017 |
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period (years) |
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amount |
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amortization |
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Amount |
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Customer relationships |
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11.1 |
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$ |
171,782 |
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(79,671 |
) |
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$ |
92,111 |
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Noncompete agreements |
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5.0 |
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14,500 |
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(13,477 |
) |
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1,023 |
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Favorable leases |
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7.5 |
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2,935 |
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(1,824 |
) |
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1,111 |
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Order backlog |
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0.4 |
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3,400 |
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(3,400 |
) |
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— |
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Reacquired franchise rights |
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5.8 |
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8,950 |
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(5,058 |
) |
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3,892 |
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201,567 |
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(103,430 |
) |
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98,137 |
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Indefinite-lived intangible: |
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Trade and brand names |
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N/A |
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146,300 |
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— |
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146,300 |
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Total intangible assets |
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$ |
347,867 |
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$ |
(103,430 |
) |
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$ |
244,437 |
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Goodwill |
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$ |
176,981 |
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$ |
— |
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$ |
176,981 |
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Weighted |
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average |
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Gross |
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amortization |
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carrying |
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Accumulated |
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Net carrying |
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December 31, 2016 |
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period (years) |
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amount |
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amortization |
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Amount |
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Customer relationships |
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11.1 |
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$ |
171,782 |
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$ |
(72,655 |
) |
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$ |
99,127 |
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Noncompete agreements |
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5.0 |
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14,500 |
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(12,027 |
) |
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2,473 |
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Favorable leases |
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7.5 |
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2,935 |
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(1,643 |
) |
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1,292 |
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Order backlog |
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0.4 |
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3,400 |
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(3,400 |
) |
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— |
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Reacquired franchise rights |
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5.8 |
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8,950 |
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(4,280 |
) |
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4,670 |
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201,567 |
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(94,005 |
) |
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107,562 |
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Indefinite-lived intangible: |
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|
|
|
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Trade and brand names |
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N/A |
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146,300 |
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— |
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146,300 |
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Total intangible assets |
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$ |
347,867 |
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$ |
(94,005 |
) |
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$ |
253,862 |
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Goodwill |
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|
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$ |
176,981 |
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$ |
— |
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$ |
176,981 |
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The Company determined that no impairment charges were required during any periods presented.
Amortization expense related to the intangible assets totaled $4,710 and $4,940 for the three months ended June 30, 2017 and 2016, respectively, and $9,425 and $9,880 for the six months ended June 30, 2017 and 2016, respectively. Included within these total amortization expense amounts are $88 and $97 related to amortization of favorable and unfavorable leases for the three months ended June 30, 2017 and 2016, respectively, and $181 and $194 for the six months ended June 30, 2017 and 2016, respectively. Amortization of favorable and unfavorable leases is recorded within store operations as a component of rent expense in the consolidated statements of operations. The anticipated annual amortization expense to be recognized in future years as of June 30, 2017 is as follows:
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Amount |
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Remainder of 2017 |
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$ |
8,789 |
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2018 |
|
|
14,583 |
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2019 |
|
|
14,215 |
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2020 |
|
|
12,517 |
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2021 |
|
|
12,422 |
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Thereafter |
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|
35,611 |
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Total |
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$ |
98,137 |
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(5) Long-term debt
Long-term debt as of June 30, 2017 and December 31, 2016 consists of the following:
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June 30, 2017 |
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December 31, 2016 |
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Term loan B requires quarterly installments plus interest through the term of the loan, maturing March 31, 2021. Outstanding borrowings bear interest at LIBOR or base rate (as defined) plus a margin at the election of the borrower |
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|
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(4.25% at June 30, 2017 and 4.33% at December 31, 2016) |
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$ |
713,062 |
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$ |
716,654 |
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Revolving credit line, requires interest only payments through the term of the loan, maturing March 31, 2019. Outstanding borrowings bear interest at LIBOR or base rate (as defined) plus a margin at the election of the borrower |
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|
|
|
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(6.25% at June 30, 2017 and 6.00% December 31, 2016) |
|
|
— |
|
|
|
— |
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Total debt, excluding deferred financing costs |
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$ |
713,062 |
|
|
|
716,654 |
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Deferred financing costs, net of accumulated amortization |
|
|
(6,702 |
) |
|
|
(7,466 |
) |
Total debt |
|
|
706,360 |
|
|
|
709,188 |
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Current portion of long-term debt and line of credit |
|
|
7,185 |
|
|
|
7,185 |
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Long-term debt, net of current portion |
|
$ |
699,175 |
|
|
$ |
702,003 |
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On May 26, 2017, the Company amended the credit agreement governing its senior secured credit facility to reduce the applicable interest rate margin for term loan borrowings by 50 basis points, with an additional 25 basis point reduction in applicable interest rate possible in the future so long as the Total Net Leverage Ratio (as defined in the credit agreement) is less than 3.50 to 1.00. The amendment to the credit agreement also reduced the interest rate margin for revolving loan borrowings by 25 basis points. In connection with the amendment to the credit agreement, during the three months ended June 30, 2017, the Company capitalized deferred financing costs of $257, recorded expense of $1,021 related to certain third party fees included in other expense on the consolidated statement of operations, and a loss on extinguishment of debt of $79 included in interest expense on the consolidated statement of operations.
Future annual principal payments of long-term debt as of June 30, 2017 are as follows:
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Amount |
|
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Remainder of 2017 |
|
$ |
3,593 |
|
2018 |
|
|
7,185 |
|
2019 |
|
|
7,185 |
|
2020 |
|
|
7,185 |
|
2021 |
|
|
687,914 |
|
Total |
|
$ |
713,062 |
|
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(6) Derivative instruments and hedging activities
The Company utilizes 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.
By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is an asset, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is a liability, the Company owes the counterparty and, therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties whose credit rating is higher than A1/A+ at the inception of the derivative transaction. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features.
Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
The Company assesses interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company monitors interest rate risk attributable to both the Company’s outstanding or forecasted debt obligations as well as the Company’s offsetting hedge positions.
In order to manage the market risk arising from the outstanding term loans, the Company has entered into a series of interest rate caps. The Company entered into two additional interest rate caps effective March 31, 2017 and terminating on March 31, 2019 with variable notional amounts in order to hedge one month LIBOR greater than 2.5%. As of June 30, 2017, the Company had interest rate cap agreements with notional amounts of $194,000 outstanding that were entered into in order to hedge three month LIBOR greater than 1.5%, and interest rate cap agreements with notional amounts of $163,429 that were entered into in order to hedge one month LIBOR greater than 2.5%.
The interest rate cap balances of $220 and $306 were recorded within other assets in the condensed consolidated balance sheets as of June 30, 2017 and December 31, 2016, respectively. These amounts have been measured at fair value and are considered to be a Level 2 fair value measurement. The Company recorded an increase to the value of its interest rate caps of $180, net of tax of $89 and a reduction to the value of its interest rate caps of $79, net of tax of $15, within other comprehensive income (loss) during the three months ended June 30, 2017 and 2016, respectively, and an increase to the value of its interest rate caps of $356, net of tax of $145 and a reduction to the value of its interest rate caps of $662, net of tax of $128, within other comprehensive income (loss) during the six months ended June 30, 2017 and 2016, respectively.
As of June 30, 2017, the Company does not expect to reclassify any amounts included in accumulated other comprehensive income (loss) into earnings during the next 12 months. Transactions and events expected to occur over the next 12 months that could necessitate reclassifying these derivatives’ loss to earnings include the re-pricing of variable-rate debt.
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(7) Related party transactions
Amounts due from related parties of $2,925 and $2,864 as of June 30, 2017 and December 31, 2016, respectively, primarily relate to currently due or potential reimbursements for certain taxes accrued or paid by the Company (see Note 10).
Activity with entities considered to be related parties is summarized below:
|
|
For the three months ended June 30, |
|
|
|
For the six months ended June 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
|
2017 |
|
|
2016 |
|
||||
Franchise revenue |
|
$ |
382 |
|
|
$ |
412 |
|
|
|
$ |
830 |
|
|
$ |
833 |
|
Equipment revenue |
|
|
554 |
|
|
|
174 |
|
|
|
|
573 |
|
|
|
767 |
|
Total revenue from related parties |
|
$ |
936 |
|
|
$ |
586 |
|
|
|
$ |
1,403 |
|
|
$ |
1,600 |
|
Additionally, the Company had deferred area development agreement revenue from related parties of $258 and $422 as of June 30, 2017 and December 31, 2016, respectively.
As of June 30, 2017, the Company had $727,053 payable to related parties pursuant to tax benefit arrangements (see Note 10).
The Company provides administrative services to the Planet Fitness NAF, LLC (“NAF”) and charges NAF a fee for providing those services. These services include accounting services, information technology, data processing, product development, legal and administrative support, and other operating expenses, which amounted to $428 and $438 for the three months ended June 30, 2017 and 2016, respectively, and $1,001 and $875 for the six months ended June 30, 2017 and 2016, respectively.
|
(8) 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 by a Continuing LLC Owner of Holdings Units for shares of Class A common stock, 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 cancelled.
In March 2017, the Company completed the March Secondary Offering of 15,000,000 shares of its Class A common stock at a price of $20.44 per share. All of the shares sold in the March Secondary Offering were offered by certain existing holders of Holdings Units and the Direct TSG Investors. The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the participating holders of Holdings Units. The shares sold in the March Secondary Offering consisted of (i) 4,790,758 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 10,209,242 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the holders of Holdings Units that participated in the March Secondary Offering. Simultaneously, and in connection with the exchange, 10,209,242 shares of Class B common stock were surrendered by the holders of Holdings Units that participated in the March Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 10,209,242 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.
In May 2017, the Company completed the May Secondary Offering of 16,085,510 shares of its Class A common stock at a price of $20.28 per share. All of the shares sold in the May Secondary Offering were offered by certain existing holders of Holdings Units and the Direct TSG Investors. The Company did not receive any proceeds from the sale of shares of Class A common stock offered by the Direct TSG Investors and the participating holders of Holdings Units. The shares sold in the May Secondary Offering consisted of (i) 5,215,691 existing shares of Class A common stock held by the Direct TSG Investors and (ii) 10,869,819 newly-issued shares of Class A common stock issued in connection with the exercise of the exchange right by the holders of Holdings Units that participated in the May Secondary Offering. Simultaneously, and in connection with the exchange, 10,869,819 shares of Class B common stock were surrendered by the holders of Holdings Units that participated in the May Secondary Offering and canceled. Additionally, in connection with the exchange, Planet Fitness, Inc. received 10,869,819 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.
In addition to the March Secondary Offering and May Secondary Offering, during the six months ended June 30, 2017, certain existing holders of Holdings Units exercised their exchange rights and exchanged 3,254,455 Holdings Units for 3,254,455 newly-issued shares of Class A common stock. Simultaneously, and in connection with these exchanges, 3,254,455 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 3,254,455 Holdings Units, increasing its total ownership interest in Pla-Fit Holdings.
As a result of these transactions, as of June 30, 2017:
|
• |
Holders of our Class A common stock owned 85,648,906 shares of our Class A common stock, representing 87.1% of the voting power in the Company and, through the Company, 85,648,906 Holdings Units representing 87.1% of the economic interest in Pla-Fit Holdings; |
|
• |
the Continuing LLC Owners collectively owned 12,701,228 Holdings Units, representing 12.9% of the economic interest in Pla-Fit Holdings and 12,701,228 shares of our Class B common stock, representing 12.9% of the voting power in the Company. |
|
(10) 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 is also subject to taxes in foreign jurisdictions.
The Company incurs U.S. federal and state income taxes on its pro rata share of income flowed through from Pla-Fit Holdings. Our effective tax rate on such income was approximately 39.5% for the three and six months ended June 30, 2017 and 2016. The provision for income taxes also reflects an effective state tax rate of 2.0% for the three and six months ended June 30, 2017 and 2.1% for three and six months ended June 30, 2016, applied to non-controlling interests, representing the remaining percentage of income before taxes, excluding income from variable interest entities, related to Pla-Fit Holdings. Undistributed earnings of foreign operations were not material for the three and six months ended June 30, 2017 and 2016.
Net deferred tax assets of $737,953 and $410,407 as of June 30, 2017 and December 31, 2016, 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 IPO. As of June 30, 2017, the Company does not have any material net operating loss carryforwards.
As of June 30, 2017 and December 31, 2016, the total liability related to uncertain tax positions was $2,608. The Company recognizes interest accrued and penalties, if applicable, related to unrecognized tax benefits in income tax expense. As of June 30, 2017, the Company anticipates that the liability for unrecognized tax benefits could decrease by up to $2,608 within the next 12 months due to the expiration of certain statutes of limitation or the settlement of examinations or issues with tax authorities. Interest and penalties for the three and six months ended June 30, 2017 and 2016 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 sales 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 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.
In connection with the March Secondary Offering, May Secondary Offering, and related and other exchanges during the six months ended June 30, 2017, 24,333,516 Holdings Units were redeemed 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 that occurred in conjunction with the exchanges, we recorded a decrease to our net deferred tax assets of $22,479 during the six months ended June 30, 2017. As a result of these exchanges, during the six months ended June 30, 2017, we also recognized deferred tax assets in the amount of $364,839, and corresponding tax benefit arrangement liabilities of $316,432, representing 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 June 30, 2017 and December 31, 2016, the Company had a liability of $727,053 and $419,071, 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 2017 |
|
$ |
3,507 |
|
2018 |
|
|
29,972 |
|
2019 |
|
|
35,740 |
|
2020 |
|
|
35,503 |
|
2021 |
|
|
36,548 |
|
Thereafter |
|
|
585,783 |
|
Total |
|
$ |
727,053 |
|
|
(11) 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. The Company is not currently aware of any 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.
|
(12) 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 and the Dominican Republic. 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 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 six months ended June 30, 2017 and 2016. 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 June 30, |
|
|
Six months ended June 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise segment revenue - U.S. |
|
$ |
37,017 |
|
|
$ |
29,143 |
|
|
$ |
73,445 |
|
|
$ |
56,373 |
|
Franchise segment revenue - International |
|
|
777 |
|
|
|
336 |
|
|
|
1,146 |
|
|
|
783 |
|
Franchise segment total |
|
|
37,794 |
|
|
|
29,479 |
|
|
|
74,591 |
|
|
|
57,156 |
|
Corporate-owned stores - U.S. |
|
|
27,210 |
|
|
|
25,306 |
|
|
|
53,183 |
|
|
|
50,004 |
|
Corporate-owned stores - International |
|
|
1,075 |
|
|
|
1,077 |
|
|
|
2,143 |
|
|
|
2,076 |
|
Corporate-owned stores total |
|
|
28,285 |
|
|
|
26,383 |
|
|
|
55,326 |
|
|
|
52,080 |
|
Equipment segment - U.S. |
|
|
41,237 |
|
|
|
35,610 |
|
|
|
68,501 |
|
|
|
65,579 |
|
Equipment segment total |
|
|
41,237 |
|
|
|
35,610 |
|
|
|
68,501 |
|
|
|
65,579 |
|
Total revenue |
|
$ |
107,316 |
|
|
$ |
91,472 |
|
|
$ |
198,418 |
|
|
$ |
174,815 |
|
Franchise segment revenue includes franchise revenue and commission income.
Franchise revenue includes revenue generated from placement services of $2,871 and $2,653 for the three months ended June 30, 2017 and 2016, respectively, and $4,977 and $4,728 for the six months ended June 30, 2017 and 2016, respectively.
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Segment EBITDA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise |
|
$ |
32,487 |
|
|
$ |
24,682 |
|
|
$ |
64,519 |
|
|
$ |
48,494 |
|
Corporate-owned stores |
|
|
12,840 |
|
|
|
9,547 |
|
|
|
23,533 |
|
|
|
19,709 |
|
Equipment |
|
|
9,809 |
|
|
|
7,859 |
|
|
|
15,904 |
|
|
|
14,177 |
|
Corporate and other |
|
|
(9,925 |
) |
|
|
(6,739 |
) |
|
|
(17,057 |
) |
|
|
(13,324 |
) |
Total Segment EBITDA |
|
$ |
45,211 |
|
|
$ |
35,349 |
|
|
$ |
86,899 |
|
|
$ |
69,056 |
|
The following table reconciles total Segment EBITDA to income before taxes:
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Total Segment EBITDA |
|
$ |
45,211 |
|
|
$ |
35,349 |
|
|
$ |
86,899 |
|
|
$ |
69,056 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
7,894 |
|
|
|
7,678 |
|
|
|
15,845 |
|
|
|
15,382 |
|
Other (income) expense |
|
|
(933 |
) |
|
|
(160 |
) |
|
|
(251 |
) |
|
|
234 |
|
Income from operations |
|
|
38,250 |
|
|
|
27,831 |
|
|
|
71,305 |
|
|
|
53,440 |
|
Interest expense, net |
|
|
(9,028 |
) |
|
|
(6,161 |
) |
|
|
(17,791 |
) |
|
|
(12,528 |
) |
Other (income) expense |
|
|
(933 |
) |
|
|
(160 |
) |
|
|
(251 |
) |
|
|
234 |
|
Income before income taxes |
|
$ |
28,289 |
|
|
$ |
21,510 |
|
|
$ |
53,263 |
|
|
$ |
41,146 |
|
The following table summarizes the Company’s assets by reportable segment:
|
|
June 30, 2017 |
|
|
December 31, 2016 |
|
||
Franchise |
|
$ |
236,008 |
|
|
$ |
202,580 |
|
Corporate-owned stores |
|
|
151,389 |
|
|
|
153,761 |
|
Equipment |
|
|
185,252 |
|
|
|
208,809 |
|
Unallocated |
|
|
781,992 |
|
|
|
436,292 |
|
Total consolidated assets |
|
$ |
1,354,641 |
|
|
$ |
1,001,442 |
|
The table above includes $2,665 and $2,795 of long-lived assets located in the Company’s corporate-owned stores in Canada as of June 30, 2017 and December 31, 2016, respectively. All other assets are located in the U.S.
The following table summarizes the Company’s goodwill by reportable segment:
|
|
June 30, 2017 |
|
|
December 31, 2016 |
|
||
Franchise |
|
$ |
16,938 |
|
|
$ |
16,938 |
|
Corporate-owned stores |
|
|
67,377 |
|
|
|
67,377 |
|
Equipment |
|
|
92,666 |
|
|
|
92,666 |
|
Consolidated goodwill |
|
$ |
176,981 |
|
|
$ |
176,981 |
|
|
(13) Corporate-owned and franchisee-owned stores
The following table shows changes in our corporate-owned and franchisee-owned stores for the three and six months ended June 30, 2017 and 2016:
|
|
For the three months ended June 30, |
|
|
For the six months ended June 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Franchisee-owned stores: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores operated at beginning of period |
|
|
1,309 |
|
|
|
1,113 |
|
|
|
1,255 |
|
|
|
1,066 |
|
New stores opened |
|
|
37 |
|
|
|
36 |
|
|
|
91 |
|
|
|
84 |
|
Stores debranded or consolidated(1) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
Stores operated at end of period |
|
|
1,345 |
|
|
|
1,148 |
|
|
|
1,345 |
|
|
|
1,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate-owned stores: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores operated at beginning of period |
|
|
58 |
|
|
|
58 |
|
|
|
58 |
|
|
|
58 |
|
New stores opened |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stores operated at end of period |
|
|
58 |
|
|
|
58 |
|
|
|
58 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stores: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores operated at beginning of period |
|
|
1,367 |
|
|
|
1,171 |
|
|
|
1,313 |
|
|
|
1,124 |
|
New stores opened |
|
|
37 |
|
|
|
36 |
|
|
|
91 |
|
|
|
84 |
|
Stores debranded or consolidated(1) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
Stores operated at end of period |
|
|
1,403 |
|
|
|
1,206 |
|
|
|
1,403 |
|
|
|
1,206 |
|
(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. |
|
(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 six months ended June 30, 2017 and 2016 are unaudited. The condensed consolidated balance sheet as of December 31, 2016 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, 2016 (the “Annual Report”) filed with the SEC on March 6, 2017. 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, as a result of the recapitalization transactions, 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”) and PF Melville LLC (“PF Melville”) based on the determination that the Company is the primary beneficiary with respect to these VIEs. These entities 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.
(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, and the liability for the Company’s tax benefit arrangements.
(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 table below presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016:
|
|
|
|
|
|
Quoted |
|
|
Significant |
|
|
|
|
|
||
|
|
Total fair |
|
|
prices |
|
|
other |
|
|
Significant |
|
||||
|
|
value at |
|
|
in active |
|
|
observable |
|
|
unobservable |
|
||||
|
|
June 30, |
|
|
markets |
|
|
inputs |
|
|
inputs |
|
||||
|
|
2017 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
||||
Interest rate caps |
|
$ |
220 |
|
|
$ |
— |
|
|
$ |
220 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
Significant |
|
|
|
|
|
||
|
|
Total fair |
|
|
prices |
|
|
other |
|
|
Significant |
|
||||
|
|
value at |
|
|
in active |
|
|
observable |
|
|
unobservable |
|
||||
|
|
December 31, |
|
|
markets |
|
|
inputs |
|
|
inputs |
|
||||
|
|
2016 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
||||
Interest rate caps |
|
$ |
306 |
|
|
$ |
— |
|
|
$ |
306 |
|
|
$ |
— |
|
(d) Recent accounting pronouncements
The FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, in September 2014. This guidance requires that an entity recognize revenue to depict the transfer of a promised good or service to its customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for such transfer. This guidance also specifies accounting for certain costs incurred by an entity to obtain or fulfill a contract with a customer and provides for enhancements to revenue specific disclosures intended to allow users of the financial statements to clearly understand the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with its customers. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 for public companies. The Company expects to adopt this new guidance in fiscal year 2018 and is still evaluating the most appropriate transition method to be utilized. The Company expects the adoption of the new guidance to change the timing of recognition of area development agreement and initial franchise fees. Currently, these fees are generally recognized upfront upon either a store opening or upon execution of the property lease for an area development agreement, and upon execution of a lease and delivery of training for franchise fees. The new guidance will generally require these fees to be recognized over the contractual terms of the related franchise license. The Company does not currently expect this new guidance to materially impact the recognition of royalty income. The Company also expects the adoption of this new guidance to change the reporting of national advertising fund contributions from franchisees and the related national advertising fund expenditures, which are not currently included in the consolidated statements of operations. The Company expects the new guidance to require these advertising fund contributions and expenditures to be reported on a gross basis in the consolidated statements of operations. We expect this change to have a material impact to our total revenues and expenses. However, we expect such contributions and expenditures to be largely offsetting and are continuing to evaluate the impact on our reported net income. The Company is continuing to evaluate the impact the adoption of this new guidance will have on all revenue transactions.
The FASB issued ASU No. 2016-02, Leases, in February 2016. 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. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public companies. Early application of the amendments in this update is permitted for all entities. The Company anticipates that adoption of this guidance will bring all current operating leases onto the statement of financial position as a right of use asset and related rent liability, and is currently evaluating the effect that implementation of this guidance will have on its consolidated statement of operations.
The FASB issued ASU No. 2016-09, Stock Compensation, in March 2016. This guidance is intended to simplify several aspects of the accounting for share-based payment award transactions. This guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within that year. The Company has adopted the guidance as of January 1, 2017 on a modified retrospective basis, noting no material impact to the consolidated financial statements.
The FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, in August 2016. This guidance is intended to reduce diversity in practice of the classification of certain cash receipts and cash payments. This guidance will be effective for fiscal years beginning after December 15, 2017, including interim periods within that year. The Company does not expect the adoption of the standard to have a material impact on its consolidated financial statements.
The FASB issued ASU No. 2017-04, 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 table below presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016:
|
|
|
|
|
|
Quoted |
|
|
Significant |
|
|
|
|
|
||
|
|
Total fair |
|
|
prices |
|
|
other |
|
|
Significant |
|
||||
|
|
value at |
|
|
in active |
|
|
observable |
|
|
unobservable |
|
||||
|
|
June 30, |
|
|
markets |
|
|
inputs |
|
|
inputs |
|
||||
|
|
2017 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
||||
Interest rate caps |
|
$ |
220 |
|
|
$ |
— |
|
|
$ |
220 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
Significant |
|
|
|
|
|
||
|
|
Total fair |
|
|
prices |
|
|
other |
|
|
Significant |
|
||||
|
|
value at |
|
|
in active |
|
|
observable |
|
|
unobservable |
|
||||
|
|
December 31, |
|
|
markets |
|
|
inputs |
|
|
inputs |
|
||||
|
|
2016 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
||||
Interest rate caps |
|
$ |
306 |
|
|
$ |
— |
|
|
$ |
306 |
|
|
$ |
— |
|
|
The carrying values of VIEs included in the consolidated financial statements as of June 30, 2017 and December 31, 2016 are as follows:
|
|
June 30, 2017 |
|
|
December 31, 2016 |
|
||||||||||
|
|
Assets |
|
|
Liabilities |
|
|
Assets |
|
|
Liabilities |
|
||||
PF Melville |
|
$ |
4,245 |
|
|
$ |
— |
|
|
$ |
4,071 |
|
|
$ |
— |
|
MMR |
|
|
3,258 |
|
|
|
— |
|
|
|
3,156 |
|
|
|
— |
|
Total |
|
$ |
7,503 |
|
|
$ |
— |
|
|
$ |
7,227 |
|
|
$ |
— |
|
|
A summary of goodwill and intangible assets at June 30, 2017 and December 31, 2016 is as follows:
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average |
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
amortization |
|
carrying |
|
|
Accumulated |
|
|
Net carrying |
|
|||
June 30, 2017 |
|
period (years) |
|
amount |
|
|
amortization |
|
|
Amount |
|
|||
Customer relationships |
|
11.1 |
|
$ |
171,782 |
|
|
|
(79,671 |
) |
|
$ |
92,111 |
|
Noncompete agreements |
|
5.0 |
|
|
14,500 |
|
|
|
(13,477 |
) |
|
|
1,023 |
|
Favorable leases |
|
7.5 |
|
|
2,935 |
|
|
|
(1,824 |
) |
|
|
1,111 |
|
Order backlog |
|
0.4 |
|
|
3,400 |
|
|
|
(3,400 |
) |
|
|
— |
|
Reacquired franchise rights |
|
5.8 |
|
|
8,950 |
|
|
|
(5,058 |
) |
|
|
3,892 |
|
|
|
|
|
|
201,567 |
|
|
|
(103,430 |
) |
|
|
98,137 |
|
Indefinite-lived intangible: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and brand names |
|
N/A |
|
|
146,300 |
|
|
|
— |
|
|
|
146,300 |
|
Total intangible assets |
|
|
|
$ |
347,867 |
|
|
$ |
(103,430 |
) |
|
$ |
244,437 |
|
Goodwill |
|
|
|
$ |
176,981 |
|
|
$ |
— |
|
|
$ |
176,981 |
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average |
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
amortization |
|
carrying |
|
|
Accumulated |
|
|
Net carrying |
|
|||
December 31, 2016 |
|
period (years) |
|
amount |
|
|
amortization |
|
|
Amount |
|
|||
Customer relationships |
|
11.1 |
|
$ |
171,782 |
|
|
$ |
(72,655 |
) |
|
$ |
99,127 |
|
Noncompete agreements |
|
5.0 |
|
|
14,500 |
|
|
|
(12,027 |
) |
|
|
2,473 |
|
Favorable leases |
|
7.5 |
|
|
2,935 |
|
|
|
(1,643 |
) |
|
|
1,292 |
|
Order backlog |
|
0.4 |
|
|
3,400 |
|
|
|
(3,400 |
) |
|
|
— |
|
Reacquired franchise rights |
|
5.8 |
|
|
8,950 |
|
|
|
(4,280 |
) |
|
|
4,670 |
|
|
|
|
|
|
201,567 |
|
|
|
(94,005 |
) |
|
|
107,562 |
|
Indefinite-lived intangible: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and brand names |
|
N/A |
|
|
146,300 |
|
|
|
— |
|
|
|
146,300 |
|
Total intangible assets |
|
|
|
$ |
347,867 |
|
|
$ |
(94,005 |
) |
|
$ |
253,862 |
|
Goodwill |
|
|
|
$ |
176,981 |
|
|
$ |
— |
|
|
$ |
176,981 |
|
The anticipated annual amortization expense to be recognized in future years as of June 30, 2017 is as follows:
|
|
Amount |
|
|
Remainder of 2017 |
|
$ |
8,789 |
|
2018 |
|
|
14,583 |
|
2019 |
|
|
14,215 |
|
2020 |
|
|
12,517 |
|
2021 |
|
|
12,422 |
|
Thereafter |
|
|
35,611 |
|
Total |
|
$ |
98,137 |
|
|
Long-term debt as of June 30, 2017 and December 31, 2016 consists of the following:
|
|
June 30, 2017 |
|
|
December 31, 2016 |
|
||
Term loan B requires quarterly installments plus interest through the term of the loan, maturing March 31, 2021. Outstanding borrowings bear interest at LIBOR or base rate (as defined) plus a margin at the election of the borrower |
|
|
|
|
|
|
|
|
(4.25% at June 30, 2017 and 4.33% at December 31, 2016) |
|
$ |
713,062 |
|
|
$ |
716,654 |
|
Revolving credit line, requires interest only payments through the term of the loan, maturing March 31, 2019. Outstanding borrowings bear interest at LIBOR or base rate (as defined) plus a margin at the election of the borrower |
|
|
|
|
|
|
|
|
(6.25% at June 30, 2017 and 6.00% December 31, 2016) |
|
|
— |
|
|
|
— |
|
Total debt, excluding deferred financing costs |
|
$ |
713,062 |
|
|
|
716,654 |
|
Deferred financing costs, net of accumulated amortization |
|
|
(6,702 |
) |
|
|
(7,466 |
) |
Total debt |
|
|
706,360 |
|
|
|
709,188 |
|
Current portion of long-term debt and line of credit |
|
|
7,185 |
|
|
|
7,185 |
|
Long-term debt, net of current portion |
|
$ |
699,175 |
|
|
$ |
702,003 |
|
Future annual principal payments of long-term debt as of June 30, 2017 are as follows:
|
|
Amount |
|
|
Remainder of 2017 |
|
$ |
3,593 |
|
2018 |
|
|
7,185 |
|
2019 |
|
|
7,185 |
|
2020 |
|
|
7,185 |
|
2021 |
|
|
687,914 |
|
Total |
|
$ |
713,062 |
|
|
Activity with entities considered to be related parties is summarized below:
|
|
For the three months ended June 30, |
|
|
|
For the six months ended June 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
|
2017 |
|
|
2016 |
|
||||
Franchise revenue |
|
$ |
382 |
|
|
$ |
412 |
|
|
|
$ |
830 |
|
|
$ |
833 |
|
Equipment revenue |
|
|
554 |
|
|
|
174 |
|
|
|
|
573 |
|
|
|
767 |
|
Total revenue from related parties |
|
$ |
936 |
|
|
$ |
586 |
|
|
|
$ |
1,403 |
|
|
$ |
1,600 |
|
|
Projected future payments under the tax benefit arrangements are as follows:
|
|
Amount |
|
|
Remainder of 2017 |
|
$ |
3,507 |
|
2018 |
|
|
29,972 |
|
2019 |
|
|
35,740 |
|
2020 |
|
|
35,503 |
|
2021 |
|
|
36,548 |
|
Thereafter |
|
|
585,783 |
|
Total |
|
$ |
727,053 |
|
|
The tables below summarize the financial information for the Company’s reportable segments for the three and six months ended June 30, 2017 and 2016.
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise segment revenue - U.S. |
|
$ |
37,017 |
|
|
$ |
29,143 |
|
|
$ |
73,445 |
|
|
$ |
56,373 |
|
Franchise segment revenue - International |
|
|
777 |
|
|
|
336 |
|
|
|
1,146 |
|
|
|
783 |
|
Franchise segment total |
|
|
37,794 |
|
|
|
29,479 |
|
|
|
74,591 |
|
|
|
57,156 |
|
Corporate-owned stores - U.S. |
|
|
27,210 |
|
|
|
25,306 |
|
|
|
53,183 |
|
|
|
50,004 |
|
Corporate-owned stores - International |
|
|
1,075 |
|
|
|
1,077 |
|
|
|
2,143 |
|
|
|
2,076 |
|
Corporate-owned stores total |
|
|
28,285 |
|
|
|
26,383 |
|
|
|
55,326 |
|
|
|
52,080 |
|
Equipment segment - U.S. |
|
|
41,237 |
|
|
|
35,610 |
|
|
|
68,501 |
|
|
|
65,579 |
|
Equipment segment total |
|
|
41,237 |
|
|
|
35,610 |
|
|
|
68,501 |
|
|
|
65,579 |
|
Total revenue |
|
$ |
107,316 |
|
|
$ |
91,472 |
|
|
$ |
198,418 |
|
|
$ |
174,815 |
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Segment EBITDA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise |
|
$ |
32,487 |
|
|
$ |
24,682 |
|
|
$ |
64,519 |
|
|
$ |
48,494 |
|
Corporate-owned stores |
|
|
12,840 |
|
|
|
9,547 |
|
|
|
23,533 |
|
|
|
19,709 |
|
Equipment |
|
|
9,809 |
|
|
|
7,859 |
|
|
|
15,904 |
|
|
|
14,177 |
|
Corporate and other |
|
|
(9,925 |
) |
|
|
(6,739 |
) |
|
|
(17,057 |
) |
|
|
(13,324 |
) |
Total Segment EBITDA |
|
$ |
45,211 |
|
|
$ |
35,349 |
|
|
$ |
86,899 |
|
|
$ |
69,056 |
|
The following table reconciles total Segment EBITDA to income before taxes:
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Total Segment EBITDA |
|
$ |
45,211 |
|
|
$ |
35,349 |
|
|
$ |
86,899 |
|
|
$ |
69,056 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
7,894 |
|
|
|
7,678 |
|
|
|
15,845 |
|
|
|
15,382 |
|
Other (income) expense |
|
|
(933 |
) |
|
|
(160 |
) |
|
|
(251 |
) |
|
|
234 |
|
Income from operations |
|
|
38,250 |
|
|
|
27,831 |
|
|
|
71,305 |
|
|
|
53,440 |
|
Interest expense, net |
|
|
(9,028 |
) |
|
|
(6,161 |
) |
|
|
(17,791 |
) |
|
|
(12,528 |
) |
Other (income) expense |
|
|
(933 |
) |
|
|
(160 |
) |
|
|
(251 |
) |
|
|
234 |
|
Income before income taxes |
|
$ |
28,289 |
|
|
$ |
21,510 |
|
|
$ |
53,263 |
|
|
$ |
41,146 |
|
The following table summarizes the Company’s assets by reportable segment:
|
|
June 30, 2017 |
|
|
December 31, 2016 |
|
||
Franchise |
|
$ |
236,008 |
|
|
$ |
202,580 |
|
Corporate-owned stores |
|
|
151,389 |
|
|
|
153,761 |
|
Equipment |
|
|
185,252 |
|
|
|
208,809 |
|
Unallocated |
|
|
781,992 |
|
|
|
436,292 |
|
Total consolidated assets |
|
$ |
1,354,641 |
|
|
$ |
1,001,442 |
|
The following table summarizes the Company’s goodwill by reportable segment:
|
|
June 30, 2017 |
|
|
December 31, 2016 |
|
||
Franchise |
|
$ |
16,938 |
|
|
$ |
16,938 |
|
Corporate-owned stores |
|
|
67,377 |
|
|
|
67,377 |
|
Equipment |
|
|
92,666 |
|
|
|
92,666 |
|
Consolidated goodwill |
|
$ |
176,981 |
|
|
$ |
176,981 |
|
|
The following table shows changes in our corporate-owned and franchisee-owned stores for the three and six months ended June 30, 2017 and 2016:
|
|
For the three months ended June 30, |
|
|
For the six months ended June 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Franchisee-owned stores: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores operated at beginning of period |
|
|
1,309 |
|
|
|
1,113 |
|
|
|
1,255 |
|
|
|
1,066 |
|
New stores opened |
|
|
37 |
|
|
|
36 |
|
|
|
91 |
|
|
|
84 |
|
Stores debranded or consolidated(1) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
Stores operated at end of period |
|
|
1,345 |
|
|
|
1,148 |
|
|
|
1,345 |
|
|
|
1,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate-owned stores: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores operated at beginning of period |
|
|
58 |
|
|
|
58 |
|
|
|
58 |
|
|
|
58 |
|
New stores opened |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stores operated at end of period |
|
|
58 |
|
|
|
58 |
|
|
|
58 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stores: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores operated at beginning of period |
|
|
1,367 |
|
|
|
1,171 |
|
|
|
1,313 |
|
|
|
1,124 |
|
New stores opened |
|
|
37 |
|
|
|
36 |
|
|
|
91 |
|
|
|
84 |
|
Stores debranded or consolidated(1) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
Stores operated at end of period |
|
|
1,403 |
|
|
|
1,206 |
|
|
|
1,403 |
|
|
|
1,206 |
|
(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. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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