Unless the context requires otherwise, references in this report to the
"Company," "we," "us" and "our" refer to
Discussions of fiscal 2020 items and year-to-year comparisons between fiscal 2021 and fiscal 2020 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our annual report on Form 10-K for the fiscal year endedDecember 31, 2021 .
Overview
We are one of the largest and fastest-growing franchisors and operators of fitness centers in the world by number of members and locations, with a highly recognized national brand. Our mission is to enhance people's lives and democratize fitness by providing a high-quality fitness experience in a welcoming, non-intimidating environment, which we call theJudgement Free Zone , where anyone-and we mean anyone-can feel they belong. Our bright, clean stores are typically 20,000 square feet, with a large selection of high-quality, purple and yellowPlanet Fitness -branded cardio, circuit- and weight-training equipment and friendly staff trainers who offer unlimited free fitness instruction to all our members in small groups through our PE@PF program. We offer this differentiated fitness experience at only$10 per month for our standard membership. This exceptional value proposition is designed to appeal to a broad population, including occasional gym users and the approximately 80% of theU.S. and Canadian populations over age 14 who are not gym members, particularly those who find the traditional fitness club setting intimidating and expensive. We and our franchisees fiercely protectPlanet Fitness' community atmosphere-a place where you do not need to be fit before joining and where progress toward achieving your fitness goals (big or small) is supported and applauded by our staff and fellow members. As ofDecember 31, 2022 , we had approximately 17.0 million members and 2,410 stores in 50 states, theDistrict of Columbia ,Puerto Rico ,Canada ,Panama ,Mexico andAustralia . Of our 2,410 stores, 2,176 were franchised and 234 were corporate-owned.
As of
COVID-19 Impact The COVID-19 pandemic has caused unprecedented economic volatility and uncertainty, which negatively impacted our operating results. Compared to the periods prior toMarch 2020 , we have experienced and may continue to experience decreased new store development and reduced equipment revenue as a result of the COVID-19 pandemic, especially during 2020 and 2021.
As stores reopened we have recognized franchise revenue and corporate-owned store revenue associated with any membership dues collected prior to temporary store closures. We may have to defer revenue in the future if stores are required to re-close.
The duration of the COVID-19 pandemic and the extent of its impact on our business remains uncertain and difficult to predict. The COVID-19 pandemic may continue to negatively impact our operating results in future periods. As a result of the COVID-19 pandemic, we experienced a decrease in our net membership base during 2020 and 2021 compared to membership levels inMarch 2020 . In 2022, the Company surpassed its previous membership all-time high from March of 2020. Despite these record membership levels, however, it is possible that the COVID-19 pandemic may have an ongoing impact on consumer behavior.
Composition of Revenues, Expenses and Cash Flows
Revenues
We generate revenue from three primary sources:
•Franchise segment revenue: Franchise segment revenue relates to services we provide to support our franchisees and includes royalty revenue, NAF revenue, franchise fees, placement revenue, online join fees and other fees associated with our franchisee-owned stores. Franchise segment revenue generally does not include the sale of tangible products by us to our franchisees. Our franchise segment revenue comprised 35%, 50% and 51% of our total revenue for the years endedDecember 31, 2022 , 2021 and 2020, respectively. •Corporate-owned store segment revenue: Includes monthly membership dues, enrollment fees, annual fees and prepaid fees paid by our members as well as retail sales. This source of revenue comprised 41%, 28%, and 29% of our total revenue for the years endedDecember 31, 2022 , 2021 and 2020, respectively. As ofDecember 31, 2022 , over 90% of our members paid their monthly dues by EFT, while the remainder prepaid annually in advance. 45 -------------------------------------------------------------------------------- •Equipment segment revenue: Includes equipment revenue for new franchisee-owned stores as well as replacement equipment for existing franchisee-owned stores, in theU.S. ,Canada andMexico . Franchisee-owned stores are generally required to replace their equipment every five to seven years. This source of revenue comprised 24%, 22% and 20% of our total revenue for the years endedDecember 31, 2022 , 2021 and 2020, respectively.
See Item 8: Financial Statements and Supplementary Data - Note 2(e) for further discussion on our revenue streams and revenue recognition policies.
Expenses
We primarily incur the following expenses:
•Cost of revenue: Primarily includes the direct costs associated with equipment
sales to new and existing franchisee-owned stores in the
•Store operations: Includes the direct costs associated with our corporate-owned stores, primarily rent, utilities, payroll, marketing, maintenance and supplies. The components of store operations remain relatively stable for each store. Our statements of operations do not include, and we are not responsible for, any costs associated with operating franchisee-owned stores. •Selling, general and administrative expenses: Consists of costs associated with administrative, corporate-owned store and franchisee support functions related to our existing business as well as growth and development activities, including certain costs to support equipment placement and assembly services. These costs primarily consist of payroll, IT-related, marketing, legal and accounting expenses. •NAF Expense: Consists of expenses incurred on behalf of the NAF. The use of amounts received by the NAF is restricted to advertising, product development, public relations, merchandising, and administrative expenses and programs to increase sales and further enhance the public reputation of the Planet Fitness brand. Cash flows We generate a significant portion of our cash flows from monthly and annual membership dues, royalties, NAF revenue and various fees related to transactions involving our franchisee-owned stores. We oversee the membership billing process, as well as the collection of our royalties, NAF revenue and certain other fees, through our third-party hosted point-of-sale systems inthe United States andCanada . We collect monthly dues from our corporate-owned store members on or around the 17th of each month, while annual fees are collected on or around the 1st day of the second month following the month in which the membership agreement was signed, provided our stores are open. Through our point-of-sale system, inthe United States andCanada , we oversee the processing of membership billings for franchisee-owned stores. Our royalties and certain other fees are generally deducted on or around the 17th of each month from these membership billings by the processor prior to the net billings being remitted to the franchisees, although our billing and collection practices vary in certain international markets. Our franchisees are responsible for maintaining the membership billing records and collection of member dues for their respective stores through the point-of-sale system. Our royalties are based on monthly and annual membership billings for the franchisee-owned stores without regard to the collections of those billings by our franchisees. The amount and timing of the collection of royalties and membership dues and fees at corporate-owned stores is, therefore, generally fairly predictable. Our corporate-owned stores also historically generate strong operating margins and cash flows, as a significant portion of our costs are fixed or semi-fixed such as rent and labor.
Equipment sales to new and existing franchisee-owned stores also generate significant cash flows. Franchisees generally either pay in advance or provide evidence of a committed financing arrangement for such equipment.
Each of these cash flows have been negatively impacted, we believe temporarily, by the COVID-19 pandemic, particularly during 2020 and 2021.
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Recent Transactions
Securitized Financing Facility
OnFebruary 10, 2022 , we completed the Series 2022-1 Issuance pursuant to which the Master Issuer issued the 2022 Notes in an aggregate outstanding principal amount of$900 million . In connection with such Series 2022-1 Issuance, the Master Issuer repaid the outstanding principal amount (and all accrued and unpaid interest thereon) of the Class A-2-I Notes, and the Master Issuer also entered into a new revolving financing facility that allows for the issuance of up to$75 million in 2022 Variable Funding Notes and certain Letters of Credit. OnFebruary 10, 2022 , we borrowed in the full amount of the$75 million 2022 Variable Funding Notes and used such proceeds to repay the outstanding principal amount (together with all accrued and unpaid interest thereon) of the 2018 Variable Funding Notes in full, and subsequently repaid the 2022 Variable Funding Notes in full onMay 9, 2022 . See Note 11 to the consolidated financial statements. Sunshine Acquisition OnFebruary 10, 2022 , the Company andPla-Fit Holdings acquired 100% of the equity interests of franchiseeSunshine Fitness , which operated 114 locations inAlabama ,Florida ,Georgia ,North Carolina , andSouth Carolina . The purchase price of the acquisition was$824.6 million consisting of$430.9 million in cash consideration, and$393.7 million of equity consideration. See Note 5 to the consolidated financial statements.
Sale of Corporate-owned Stores
OnAugust 31, 2022 , the Company sold 6 corporate-owned stores located inColorado to a franchisee for$20.8 million . The net value of assets derecognized in connection with the sale amounted to$19.5 million , which included goodwill of$14.4 million , intangible assets of$2.6 million , and net tangible assets of$2.4 million , which resulted in a gain on sale of corporate-owned stores of$1.3 million . See Note 6 to the consolidated financial statements.
Share repurchase programs
2019 share repurchase program
On
OnDecember 4, 2019 , the Company entered into a$300.0 million accelerated share repurchase agreement (the "2019 ASR Agreement") withJPMorgan Chase Bank, N.A . ("JPMC"). Pursuant to the terms of the 2019 ASR Agreement, onDecember 5, 2019 , the Company paid JPMC$300.0 million upfront in cash and received 3,289,924 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$240.0 million . Final settlement of the ASR Agreement occurred onMarch 2, 2020 . At final settlement, JPMC delivered 666,961 additional shares of the Company's Class A common stock, based on a weighted average cost per share of$75.82 over the term of the 2019 ASR Agreement, which were retired. This was evaluated as an unsettled forward contract indexed to our own stock, with$60.0 million classified as a reduction to retained earnings at the original date of payment. During the year endedDecember 31, 2022 , the Company purchased 1,528,720 shares of Class A common stock for a total cost of$94.3 million . All purchased shares were retired. Subsequent to these repurchases, there was$105.7 million remaining under the 2019 share repurchase program.
2022 share repurchase program
On
The timing of purchases and amount of stock repurchased will be subject to the Company's discretion and will depend on market and business conditions, the Company's general working capital needs, stock price, applicable legal requirements and other factors. Our ability to repurchase shares at any particular time is also subject to the terms of the Indenture governing the Securitized Senior Notes. Purchases may be effected through one or more open market transactions, privately negotiated transactions, transactions structured through investment banking institutions, or a combination of the foregoing.
Seasonality
Prior to the COVID-19 pandemic, our results were subject to seasonality fluctuations in that member joins are typically higher in January as compared to other months of the year. In addition, our quarterly results may fluctuate significantly because of several factors, including the timing of store openings, timing of price increases for enrollment fees and monthly membership dues and general economic conditions. The seasonality of our membership growth in 2020 and 2021 was meaningfully different than our historical patterns. We believe this was primarily a result of the COVID-19 pandemic, and 2022 returned to a pattern more consistent with years prior to the COVID-19 pandemic. 47
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Our Segments
We operate and manage our business in three business segments: Franchise, Corporate-owned stores and Equipment. Our Franchise segment includes operations related to our franchising business inthe United States ,Puerto Rico ,Canada ,Panama ,Mexico andAustralia , as well as revenues and expenses of the NAF. Our Corporate-owned stores segment includes operations with respect to all corporate-owned stores throughoutthe United States andCanada . The Equipment segment includes the sale of equipment to franchisee-owned stores in theU.S ,Canada andMexico . We evaluate the performance of our segments and allocate resources to them based on revenue and earnings before interest, taxes, depreciation and amortization, referred to as Segment EBITDA. Revenue and Segment EBITDA for all operating segments include only transactions with unaffiliated customers and do not include intersegment transactions. The tables below summarize the financial information for our segments for the years endedDecember 31, 2022 , 2021 and 2020. "Corporate and other," as it relates to Segment EBITDA, primarily includes corporate overhead costs, such as payroll and related benefit costs and professional services that are not directly attributable to any individual segment. Year Ended December 31, 2022 2021 2020 (in thousands) Revenue Franchise segment$ 329,634 $ 290,710 $ 206,156
Corporate-owned stores segment 379,393 167,219 117,142 Equipment segment
227,745 129,094 83,320 Total revenue$ 936,772 $ 587,023 $ 406,618 Segment EBITDA Franchise segment$ 216,817 $ 194,303 $ 114,968 Corporate-owned stores segment 142,083 49,196 23,672 Equipment segment 59,082 29,680 13,097 Corporate and other (49,366) (78,265) (33,242) Total Segment EBITDA(1)$ 368,616 $ 194,914 $ 118,495
(1)Total Segment EBITDA is equal to EBITDA, which is a metric that is not presented in accordance with GAAP. Refer to "-Non-GAAP Financial Measures" for a definition of EBITDA and a reconciliation to net income, the most directly comparable GAAP measure.
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A reconciliation of income from operations to Segment EBITDA is set forth below: Corporate-owned Corporate and (in thousands) Franchise stores Equipment other Total Year EndedDecember 31, 2022 Income (loss) from operations$ 209,182 $ 47,779$ 54,039 $ (80,922) $ 230,078 Depreciation and amortization 7,411 94,297 5,044 17,270 124,022 Other income (expense) 224 7 (1) 14,753 14,983 Equity earnings (losses) of unconsolidated entities, net of tax - - - (467) (467) Segment EBITDA(1)$ 216,817 $ 142,083 $ 59,082 $ (49,366) $ 368,616 Year EndedDecember 31, 2021 Income (loss) from operations$ 186,767 $ 13,375$ 24,746 $ (81,493) $ 143,395 Depreciation and amortization 7,540 35,811 5,044 14,405 62,800 Other income (expense) (4) 10 (110) (10,998) (11,102) Equity earnings (losses) of unconsolidated entities, net of tax - - - (179) (179) Segment EBITDA(1)$ 194,303 $ 49,196$ 29,680 $ (78,265) $ 194,914 Year EndedDecember 31, 2020 Income (loss) from operations$ 107,254 $ (6,209)$ 8,049 $ (49,334) $ 59,760 Depreciation and amortization 7,784 30,532 5,048 10,468 53,832 Other income (expense) (70) (651) - 5,624 4,903 Segment EBITDA(1)$ 114,968 $ 23,672$ 13,097 $ (33,242) $ 118,495
(1)Total Segment EBITDA is equal to EBITDA, which is a metric that is not presented in accordance with GAAP. Refer to "-Non-GAAP Financial Measures" for a definition of EBITDA and a reconciliation to net income, the most directly comparable GAAP measure.
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How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how our business is performing include total monthly dues and annual fees from members (which we refer to as system-wide sales), the number of new store openings, same store sales for both corporate-owned and franchisee-owned stores, average royalty fee percentages for franchisee-owned stores, monthly PF Black Card membership penetration percentage, EBITDA, Adjusted EBITDA, Segment EBITDA, four-wall EBITDA, royalty adjusted four-wall EBITDA, Adjusted net income, and Adjusted net income per share, diluted. See "-Non-GAAP Financial Measures" below for our definition of EBITDA, Adjusted EBITDA, four-wall EBITDA, royalty adjusted four-wall EBITDA, Adjusted net income, and Adjusted net income per share, diluted and why we present EBITDA, Adjusted EBITDA, four-wall EBITDA, royalty-adjusted four-wall EBITDA, Adjusted net income, and Adjusted net income per share, diluted, and for a reconciliation of our EBITDA, Adjusted EBITDA, and Adjusted net income to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, and a reconciliation of Adjusted net income per share, diluted to net income per share, diluted, the most directly comparable financial measure calculated in accordance with GAAP.
Total monthly dues and annual fees from members (system-wide sales)
We review the total amount of dues we collect from our members on a monthly basis, which allows us to assess changes in the performance of our corporate-owned and franchisee-owned stores from period to period, any competitive pressures, local or regional membership traffic patterns and general market conditions that might impact our store performance. System-wide sales is an operating measure that includes monthly membership dues and annual fee billings by franchisees that are not revenue realized by the Company in accordance with GAAP, as well as monthly membership dues and annual fee billings by the Company's corporate-owned stores. While the Company does not record sales by franchisees as revenue, and such sales are not included in the Company's consolidated financial statements, the Company believes that this operating measure aids in understanding how the Company derives its royalty revenue and is important in evaluating its performance. Provided our stores are open, we bill monthly dues on or around the 17th of every month and bill annual fees once per year from each member based upon when the member signed his or her membership agreement. System-wide sales were$3.9 billion ,$3.4 billion and$2.4 billion , during the years endedDecember 31, 2022 , 2021 and 2020, respectively.
Number of new store openings
The number of new store openings reflects stores opened during a particular reporting period for both corporate-owned and franchisee-owned stores. Opening new stores is an important part of our growth strategy and we expect the majority of our future new stores will be franchisee-owned. Before we obtain the certificate of occupancy or report any revenue for new corporate-owned stores, we incur pre-opening costs, such as rent expense, labor expense and other operating expenses. Our stores open with an initial start-up period requirement of higher than normal marketing spend and operating expenses may also be higher, particularly as a percentage of monthly revenue. New stores may not be profitable and their revenue may not follow historical patterns. The following table shows the growth in our corporate-owned and franchisee-owned store base for the years endedDecember 31, 2022 , 2021 and 2020: 50 --------------------------------------------------------------------------------
Year Ended December 31, 2022 2021 2020 Franchisee-owned stores: Stores operated at beginning of period 2,142 2,021
1,903
New stores opened 144 125 125 Stores acquired from the Company 6 - - Stores debranded, sold or consolidated(1) (116) (4) (7) Stores operated at end of period(2) 2,176 2,142
2,021
Corporate-owned stores: Stores operated at beginning of period 112 103 98 New stores opened 14 7 5 Stores sold to franchisees (6) - - Stores acquired from franchisees 114 2 - Stores operated at end of period(2) 234 112 103 Total stores: Stores operated at beginning of period 2,254 2,124
2,001
New stores opened 158 132 130 Stores debranded, sold or consolidated(1) (2) (2) (7) Stores operated at end of period(2) 2,410 2,254
2,124
(1)The term "debranded" 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. (2)The "stores operated" includes stores that have closed temporarily related to the COVID-19 pandemic. All stores were closed inMarch 2020 in response to the COVID-19 pandemic, and as ofDecember 31, 2022 , all 2,410 were re-opened and operating. Same store sales Same store sales refers to year-over-year sales comparisons for the same store sales base of both corporate-owned and franchisee-owned stores. We define the same store sales base to include those stores that have been open and for which monthly membership dues have been billed for longer than 12 months. We measure same store sales based solely upon monthly dues billed to members of our corporate-owned and franchisee-owned stores.
Several factors affect our same store sales in any given period, including the following:
•the number of stores that have been in operation for more than 12 months;
•the percentage mix and pricing of PF Black Card and standard memberships in any period;
•growth in total net memberships per store;
•consumer recognition of our brand and our ability to respond to changing consumer preferences;
•overall economic trends, particularly those related to consumer spending;
•our and our franchisees' ability to operate stores effectively and efficiently to meet consumer expectations;
•marketing and promotional efforts;
•local competition;
•trade area dynamics; and
•opening of new stores in the vicinity of existing locations.
Consistent with common industry practice, we present same store sales as compared to the same period in the prior year for all stores that have been open and for which monthly membership dues have been billed for longer than 12 months, beginning with the thirteenth month and thereafter, as applicable. Same store sales of our international stores are calculated on a constant currency basis, meaning that we translate the current year's same store sales of our international stores at the same exchange rates used in the prior year. Since opening new stores will be a significant component of our revenue growth, same store sales is only one measure of how we evaluate our performance. 51 -------------------------------------------------------------------------------- Stores acquired from or sold to franchisees are removed from the franchisee-owned or corporate-owned same store sales base, as applicable, upon the ownership change and for the twelve months following the date of the ownership change. These stores are included in the corporate-owned or franchisee-owned same store sales base, as applicable, following the twelfth month after the acquisition or sale. These stores remain in the system-wide same store sales base in all periods. We report same store sales for a given period as long as more than 50% of the stores in our same store sales base were open for every month in both the current period and corresponding prior year period. All of our stores were closed for a portion of the year endedDecember 31, 2020 due to the COVID-19 pandemic. Because none of our stores in the same store sales base billed monthly membership dues in all of the months included in the year endedDecember 31, 2020 , we are not providing same store sales comparisons ("NC") for the years endedDecember 31, 2021 and 2020. The following table shows our same store sales for the years endedDecember 31, 2022 , 2021 and 2020: Year Ended December 31, 2022 2021 2020 Same store sales growth: Franchisee-owned stores 11.2 % NC NC Corporate-owned stores 13.1 % NC NC System-wide stores 11.4 % NC NC Number of stores in same store sales base: Franchisee-owned stores 2,004 Corporate-owned stores 104 Total stores 2,226 Net member growth per store Net member growth per store refers to the net change in total members in relation to total stores over time. We capture all membership changes daily through our point-of-sale system. We monitor a combination of membership growth, average members per store, average monthly EFT and transfers from or to an individual store location. We seek to make it simple for members to join, whether online, through our mobile application or in-store, and, while some memberships require a cancellation fee, we offer, and require our franchisees to offer, a non-committal membership option. This approach to memberships is part of our commitment to appeal to new and occasional gym users. As a result, we do not rely upon membership attrition as an operating metric in assessing our performance. We primarily attribute our membership growth to the continued net member growth in existing stores as well as the growth of our system-wide store base.
Average royalty fee percentages for the franchisee-owned stores
The average royalty fee percentage represents royalties collected by us from our franchisees as a percentage of the monthly membership dues and annual fees that are billed by the franchisees to their member base. We have varying royalty fee structures with our franchisee base, ranging from a tiered monthly fee to a royalty of 7.0% of total monthly EFT and annual membership fees across our franchisee base. Our royalty fee in theU.S. andCanada has increased over time to a current rate of 7.0% and 6.59%, respectively, for new franchisees.
PF Black Card penetration percentage
Our PF Black Card penetration percentage represents the number of our members that have opted to enroll in our PF Black Card membership program as a percentage of our total active membership base. PF Black Card members pay higher monthly membership dues than our standard membership and receive additional benefits for these additional fees. These benefits include access to all of our stores system-wide, guest privileges and access to exclusive areas in our stores that provide amenities such as water massage beds, massage chairs, tanning equipment and more. We view PF Black Card penetration percentage as a critical metric in assessing the performance and growth of our business.
Non-GAAP Financial Measures
We refer to EBITDA, Adjusted EBITDA, four-wall EBITDA and royalty adjusted four-wall EBITDA as we use these measures to evaluate our operating performance and we believe these measures are useful to investors in evaluating our performance. EBITDA, Adjusted EBITDA, four-wall EBITDA and royalty adjusted four-wall EBITDA as presented in this Form 10-K are supplemental measures of our performance that are neither required by, nor presented in accordance with GAAP. EBITDA, Adjusted EBITDA, four-wall EBITDA and royalty adjusted four-wall EBITDA should not be considered as substitutes for 52 -------------------------------------------------------------------------------- GAAP metrics such as net income or any other performance measures derived in accordance with GAAP. Also, in the future we may incur expenses or charges such as those added back to calculate Adjusted EBITDA. Our presentation of EBITDA, Adjusted EBITDA, four-wall EBITDA and royalty adjusted four-wall EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. We have also disclosed Segment EBITDA as an important financial metric utilized by the Company to evaluate performance and allocate resources to segments in accordance with ASC 280, Segment Reporting. As part of such disclosure in "Our Segments" within Management's Discussion and Analysis of Financial Condition and Results of Operations, the Company has provided a reconciliation from income from operations to Total Segment EBITDA, which is equal to the Non-GAAP financial metric EBITDA. We define EBITDA as net income before interest, taxes, depreciation and amortization. We believe that EBITDA, which eliminates the impact of certain expenses that we do not believe reflect our underlying business performance, provides useful information to investors to assess the performance of our segments as well as the business as a whole. Our Board of Directors also uses EBITDA as a key metric to assess the performance of management. We define Adjusted EBITDA as EBITDA, adjusted for the impact of certain non-cash and other items that we do not consider in our evaluation of ongoing performance of the Company's core operations. These items include certain purchase accounting adjustments, transaction fees, stock offering-related costs, severance expense and certain other charges and gains. We believe that Adjusted EBITDA is an appropriate measure of operating performance in addition to EBITDA because it eliminates the impact of other items that we believe reduce the comparability of our underlying core business performance from period to period and is therefore useful to our investors in comparing the core performance of our business from period to period. Four-wall EBITDA is an assessment of our average corporate-owned store-level profitability for stores included in the same-store-sales base, which includes local and national advertising expense and adjusts for certain administrative and other items that we do not consider in our evaluation of individual store-level performance. Royalty adjusted four-wall EBITDA then applies the current royalty rate. Accordingly, we believe that Royalty adjusted four-wall EBITDA is comparable to a franchise store under our current franchise agreement and is useful to investors to assess the operating performance of an average store in our system. Management also uses such metrics in assessing store-level operating performance over time.
A reconciliation of net income to EBITDA and Adjusted EBITDA is set forth below
for the years ended
Year Ended December 31, 2022 2021 2020 (in thousands) Net income (loss)$ 110,456 $ 46,122 $ (15,204) Interest income (5,005) (878) (2,937) Interest expense 88,628 81,211 82,117 Provision for income taxes 50,515 5,659 687 Depreciation and amortization 124,022 62,800 53,832 EBITDA 368,616 194,914 118,495 Purchase accounting adjustments-revenue(1) 332 379 279 Purchase accounting adjustments-rent(2) 436 433 490 Loss on reacquired franchise rights(3) 1,160 - - Transaction fees and acquisition-related costs(4) 5,497 - - Gain on settlement of preexisting contract with acquiree(5) (2,059) - - Severance costs(6) - - 981 Legal matters(7) 9,739 - 5,810
(Gain) loss on adjustment of allowance for credit losses on held-to-maturity investment(8)
(2,506) 17,462 - Dividend income on held-to-maturity investment(9) (1,876) (1,401) - Insurance recovery(10) (174) (2,500) - Tax benefit arrangement remeasurement(11) (13,831) 11,737 (5,949) Gain on sale of corporate-owned stores(12) (1,324) - - Other(13) 1,824 1,286 (1,265) Adjusted EBITDA(14)$ 365,834 $ 222,310 $ 118,841
(1)Represents the impact of revenue-related purchase accounting adjustments associated with the 2012 Acquisition. At the time of the 2012 Acquisition, the Company maintained a deferred revenue account, which consisted of deferred area
53 -------------------------------------------------------------------------------- development agreement fees, deferred franchise fees, and deferred enrollment fees that the Company billed and collected up front but recognizes for GAAP purposes at a later date. In connection with the 2012 Acquisition, it was determined that the carrying amount of deferred revenue was greater than the fair value assessed in accordance with ASC 805-Business Combinations, which resulted in a write-down of the carrying value of the deferred revenue balance upon application of acquisition push-down accounting under ASC 805. For the years endedDecember 31, 2022 , 2021 and 2020, these amounts represent the additional revenue that would have been recognized in those years if the write-down to deferred revenue had not occurred in connection with the application of acquisition pushdown accounting. (2)Represents the impact of rent related purchase accounting adjustments. In accordance with guidance in ASC 805-Business Combinations, in connection with the 2012 Acquisition, the Company's deferred rent liability was required to be written off as of the acquisition date and rent was recorded on a straight-line basis from the acquisition date through the end of the lease term. This resulted in higher overall rent expense each period than would have otherwise been recorded had the deferred rent liability not been written off as a result of the acquisition push down accounting applied in accordance with ASC 805. Adjustments of$0.2 million ,$0.2 million and$0.1 million in the years endedDecember 31, 2022 , 2021 and 2020, respectively, reflect the difference between the higher rent expense recorded in accordance with GAAP since the acquisition and the rent expense that would have been recorded had the 2012 Acquisition not occurred. Adjustments of$0.3 million ,$0.3 million and$0.4 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively, are due to the amortization of favorable and unfavorable lease intangible assets. All of the rent related purchase accounting adjustments are adjustments to rent expense which is included in store operations on our consolidated statements of operations. (3)Represents the impact of a non-cash loss recorded in accordance with ASC 805-Business Combinations related to our acquisitions of franchisee-owned stores. The loss recorded under GAAP represents the difference between the fair value of the reacquired franchise rights and the contractual terms of the reacquired franchise rights and is included in other (gain) loss on our consolidated statements of operations. (4)Represents transaction fees and acquisition-related costs incurred in connection with our acquisition of franchisee-owned stores. (5)Represents a gain on settlement of deferred revenue from existing contracts with acquired franchisee-stores recorded in accordance with ASC 805 - Business Combinations, and is included in other (gains) losses, net on our consolidated statement of operations. (6)Represents severance expense recorded in connection with a reduction in force in 2020. (7)Represents costs associated with legal matters in which the Company is a defendant. In 2022, this represents an$8.6 million legal reserve related to a preliminary settlement agreement of terms for a settlement agreement between the Company and a franchisee inMexico ("Preliminary Settlement Agreement") and a$1.2 million reserve against an indemnification receivable related to a legal matter. In 2020 this amount includes expense of$3.8 million related to the settlement of legal claims, and a$2.0 million reserve against an indemnification receivable related to a legal matter. (8)Represents a (gain) loss on the adjustment of the allowance for credit losses on the Company's held-to-maturity investment. (9)Represents dividend income recognized on a held-to-maturity investment. (10)Represents insurance recoveries. In 2021, the amount relates to previously recognized expenses related to the settlement of legal claims. (11)Represents (gains) and losses related to the adjustment of our tax benefit arrangements primarily due to changes in our deferred state tax rate. (12)Represents a gain on the sale of corporate-owned stores. (13)Represents certain other charges and gains that we do not believe reflect our underlying business performance. (14)EffectiveSeptember 30, 2022 , we no longer exclude pre-opening costs from our computation of Adjusted EBITDA. Adjusted EBITDA for all prior periods presented has been restated to the current period computation methodology. Adjusted net income assumes all net income is attributable toPlanet Fitness, Inc. , which assumes the full exchange of all outstanding Holdings Units for shares of Class A common stock ofPlanet Fitness, Inc. , adjusted for certain non-cash and other items that we do not believe directly reflect our core operations. Adjusted net income per share, diluted, is calculated by dividing Adjusted net income by the total weighted-average shares of Class A common stock outstanding assuming the full exchange of all outstanding Holdings Units and corresponding Class B common stock as of the beginning of each period presented. Adjusted net income and Adjusted net income per share, diluted, are supplemental measures of operating performance that do not represent and should not be considered alternatives to net income and earnings per share, as determined by GAAP. We believe Adjusted net income and Adjusted net income per share, diluted, supplement GAAP measures and enable us to more effectively evaluate our performance period-over-period. A reconciliation of Adjusted net income to net income, the most directly comparable GAAP measure, and the computation of Adjusted net income per share, diluted, are set forth below. 54 -------------------------------------------------------------------------------- Year Ended December 31, (in thousands, except per share data) 2022 2021 2020 Net income (loss)$ 110,456 $ 46,122 $ (15,204) Provision for income taxes, as reported 50,515 5,659 687 Purchase accounting adjustments-revenue(1) 332 379 279 Purchase accounting adjustments-rent(2) 436 433 490 Loss on reacquired franchise rights(3) 1,160 - - Transaction fees and acquisition-related costs(4) 5,497 - - Loss on extinguishment of debt(5) 1,583 - - Gain on settlement of preexisting contract with acquiree(6) (2,059) - - Severance costs(7) - - 981 Legal matters(8) 9,739 - 5,810
(Gain) loss on adjustment of allowance for credit losses on held-to-
maturity investment(9) (2,506) 17,462 - Dividend income on held-to-maturity investment(10) (1,876) (1,401) - Insurance recovery(11) (174) (2,500) - Tax benefit arrangement remeasurement(12) (13,831) 11,737 (5,949) Gain on sale of corporate-owned stores(13) (1,324) - - Other(14) 1,824 1,286 (1,265) Purchase accounting amortization(15) 40,671 16,636 16,846 Adjusted income before income taxes$ 200,443 $ 95,813 $ 2,675 Adjusted income taxes(16) 51,915 25,870 712 Adjusted net income(17)$ 148,528 $ 69,943 $ 1,963 Adjusted net income per share, diluted$ 1.64 $ 0.80 $ 0.02 Adjusted weighted-average shares outstanding, diluted(18) 90,411 87,218 87,166 (1)Represents the impact of revenue-related purchase accounting adjustments associated with the 2012 Acquisition. At the time of the 2012 Acquisition, the Company maintained a deferred revenue account, which consisted of deferred area development agreement fees, deferred franchise fees, and deferred enrollment fees that the Company billed and collected up front but recognizes for GAAP purposes at a later date. In connection with the 2012 Acquisition, it was determined that the carrying amount of deferred revenue was greater than the fair value assessed in accordance with ASC 805-Business Combinations, which resulted in a write-down of the carrying value of the deferred revenue balance upon application of acquisition push-down accounting under ASC 805. For the years endedDecember 31, 2022 , 2021 and 2020, these amounts represent the additional revenue that would have been recognized in those years if the write-down to deferred revenue had not occurred in connection with the application of acquisition pushdown accounting. (2)Represents the impact of rent related purchase accounting adjustments. In accordance with guidance in ASC 805-Business Combinations, in connection with the 2012 Acquisition, the Company's deferred rent liability was required to be written off as of the acquisition date and rent was recorded on a straight-line basis from the acquisition date through the end of the lease term. This resulted in higher overall rent expense each period than would have otherwise been recorded had the deferred rent liability not been written off as a result of the acquisition push down accounting applied in accordance with ASC 805. Adjustments of$0.2 million ,$0.2 million and$0.1 million in the years endedDecember 31, 2022 , 2021 and 2020, respectively, reflect the difference between the higher rent expense recorded in accordance with GAAP since the acquisition and the rent expense that would have been recorded had the 2012 Acquisition not occurred. Adjustments of$0.3 million ,$0.3 million and$0.4 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively, are due to the amortization of favorable and unfavorable lease intangible assets. All of the rent related purchase accounting adjustments are adjustments to rent expense which is included in store operations on our consolidated statements of operations. (3)Represents the impact of a non-cash loss recorded in accordance with ASC 805-Business Combinations related to our acquisition of franchisee-owned stores. The loss recorded under GAAP represents the difference between the fair value of the reacquired franchise rights and the contractual terms of the reacquired franchise rights and is included in other (gain) loss on our consolidated statements of operations. (4)Represents transaction fees and acquisition-related costs incurred in connection with our acquisition of franchisee-owned stores. 55 -------------------------------------------------------------------------------- (5)Represents a loss on extinguishment of debt as a result of the repayment of the 2018-1 Class A-2-I notes prior to the anticipated repayment date. (6)Represents a gain on settlement of deferred revenue from existing contracts with acquired franchisee-stores recorded in accordance with ASC 805 - Business Combinations, and is included in other (gains) losses, net on our consolidated statement of operations. (7)Represents severance expense recorded in connection with a reduction in force in 2020. (8)Represents costs associated with legal matters in which the Company is a defendant. In 2022, this represents an$8.6 million legal reserve related to the Preliminary Settlement Agreement and a$1.2 million reserve against an indemnification receivable related to a legal matter. In 2020 this amount includes expense of$3.8 million related to the settlement of legal claims, and a$2.0 million reserve against an indemnification receivable related to a legal matter. (9)Represents a (gain) loss on the adjustment of the allowance for credit losses on the Company's held-to-maturity investment. (10)Represents dividend income recognized on a held-to-maturity investment. (11)Represents an insurance recovery of previously recognized expenses related to the settlement of legal claims. (12)Represents gains related to the adjustment of our tax benefit arrangements primarily due to changes in our deferred state tax rate. (13)Represents a gain on the sale of corporate-owned stores. (14)Represents certain other charges and gains that we do not believe reflect our underlying business performance. (15)Includes$12.4 million of amortization of intangible assets, other than favorable leases, for each of the years endedDecember 31, 2022 , 2021 and 2020, recorded in connection with the 2012 Acquisition, and$27.9 million ,$4.3 million and$4.5 million of amortization of intangible assets for the years endedDecember 31, 2022 , 2021 and 2020, respectively, created in connection with historical acquisitions of franchisee-owned stores. The adjustment represents the amount of actual non-cash amortization expense recorded, in accordance with GAAP, in each period. (16)Represents corporate income taxes at an assumed effective tax rate of 25.9%, 27.0% and 26.6% for the years endedDecember 31, 2022 , 2021 and 2020, respectively, applied to adjusted income before income taxes. (17)EffectiveSeptember 30, 2022 , we no longer exclude pre-opening costs from our computation of Adjusted net income. Adjusted net income for all prior periods presented has been restated to the current period computation methodology. (18)Assumes the full exchange of all outstanding Holdings Units and corresponding shares of Class B common stock for shares of Class A common stock ofPlanet Fitness, Inc. A reconciliation of net income (loss) per share, diluted, to Adjusted net income per share, diluted, is set forth below for the years endedDecember 31, 2022 , 2021 and 2020:
Year Ended
Net income per (in thousands, except per share amounts) Net income
Weighted Average Shares share, diluted
Net income attributable to
84,544$ 1.18 Assumed exchange of shares(2) 11,054 5,867 Net income 110,456
Adjustments to arrive at adjusted income before income 89,987 taxes(3) Adjusted income before income taxes
200,443 Adjusted income taxes(4) 51,915 Adjusted net income$ 148,528 90,411$ 1.64 (1)Represents net income attributable toPlanet Fitness, Inc. for the year endedDecember 31, 2022 and the associated weighted average shares of Class A common stock outstanding (see Note 16 to our consolidated financial statements included elsewhere in this Form 10-K). (2)Assumes the full exchange of all outstanding Holdings Units and corresponding shares of Class B common stock for shares of Class A common stock ofPlanet Fitness, Inc. as of the beginning of the period presented. Also assumes the addition of net income attributable to non-controlling interests corresponding with the assumed exchange of Holdings Units and shares of Class B common stock for shares of Class A common stock. (3)Represents the total impact of all adjustments identified in the adjusted net income table above to arrive at adjusted income before income taxes, and the impact of dilutive stock options and RSUs. (4)Represents corporate income taxes at an assumed effective tax rate of 25.9% applied to adjusted income before income taxes. 56 --------------------------------------------------------------------------------
Year Ended
Net income per (in thousands, except per share amounts) Net income
Weighted Average Shares share, diluted
Net income attributable to
83,894$ 0.51 Assumed exchange of shares(2) 3,348 3,324 Net income 46,122
Adjustments to arrive at adjusted income before income 49,691 taxes(3) Adjusted income before income taxes
95,813 Adjusted income taxes(4) 25,870 Adjusted net income$ 69,943 87,218$ 0.80 (1)Represents net income attributable toPlanet Fitness, Inc. for the year endedDecember 31, 2021 and the associated weighted average shares of Class A common stock outstanding (see Note 16 to our consolidated financial statements included elsewhere in this Form 10-K). (2)Assumes the full exchange of all outstanding Holdings Units and corresponding shares of Class B common stock for shares of Class A common stock ofPlanet Fitness, Inc. as of the beginning of the period presented. Also assumes the addition of net income attributable to non-controlling interests corresponding with the assumed exchange of Holdings Units and shares of Class B common stock for shares of Class A common stock. (3)Represents the total impact of all adjustments identified in the adjusted net income table above to arrive at adjusted income before income taxes. EffectiveSeptember 30, 2022 , we no longer exclude pre-opening costs from our computation of Adjusted net income. Adjusted net income for all prior periods presented has been restated to the current period computation methodology. (4)Represents corporate income taxes at an assumed effective tax rate of 27.0% applied to adjusted income before income taxes.
Year Ended
Net income per (in thousands, except per share amounts) Net income
Weighted Average Shares share, diluted
Net loss attributable to
$ (14,991) 80,303$ (0.19) Assumed exchange of shares(2) (213) 6,293 Net loss (15,204)
Adjustments to arrive at adjusted income before income 17,879 taxes(3)
570 Adjusted income before income taxes 2,675 Adjusted income taxes(4) 712 Adjusted net income$ 1,963 87,166$ 0.02 (1)Represents net loss attributable toPlanet Fitness, Inc. for the year endedDecember 31, 2020 , and the associated weighted average shares of Class A common stock outstanding (see Note 16 to our consolidated financial statements included elsewhere in this form 10-K). (2)Assumes the full exchange of all outstanding Holdings Units and corresponding shares of Class B common stock for shares of Class A common stock ofPlanet Fitness, Inc. as of the beginning of the period presented. Also assumes the addition of net income attributable to non-controlling interests corresponding with the assumed exchange of Holdings Units and shares of Class B common stock for shares of Class A common stock. (3)Represents the total impact of all adjustments identified in the adjusted net income table above to arrive at adjusted income before income taxes. EffectiveSeptember 30, 2022 , we no longer exclude pre-opening costs from our computation of Adjusted net income. Adjusted net income for all prior periods presented has been restated to the current period computation methodology. (4)Represents corporate income taxes at an assumed effective tax rate of 26.6% applied to adjusted income before income taxes. 57
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The following table reconciles Corporate-owned stores segment EBITDA to four-wall EBITDA to royalty adjusted four-wall EBITDA for the year endedDecember 31, 2022 : Year Ended December 31, 2022 (in thousands) Revenue EBITDA EBITDA Margin Corporate-owned stores segment$ 379,393 $ 142,083 37.5 % New stores(1) (3,278) 5,912 Selling, general and administrative(2) -
12,929
Impact of eliminations(3) -
(3,131)
Gain on sale of corporate-owned stores -
(1,324)
Purchase accounting adjustments(4) - 1,644 Four-wall$ 376,115 $ 158,113 42.0 % Royalty adjustment(5) - (27,264) Royalty adjusted four-wall$ 376,115 $ 130,849 34.8 % (1)Includes the impact of stores open less than 13 months and those which have not yet opened. (2)Reflects administrative costs attributable to the Corporate-owned stores segment but not directly related to store operations. (3)Reflects certain intercompany charges and other fees which are eliminated in consolidation. (4)Represents the impact of certain purchase accounting adjustments associated with the 2012 Acquisition and our historical acquisitions of franchisee-owned stores. These are primarily related to fair value adjustments to deferred rent. (5)Includes the effect of royalties at a rate of 7.0% as if the stores were similar to a franchisee-owned store at the current franchise royalty rate. 58 -------------------------------------------------------------------------------- Results of Operations The following table sets forth our consolidated statements of operations as a percentage of total revenue for the years endedDecember 31, 2022 , 2021 and 2020: Year ended December 31, 2022 2021 2020 Revenue: Franchise revenue 29.0 % 40.6 % 40.1 % National advertising fund revenue 6.2 % 8.9 % 10.6 % Franchise segment 35.2 % 49.5 % 50.7 % Corporate-owned stores 40.5 % 28.5 % 28.8 % Equipment 24.3 % 22.0 % 20.5 % Total revenue 100.0 % 100.0 % 100.0 % Operating costs and expenses: Cost of revenue 18.9 % 17.2 % 17.5 % Store operations 23.4 % 18.9 % 21.6 % Selling, general and administrative 12.3 % 16.1 % 16.9 % National advertising fund expense 7.1 % 10.1 % 15.1 % Depreciation and amortization 13.2 % 10.7 % 13.2 % Other loss 0.5 % 2.6 % 1.1 % Total operating costs and expenses 75.4 % 75.6 % 85.4 % Income from operations 24.6 % 24.4 % 14.6 % Other income (expense), net: Interest income 0.5 % 0.1 % 0.7 % Interest expense (9.5) % (13.8) % (20.2) % Other income (expense), net 1.6 % (1.9) % 1.2 % Total other expense, net (7.4) % (15.6) % (18.3) % Income (loss) before income taxes 17.2 % 8.8 % (3.7) %
Equity earnings (losses) of unconsolidated entities, net of tax
- % - % - % Provision for income taxes 5.4 % 1.0 % 0.2 % Net income (loss) 11.8 % 7.8 % (3.9) %
Less net income (loss) attributable to non-controlling interests
1.2 % 0.6 % (0.1) % Net income (loss) attributable to Planet Fitness, Inc. 10.6 % 7.2 % (3.8) % 59
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The following table sets forth a comparison of our consolidated statements of
operations for the years ended
Year Ended December 31, 2022 2021 2020 (in thousands) Revenue: Franchise revenue$ 271,559 $ 238,349 $ 162,855 National advertising fund revenue 58,075 52,361 43,301 Franchise segment 329,634 290,710 206,156 Corporate-owned stores 379,393 167,219 117,142 Equipment 227,745 129,094 83,320 Total revenue 936,772 587,023 406,618 Operating costs and expenses: Cost of revenue 177,200 100,993 70,955 Store operations 219,422 110,716 87,797 Selling, general and administrative 114,853 94,540 68,585 National advertising fund expense 66,116 59,442 61,255 Depreciation and amortization 124,022 62,800 53,832 Other losses, net 5,081 15,137 4,434 Total operating costs and expenses 706,694 443,628 346,858 Income from operations 230,078 143,395 59,760 Other income (expense), net: Interest income 5,005 878 2,937 Interest expense (88,628) (81,211) (82,117) Other income (expense), net 14,983 (11,102) 4,903 Total other expense, net (68,640) (91,435) (74,277) Income (loss) before income taxes 161,438 51,960 (14,517) Equity earnings (losses) of unconsolidated entities, net of tax (467) (179) - Provision for income taxes 50,515 5,659 687 Net income (loss) 110,456 46,122 (15,204)
Less net income (loss) attributable to non-controlling interests
11,054 3,348 (213)
Net income (loss) attributable to
Comparison of the years ended
Revenue
Total revenues were
Franchise segment revenue was$329.6 million in the year endedDecember 31, 2022 compared to$290.7 million in the year endedDecember 31, 2021 , an increase of$38.9 million , or 13.4%. Franchise revenue was$271.6 million in the year endedDecember 31, 2022 compared to$238.3 million in the year endedDecember 31, 2021 , an increase of$33.2 million or 13.9%. Included in franchise revenue is royalty revenue of$228.7 million , franchise and other fees of$24.5 million , and placement revenue of$17.1 million for the year endedDecember 31, 2022 , compared to royalty revenue of$205.9 million , franchise and other fees of$21.7 million , and placement revenue of$10.0 million for the year endedDecember 31, 2021 . Of the$22.8 million increase in royalty revenue in the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 ,$14.4 million was attributable to a franchise same store sales increase of 11.2%,$9.7 million was attributable to new stores opened sinceJanuary 1, 2021 ,$5.2 million was due to prior year COVID-related temporary closures and$2.8 million was from higher royalties on annual fees. Partially offsetting the royalty revenue increases was a decrease of approximately$9.3 million primarily as a result of the stores acquired in the Sunshine Acquisition becoming corporate-owned stores. The$7.2 million increase in placement revenue was primarily driven by higher new and replacement equipment placements and the$2.8 million increase in franchise and other fees was primarily attributable to higher online join fees. 60 -------------------------------------------------------------------------------- National advertising fund revenue was$58.1 million in the year endedDecember 31, 2022 , compared to$52.4 million in the year endedDecember 31, 2021 , an increase of$5.7 million , or 10.9%. The increase in national advertising fund revenue in the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 was primarily due to higher same store sales, new stores opened sinceJanuary 1, 2021 and stores that were not open for all of the prior year period due to COVID-related temporary closures. Revenue from our corporate-owned stores segment was$379.4 million in the year endedDecember 31, 2022 , compared to$167.2 million in the year endedDecember 31, 2021 , an increase of$212.2 million , or 126.9%. Of the increase,$180.8 million was attributable to the stores acquired or opened as a result of the Sunshine Acquisition,$22.3 million was from the corporate-owned store same store sales increase of 13.1%, and$8.7 million was from new stores opened or acquired sinceJanuary 1, 2021 and stores that were not open for all of the prior year period due to COVID-related temporary closures. Partially offsetting these increases was a reduction of$1.7 million related to the sale of sixColorado corporate-owned stores in 2022. Equipment segment revenue was$227.7 million in the year endedDecember 31, 2022 , compared to$129.1 million in the year endedDecember 31, 2021 , an increase of$98.7 million , or 76.4%. Of the increase$77.0 million was driven by higher equipment sales to existing franchisee-owned stores, and$21.7 million was driven by higher equipment sales to new franchisee owned stores in the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 . In the year endedDecember 31, 2022 , we had equipment sales to 153 new franchisee-owned stores compared to 128 in the prior year.
Cost of revenue
Cost of revenue was$177.2 million in the year endedDecember 31, 2022 compared to$101.0 million in the year endedDecember 31, 2021 , an increase of$76.2 million , or 75.5%. Cost of revenue, which primarily relates to our equipment segment, increased as a result of higher equipment sales to new and existing franchisee-owned stores in the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 as described above.
Store operations
Store operation expenses, which relates to our Corporate-owned stores segment, were$219.4 million in the year endedDecember 31, 2022 compared to$110.7 million in the year endedDecember 31, 2021 , an increase of$108.7 million , or 98.2%. Of the increase,$89.6 million was attributable to the stores acquired in the Sunshine Acquisition,$13.4 million from new stores opened or acquired sinceJanuary 1, 2021 and$6.9 million from mature stores as a result of higher rent, occupancy, payroll and prior year COVID-related temporary closures. Partially offsetting the increase was$1.2 million of lower expense as a result of the sale of sixColorado corporate-owned stores in 2022.
Selling, general and administrative
Selling, general and administrative expenses were$114.9 million in the year endedDecember 31, 2022 compared to$94.5 million in the year endedDecember 31, 2021 , an increase of$20.3 million , or 21.5%. Of the increase,$9.0 million was attributable to higher selling, general and administrative expense from the Sunshine Acquisition and$5.5 million was related to transaction costs incurred in connection with the Sunshine Acquisition. Outside of increases from the Sunshine Acquisition we also had increases of$2.1 million of higher legal and consulting fees,$2.9 million of higher travel expense,$1.5 million of higher software and other information system expense,$1.1 million of higher insurance expense and$0.8 million due to higher compensation expense during the year endedDecember 31, 2022 compared to the prior year. Partially offsetting these increases was$2.7 million of higher spend in the prior year period to support reopening efforts as a result of the COVID-19 pandemic.
National advertising fund expense
National advertising fund expense was
Depreciation and amortization
Depreciation and amortization expense consists of the depreciation of property and equipment, including leasehold and building improvements and equipment. Amortization expense consists of amortization related to our intangible assets, including customer relationships and reacquired franchise rights. Depreciation and amortization expense was$124.0 million in the year endedDecember 31, 2022 compared to$62.8 million in the year endedDecember 31, 2021 , an increase of$61.2 million , or 97.5%. Of the increase,$56.7 million was attributable to the depreciation and amortization of assets acquired in the Sunshine Acquisition and$2.9 million was attributable to depreciation of newly added information system assets. 61
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Other losses, net
Other loss was$5.1 million in the year endedDecember 31, 2022 compared to$15.1 million in the year endedDecember 31, 2021 . The$5.1 million loss in 2022 is primarily the result of an$8.6 million legal reserve due to the Preliminary Settlement Agreement, a$1.2 million loss on unfavorable reacquired franchise rights in connection with the Sunshine Acquisition and a$1.2 million reserve against an indemnification receivable related to a legal matter, partially offset by a$2.5 million gain from the reduction in the Company's allowance for expected credit losses, a$2.1 million gain from the settlement of preexisting contracts in connection with the Sunshine Acquisition, and a$1.3 million gain on the sale of corporate-owned stores. The$15.1 million loss in the year endedDecember 31, 2021 includes$17.5 million of credit loss expense on our held-to-maturity investment based upon facts and circumstances that existed as ofDecember 31, 2021 related to the investee's performance and overall financial condition, partially offset by a gain of$2.5 million from an insurance recovery related to the settlement of legal claims.
Interest income
Interest income was$5.0 million in the year endedDecember 31, 2022 compared to$0.9 million in the year endedDecember 31, 2021 . The increase was primarily a result of higher interest rates in the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 .
Interest expense
Interest expense primarily consists of interest on long-term debt as well as the amortization of deferred financing costs.
Interest expense was$88.6 million in the year endedDecember 31, 2022 compared to$81.2 million in the year endedDecember 31, 2021 , an increase of$7.4 million , or 9.1%. The increase in interest expense is due to higher interest expense from the increased principal balance and a$1.6 million loss on extinguishment of debt from the write-off of remaining deferred financing costs, both as a result of the debt refinancing completed onFebruary 10, 2022 .
Other income (expense)
Other income (expense) was income of$15.0 million in the year endedDecember 31, 2022 compared to an expense of$11.1 million in the year endedDecember 31, 2021 . These amounts included income of$13.8 million and expense of$11.7 million attributable to the remeasurement of our tax benefit arrangements due to changes in our effective tax rate in the years endedDecember 31, 2022 andDecember 31, 2021 , respectively. Other income (expense) also includes the effects of foreign currency gains and losses.
Provision for income taxes
Income tax expense was$50.5 million for the year endedDecember 31, 2022 compared to$5.7 million for the year endedDecember 31, 2021 , an increase of$44.9 million . The$44.9 million increase is primarily attributable to our higher income before taxes in the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 , and by an income tax expense in 2022 due to remeasurement of deferred taxes.
Segment results
Franchise
Franchise segment EBITDA was$216.8 million in the year endedDecember 31, 2022 compared to$194.3 million in the year endedDecember 31, 2021 , an increase of$22.5 million , or 11.6%. The franchise segment EBITDA increase was primarily due to the$33.2 million of higher franchise revenue and$5.7 million of higher NAF revenue as described above, partially offset by$6.7 million of higher NAF expense and an$8.6 million legal reserve related to the Preliminary Settlement Agreement. Depreciation and amortization was$7.4 million in the year endedDecember 31, 2022 and$7.5 million in the year endedDecember 31, 2021 .
Corporate-owned stores
Corporate-owned stores segment EBITDA was$142.1 million in the year endedDecember 31, 2022 compared to$49.2 million in the year endedDecember 31, 2021 , an increase of$92.9 million , or 188.8%. Of the corporate-owned store segment EBITDA increase,$78.1 million was attributable to the Sunshine Acquisition,$13.7 million was attributable to the same store sales increase of 13.1% and$3.5 million was due to prior year COVID-related temporary closures. These increases were partially offset by a decrease of$2.9 million from new stores opened sinceJanuary 1, 2021 . Depreciation and amortization was$94.3 million for the year endedDecember 31, 2022 , compared to$35.8 million for the year endedDecember 31, 2021 . The increase in depreciation and amortization was primarily attributable the Sunshine Acquisition. 62
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Equipment
Equipment segment EBITDA was$59.1 million in the year endedDecember 31, 2022 compared to$29.7 million in the year endedDecember 31, 2021 , an increase of$29.4 million , or 99.1%. The increase was driven by higher equipment sales to new and existing franchisee-owned stores in the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 , as described above. Depreciation and amortization was$5.0 million for both the years endedDecember 31, 2022 andDecember 31, 2021 .
Liquidity and Capital Resources
As of
We require cash principally to fund day-to-day operations, to finance capital investments, to service our outstanding debt and tax benefit arrangements and to address our working capital needs. Based on our current level of operations, we believe that with our available cash balance, the cash generated from our operations, and amounts available under our Variable Funding Notes will be adequate to meet our anticipated debt service requirements and obligations under our tax benefit arrangements, capital expenditures and working capital needs for at least the next 12 months. We believe that we will be able to meet these obligations even if we continue to experience a reduction in sales and profits as a result of the COVID-19 pandemic. Our ability to continue to fund these items could be adversely affected by the occurrence of any of the events described under "Risk Factors." There can be no assurance that our business will generate sufficient cash flows from operations or otherwise to enable us to service our indebtedness, including our Securitized Senior Notes, or to make anticipated capital expenditures. Our future operating performance and our ability to service, extend or refinance our indebtedness will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control, including potential future impacts related to the COVID-19 pandemic. The following table presents summary cash flow information for the years endedDecember 31, 2022 and 2021: Year Ended December 31, (in thousands) 2022 2021 Net cash provided by (used in): Operating activities$ 240,207 $ 189,289 Investing activities (506,566) (90,916) Financing activities 135,725 (10,246) Effect of foreign exchange rates on cash (808) 14 Net (decrease) increase in cash$ (131,442) $ 88,141
Operating activities
For the year endedDecember 31, 2022 , net cash provided by operating activities was$240.2 million compared to$189.3 million in the year endedDecember 31, 2021 , an increase of$50.9 million . Of the increase,$127.0 million was due to higher net income after adjustments to reconcile net income to net cash provided by operating activities, partially offset by$76.1 million due to unfavorable changes in working capital primarily from payments made under tax benefit arrangements, a larger decrease in accounts payable and accrued expenses, higher other assets, and an increase in accounts receivable as a result of higher equipment sales volume, partially offset by an increase in deferred revenue in the current year period. in the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . Investing activities For the year endedDecember 31, 2022 , net cash used in investing activities was$506.6 million compared to$90.9 million in the year endedDecember 31, 2021 , an increase of$415.7 million . The primary drivers of the increase were$424.9 million of net cash used in the Sunshine acquisition and$46.0 million from higher capital expenditures in the year endedDecember 31, 2022 , partially offset by cash received of$20.8 million from the sale of sixColorado corporate-owned stores and$32.6 of lower cash used for investments in the year endedDecember 31, 2022 . 63
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Capital expenditures for the years ended
Year Ended December 31, (in thousands) 2022 2021 New corporate-owned stores$ 40,788 $ 22,614 Existing corporate-owned stores 43,289 16,651 Information systems 15,816 14,391 Corporate and all other 164 418 Total capital expenditures$ 100,057 $ 54,074 Financing activities For the year endedDecember 31, 2022 , net cash provided by financing activities was$135.7 million compared to net cash used in financing activities of$10.2 million in the year endedDecember 31, 2021 , an increase of$146.0 million . The primary drivers of the net cash provided by financing activities in the year endedDecember 31, 2022 were$234.0 million of net cash provided from long-term debt, consisting of$975.0 million of borrowings,$724.8 million of principal payments and$16.2 million of deferred financing costs incurred. Partially offsetting the increase was cash used for share repurchases of$94.3 million in the year endedDecember 31, 2022 .
Securitized Financing Facility
Planet Fitness Master Issuer LLC (the "Master Issuer"), a limited-purpose, bankruptcy remote, wholly-owned indirect subsidiary ofPla-Fit Holdings, LLC , is the master issuer of outstanding senior secured notes under a securitized financing facility that was entered into inAugust 2018 . InFebruary 2022 , the Master Issuer completed a refinancing transaction with respect to this facility under which the Master Issuer issued the Series 2022-1 Class A-2 Notes with initial principal amounts totaling$900 million . The net proceeds from the sale of the Series 2022-1 Class A-2 Notes were used to repay in full the Master Issuer's outstanding Series 2018-1 Class A-2-I Notes, including the payment of transaction costs. The remaining funds were used for the Sunshine Acquisition and other general corporate purposes. In connection with the issuance of the Series 2022-1 Class A-2 Notes, the Master Issuer also issued the Series 2022-1 Class A-1 Notes, which allow for the drawing of up to$75 million of Variable Funding Notes, including a Letters of Credit facility, which was used to repay the 2018-1 Class A-1 Notes. The 2022 Variable Funding Notes are undrawn as ofDecember 31, 2022 due to repayment in full onMay 9, 2022 using cash on hand. Except as described above, there were no material changes to the terms of any debt obligations sinceDecember 31, 2021 . The Company was in compliance with its debt covenants as ofDecember 31, 2022 . See Note 11 to the consolidated financial statements contained in Item 8 herein for further information related to our long-term debt obligations.
Share Repurchase Program
2019 share repurchase program
On
OnDecember 4, 2019 , the Company entered into a$300 million accelerated share repurchase agreement (the "2019 ASR Agreement") withJPMorgan Chase Bank, N.A . ("JPMC"). Pursuant to the terms of the 2019 ASR Agreement, onDecember 5, 2019 , the Company paid JPMC$300 million upfront in cash and received approximately 3.3 million shares of the Company's Class A common stock, which were retired. Final settlement of the ASR Agreement occurred onMarch 2, 2020 . At final settlement, JPMC delivered approximately 667,000 additional shares of the Company's Class A common stock, based on a weighted average cost per share of$75.82 over the term of the 2019 ASR Agreement, which were retired.
On
2022 share repurchase program
On
64 -------------------------------------------------------------------------------- The timing of purchases and amount of stock repurchased will be subject to the Company's discretion and will depend on market and business conditions, the Company's general working capital needs, stock price, applicable legal requirements and other factors. Our ability to repurchase shares at any particular time is also subject to the terms of the Indenture governing the Securitized Senior Notes. Purchases may be effected through one or more open market transactions, privately negotiated transactions, transactions structured through investment banking institutions, or a combination of the foregoing. The Company may reinstate or terminate the program at any time.
Contractual Obligations and Commitments
The following table presents contractual obligations and commercial commitments
as of
Payments due during the years ending December 31, (in thousands) Total 2023 2024-2025 2026-2027 Thereafter Long-term debt(1)$ 2,025,187 20,750 621,188 429,563 953,686 Interest on long-term debt 431,227 80,802 152,326 89,082 109,017 Obligations under tax benefit arrangements(2) 494,465 31,940 92,866 110,799 258,860 Operating leases 456,597 49,853 121,467 114,459 170,818 Advertising commitments(3) 77,865 58,681 19,184 - - Purchase obligations(4) 22,019 22,019 - - - Total Contractual Obligations$ 3,507,360 $
264,045
(1)Long-term debt payments include scheduled principal payments only. (2)Timing of payments under tax benefit arrangements is estimated. (3)As ofDecember 31, 2022 , we had advertising purchase commitments of approximately$77.9 million , including commitments for the NAF. (4)Purchase obligations consists of$22.0 million for open purchase orders primarily related to equipment to be sold to franchisees. For the majority of our equipment purchase obligations, our policy is to require the franchisee to provide us with either a deposit or proof of a committed financing arrangement.
Off-Balance Sheet Arrangements
As ofDecember 31, 2022 , our off-balance sheet arrangements consisted of guarantees of lease agreements for certain franchisees. Our maximum total commitment under these agreements is approximately$5.9 million and would only require payment upon default by the primary obligor. The estimated fair value of these guarantees atDecember 31, 2022 was not material, and no accrual has been recorded for our potential obligation under these arrangements. 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 if certain conditions are met. See Note 18 to our consolidated financial statements included elsewhere in this Form 10-K for more information regarding these operating leases and guarantees.
Critical Accounting Estimates
Our discussion and analysis of operating results and financial condition are based upon our consolidated financial statements included elsewhere in this Form 10-K. The preparation of our financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures of contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from those estimates. While estimates and judgments are applied in arriving at many reported amounts, we believe that the following critical accounting estimates involve a higher degree of judgment and complexity.
Business combinations
We account for business combinations using the purchase method of accounting which results in the assets acquired and liabilities assumed being recorded at fair value at the date of acquisition. The excess costs of acquired businesses over the fair values of the assets acquired and liabilities assumed will be recognized as goodwill. The valuation methodologies used are based on the nature of the asset or liability. The significant assets and liabilities measured at fair value include property and equipment, intangible assets, and favorable and unfavorable leases. For the 2012 Acquisition, intangible assets consisted of trade and brand names, member relationships, franchisee relationships related to both our franchise and equipment segments, non-compete agreements, order backlog and favorable and unfavorable leases. For other 65
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acquisitions, which consist of acquisitions of stores from franchisees, intangible assets generally consist of member relationships, re-acquired franchise rights, and favorable and unfavorable leases.
The Company uses a variety of information sources to determine the estimated fair values of acquired assets and liabilities, including third-party valuation experts. The fair value of trade and brand names is estimated using the relief from royalty method, an income approach to valuation, which includes projecting future system-wide sales and other estimates. Membership relationships and franchisee relationships are valued based on an estimate of future revenues and costs related to the respective contracts over the remaining expected lives. Our valuation includes assumptions related to the projected attrition and renewal rates on those existing franchise and membership arrangements being valued. Re-acquired franchise rights are valued using an excess earnings approach. The valuation of re-acquired franchise rights is determined using a multi-period excess earnings method under the income approach. For re-acquired franchise rights with terms that are either favorable or unfavorable (from our perspective) to the terms included in our current franchise agreements, a gain or charge is recorded at the time of the acquisition to the extent of the favorability or unfavorability, respectively. Favorable and unfavorable operating leases are recorded based on differences between contractual rents under the respective lease agreements and prevailing market rents at the lease acquisition date, and are recorded as a component of the ROU asset. Real and personal property asset valuation is determined using the replacement cost approach.
Income taxes
Deferred income taxes are recognized for the expected future tax consequences attributable to temporary differences between the carrying amount of the existing tax assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied in the years in which temporary differences are expected to be recovered or settled. The principal items giving rise to temporary differences are the use of accelerated depreciation and certain basis differences resulting from acquisitions and the recapitalization transactions. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the provision for income taxes, we make estimates and judgments which affect our evaluation of the carrying value of our deferred tax assets as well as our calculation of certain tax liabilities. We evaluate the carrying value of our deferred tax assets on a quarterly basis. In completing this evaluation, we consider all available positive and negative evidence. Such evidence includes historical operating results, the existence of cumulative earnings and losses in the most recent fiscal years, taxable income in prior carryback year(s) if permitted under the tax law, expectations for future pre-tax operating income, the time period over which our temporary differences will reverse, and the implementation of feasible and prudent tax planning strategies. Estimating future taxable income is inherently uncertain and requires judgment. As ofDecember 31, 2022 , we had$453.1 million of net deferred tax assets, net of valuation allowances. We expect to realize future tax benefits related to the utilization of these assets. As ofDecember 31, 2022 , the Company has provided a valuation allowance of$4.0 million against the portion of its deferred tax assets that would generate capital losses for which the Company does not have sufficient positive evidence to support its recoverability. We recognize the effects of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
Tax Benefit Arrangements
As described in Note 17 to the consolidated financial statements included in Part II, Item 8, we are a party to the tax benefit arrangements under which we are contractually committed to pay certain non-controlling interest holders 85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of certain transactions. Amounts payable under the tax benefit arrangements are contingent upon, among other things, (i) generation of future taxable income over the term of the tax benefit arrangements and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the tax benefit arrangements to utilize the tax benefits, then we would not be required to make the related payments. Therefore, we would only recognize a liability for tax benefit arrangement payments if we determine it is probable that we will generate sufficient future taxable income over the term of the tax benefit arrangements to utilize the related tax benefits. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions. As ofDecember 31, 2022 , we recognized$494.5 million of liabilities relating to our obligations under the tax benefit arrangements. We concluded that we would have sufficient future taxable income to utilize all of the related tax benefits generated by all transactions that occurred. Changes in the liability resulting from historical exchanges under these tax benefit arrangements may occur based on changes in anticipated future taxable income, changes in applicable tax rates or other changes in tax attributes that may occur and impact the expected future tax benefits to be received by the Company. Changes in the projected liability under these tax benefit arrangements are and will be recorded as a component of other income (expense) each period. The projection of future taxable income involves 66 -------------------------------------------------------------------------------- significant judgment. Actual taxable income may differ from estimates, which could significantly impact the liability under the tax benefit arrangements and the Company's consolidated results of operations.
Investments and allowance for expected credit losses
Our held-to-maturity securities are reported at amortized cost. We reserve for expected credit losses on our held-to-maturity debt securities through the allowance for expected credit losses. The allowance for expected credit losses estimate reflects a lifetime loss estimate and is based on historical loss information for assets with similar risk characteristics, adjusted for management's expectations. Adjustments for management's expectations may be based on factors such as investee earnings performance, recent financing rounds at reduced valuations, changes in the regulatory, economic or technological environment of an investee or doubt about an investee's ability to continue as a going concern. An increase or a decrease in the allowance for expected credit losses is recorded through other gain (loss) as a credit loss expense or a reversal thereof. The allowance for expected credit losses is presented as a deduction from the amortized cost of the held-to-maturity securities. A held-to-maturity investment security and its allowance for expected credit losses is written off when deemed uncollectible. 67
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