Planet Fitness, Inc. (PLNT) FY 2023 MD&A

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context requires otherwise, references in this report to the “Company,” “we,” “us” and “our” refer to Planet Fitness, Inc. and its consolidated subsidiaries.

Discussions of fiscal 2021 items and year-to-year comparisons between fiscal 2022 and fiscal 2021 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 ended December 31, 2022.

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 the Judgement 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 yellow Planet 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 starting at only $10 per month for our standard Classic Card membership. This exceptional value proposition is designed to appeal to a broad population, including occasional gym users people 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 protect Planet 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 of December 31, 2023, we had approximately 18.7 million members and 2,575 stores in all 50 states, the District of Columbia, Puerto Rico, Canada, Panama, Mexico and Australia. Of our 2,575 stores, 2,319 were franchised and 256 were corporate-owned.

As of December 31, 2023, we had contractual commitments to open approximately 1,000 new stores.

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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 royalties, NAF contributions, initial and successor franchise fees and upfront fees from ADAs, transfer fees, equipment placement revenue, membership 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 36.2% and 35.2% of our total revenue for the years ended December 31, 2023 and 2022, 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 41.9% and 40.5% of our total revenue for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023, approximately 95% of members at our corporate stores paid their monthly dues by EFT, while the remainder prepaid annually in advance.

•Equipment segment revenue: Includes equipment revenue for new franchisee-owned stores as well as replacement equipment for existing franchisee-owned stores, in the U.S., Canada and Mexico. Franchisee-owned stores are generally required to replace their equipment every five to nine years. This source of revenue comprised 21.9% and 24.3% of our total revenue for the years ended December 31, 2023 and 2022, 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, including freight costs, to new and existing franchisee-owned stores in the U.S., Canada and Mexico. Cost of revenue also includes the cost of retail merchandise sold at our corporate-owned stores. Our cost of revenue changes primarily based on equipment sales volume.

•Store operations: Includes the direct costs associated with our corporate-owned stores, primarily payroll, rent, utilities, supplies, maintenance, insurance, and local and national advertising. 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 primarily 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, information technology, marketing, legal, accounting, and insurance related 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 in the United States and Canada. 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. 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 generally 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.

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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 pay in advance, provide evidence of a committed financing arrangement for such equipment or provide evidence of availability under an existing credit facility.

Recent Transactions

Florida Acquisition

On April 16, 2023, the Company purchased from one of its franchisees a majority of the assets associated with four stores operating in Florida (the “Florida Acquisition”) for approximately $26.3 million in cash consideration. See Note 5 to the consolidated financial statements.

Equity Method Investments

On June 23, 2023, the Company acquired a 12.5% ownership interest for $10.0 million in Planet Fitmex, LLC, which is classified as an equity method investment as a result of its organizational structure. During the remainder of 2023, the Company invested an additional $25.6 million in the form of cash and received $17.0 million worth of equity interests for the contribution of five stores that were acquired from a franchisee in October 2023 in connection with a legal settlement. Following such additional investments, the Company’s ownership stake increased to 33.2% with a total investment of $52.6 million. See Note 8 to the consolidated financial statements.

Securitized Financing Facility

On February 10, 2022, the Company 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. On February 10, 2022, the Company 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 on May 9, 2022. See Note 11 to the consolidated financial statements.

Sunshine Acquisition

On February 10, 2022, the Company and Pla-Fit Holdings acquired 100% of the equity interests of franchisee Sunshine Fitness, which operated 114 locations in Alabama, Florida, Georgia, North Carolina, and South Carolina (the “Sunshine Acquisition”). 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

On August 31, 2022, the Company sold 6 corporate-owned stores located in Colorado 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 November 5, 2019, the Company’s board of directors approved a share repurchase program of up to $500.0 million.

On December 4, 2019, the Company entered into a $300.0 million accelerated share repurchase agreement (the “2019 ASR Agreement”) with JPMorgan Chase Bank, N.A. (“JPMC”). Pursuant to the terms of the 2019 ASR Agreement, on December 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 on March 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 ended December 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.

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2022 share repurchase program

On November 4, 2022, the Company’s board of directors approved a share repurchase program of up to $500.0 million, which replaced the 2019 share repurchase program. During the year ended December 31, 2023, the Company purchased 1,698,753 shares of Class A common stock for a total cost of $125.0 million. A share repurchase excise tax of $1.0 million was also incurred as a result of new legislation that went into effect beginning in 2023. All repurchased shares were retired. Subsequent to these repurchases, there is $375.0 million remaining under the 2022 share repurchase program.

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 and 2023 have returned to a pattern more consistent with years prior to the COVID-19 pandemic.

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 in the United States, Puerto Rico, Canada, Panama, Mexico and Australia, as well as revenues and expenses of the NAF. Our 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 in the U.S, Canada and Mexico. 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 following tables summarize the financial information for our segments:

(1) “Corporate and other” primarily includes corporate overhead costs, such as payroll and related benefit costs and professional services that are not directly attributable to any individual segment.

(2) 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:

(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.

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 and presented 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 $4.5 billion and $3.9 billion during the years ended December 31, 2023 and 2022, 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:

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(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.

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 Classic Card 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 is a significant component of our revenue growth, same store sales is only one measure of how we evaluate our performance.

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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. The following table shows our same store sales:

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 dues 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 dues and annual membership fees across our franchisee base. Our royalty fee in the U.S. and Canada 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 Classic Card 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 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

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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. 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. 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:

(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. These amounts represent the additional revenue that would have been recognized 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 $0.1 million and $0.2 million in the years ended December 31, 2023 and 2022, respectively, reflect the difference between the higher rent expense recorded in accordance with GAAP since the acquisition

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and the rent expense that would have been recorded had the 2012 Acquisition not occurred. Adjustments of $0.5 million and $0.3 million for the years ended December 31, 2023 and 2022, 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 losses, net 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 losses, net on our consolidated statements of operations.

(6) Represents certain severance and related expenses recorded in connection with the departure of the Chief Executive Officer and the elimination of the President and Chief Operating Officer position. Also includes costs associated with the search for a new Chief Executive Officer and retention payments for certain key employees through the Chief Executive Officer transition.

(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 preliminary terms of a settlement agreement with a franchisee in Mexico (the “Preliminary Settlement Agreement”) and a $1.2 million reserve against an indemnification receivable related to a legal matter. During 2023, the Company revised its reserve related to the Preliminary Settlement Agreement and recorded an increase to the liability of $6.3 million to $14.5 million, net of legal fees paid, and subsequently paid the liability.

(8) Represents a loss (gain) 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 gains related to the adjustment of our tax benefit arrangements primarily due to changes in our deferred state tax rate.

(11) Represents a gain on the sale of corporate-owned stores.

(12) Represents the amortization expense of the Company’s pro-rata portion of the basis difference in its equity method investees, which is included within losses from equity-method investments, net of tax on our consolidated statements of operations.

(13) Represents certain other gains and charges that we do not believe reflect our underlying business performance.

Adjusted net income assumes that all net income is attributable to Planet Fitness, Inc., which assumes the full exchange of all outstanding Holdings Units for shares of Class A common stock of Planet 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 plus any dilutive options and restricted stock units as calculated in accordance with GAAP and 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 calculated in accordance with 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 net income to Adjusted net income, the most directly comparable GAAP measure, and the computation of Adjusted net income per share, diluted, are set forth below:

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(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. These amounts represent the additional revenue that would have been recognized 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 $0.1 million and $0.2 million in the years ended December 31, 2023 and 2022, 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 $0.5 million and $0.3 million for the years ended December 31, 2023 and 2022, 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 losses, net 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 losses, net on our consolidated statements of operations.

(6) Represents certain severance and related expenses recorded in connection with the departure of the Chief Executive Officer and the elimination of the President and Chief Operating Officer position. Also includes costs associated with the search for a new Chief Executive Officer and retention payments for certain key employees through the Chief Executive Officer transition.

(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 the Preliminary Settlement Agreement and a $1.2 million reserve against an indemnification receivable related to a legal matter. During 2023, the Company revised its reserve related to the Preliminary Settlement Agreement and recorded an increase to the liability of $6.3 million to $14.5 million, net of legal fees paid, and subsequently paid the liability.

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(8) Represents a loss (gain) 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 gains related to the adjustment of our tax benefit arrangements primarily due to changes in our deferred state tax rate.

(11) Represents a gain on the sale of corporate-owned stores.

(12) Represents the amortization expense of the Company’s pro-rata portion of the basis difference in its equity method investees, which is included within losses from equity-method investments, net of tax on our consolidated statements of operations.

(13) Represents certain other gains and charges that we do not believe reflect our underlying business performance.

(14) 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.

(15) Includes $12.4 million of amortization of intangible assets, other than favorable leases, for each of the years ended December 31, 2023 and 2022, recorded in connection with the 2012 Acquisition, and $39.1 million and $27.9 million of amortization of intangible assets for the years ended December 31, 2023 and 2022, 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% for both the years ended December 31, 2023 and 2022, applied to adjusted income before income taxes.

(17) Assumes the full exchange of all outstanding Holdings Units and corresponding shares of Class B common stock for shares of Class A common stock of Planet Fitness, Inc.

A reconciliation of net income per share, diluted, to Adjusted net income per share, diluted, is set forth below:

(1) Represents net income attributable to Planet Fitness, Inc. 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 of Planet 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.

(4) Represents corporate income taxes at an assumed effective tax rate of 25.9% for both the years ended December 31, 2023 and 2022, applied to adjusted income before income taxes.

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The following table reconciles Corporate-owned stores segment EBITDA to four-wall EBITDA to royalty adjusted four-wall EBITDA:

(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.

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Results of Operations

The following table sets forth a comparison of our consolidated statements of operations in dollars and as a percentage of total revenue:

Comparison of the years ended December 31, 2023 and December 31, 2022

Revenue

Total revenues were $1,071.3 million in the year ended December 31, 2023, compared to $936.8 million in the year ended December 31, 2022, an increase of $134.6 million, or 14.4%.

Franchise segment revenue was $387.9 million in the year ended December 31, 2023 compared to $329.6 million in the year ended December 31, 2022, an increase of $58.3 million, or 17.7%.

Franchise revenue was $317.9 million in the year ended December 31, 2023 compared to $271.6 million in the year ended December 31, 2022, an increase of $46.4 million, or 17.1%. Included in franchise revenue is royalty revenue of $260.7 million, franchise and other fees of $32.7 million, and placement revenue of $19.8 million for the year ended December 31, 2023, compared to royalty revenue of $228.7 million, franchise and other fees of $24.2 million, and placement revenue of $17.1 million for the year ended December 31, 2022. Of the $32.1 million increase in royalty revenue, $17.4 million was attributable to a franchise same store sales increase of 8.5%, $6.8 million was attributable to new stores opened since January 1, 2022 and $7.9 million was from higher royalties on annual fees. The $8.5 million increase in franchise and other fees was primarily attributable to higher online join fees and a $2.7 million increase in placement revenue that was primarily driven by higher

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replacement equipment placements. Also included in franchise revenue was a $3.5 million increase in revenue associated with the sale of HVAC units to franchisees.

National advertising fund revenue was $70.0 million in the year ended December 31, 2023, compared to $58.1 million in the year ended December 31, 2022, an increase of $11.9 million, or 20.6%. $5.7 million of this increase was due to higher same store sales and new stores opened since January 1, 2022 and $6.2 million was from the collection of national advertising fund revenue on annual fees billed to new members, which began in 2023.

Revenue from our corporate-owned stores segment was $449.3 million in the year ended December 31, 2023, compared to $379.4 million in the year ended December 31, 2022, an increase of $69.9 million, or 18.4%. This increase was primarily attributable to $37.5 million from the corporate-owned store same store sales increase of 10.1%, $17.1 million from the stores acquired as a result of the Sunshine Acquisition, $15.1 million was from new stores opened since January 1, 2022 and $6.5 million was from the stores acquired in the Florida Acquisition. Partially offsetting these increases was a reduction of $6.2 million related to the sale of six Colorado corporate-owned stores in 2022.

Equipment segment revenue was $234.1 million in the year ended December 31, 2023, compared to $227.7 million in the year ended December 31, 2022, an increase of $6.4 million, or 2.8%. This increase was primarily attributable to $16.2 million of by higher equipment sales to existing franchisee-owned stores, partially offset by $9.8 million of lower revenue from equipment sales to new franchisee-owned stores in the year ended December 31, 2023. In the year ended December 31, 2023, we had equipment sales to 135 new franchisee-owned stores compared to 153 in the prior year.

Cost of revenue

Cost of revenue was $190.0 million in the year ended December 31, 2023, compared to $177.2 million in the year ended December 31, 2022, an increase of $12.8 million, or 7.2%. Cost of revenue, which primarily relates to our equipment segment, increased $7.9 million as a result of higher equipment sales to existing franchisee-owned stores, partially offset by lower equipment sales to new franchisee-owned stores in the year ended December 31, 2023, as described above. An additional increase of $3.5 million was due to costs of HVAC units sold to franchisees, and the remaining increase was due to higher cost of sales associated with products sold in corporate-owned stores.

Store operations

Store operation expenses, which relates to our Corporate-owned stores segment, were $253.6 million in the year ended December 31, 2023 compared to $219.4 million in the year ended December 31, 2022, an increase of $34.2 million, or 15.6%. This increase was primarily attributable to $11.7 million from new stores opened since January 1, 2022, $11.6 million from stores acquired in the Sunshine Acquisition, $11.3 million from stores included in our same store sales base as a result of higher rent, occupancy, and payroll expense, and $3.7 million from the stores acquired in the Florida Acquisition. These increases were partially offset by a decrease of $4.0 million related to the sale of six Colorado corporate-owned stores in 2022.

Selling, general and administrative

Selling, general and administrative expenses were $124.9 million in the year ended December 31, 2023, compared to $114.9 million in the year ended December 31, 2022, an increase of $10.1 million, or 8.8%. This increase was primarily attributable to $4.9 million of executive transition costs, $4.3 million of higher payroll expense and $2.6 million of higher technology related expenses, partially offset by lower advisory fees as a result of the Sunshine Acquisition in the prior year.

National advertising fund expense

National advertising fund expense was $70.1 million in the year ended December 31, 2023, compared to $66.1 million in the year ended December 31, 2022, an increase of $4.0 million, or 6.0%. This increase was primarily a result of higher advertising and marketing expenditures due to higher national advertising revenue as described above.

Depreciation and amortization

Depreciation and amortization expense was $149.4 million in the year ended December 31, 2023, compared to $124.0 million in the year ended December 31, 2022, an increase of $25.4 million, or 20.5%. This increase was primarily attributable to the assets acquired in the Sunshine Acquisition and Florida Acquisition as well as new stores opened since January 1, 2022.

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Other losses, net

Other losses, net was a loss of $10.4 million in the year ended December 31, 2023 compared to a loss of $5.1 million in the year ended December 31, 2022. The loss in 2023 was primarily the result of a $6.3 million increase in a reserve for a legal matter and a $2.7 million loss due to an increase to the Company’s allowance for expected credit losses. The loss in 2022 was primarily the result of an $8.6 million legal reserve, 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.

Interest income

Interest income was $17.7 million in the year ended December 31, 2023, compared to $5.0 million in the year ended December 31, 2022. This increase was primarily a result of higher interest rates on our cash, cash equivalents and investments in marketable securities in the year ended December 31, 2023 compared to the year ended December 31, 2022.

Interest expense

Interest expense primarily consists of interest on long-term debt as well as the amortization of deferred financing costs.

Interest expense was $86.6 million in the year ended December 31, 2023, compared to $88.6 million in the year ended December 31, 2022, a decrease of $2.1 million, or 2.3%. This decrease was primarily due to a $1.6 million loss on extinguishment of debt from the write-off of remaining deferred financing costs in the prior year period and $0.5 million of lower interest expense from the repayment of the variable funding notes in May 2022. Partially offsetting these decreases is higher interest expense in the year ended December 31, 2023 from the increased principal balance as a result of the debt refinancing completed on February 10, 2022.

Other income, net

Other income, net was $3.5 million in the year ended December 31, 2023, compared to $15.0 million in the year ended December 31, 2022. These amounts included income of $2.0 million and $13.8 million attributable to the remeasurement of our tax benefit arrangements due to changes in our effective tax rate and income of $2.1 million and $1.9 million attributable to accrued dividends from the Company’s held-to-maturity debt security investment in the years ended December 31, 2023 and December 31, 2022, respectively. Other income (expense) also includes the effects of foreign currency gains and losses.

Provision for income taxes

Income tax expense was $58.5 million for the year ended December 31, 2023, compared to $50.5 million for the year ended December 31, 2022, an increase of $8.0 million, or 15.8%. This increase is primarily attributable to our higher income before taxes in the year ended December 31, 2023 as compared to the year ended December 31, 2022.

The Company’s effective tax rate was 28.2% for the year ended December 31, 2023, compared to 31.3% in the prior year. The decrease in the effective income tax rate was primarily due to an income tax expense in 2022 resulting from a change in our deferred tax rate, partially offset by a reduction in state and local taxes.

Segment results

Franchise

Franchise segment EBITDA was $266.7 million in the year ended December 31, 2023, compared to $216.8 million in the year ended December 31, 2022, an increase of $49.9 million, or 23.0%. This increase was primarily due to the $46.4 million of higher franchise revenue and $11.9 million of higher NAF revenue as described above, partially offset by $4.0 million of higher NAF expense, $3.5 million of higher costs of HVAC units sold to franchisees, and $1.3 million of higher selling, general and administrative expense. Depreciation and amortization was $7.4 million for both the years ended December 31, 2023 and 2022.

Corporate-owned stores

Corporate-owned stores segment EBITDA was $171.5 million in the year ended December 31, 2023, compared to $142.1 million in the year ended December 31, 2022, an increase of $29.4 million, or 20.7%. This increase was primarily attributable to $25.1 million from the corporate-owned same store sales increase of 10.1%, $5.2 million from the Sunshine Acquisition, $2.8 million from the stores acquired in the Florida Acquisition, and $2.7 million from stores opened since January 1, 2022. These increases were partially offset by $3.5 million of higher corporate-owned store selling general and administrative expense and a decrease of $2.2 million related to the sale of six Colorado corporate-owned stores in 2022. Depreciation and amortization was $118.3 million for the year ended December 31, 2023, compared to $94.3 million for the year ended

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December 31, 2022. The increase in depreciation and amortization was primarily attributable the Sunshine Acquisition, the Florida Acquisition and new stores opened since January 1, 2022.

Equipment

Equipment segment EBITDA was $56.0 million in the year ended December 31, 2023, compared to $59.1 million in the year ended December 31, 2022, a decrease of $3.0 million, or 5.1%. This decrease was primarily driven by certain discounts provided to franchisees in year ended December 31, 2023 compared to the year ended December 31, 2022, as well as lower volume rebates earned from equipment vendors. Depreciation and amortization was $5.0 million for both the years ended December 31, 2023 and 2022.

Liquidity and Capital Resources

As of December 31, 2023, we had $275.8 million of cash and cash equivalents, $74.9 million of short-term marketable securities, $50.9 million of long-term marketable securities and $46.3 million of restricted cash.

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. 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.

Summary of Cash Flows

Operating activities

For the year ended December 31, 2023, net cash provided by operating activities was $330.3 million compared to $240.2 million in the year ended December 31, 2022, an increase of $90.0 million, or 37.5%. Of the increase, $77.6 million was due to higher net income after adjustments to reconcile net income to net cash provided by operating activities and $12.5 million was due to favorable changes in working capital primarily attributable to an accounts receivable decrease compared to an increase in the prior year, favorable changes in accounts payable and accrued expenses, and lower other assets, partially offset by higher payments made under tax benefit arrangements in the current year period and a larger reduction in other liabilities and other current liabilities compared to the prior year period.

Investing activities

For the year ended December 31, 2023, net cash used in investing activities was $340.0 million compared to $506.6 million in the year ended December 31, 2022, a decrease of $166.6 million. The primary drivers of the decrease were $43.3 million of cash used in acquisitions in the current year compared to $424.9 million used for the Sunshine Acquisition in the prior year. Partially offsetting the decrease was $122.8 million of cash used for the purchase of marketable securities, net of maturities, $35.9 million from higher capital expenditures, $35.6 million of higher cash used for other investments in the current year period, and cash received of $20.8 million from the sale of six Colorado corporate-owned stores in the prior year period.

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Capital expenditures for the years ended December 31, 2023 and 2022:

Financing activities

For the year ended December 31, 2023, net cash used in financing activities was $141.4 million compared to net cash provided by financing activities of $135.7 million in the year ended December 31, 2022, a decrease of $277.1 million. The primary drivers of the decrease in net cash provided by financing activities was principal payments on long-term debt of $20.7 million in the year ended December 31, 2023 compared to net cash provided by long-term debt of $234.0 million in the year ended December 31, 2022, and an increase of $30.7 million of cash used for share repurchases in 2023.

Securitized Financing Facility

Planet Fitness Master Issuer LLC (the “Master Issuer”), a limited-purpose, bankruptcy remote, wholly-owned indirect subsidiary of Pla-Fit Holdings, LLC, is the master issuer of outstanding senior secured notes under a securitized financing facility that was entered into in August 2018. In February 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 of December 31, 2023 due to repayment in full on May 9, 2022 using cash on hand.

There were no material changes to the terms of any debt obligations in the year ended December 31, 2023. The Company was in compliance with its debt covenants as of December 31, 2023. 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 November 5, 2019, our board of directors approved a share repurchase program of up to $500 million (the “2019 Share Repurchase Program”).

On December 4, 2019, the Company entered into a $300 million accelerated share repurchase agreement (the “2019 ASR Agreement”) with JPMorgan Chase Bank, N.A. (“JPMC”). Pursuant to the terms of the 2019 ASR Agreement, on December 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 on March 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 March 18, 2020, the Company announced the suspension of its 2019 share repurchase program.

2022 share repurchase program

On November 4, 2022, the Company’s board of directors approved a share repurchase program of up to $500 million, which replaced the 2019 share repurchase program. During the year ended December 31, 2023, the Company purchased 1,698,753 shares of Class A common stock for a total cost of $125,030. A share repurchase excise tax of $1,048 was also incurred as a result of new legislation that went into effect beginning in 2023. All repurchased shares were retired. Subsequent to these repurchases, there is $374,970 remaining under the 2022 share repurchase program.

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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 December 31, 2023.

(1) Long-term debt payments include scheduled principal payments only.

(2) Timing of payments under tax benefit arrangements is estimated.

(3) Advertising purchase commitments include commitments for the NAF.

(4) Purchase obligations consists of 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 of December 31, 2023, our off-balance sheet arrangements consisted of guarantees of lease agreements for certain franchisees. Our maximum total commitment under these agreements is approximately $5.2 million and would only require payment upon default by the primary obligor. The estimated fair value of these guarantees at December 31, 2023 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 Policies and 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 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.

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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 right-of-use (“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 of December 31, 2023, we had $502.5 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 of December 31, 2023, the Company has provided a valuation allowance of $4.9 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 of December 31, 2023, we recognized $495.7 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 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.

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Investments and allowance for expected credit losses

Our held-to-maturity debt security is 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 debt securities. A held-to-maturity investment security and its allowance for expected credit losses is written off when deemed uncollectible.