10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 1, 2023
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2023
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number: 001-40887
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|||||||
(952 ) 947-0000
(Address of principal executive offices, including zip code; Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ☒ | Non-accelerated filer | ☐ | |||||||||||||||||||
| Smaller reporting company | Emerging growth company | ||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 27, 2023, the registrant had 195,038,261 shares of common stock outstanding, par value $0.01 per share.
TABLE OF CONTENTS
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2
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIFE TIME GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
| March 31, 2023 |
December 31, 2022 |
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| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Center operating supplies and inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Income tax receivable | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Intangible assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Construction accounts payable | |||||||||||
| Deferred revenue | |||||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Current maturities of debt | |||||||||||
| Current maturities of operating lease liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, net of current portion | |||||||||||
| Operating lease liabilities, net of current portion | |||||||||||
| Deferred income taxes | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
Commitments and contingencies (Note 10) |
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| Stockholders’ equity: | |||||||||||
Common stock, $ |
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| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( |
( |
|||||||||
| Accumulated other comprehensive loss | ( |
( |
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| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See notes to unaudited condensed consolidated financial statements.
3
LIFE TIME GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
| Three Months Ended March 31, |
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| 2023 | 2022 | ||||||||||
| Revenue: | |||||||||||
| Center revenue | $ | $ | |||||||||
| Other revenue | |||||||||||
| Total revenue | |||||||||||
| Operating expenses: | |||||||||||
| Center operations | |||||||||||
| Rent | |||||||||||
| General, administrative and marketing | |||||||||||
| Depreciation and amortization | |||||||||||
| Other operating expense (income) | ( |
||||||||||
| Total operating expenses | |||||||||||
| Income (loss) from operations | ( |
||||||||||
| Other (expense) income: | |||||||||||
| Interest expense, net of interest income | ( |
( |
|||||||||
| Equity in earnings of affiliate | |||||||||||
| Total other expense | ( |
( |
|||||||||
| Income (loss) before income taxes | ( |
||||||||||
| Provision for (benefit from) income taxes | ( |
||||||||||
| Net income (loss) | $ | $ | ( |
||||||||
| Income (loss) per common share: | |||||||||||
| Basic | $ | $ | ( |
||||||||
| Diluted | $ | $ | ( |
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| Weighted-average common shares outstanding: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
See notes to unaudited condensed consolidated financial statements.
4
LIFE TIME GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
| Three Months Ended March 31, |
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| 2023 | 2022 | ||||||||||
| Net income (loss) | $ | $ | ( |
||||||||
Foreign currency translation adjustments, net of tax of $ |
|||||||||||
| Comprehensive income (loss) | $ | $ | ( |
||||||||
See notes to unaudited condensed consolidated financial statements.
5
LIFE TIME GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
| Common Stock | Additional Paid-In Capital |
Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Equity |
|||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | |||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock option exercises | — | — | |||||||||||||||||||||||||||||||||
| Issuances of common shares in connection with the vesting of restricted stock units | ( |
— | — | ( |
|||||||||||||||||||||||||||||||
| Issuances of common stock in connection with business acquisitions | — | — | |||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital |
Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Equity |
|||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||
| Net loss | — | — | — | ( |
— | ( |
|||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Settlement of accrued compensation liabilities through the issuance of share-based compensation awards | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
6
LIFE TIME GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Three Months Ended March 31, |
|||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | $ | ( |
||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Deferred income taxes | ( |
||||||||||
| Share-based compensation | |||||||||||
| Non-cash rent expense | |||||||||||
| Impairment charges associated with long-lived assets | |||||||||||
| Gain on disposal of property and equipment, net | ( |
( |
|||||||||
| Amortization of debt discounts and issuance costs | |||||||||||
| Changes in operating assets and liabilities | ( |
( |
|||||||||
| Other | ( |
( |
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| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | ( |
( |
|||||||||
| Proceeds from sale-leaseback transactions | |||||||||||
| Other | |||||||||||
| Net cash used in investing activities | ( |
( |
|||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from borrowings | |||||||||||
| Repayments of debt | ( |
( |
|||||||||
| Proceeds from revolving credit facility | |||||||||||
| Repayments of revolving credit facility | ( |
( |
|||||||||
| Repayments of finance lease liabilities | ( |
( |
|||||||||
| Proceeds from stock option exercises | |||||||||||
| Other | ( |
( |
|||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of exchange rates on cash and cash equivalents | |||||||||||
| Increase in cash and cash equivalents | |||||||||||
| Cash and cash equivalents – beginning of period | |||||||||||
| Cash and cash equivalents – end of period | $ | $ | |||||||||
See notes to unaudited condensed consolidated financial statements.
7
LIFE TIME GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands except per share data)
454
1. Nature of Business and Basis of Presentation
Nature of Business
Life Time Group Holdings, Inc. (collectively with its direct and indirect subsidiaries, “Life Time,” “we,” “our,” or the “Company”) is a holding company incorporated in the state of Delaware. Life Time Group Holdings, Inc. changed its name from LTF Holdings, Inc. effective on June 21, 2021. As a holding company, Life Time Group Holdings, Inc. does not have its own independent assets or business operations, and all of our assets and business operations are through Life Time, Inc. and its direct and indirect subsidiaries. We are primarily dedicated to providing premium health, fitness and wellness experiences at our athletic country club destinations and via our comprehensive digital platform and portfolio of iconic athletic events – all with the objective of inspiring healthier, happier lives. We design, build and operate our athletic country club destinations that are distinctive and large, multi-use sports and athletic, professional fitness, family recreation and spa centers in a resort-like environment. As of March 31, 2023, we operated 164 centers in 29 states and one Canadian province.
Basis of Presentation
2. Summary of Significant Accounting Policies
New Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In response to the concerns about structural risks of interbank offered rates (“IBORs”) and, particularly, the risk of cessation of the London Interbank Offered Rate (“LIBOR”), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. ASU 2020-04 provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope,” which provides implementation guidance associated with ASU 2020-04 and clarifies certain optional expedients in Topic 848. In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848,” which defers the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. We plan to replace LIBOR with Term Secured Overnight Financing Rate (“SOFR”) no later than June 30, 2023. We do not expect that the adoption of this ASU will have a material impact on our consolidated financial statements.
Fair Value Measurements
The accounting guidance establishes a framework for measuring fair value and expanded disclosures about fair value measurements. The guidance applies to all assets and liabilities that are measured and reported on a fair value basis. This enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The guidance requires that each asset and liability carried at fair value be classified into one of the following categories:
8
LIFE TIME GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands except per share data)
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The carrying amounts related to cash and cash equivalents, accounts receivable, income tax receivable, accounts payable and accrued liabilities approximate fair value.
Fair Value Measurements on a Recurring Basis. We had no material remeasurements of such assets or liabilities to fair value during the three months ended March 31, 2023 and 2022.
Financial Assets and Liabilities. At March 31, 2023, the fair value of our outstanding Term Loan Facility, Secured Notes and Unsecured Notes (each of which is defined in Note 6, Debt) was approximately $273.6 million, $894.9 million and $451.3 million, respectively. At December 31, 2022, the fair value of our outstanding Term Loan Facility, Secured Notes and Unsecured Notes was approximately $272.3 million, $860.3 million and $425.1 million, respectively. The carrying amount of our outstanding Mortgage Notes and Construction Loan (each of which is defined in Note 6, Debt) at March 31, 2023 and December 31, 2022 approximates fair value. The fair value of our debt is based on the amount of future cash flows discounted using rates we would currently be able to realize for similar instruments of comparable maturity. If our long-term debt were recorded at fair value, it would be classified as Level 2 in the fair value hierarchy. For more information regarding our debt, see Note 6, Debt.
Fair Value Measurements on a Nonrecurring Basis. Assets and liabilities that are measured at fair value on a nonrecurring basis primarily relate to our goodwill, intangible assets and other long-lived assets, which are remeasured when the derived fair value is below carrying value on our condensed consolidated balance sheets. For these assets, we do not periodically adjust carrying value to fair value except in the event of impairment. If we determine that impairment has occurred, the carrying value of the asset would be reduced to fair value and the difference would be recorded as a loss within operating income in our condensed consolidated statements of operations.
During the three months ended March 31, 2022, we determined that certain projects were no longer deemed viable for construction, and that the previously capitalized site development costs associated with these projects were impaired. Accordingly, as it relates to these long-lived assets, we recognized impairment charges of $0.2 million during the three months ended March 31, 2022. There were no impairment charges recognized during the three months ended March 31, 2023. Fair value remeasurements are based on significant unobservable inputs (Level 3). Fixed asset fair values are primarily derived using a discounted cash flow (“DCF”) model to estimate the present value of net cash flows that the asset or asset group was expected to generate. The key inputs to the DCF model generally include our forecasts of net cash generated from revenue, expenses and other significant cash outflows, such as capital expenditures, as well as an appropriate discount rate.
3. Supplemental Balance Sheet and Cash Flow Information
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
| March 31, 2023 |
December 31, 2022 |
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| Property held for sale | $ | $ | |||||||||
| Construction contract receivables | |||||||||||
| Prepaid insurance | |||||||||||
| Prepaid software licenses and maintenance | |||||||||||
| Other | |||||||||||
| Prepaid expenses and other current assets | $ | $ | |||||||||
9
LIFE TIME GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands except per share data)
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
| March 31, 2023 |
December 31, 2022 |
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| Real estate taxes | $ | $ | |||||||||
| Accrued interest | |||||||||||
| Payroll liabilities | |||||||||||
| Utilities | |||||||||||
| Self-insurance accruals | |||||||||||
| Corporate accruals | |||||||||||
| Other | |||||||||||
| Accrued expenses and other current liabilities | $ | $ | |||||||||
Supplemental Cash Flow Information
Decreases (increases) in operating assets and increases (decreases) in operating liabilities are as follows:
| Three Months Ended March 31, |
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| 2023 | 2022 | ||||||||||
| Accounts receivable | $ | ( |
$ | ( |
|||||||
| Center operating supplies and inventories | ( |
( |
|||||||||
| Prepaid expenses and other current assets | ( |
( |
|||||||||
| Income tax receivable | |||||||||||
| Other assets | |||||||||||
| Accounts payable | ( |
||||||||||
| Accrued expenses and other current liabilities | ( |
( |
|||||||||
| Deferred revenue | |||||||||||
| Other liabilities | ( |
||||||||||
| Changes in operating assets and liabilities | $ | ( |
$ | ( |
|||||||
Additional supplemental cash flow information is as follows:
| Three Months Ended March 31, |
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| 2023 | 2022 | ||||||||||
| Net cash paid for (received from) income taxes, net of refunds received (taxes paid) | $ | $ | ( |
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| Cash payments for interest, net of capitalized interest | |||||||||||
| Capitalized interest | |||||||||||
| Non-cash activity: | |||||||||||
| Issuance of common stock in connection with a business acquisition | |||||||||||
10
LIFE TIME GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands except per share data)
4. Goodwill and Intangibles
The goodwill balance was $1,235.0 million and $1,233.2 million at March 31, 2023 and December 31, 2022, respectively. The $1.8 million change in goodwill for the three months ended March 31, 2023 was related to a business acquisition during the first quarter of 2023.
Intangible assets consisted of the following:
| March 31, 2023 | |||||||||||||||||
| Gross | Accumulated Amortization | Net | |||||||||||||||
| Trade name | $ | $ | — | $ | |||||||||||||
| Other | ( |
||||||||||||||||
| Total intangible assets | $ | $ | ( |
$ | |||||||||||||
| December 31, 2022 | |||||||||||||||||
| Gross | Accumulated Amortization | Net | |||||||||||||||
| Trade name | $ | $ | — | $ | |||||||||||||
| Other | ( |
||||||||||||||||
| Total intangible assets | $ | $ | ( |
$ | |||||||||||||
Other intangible assets at March 31, 2023 and December 31, 2022 include a facility license as well as trade names and customer relationships associated with our race registration and timing businesses. The facility license is associated with an outdoor enthusiast and bicycling event, which was acquired during the year ended December 31, 2021 for approximately $10.2 million, of which approximately $1.1 million was paid during the three months ended March 31, 2023. This license expires in April 2031. The transaction was accounted for as an asset acquisition, and the associated costs are being amortized on a straight-line basis over its estimated useful life of 9.8 years.
Amortization expense associated with intangible assets for the three months ended March 31, 2023 and 2022 was $0.3 million and $0.5 million, respectively. Amortization expense associated with intangible assets is included in Depreciation and amortization in our condensed consolidated statements of operations.
There were no
5. Revenue
Revenue associated with our membership dues, enrollment fees, and certain services from our in-center businesses is recognized over time as earned. Revenue associated with products and services offered in our cafes and spas, as well as through e-commerce, is recognized at a point in time. The following is a summary of revenue, by major revenue stream, that we recognized during the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, |
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| 2023 | 2022 | ||||||||||
| Membership dues and enrollment fees | $ | $ | |||||||||
| In-center revenue | |||||||||||
| Total center revenue | |||||||||||
| Other revenue | |||||||||||
| Total revenue | $ | $ | |||||||||
The timing associated with the revenue we recognized during the three months ended March 31, 2023 and 2022 is as follows:
11
LIFE TIME GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands except per share data)
| Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||||
| Center Revenue |
Other Revenue |
Total Revenue |
Center Revenue |
Other Revenue |
Total Revenue |
||||||||||||||||||||||||||||||
| Goods and services transferred over time | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Goods and services transferred at a point in time | |||||||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Contract liabilities represent payments or consideration received in advance for goods or services that the Company has not yet transferred to the customer. Contract liabilities consist primarily of deferred revenue for fees collected in advance for membership dues, enrollment fees, Dynamic Personal Training and other center services offerings, as well as our media and athletic events. Contract liabilities at March 31, 2023 and December 31, 2022 were $44.8 million and $38.9 million, respectively.
Contract liabilities that will be recognized within one year are classified as deferred revenue in our condensed consolidated balance sheets. Deferred revenue at March 31, 2023 and December 31, 2022 was $42.4 million and $36.9 million, respectively, and consists primarily of prepaid membership dues, enrollment fees, Dynamic Personal Training and other in-center services, as well as media and athletic events. The $5.5 million increase was primarily driven by prepayment of athletic events and kids camps that have yet to be serviced.
6. Debt
Debt consisted of the following:
| March 31, 2023 |
December 31, 2022 | ||||||||||
| Term Loan Facility, maturing December 2024 | $ | $ | |||||||||
| Revolving Credit Facility, maturing December 2026 | |||||||||||
| Secured Notes, maturing January 2026 | |||||||||||
| Unsecured Notes, maturing April 2026 | |||||||||||
| Construction Loan, maturing February 2026 | |||||||||||
| Mortgage Notes, various maturities | |||||||||||
| Other debt | |||||||||||
| Fair value adjustment | |||||||||||
| Total debt | |||||||||||
| Less unamortized debt discounts and issuance costs | ( |
( |
|||||||||
| Total debt less unamortized debt discount and issuance costs | |||||||||||
| Less current maturities | ( |
( |
|||||||||
| Long-term debt, less current maturities | $ | $ | |||||||||
Senior Secured Credit Facility
In June 2015, Life Time, Inc. and certain of our other wholly-owned subsidiaries entered into a senior secured credit facility with a group of lenders led by Deutsche Bank AG as the administrative agent. On January 22, 2021, Life Time, Inc. and certain of our other wholly-owned subsidiaries entered into an eighth amendment to the credit agreement governing our senior secured credit agreement (the “Credit Agreement”). Pursuant to such eighth amendment to the Credit Agreement, Life Time, Inc. and such other subsidiaries, among other things, (i) entered into a new term loan facility (the “Term Loan Facility”) and incurred new term loans in an aggregate principal amount of $850.0 million and (ii) extended the maturity on the vast majority of commitments under the revolving portion of our senior secured credit facility (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Credit Facilities”). On December 2, 2021, Life Time, Inc. and certain of our other wholly-owned subsidiaries entered into a ninth amendment to the Credit Agreement. Pursuant to such
12
LIFE TIME GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands except per share data)
ninth amendment, Life Time, Inc. and such other subsidiaries increased the commitments under the Revolving Credit Facility to $475.0 million and extended the maturity of the Revolving Credit Facility to December 2, 2026, except that the maturity will be: (a) September 22, 2024 if we have not refinanced or amended the Term Loan Facility in a manner set forth in such amendment by such date; (b) October 16, 2025 if we have at least $100.0 million remaining outstanding on the senior unsecured notes (the “Unsecured Notes”) that mature in April 2026 on such date; and (c) January 14, 2026 if we have at least $100.0 million remaining outstanding on the senior secured notes (the “Secured Notes”) that mature in January 2026 on such date.
Upon the exercise of an accordion feature and subject to certain conditions, borrowings under the Credit Facilities may be increased subject, in certain cases, to meeting a first lien net leverage ratio. The Credit Facilities are secured by a first priority lien (on a pari-passu basis with the Secured Notes described below) on substantially all of our assets.
Term Loan Facility
The $850.0 million Term Loan Facility matures in December 2024. On October 13, 2021, we used a portion of net proceeds we received in connection with the IPO to pay down $575.7 million of our Term Loan Facility. As a result of the pay down, we are no longer required to make quarterly principal payments on the Term Loan Facility prior to its maturity. At March 31, 2023, the Term Loan Facility loan balance was $273.6 million, with interest due at intervals ranging from 30 to 180 days at interest rates ranging from LIBOR plus 4.75 % or base rate plus 3.75 %, in either case subject to a 1.00 % rate floor.
Revolving Credit Facility
Our Revolving Credit Facility provides for a $475.0 million revolver and matures in December 2026, or earlier as detailed above under “—Senior Secured Credit Facility.” At March 31, 2023, there were $85.0 million of outstanding borrowings under the Revolving Credit Facility and there were $30.5 million of outstanding letters of credit, resulting in total revolver availability of $359.5 million, which was available at intervals ranging from 30 to 180 days at interest rates ranging from LIBOR plus 4.00 % or base rate plus 3.00 %.
The weighted average interest rate and debt outstanding under the Revolving Credit Facility for the three months ended March 31, 2023 was 8.69 % and $76.3 million, respectively. The highest month-end balance during that same period was $115.0 million.
Secured Notes
On January 22, 2021, Life Time, Inc. issued the Secured Notes in an aggregate principal amount of $925.0 million. These notes mature in January 2026 and interest only payments are due semi-annually in arrears at 5.75 %. Life Time, Inc. has the option, which began on January 15, 2023, to call the Secured Notes, in whole or in part, on one or more occasions, subject to the payment of a redemption price that includes a call premium that varies depending on the year of redemption. In addition, at any time prior to January 15, 2023, Life Time, Inc. could have redeemed up to 40.00 % of the aggregate principal amount of the Secured Notes outstanding with the net proceeds of certain equity offerings by us at a redemption price equal to 105.75 % of the principal amount of the Secured Notes, plus accrued and unpaid interest, if any, to, but not including, the redemption date. Life Time, Inc. did not exercise this redemption right. The Secured Notes and the related guarantees are our senior secured obligations and are secured on a first-priority basis by security interests on substantially all of our assets.
Unsecured Notes
On February 5, 2021, Life Time, Inc. issued the Unsecured Notes in the original principal amount of $475.0 million. The Unsecured Notes mature in April 2026 and interest only payments are due semi-annually in arrears at 8.00 %. Life Time, Inc. has the option, which began on February 1, 2023, to redeem the Unsecured Notes, in whole or in part, on one or more occasions, subject to the payment of a redemption price that includes a call premium that varies depending on the year of redemption. In addition, at any time prior to February 1, 2023, Life Time, Inc. could have redeemed up to 40.00 % of the aggregate principal amount of the Unsecured Notes outstanding with the net proceeds of certain equity offerings by us at a redemption price equal to 108.00 % of the principal amount of the Unsecured Notes, plus accrued and unpaid interest, if any, to, but not including, the redemption date. Life Time, Inc. did not exercise this redemption right. The Unsecured Notes and the related guarantees are our general senior unsecured obligations and will rank equally in right of payment with all of our existing and future senior indebtedness without giving effect to collateral arrangements.
13
LIFE TIME GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands except per share data)
Construction Loan
On January 22, 2021, we closed on a construction loan (the “Construction Loan”) providing up to $28.0 million to partially finance the construction of a Life Time Living location. The Construction Loan has a maturity date of February 15, 2026 and is collateralized by the property. Borrowings under the Construction Loan bear interest at a variable annual rate of no less than 4.80 %. Interest only payments are due monthly beginning April 15, 2022 and continuing through February 15, 2024. Beginning March 15, 2024, based on the principal balance due as of February 15, 2024, monthly principal and interest installment payments will be due in an amount sufficient to fully amortize the principal balance at maturity. At March 31, 2023 and December 31, 2022, there were $28.0 million and $21.3 million of outstanding borrowings under the Construction Loan, respectively.
Mortgage Notes
Certain of our subsidiaries have entered into mortgage facilities with various financial institutions (collectively, the “Mortgage Notes”), which are collateralized by certain of our related real estate and buildings, including one of our corporate headquarters properties. The Mortgage Notes have varying maturity dates from February 2024 through August 2027 and carried a weighted average interest rate of 5.13 % and 5.12 % at March 31, 2023 and December 31, 2022, respectively. Payments of principal and interest on each of the Mortgage Notes are payable monthly on the first business day of each month. The Mortgage Notes contain customary affirmative covenants, including but not limited to, payment of property taxes, granting of lender access to inspect the properties, maintenance of the properties, providing financial statements, providing estoppel certificates and lender consent to leases. The Mortgage Notes also contain various customary negative covenants, including, but not limited to, restrictions on transferring the property, change in control of the borrower and changing the borrower’s business or principal place of business. As of March 31, 2023, we were either in compliance in all material respects with the covenants associated with the Mortgage Notes or the covenants were not applicable.
Debt Discounts and Issuance Costs
Unamortized debt discounts and issuance costs associated with the Term Loan Facility, Secured Notes, Unsecured Notes and Construction Loan of $17.5 million and $19.2 million are included in Long-term debt, net of current portion on our condensed consolidated balance sheets at March 31, 2023 and December 31, 2022, respectively.
Unamortized revolver-related debt issuance costs of $2.9 million and $3.1 million are included in Other assets on our condensed consolidated balance sheets at March 31, 2023 and December 31, 2022, respectively.
Debt Covenants
We are required to comply with certain affirmative and restrictive covenants under our Credit Facilities, Secured Notes and Unsecured Notes. We are also required to comply with a first lien net leverage ratio covenant under the Revolving Credit Facility, which requires us to maintain a first lien net leverage ratio, if 30.00 % or more of the Revolving Credit Facility commitments are outstanding shortly after the end of any fiscal quarter (excluding all cash collateralized undrawn letters of credit and other undrawn letters of credit up to $20.0 million).
As of March 31, 2023, we were either in compliance in all material respects with the covenants under the Credit Facilities, or the covenants were not applicable.
Future Maturities of Long-Term Debt
Aggregate annual future maturities of long-term debt, excluding unamortized discounts, issuance costs and fair value adjustments, at March 31, 2023 were as follows:
| April 2023 through March 2024 | $ | ||||
| April 2024 through March 2025 | |||||
| April 2025 through March 2026 | |||||
| April 2026 through March 2027 | |||||
| April 2027 through March 2028 | |||||
| Thereafter | |||||
| Total future maturities of long-term debt | $ | ||||
14
LIFE TIME GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands except per share data)
7. Leases
Lease Cost
Lease cost included in our condensed consolidated statements of operations for the three months ended March 31, 2023 and 2022 consisted of the following:
| Three Months Ended March 31, |
Classification in Condensed Consolidated Statements of Operations |
||||||||||||||||
| 2023 | 2022 | ||||||||||||||||
| Lease cost: | |||||||||||||||||
| Operating lease cost | $ | $ | Rent | ||||||||||||||
| Short-term lease cost | Rent | ||||||||||||||||
| Variable lease cost | Rent | ||||||||||||||||
| Finance lease cost: | |||||||||||||||||
| Amortization of right-of-use assets | Depreciation and amortization | ||||||||||||||||
| Interest on lease liabilities | Interest expense, net of interest income | ||||||||||||||||
| Interest on financing obligations | Interest expense, net of interest income | ||||||||||||||||
| Total lease cost | $ | $ | |||||||||||||||
Operating and Finance Lease Right-of-Use Assets and Lease-Related Liabilities
Operating and finance lease right-of-use assets and lease-related liabilities were as follows:
| March 31, 2023 | December 31, 2022 | Classification on Condensed Consolidated Balance Sheets |
|||||||||||||||
| Lease right-of-use assets: | |||||||||||||||||
| Operating leases | $ | $ | Operating lease right-of-use assets | ||||||||||||||
Finance leases (1)
|
|||||||||||||||||
| Total lease right-of-use assets | $ | $ | |||||||||||||||
| Lease liabilities: | |||||||||||||||||
| Current | |||||||||||||||||
| Operating leases | $ | $ | Current maturities of operating lease liabilities | ||||||||||||||
| Finance leases | |||||||||||||||||
| Non-Current | |||||||||||||||||
| Operating leases | Operating lease liabilities, net of current portion | ||||||||||||||||
| Finance leases | |||||||||||||||||
| Financing obligations | Other liabilities | ||||||||||||||||
| Total lease-related liabilities | $ | $ | |||||||||||||||
15
LIFE TIME GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands except per share data)
Remaining Lease Terms and Discount Rates
The weighted-average remaining lease terms and discount rates associated with our lease-related liabilities at March 31, 2023 were as follows:
| March 31, 2023 | |||||
Weighted-average remaining lease term (1)
|
|||||
| Operating leases | |||||
| Finance leases | |||||
| Financing obligations | |||||
| Weighted-average discount rate | |||||
| Operating leases | |||||
| Finance leases | |||||
| Financing obligations | |||||
(1) The weighted-average remaining lease term associated with our operating and finance lease liabilities does not include all of the optional renewal periods available to us under our current lease arrangements. Rather, the weighted-average remaining lease term only includes periods covered by an option to extend a lease if we are reasonably certain to exercise that option.
Sale-Leaseback Transaction
During the three months ended March 31, 2023, we entered into and consummated a sale-leaseback transaction with an unrelated third party. Under this transaction, we sold one property with a combined net book value of $26.0 million for $33.0 million, which was reduced by transaction costs of $0.3 million, for net cash proceeds of $32.7 million. The estimated fair value of the property sold was $33.0 million, which resulted in the recognition of a gain of $6.7 million on this transaction. This gain is included in Other operating expense (income) in our condensed consolidated statement of operations.
Supplemental Cash Flow Information
Supplemental cash flow information associated with our operating and finance leases is as follows:
| Three Months Ended March 31, |
|||||||||||
| 2023 | 2022 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | $ | |||||||||
| Operating cash flows from finance leases | |||||||||||
| Operating cash flows from financing obligations | |||||||||||
| Financing cash flows from finance leases | |||||||||||
| Non-cash information: | |||||||||||
| Right-of-use assets obtained in exchange for initial lease liabilities: | |||||||||||
| Operating leases | |||||||||||
| Finance leases | |||||||||||
| Right-of-use asset adjustments recognized as a result of the remeasurement of existing lease liabilities: | |||||||||||
| Operating leases | |||||||||||
| Non-cash increase in operating lease right-of-use assets associated with below-market sale-leaseback transactions | |||||||||||
| Non-cash increase in financing obligations as a result of interest accretion | |||||||||||
16
LIFE TIME GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands except per share data)
Maturities of Operating and Finance Lease Liabilities
The maturities associated with our operating and finance lease liabilities at March 31, 2023 are as follows:
| Operating Leases | Finance Leases | Financing Obligations | Total | ||||||||||||||||||||
| April 2023 through March 2024 | $ | $ | $ | $ | |||||||||||||||||||
| April 2024 through March 2025 | |||||||||||||||||||||||
| April 2025 through March 2026 | |||||||||||||||||||||||
| April 2026 through March 2027 | |||||||||||||||||||||||
| April 2027 through March 2028 | |||||||||||||||||||||||
| Thereafter | |||||||||||||||||||||||
| Total lease payments | |||||||||||||||||||||||
| Less: Imputed interest | |||||||||||||||||||||||
| Present value of lease liabilities | $ | $ | $ | $ | |||||||||||||||||||
Leases Not Yet Commenced
As of March 31, 2023, we had several leases associated with future centers and Life Time Work locations that were executed, but we did not yet have control of the underlying assets. Accordingly, as of March 31, 2023, we did not recognize any right-of-use assets or lease liabilities associated with these arrangements on our condensed consolidated balance sheet. These arrangements contain undiscounted lease payments that are payable during the initial lease terms, which range from 15 to 25 years, totaling approximately $380.0 million.
8. Stockholders’ Equity
2021 Equity Incentive Plan
In connection with the IPO and effective October 6, 2021, we adopted the 2021 Incentive Award Plan (the “2021 Equity Plan”), under which we may grant cash and equity-based incentive awards to our employees, consultants and directors. The maximum number of shares of our common stock available for issuance under the 2021 Equity Plan is equal to the sum of (i) approximately 14.5 million shares of our common stock, (ii) an annual increase on the first day of each year beginning in 2022 and ending in and including 2031, equal to the lesser of (A) 4 % of the outstanding shares of our common stock on the last day of the immediately preceding fiscal year and (B) such lesser amount as determined by our board of directors, and (iii) the approximately 1.0 million shares of our common stock that were available for issuance under the LTF Holdings, Inc. 2015 Equity Incentive Plan (the “2015 Equity Plan”) as of October 6, 2021, provided, however, no more than 14.5 million shares may be issued upon the exercise of incentive stock options. Effective January 1, 2022, the number of shares of our common stock available for issuance under the 2021 Equity Plan increased by approximately 7.7 million shares pursuant to the evergreen feature described in part (ii) of the immediately preceding sentence. Our board of directors determined that no additional shares would become available under such evergreen feature effective as of January 1, 2023. Additionally, the number of shares of our common stock available for issuance under the 2021 Equity Plan may increase with respect to awards under the 2015 Equity Plan which are forfeited or lapse unexercised and which following the effective date of the 2021 Equity Plan are not issued under such prior plan. The share reserve formula under the 2021 Equity Plan is intended to provide us with the continuing ability to grant equity awards to eligible employees, directors and consultants for the 10 -year term of the 2021 Equity Plan.
As of March 31, 2023, approximately 18.4 million shares were available for future awards to employees and other eligible participants under the 2021 Equity Plan.
2021 Employee Stock Purchase Plan
In connection with the IPO and effective October 6, 2021, we adopted the 2021 Employee Stock Purchase Plan (the “ESPP”). The ESPP is designed to allow our eligible employees to purchase shares of our common stock, at periodic intervals, with their accumulated payroll deductions. The ESPP consists of two components: an Internal Revenue Service (“IRS”) Code section 423 (“Section 423”) component, which is intended to qualify under Section 423 of the IRS Code and a non-Section 423 component, which need not qualify under Section 423 of the IRS Code. The aggregate number of shares of our common stock that has initially been reserved for issuance under the ESPP is equal to (i) approximately 2.9 million shares of our common stock, and (ii) an annual increase on the first day of each year beginning in 2022 and ending in and
17
LIFE TIME GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands except per share data)
including 2031, equal to the lesser of (A) 1 % of the aggregate number of shares of our common stock outstanding on the final day of the immediately preceding calendar year and (B) such smaller number of our shares of common stock as determined by our board of directors; provided that in no event will more than 29.0 million shares of our common stock be available for issuance under the Section 423 component of the ESPP. Our board of directors determined that no additional shares would become available under the ESPP as of January 1, 2022 or January 1, 2023 pursuant to the evergreen feature described in part (ii) of the immediately preceding sentence. Our board of directors or the compensation committee will have authority to interpret the terms of the ESPP and determine eligibility of participants.
We launched the first offering period under the ESPP on December 1, 2022. The ESPP permits participants to purchase common stock through payroll deductions of up to 15 % of their eligible compensation, which includes a participant’s gross base compensation for services to us. On the first trading day of each offering period, each participant is automatically granted an option to purchase shares of our common stock. The purchase option expires at the end of the applicable offering period and will be exercised on each purchase date during such offering period to the extent of the payroll deductions accumulated during the offering period. We have consecutive offering periods of approximately six months in length commencing on each June 1 and December 1 during the term of the ESPP. The purchase price for a share of our common stock is 90 % of the fair market value of a share on the enrollment date for such offering period or on the purchase date, whichever is lower, and subject to adjustment by our board of directors or compensation committee. Participants may voluntarily end their participation in the ESPP prior to the end of the applicable offering period and are paid their accrued payroll deductions that have not yet been used to purchase shares of common stock. Upon exercise, the participant purchases the number of whole shares that his or her accumulated payroll deductions will buy at the purchase option price, subject to the certain participation limitations. Participation ends automatically upon a participant’s termination of employment. No shares were issued under the ESPP as of March 31, 2023. We recognized $0.2 million of share-based compensation expense for the discount received by participants for the three months ended March 31, 2023, all of which is included in General, administrative and marketing in our condensed consolidated statement of operations. As of March 31, 2023, unrecognized share-based compensation expense related to the first offering period under the ESPP was approximately $0.1 million, which is expected to be recognized over a weighted average remaining period of 0.2 years.
Stock Options
During the three months ended March 31, 2023, the Company granted approximately 0.7 million stock option awards under the 2021 Equity Plan. These options have a 10-year contractual term from the date of grant and vest in ratable annual installments on each of the first anniversaries of the grant date, subject to continuous employment or service from the grant date through the applicable vesting date. The exercise price associated with each of these awards is not less than the fair market value per share of our common stock at the time of grant. The fair value of the options granted during the three months ended March 31, 2023 was calculated using the Black-Scholes option pricing model. Approximately 0.3 million stock options were exercised during the three months ended March 31, 2023. As of March 31, 2023, options to purchase approximately 25.2 million shares of our common stock were outstanding, of which approximately 21.6 million were exercisable.
Share-based compensation expense associated with stock options for the three months ended March 31, 2023 was $2.2 million, of which $0.2 million and $2.0 million is included in Center operations and General, administrative and marketing, respectively, in our condensed consolidated statements of operations. Share-based compensation expense associated with stock options for the three months ended March 31, 2022 was $11.4 million, of which $1.0 million, $10.1 million and $0.3 million is included in Center operations, General, administrative and marketing and Other operating expense (income), respectively, in our condensed consolidated statements of operations. As of March 31, 2023, unrecognized share-based compensation expense related to stock options was approximately $20.4 million, which is expected to be recognized over a weighted average remaining period of 2.8 years.
Restricted Stock Units
During the three months ended March 31, 2023, the Company granted approximately 0.7 million restricted stock unit awards to our executives under the 2021 Equity Plan, of which approximately 0.3 million were performance-based and approximately 0.4 million were subject to time-based vesting over years with a performance qualifier, in each case subject to continuous employment or service from the grant date through the applicable vesting date. At March 31, 2023, approximately 2.5 million restricted stock units were outstanding.
In the event actual performance exceeds the target amount for the performance-based restricted stock units, the above-target amount is to be paid through the issuance of fully-vested shares of the Company’s common stock at such time of determination in 2024. Accordingly, we account for the projected above-target amount as liability-classified share-based
18
LIFE TIME GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands except per share data)
payment awards. For information regarding our liability-classified share-based payment awards, see “—Liability-Classified Share-Based Payment Awards” below.
Share-based compensation expense associated with restricted stock units for the three months ended March 31, 2023 was $3.0 million, of which $0.5 million, $2.3 million and $0.2 million is included in Center operations, General, administrative and marketing and Other operating expense (income), respectively, in our condensed consolidated statements of operations. Share-based compensation expense associated with restricted stock units for the three months ended March 31, 2022 was $5.2 million, of which $0.2 million and $5.0 million is included in Center operations and General, administrative and marketing, respectively, in our condensed consolidated statements of operations. As of March 31, 2023, unrecognized share-based compensation expense related to restricted stock units was approximately $36.3 million, which is expected to be recognized over a weighted average remaining period of 2.4 years.
Liability-Classified Share-Based Payment Awards
Because the projected above-target amount for the performance-based restricted stock units (which is described in “—Restricted Stock Units” above) represents a fixed dollar amount that, if payable, would be settled in a variable number of shares of the Company’s common stock, we account for such share-based payment awards as a liability-classified award. Based on our current assessment, we have deemed it probable that the target performance amount will be exceeded. Accordingly, we recognized $0.2 million of share-based compensation expense associated with these liability-classified share-based payment awards during the three months ended March 31, 2023, all of which is included in General, administrative and marketing in our condensed consolidated statements of operations. The offset to this share-based compensation expense was recognized as an increase in Accrued expenses and other current liabilities on our condensed consolidated balance sheet.
Restricted Stock
9. Income (Loss) Per Share
For the three months ended March 31, 2023, our potentially dilutive securities include stock options, restricted stock units and shares to be issued under our ESPP. For the three months ended March 31, 2022, our potentially dilutive securities include stock options, restricted stock units and restricted stock. Due to the net loss that we recognized during the three months ended March 31, 2022, the potentially dilutive shares of common stock associated with these equity-based securities were determined to be antidilutive and, therefore, are excluded from the computation of diluted loss per share for the three months ended March 31, 2022.
The following table sets forth the calculation of basic and diluted income (loss) per share for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, |
|||||||||||
| 2023 | 2022 | ||||||||||
| Net income (loss) | $ | $ | ( |
||||||||
| Weighted-average common shares outstanding – basic | |||||||||||
| Dilutive effect of stock-based compensation awards | |||||||||||
| Weighted-average common shares outstanding – diluted | |||||||||||
| Income (loss) per common share – basic | $ | $ | ( |
||||||||
| Income (loss) per common share – diluted | $ | $ | ( |
||||||||
19
LIFE TIME GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands except per share data)
The following is a summary of potential shares of common stock that were antidilutive and excluded from the weighted average share computations for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, |
|||||||||||
| 2023 | 2022 | ||||||||||
| Stock options | |||||||||||
| Restricted stock units | |||||||||||
| Restricted stock | |||||||||||
| Potential common shares excluded from the weighted average share calculations | |||||||||||
10. Commitments and Contingencies
Life Time, Inc. et al. v. Zurich American Insurance Company
On August 19, 2020, Life Time, Inc., several of its subsidiaries, and a joint venture entity, Bloomingdale Life Time Fitness LLC (collectively, the “Life Time Parties”) filed a complaint against Zurich American Insurance Company (“Zurich”) in the Fourth Judicial District of the State of Minnesota, County of Hennepin (Case No. 27-CV-20-10599) (the “Action”) seeking declaratory relief and damages with respect to Zurich’s failure under a property/business interruption insurance policy to provide certain coverage to the Life Time Parties related to the closure or suspension by governmental authorities of their business activities due to the spread or threat of the spread of COVID-19. On March 15, 2021, certain of the Life Time Parties filed a First Amended Complaint in the Action adding claims against Zurich under a Builders’ Risk policy related to the suspension of multiple construction projects. The parties are currently in discovery. The Action is subject to many uncertainties, and the outcome of the matter is not predictable with any assurance.
Other
We are also engaged in other proceedings incidental to the normal course of business. Due to their nature, such legal proceedings involve inherent uncertainties, including but not limited to court rulings, negotiations between affected parties and governmental intervention. We establish reserves for matters that are probable and estimable in amounts we believe are adequate to cover reasonable adverse judgments. Based upon the information available to us and discussions with legal counsel, it is our opinion that the outcome of the various legal actions and claims that are incidental to our business will not have a material adverse impact on our consolidated financial position, results of operations or cash flows. Such matters are subject to many uncertainties, and the outcomes of individual matters are not predictable with assurance.
11. Subsequent Events
20
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements in this discussion and analysis are forward-looking statements within the meaning of federal securities regulations. Forward-looking statements in this discussion and analysis include, but are not limited to, our plans, strategies and prospects, both business and financial, including our financial outlook, possible or assumed future actions, opportunities for growth and margin expansion, improvements to our balance sheet and leverage, capital expenditures, consumer demand, industry and economic trends, business strategies, events or results of operations. Generally, forward-looking statements are not based on historical facts but instead represent only our current beliefs and assumptions regarding future events. All forward-looking statements are, by nature, subject to risks, uncertainties and other factors. This discussion and analysis does not purport to identify factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements. You should understand that forward-looking statements are not guarantees of performance or results and are preliminary in nature. Statements preceded by, followed by or that otherwise include the words “believe,” “assumes,” “expects,” “anticipates,” “intends,” “continues,” “projects,” “predicts,” “estimates,” “plans,” “potential,” “may increase,” “may result,” “will result,” “may fluctuate,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “foreseeable,” “may,” and “could” as well as the negative version of these words or similar terms and phrases are generally forward-looking in nature and not historical facts. In addition, any statements or information that refer to expectations, beliefs, plans, projections, objectives, performance or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking.
The forward-looking statements contained in this discussion and analysis are based on management’s current beliefs and assumptions and are not guarantees of future performance. The forward-looking statements are subject to various risks, uncertainties, assumptions or changes in circumstances that are difficult to predict or quantify. Actual results may differ materially from these expectations due to numerous factors, many of which are beyond our control, including risks relating to our business operations and competitive and economic environment, risks relating to our brand, risks relating to the growth of our business, risks relating to our technological operations, risks relating to our capital structure and lease obligations, risks relating to our human capital, risks relating to legal compliance and risk management and risks relating to ownership of our common stock and the other important factors discussed under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (the “SEC”) and as such risk factors may be updated from time to time in our periodic filings with the SEC that are accessible on the SEC’s website at www.sec.gov. Since it is not possible to foresee all such factors, these factors should not be considered as complete or exhaustive. Consequently, we caution investors not to place undue reliance on any forward-looking statements, as no forward-looking statement can be guaranteed, and actual results may vary materially. Additionally, our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, investments or other strategic transactions we may make.
All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. Forward-looking statements speak only as of the date of this report. We do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Overview
Initial Public Offering
On October 12, 2021, Life Time Group Holdings, Inc. consummated its initial public offering (“IPO”) of 39.0 million shares of its common stock for total gross proceeds of $702.0 million before deducting the underwriting discounts and other offering expenses. Additionally, on November 1, 2021, Life Time Group Holdings, Inc. consummated the sale of nearly 1.6 million additional shares of its common stock pursuant to the partial exercise by the underwriters of their over-allotment option, resulting in total gross proceeds of approximately $28.4 million before deducting the underwriting discounts and commissions.
21
Business and Strategy
Life Time, the “Healthy Way of Life Company,” is a leading lifestyle brand offering premium health, fitness and wellness experiences to a community of more than 1.4 million individual members, who together comprise more than 813,000 memberships, as of March 31, 2023. Since our founding over 30 years ago, we have sought to continuously innovate ways for our members to lead healthy and happy lives by offering them the best places, programs and performers. We deliver high-quality experiences through our omni-channel physical and digital ecosystem that includes more than 160 centers—distinctive, resort-like athletic country club destinations—across 29 states in the United States and one province in Canada. Our track record of providing differentiated experiences to our members has fueled our strong, long-term financial performance.
Our luxurious athletic country clubs, which are located in both affluent suburban and urban locations, total approximately 16 million square feet in the aggregate. We offer expansive fitness floors with top-of-the-line equipment, spacious locker rooms, group fitness studios, indoor and outdoor pools and bistros, indoor and outdoor tennis courts, pickleball courts, basketball courts, LifeSpa, LifeCafe and our childcare and Kids Academy learning spaces. Our premium service offerings are delivered by over 35,000 Life Time team members, including over 9,200 certified fitness professionals, ranging from personal trainers to studio performers.
Our members are highly engaged and draw inspiration from the experiences and community we have created. The value our members place on our community is reflected in the continued strength and growth of our average revenue per center membership and the visits to our athletic country clubs. Our average revenue per center membership and the visits to our clubs for the three months ended March 31, 2023 were $667 and 26 million, respectively, as compared to $580 and 20 million, respectively, for the three months ended March 31, 2022. We believe that no other company in the United States delivers the same quality and breadth of health, fitness and wellness experiences that we deliver, which enabled us to consistently grow our annual membership dues and in-center revenue for 20 consecutive years, prior to the impact of the COVID-19 pandemic, and now again as we have emerged from the pandemic.
We have been focused on returning to consistent annual growth in our membership dues and in-center revenue. Our total Center revenue has grown significantly since the adverse impacts of the pandemic. Our total Center revenue increased to $497.8 million for the three months ended March 31, 2023 as compared to $381.6 million for the three months ended March 31, 2022. We expect it to continue to grow as our existing centers re-ramp in their performance, our new centers ramp to expected performance, we open new centers in desirable locations across the country and we continue to execute on our strategic initiatives discussed below. As of March 31, 2023, we had 20 new centers open for less than three years and 10 new centers under construction, with $401 million of growth capital expenditures already invested into these yet-to-open new centers. We believe the combined dynamic of our ramping new centers, which on average have taken three to four years to ramp to expected performance, plus the future growth that we have not yet realized from the capital expenditures already invested in our centers under construction creates a strong tailwind for the continued growth of our total Center revenue. We also have significant opportunities to continue expanding our portfolio of premium centers with 18 to 20 new centers planned over 2023 and 2024 in increasingly affluent markets.
During the pandemic, we determined that we had been under-valuing the experiences delivered to our engaged members and that certain members would likely not return following the pandemic. We thus began to implement a new pricing strategy coming out of the pandemic. As we continued to enhance and broaden the premium experiences for our members, we strategically increased our membership pricing across most of our new and existing centers, particularly for our new member join rates. New members are thus joining at higher membership dues rates and we expect these members to be incrementally more profitable than the members we lose over the long-term. As expected, our total center memberships have not fully recovered to their 2019 pre-pandemic levels, but for the first time in the three months ended March 31, 2023, our membership dues revenue exceeded our pre-pandemic membership dues revenue for centers opened at the end of 2019. We believe we can continually refine our pricing, and transition existing memberships to higher membership prices or tiers, as we deliver exceptional experiences and find the optimal balance among memberships per center, the member experience and financial returns for each center.
With the strong recovery of our membership dues revenue, we have also been able to focus on margin expansion. We experienced significant margin expansion in the three months ended March 31, 2023, and we believe we have opportunities to continue to expand margins as we benefit from higher dues revenue and as we continue to optimize the roll-out of our strategic initiatives and improve the efficiency of our club operations and corporate office.
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We have implemented several strategic initiatives as we continue to evolve our premium lifestyle brand in ways that elevate and broaden our member experiences and allow our members to integrate health, fitness and wellness into their lives with greater ease and frequency. We believe these initiatives are driving significant increases in center usage and higher memberships. These strategic initiatives include pickleball, Dynamic Personal Training, small group training such as Alpha, GTX and Ultra Fit, and our ARORA community focused on members aged 55 years and older, where we have experienced a significant increase in our unique participants or total sessions. We also continue to enhance our digital platform to deliver a true omni-channel experience for our members. Our Life Time Digital offering delivers live streaming fitness classes, remote goal-based personal training, nutrition and weight loss support and curated award-winning health, fitness and wellness content. In addition, our members are able to purchase a wide variety of equipment, wearables, apparel, beauty products and nutritional supplements via our digital health store. We are continuing to invest in our digital capabilities in order to strengthen our relationships with our members and more comprehensively address their health, fitness and wellness needs so that they can remain engaged and connected with Life Time at any time or place.
We also continue to expand our “Healthy Way of Life” ecosystem in response to the desire of our members to holistically integrate health and wellness into every aspect of their daily lives. In 2018, we launched Life Time Work, an asset-light branded co-working model that offers premium work spaces in close proximity to our centers and integrates ergonomic furnishings and promotes a healthy working environment. Life Time Work members also generally receive access to all of our resort-like athletic destinations across the United States and Canada. Life Time Living offers luxury wellness-oriented residences also in close proximity to one of our athletic country clubs. At March 31, 2023, we had 11 Life Time Work and two Life Time Living locations open and operating. Our Life Time Living offering is generating interest from new property developers and presenting opportunities for new center development that we had not previously had. As we expand our footprint with new centers and nearby work and living spaces, as well as strengthen our digital capabilities, we expect to continue to grow our omni-channel platform to support the “Healthy Way of Life” journey of our members.
We have continued to actively monitor the macroeconomic environment and its impact on our business, including with respect to inflation, interest rates, labor and supply chain issues, as well as a potential economic recession. The inflation rate has been elevated for several quarters and continued to be elevated in the first quarter of 2023, which has had an impact on our expenses in several areas, including wages, construction costs and other operating expenses. These inflationary impacts have resulted in pressure on our margin performance and an increase in our capital expenditures. The rising interest rate environment has also increased the cost of our Term Loan Facility and Revolving Credit Facility and may result in increased cap rates on future sale-leaseback transactions. We anticipate the remainder of fiscal year 2023 will continue to be a dynamic macroeconomic environment.
Non-GAAP Financial Measures
This discussion and analysis includes certain financial measures that are not presented in accordance with generally accepted accounting principles in the United States (“GAAP”), including Adjusted EBITDA and free cash flow before growth capital expenditures and ratios related thereto. These non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles and should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In addition, these non-GAAP financial measures should be read in conjunction with our financial statements prepared in accordance with GAAP. The reconciliations of the Company’s non-GAAP financial measures to the corresponding GAAP measures should be carefully evaluated. We use Adjusted EBITDA as an important performance metric for the Company. In addition, free cash flow before growth capital expenditures is an important liquidity metric we use to evaluate our ability to make principal payments on our indebtedness and to fund our capital expenditures and working capital requirements.
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Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) before interest expense, net, provision for (benefit from) income taxes and depreciation and amortization, excluding the impact of share-based compensation expense, (gain) loss on sale-leaseback transactions, capital transaction costs, legal settlements, asset impairment, severance and other items that are not indicative of our ongoing operations, including incremental costs related to COVID-19.
Management uses Adjusted EBITDA to evaluate the Company’s performance. We believe that Adjusted EBITDA is an important metric for management, investors and analysts as it removes the impact of items that we do not believe are indicative of our core operating performance and allows for consistent comparison of our operating results over time and relative to our peers. We use Adjusted EBITDA to supplement GAAP measures of performance in evaluating the effectiveness of our business strategies, and to establish annual budgets and forecasts. We also use Adjusted EBITDA or variations thereof to establish short-term incentive compensation for management.
Free Cash Flow Before Growth Capital Expenditures
We define free cash flow before growth capital expenditures as net cash provided by (used in) operating activities less center maintenance capital expenditures and corporate capital expenditures. We believe free cash flow before growth capital expenditures assists investors and analysts in evaluating our liquidity and cash flows, including our ability to make principal payments on our indebtedness and to fund our capital expenditures and working capital requirements. Our management considers free cash flow before growth capital expenditures to be a key indicator of our liquidity and we present this metric to our board of directors. Additionally, we believe free cash flow before growth capital expenditures is frequently used by analysts, investors and other interested parties in the evaluation of companies in our industry. We also believe that investors, analysts and rating agencies consider free cash flow before growth capital expenditures as a useful means of measuring our ability to make principal payments on our indebtedness and evaluating our liquidity, and management uses this measurement for one or more of these purposes.
Adjusted EBITDA and free cash flow before growth capital expenditures should be considered in addition to, and not as a substitute for or superior to, financial measures calculated in accordance with GAAP. These are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income (loss) or any other performance measures derived in accordance with GAAP or as an alternative to net cash provided by (used in) operating activities as a measure of our liquidity and may not be comparable to other similarly titled measures of other businesses. Adjusted EBITDA and free cash flow before growth capital expenditures have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our operating results or cash flows as reported under GAAP. Furthermore, we compensate for the limitations described above by relying primarily on our GAAP results and using Adjusted EBITDA and free cash flow before growth capital expenditures only for supplemental purposes. See our condensed consolidated financial statements included elsewhere in this report for our GAAP results.
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Non-GAAP Measurements and Key Performance Indicators
We prepare and analyze various non-GAAP performance metrics and key performance indicators to assess the performance of our business and allocate resources. For more information regarding our non-GAAP performance metrics, see “—Non-GAAP Financial Measures” above. These are not measurements of our financial performance under GAAP and should not be considered as alternatives to any other performance measures derived in accordance with GAAP.
Set forth below are certain GAAP and non-GAAP measurements and key performance indicators for the three months ended March 31, 2023 and 2022. The following information has been presented consistently for all periods presented.
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| ($ in thousands, except for Average Center revenue per center membership data) | |||||||||||
| Membership Data | |||||||||||
| Center memberships | 764,173 | 673,983 | |||||||||
| Digital On-hold memberships | 49,333 | 70,289 | |||||||||
| Total memberships | 813,506 | 744,272 | |||||||||
| Revenue Data | |||||||||||
| Membership dues and enrollment fees | 71.8% | 71.3% | |||||||||
| In-center revenue | 28.2% | 28.7% | |||||||||
| Total Center revenue | 100.0% | 100.0% | |||||||||
| Membership dues and enrollment fees | $ | 357,488 | $ | 271,915 | |||||||
| In-center revenue | 140,264 | 109,706 | |||||||||
| Total Center revenue | $ | 497,752 | $ | 381,621 | |||||||
Average Center revenue per center membership (1)
|
$ | 667 | $ | 580 | |||||||
Comparable center revenue (2)
|
24.6% | 50.3% | |||||||||
| Center Data | |||||||||||
Net new center openings (3)
|
3 | 2 | |||||||||
Total centers (end of period) (3)
|
164 | 153 | |||||||||
Total center square footage (end of period) (4)
|
16,100,000 | 15,300,000 | |||||||||
| GAAP and Non-GAAP Financial Measures | |||||||||||
| Net income (loss) | $ | 27,460 | $ | (37,966) | |||||||
Net income (loss) margin (5)
|
5.4 | % | (9.7) | % | |||||||
Adjusted EBITDA (6)
|
$ | 120,102 | $ | 40,626 | |||||||
Adjusted EBITDA margin (6)
|
23.5 | % | 10.4 | % | |||||||
| Center operations expense | $ | 274,109 | $ | 239,573 | |||||||
Pre-opening expenses (7)
|
$ | 1,685 | $ | 1,387 | |||||||
| Rent | $ | 66,537 | $ | 55,964 | |||||||
Non-cash rent expense (open properties) (8)
|
$ | 6,378 | $ | 1,068 | |||||||
Non-cash rent expense (properties under development) (8)
|
$ | 2,650 | $ | 4,941 | |||||||
| Net cash provided by operating activities | $ | 74,348 | $ | 9,062 | |||||||
Free cash flow before growth capital expenditures (9)
|
$ | 26,583 | $ | (35,256) | |||||||
(1) We define Average Center revenue per center membership as Center revenue less Digital On-hold revenue, divided by the average number of Center memberships for the period, where the average number of Center memberships for the period is an average derived from dividing the sum of the total Center memberships outstanding at the beginning of the period and at the end of each month during the period by one plus the number of months in each period.
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(2) We measure the results of our centers based on how long each center has been open as of the most recent measurement period. We include a center, for comparable center revenue purposes, beginning on the first day of the 13th full calendar month of the center’s operation, in order to assess the center’s growth rate after one year of operation.
(3) Net new center openings is calculated as the number of centers that opened for the first time to members during the period, less any centers that closed during the period. Total centers (end of period) is the number of centers operational as of the last day of the period.
(4) Total center square footage (end of period) reflects the aggregate fitness square footage, which we use as a metric for evaluating the efficiencies of a center as of the end of the period. The square footage figures exclude areas used for tennis courts, outdoor swimming pools, outdoor play areas and stand-alone Work, Sport and Swim locations. These figures are approximations.
(5) Net income (loss) margin is calculated as net income (loss) divided by total revenue.
(6) We present Adjusted EBITDA as a supplemental measure of our performance. We define Adjusted EBITDA as net income (loss) before interest expense, net, provision for (benefit from) income taxes and depreciation and amortization, excluding the impact of share-based compensation expense, (gain) loss on sale-leaseback transactions, capital transaction costs, legal settlements, asset impairment, severance and other items that are not indicative of our ongoing operations, including incremental costs related to COVID-19.
Adjusted EBITDA margin is calculated as Adjusted EBITDA divided by total revenue.
The following table provides a reconciliation of net income (loss), the most directly comparable GAAP measure, to Adjusted EBITDA:
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| ($ in thousands) | 2023 | 2022 | |||||||||
| Net income (loss) | $ | 27,460 | $ | (37,966) | |||||||
| Interest expense, net of interest income | 31,195 | 29,943 | |||||||||
| Provision for (benefit from) income taxes | 8,872 | (2,867) | |||||||||
| Depreciation and amortization | 58,197 | 58,107 | |||||||||
Share-based compensation expense (a)
|
5,622 | 21,438 | |||||||||
COVID-19 related expenses (b)
|
322 | 212 | |||||||||
Gain on sale-leaseback transactions (c)
|
(6,732) | (28,372) | |||||||||
Capital transaction costs (d)
|
— | 255 | |||||||||
Other (e)
|
(4,834) | (124) | |||||||||
| Adjusted EBITDA | $ | 120,102 | $ | 40,626 | |||||||
(a) Share-based compensation expense recognized during the three months ended March 31, 2023 was associated with stock options, restricted stock units, our employee stock purchase plan (“ESPP”) that launched on December 1, 2022, and liability classified awards related to our short-term incentive plan for our executive officers in 2023. Share-based compensation expense recognized during the three months ended March 31, 2022 was associated with stock options, restricted stock and restricted stock units. The majority of this expense was associated with awards that were fully vested and became exercisable on April 4, 2022 in connection with the expiration of the lock-up period following our IPO.
(b) Represents the incremental expenses we recognized related to the COVID-19 pandemic. We adjust for these expenses as they do not represent expenses associated with our normal ongoing operations. We believe that adjusting for these expenses provides a more accurate and consistent representation of our actual operating performance from period to period. For the three months ended March 31, 2023 and 2022, COVID-19 related expenses primarily consisted of legal-related costs in pursuit of our claim against Zurich. For more information regarding this claim, see Note 10, Commitments and Contingencies, to our condensed consolidated financial statements in this report.
(c) We adjust for the impact of gains on the sale-leaseback of our properties as they do not reflect costs associated with our ongoing operations. For details on the gain on sale-leaseback transactions that we recognized during the three months ended March 31, 2023, see “Sale-Leaseback Transactions” within Note 7, Leases, to our condensed consolidated financial statements in this report.
(d) Represents one-time costs related to capital transactions, including debt and equity offerings that are non-recurring in nature, but excluding direct costs related to the IPO, which were netted against the proceeds of the IPO.
(e) Includes costs associated with transactions that are unusual and non-recurring in nature.
(7) Represents non-capital expenditures associated with opening new centers, which are incurred prior to the commencement of a new center opening. The number of centers under construction or development, the types of centers and our costs associated with any particular center opening can vary significantly from period to period.
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(8) Reflects the non-cash portion of our annual GAAP operating lease expense that is greater or less than the cash operating lease payments. Non-cash rent expense for our open properties represents non-cash expense associated with properties that were operating at the end of each period presented. Non-cash rent expense for our properties under development represents non-cash expense associated with properties that are still under development at the end of each period presented.
(9) Free cash flow before growth capital expenditures, a non-GAAP financial measure, is calculated as net cash provided by operating activities less center maintenance capital expenditures and corporate capital expenditures.
The following table provides a reconciliation from net cash provided by operating activities to free cash flow before growth capital expenditures:
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| ($ in thousands) | 2023 | 2022 | |||||||||
| Net cash provided by operating activities | $ | 74,348 | $ | 9,062 | |||||||
| Center maintenance capital expenditures | (32,899) | (16,396) | |||||||||
| Corporate capital expenditures | (14,866) | (27,922) | |||||||||
| Free cash flow before growth capital expenditures | $ | 26,583 | $ | (35,256) | |||||||
Factors Affecting the Comparability of our Results of Operations
Impact of COVID-19 on our Business
Overview
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, the United States declared a National Public Health Emergency and we closed all of our centers based on orders and advisories from federal, state and local governmental authorities regarding COVID-19. Throughout this report, including this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” when we refer to “COVID-19” or “the pandemic,” such as when we describe the “impact of COVID-19” on our operations, we mean the coronavirus-related orders issued by governmental authorities affecting our operations and/or the presence of coronavirus in our centers, including COVID-19 positive members or team members.
We re-opened our first center on May 8, 2020, and continued to re-open our centers as state and local governmental authorities permitted, subject to operating processes and protocols that we developed in consultation with an epidemiologist (MD/PhD) to provide a healthy and clean environment for our members and team members and to meet various governmental requirements and restrictions. Our centers were also impacted in 2021 as a result of the Delta variant and then again later in 2021 and into 2022 with the Omicron variant. The performance of our centers has improved significantly as our centers have ramped back from the adverse impacts of COVID-19, but our improvement has varied depending on various factors, including how early we were able to re-open them, whether we were required to close them again, their geographic location and applicable governmental restrictions.
We have experienced a slightly faster recovery in our membership dues revenue compared to our in-center revenue. We expect membership dues revenue to remain a higher percentage of our total revenue in the near term and return to more historical levels over time. We continue to be encouraged by our improved business performance, the traction of our strategic initiatives and the diminishing negative impacts from COVID-19.
Operations
As of March 31, 2023, total memberships were 813,506, an increase of 9.3% compared to 744,272 at March 31, 2022. Center memberships were 764,173, an increase of 13.4% compared to 673,983 at March 31, 2022. Digital On-hold memberships were 49,333, a decrease of 29.8% compared to 70,289 at March 31, 2022.
We have experienced a significant decrease in COVID-19 related restrictions on our operations. While we are still utilizing certain of the processes we implemented to provide a healthy and clean environment for our members and team members, we are no longer subject to the stricter requirements such as face coverings, vaccine mandates or negative test results. We will continue to monitor governmental orders regarding the operations of our centers, as well as our center operating processes and protocols.
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Leverage
We are focused on improving the ratio of our net debt to Adjusted EBITDA, or our leverage ratio. We define net debt as the current and long-term portion of our debt, excluding unamortized debt discounts and issuance costs and fair value adjustments, less cash and cash equivalents. Our leverage ratio has been elevated due in part to the adverse impacts of COVID-19, which required us to incur additional debt and significantly reduced our Adjusted EBITDA. We believe that we can significantly improve our leverage ratio in 2023 as our profitability improves and we continue to strengthen our balance sheet, including through sale-leaseback transactions.
During the three months ended March 31, 2023, we completed a sale-leaseback transaction of one property for aggregate gross proceeds of $33.0 million. For more information regarding the sale-leaseback transaction that was consummated during the three months ended March 31, 2023, see Note 7, Leases, to our condensed consolidated financial statements included elsewhere in this report.
Investment in Business
We have continued to invest in our business to elevate and broaden our member experiences and drive additional revenue per center membership, including improving our in-center services and products, such as pickleball, Dynamic Personal Training, small group training and our ARORA community, introducing new types of memberships, providing concierge-type member services and expanding our omni-channel offerings. Elevating our member experiences requires investment in our team members, programs, products, services and centers. These investments may impact our short-term results of operations and cash flows as our investments in our business may be made more quickly than we achieve additional revenue per center membership. While we remain focused on providing exceptional experiences to our members and growing our revenue, we are also focused on center efficiencies and expense control given our recovery of membership dues and a significant portion of our center memberships.
Impact of Our Asset-light, Flexible Real Estate Strategy on Rent Expense
Our asset-light, flexible real estate strategy has allowed us to expand our business by leveraging operating leases and sale-leaseback transactions. Approximately 66% of our centers are now leased, including approximately 93% of our new centers opened within the last five years, versus a predominantly owned real estate strategy prior to 2015. Rent expense, which includes both cash and non-cash rent expense, will continue to increase as we lease more centers and will therefore impact the comparability of our results of operations. The impact of these increases is dependent upon the timing of our centers under development and the center openings and terms of the leases for the new centers or sale-leaseback transactions.
Macroeconomic Trends
We have been actively monitoring the macroeconomic environment and its impact on our business, including with respect to inflation, interest rates, labor and supply chain issues, as well as a potential economic recession. See “—Overview—Business” for additional information.
Share-Based Compensation
During the three months ended March 31, 2023, we recognized share-based compensation expense associated with stock options, restricted stock units, our ESPP that launched on December 1, 2022 and liability classified awards related to our short-term incentive plan for our executive officers in 2023, totaling approximately $5.6 million. During the three months ended March 31, 2022, we recognized share-based compensation expense associated with stock options, restricted stock and restricted stock units totaling approximately $21.4 million. The majority of this expense was associated with awards that were fully vested and became exercisable on April 4, 2022 in connection with the expiration of the lock-up period following our IPO.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate results could differ from those estimates. In recording transactions and balances resulting from business operations, we use estimates based on the best information available. We revise the recorded estimates when better information is available, facts change or we can determine actual amounts. These revisions can affect operating results.
Management has evaluated the development and selection of our critical accounting policies and estimates used in the preparation of the Company’s unaudited condensed consolidated financial statements and related notes and believes these policies to be reasonable and appropriate. Certain of these policies involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position, and are, therefore, discussed as critical.
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Our most significant estimates and assumptions that materially affect the Company’s unaudited condensed consolidated financial statements involve difficult, subjective or complex judgments, which management used while performing goodwill, indefinite-lived intangible and long-lived asset impairment analyses and sale-leaseback arrangements. Given the additional effects from the COVID-19 pandemic, these estimates can be more challenging, and actual results could differ materially from our estimates. As it relates to the long-lived asset impairment analyses that we have performed during the three months ended March 31, 2023 and 2022, we determined during the three months ended March 31, 2022 that certain projects were no longer deemed viable for construction, and that the previously capitalized site development costs associated with these projects were impaired during the three months ended March 31, 2022. Accordingly, as it relates to these long-lived assets, we recognized impairment charges of $0.2 million during the three months ended March 31, 2022. There were no impairment charges recognized during the three months ended March 31, 2023.
More information on all of our significant accounting policies can be found in Note 2, “Summary of Significant Accounting Policies” to our audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC. There have been no material changes to our critical accounting policies as compared to the critical accounting policies described in such Annual Report on Form 10-K.
Results of Operations
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
The following table sets forth our condensed consolidated statements of operations data (amounts in thousands) and data as a percentage of total revenue for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | |||||||||||||||||||||||
| As a Percentage of Total Revenue | |||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Center revenue | $ | 497,752 | $ | 381,621 | 97.4 | % | 97.3 | % | |||||||||||||||
| Other revenue | 13,099 | 10,633 | 2.6 | % | 2.7 | % | |||||||||||||||||
| Total revenue | 510,851 | 392,254 | 100.0 | % | 100.0 | % | |||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Center operations | 274,109 | 239,573 | 53.7 | % | 61.1 | % | |||||||||||||||||
| Rent | 66,537 | 55,964 | 13.0 | % | 14.2 | % | |||||||||||||||||
| General, administrative and marketing | 42,497 | 66,561 | 8.3 | % | 17.0 | % | |||||||||||||||||
| Depreciation and amortization | 58,197 | 58,107 | 11.4 | % | 14.8 | % | |||||||||||||||||
| Other operating expense (income) | 2,127 | (17,035) | 0.4 | % | (4.3) | % | |||||||||||||||||
| Total operating expenses | 443,467 | 403,170 | 86.8 | % | 102.8 | % | |||||||||||||||||
| Income (loss) from operations | 67,384 | (10,916) | 13.2 | % | (2.8) | % | |||||||||||||||||
| Other (expense) income: | |||||||||||||||||||||||
| Interest expense, net of interest income | (31,195) | (29,943) | (6.1) | % | (7.6) | % | |||||||||||||||||
| Equity in earnings of affiliate | 143 | 26 | — | % | — | % | |||||||||||||||||
| Total other expense | (31,052) | (29,917) | (6.1) | % | (7.6) | % | |||||||||||||||||
| Income (loss) before income taxes | 36,332 | (40,833) | 7.1 | % | (10.4) | % | |||||||||||||||||
| Provision for (benefit from) income taxes | 8,872 | (2,867) | 1.7 | % | (0.7) | % | |||||||||||||||||
| Net income (loss) | $ | 27,460 | $ | (37,966) | 5.4 | % | (9.7) | % | |||||||||||||||
Total revenue. The $118.6 million increase in Total revenue for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 primarily reflects strong growth in membership dues and in-center revenues, which included the continued ramp of our centers and higher utilization of our in-center offerings by our members.
With respect to the $116.1 million increase in Center revenue for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022:
•73.7% was from membership dues and enrollment fees, which increased $85.6 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. This increase reflects the improvement in our Center memberships, which increased to 764,173 as of March 31, 2023 from 673,983 as of March 31, 2022, as well as higher average monthly dues per Center membership during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022; and
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•26.3% was from in-center revenue, which increased $30.6 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. This increase was recognized across all of our primary in-center businesses and reflects the higher utilization of our offerings by our members during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.
The $2.5 million increase in Other revenue for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily driven by the improved performance of our Life Time Work and Life Time Living locations, as well as our race registration and timing businesses.
Center operations expenses. The $34.5 million increase in Center operations expenses for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily driven by additional staffing requirements to support increased usage in existing and new centers, expanded programming, increased labor costs and utility cost inflation during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.
Rent expense. The $10.6 million increase in Rent expense for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily driven by the timing of sale-leaseback transactions during both the current and prior year as well as our taking possession of two properties since March 31, 2022 for future centers where we started incurring GAAP rent expense, most of which is non-cash.
General, administrative and marketing expenses. The $24.1 million decrease in General, administrative and marketing expenses for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily driven by a $15.2 million decrease in share-based compensation expense as well as the benefits that we experienced during the three months ended March 31, 2023 from operational efficiency efforts.
Depreciation and amortization. Depreciation and amortization was $58.2 million for the three months ended March 31, 2023, a $0.1 million increase compared to $58.1 million for the three months ended March 31, 2022.
Other operating expense (income). Other operating expense for the three months ended March 31, 2023 was $2.1 million, as compared to Other operating income of $17.0 million for the three months ended March 31, 2022. The $19.1 million change was primarily attributable to the recognition of a $28.4 million gain on sale-leaseback transactions during the three months ended March 31, 2022, partially offset by the recognition of a $6.7 million gain on a sale-leaseback transaction and increased costs to support the revenue growth we experienced in our Life Time Work, Life Time Living and race registration and timing businesses during the three months ended March 31, 2023.
Interest expense, net of interest income. The $1.3 million increase in Interest expense, net of interest income for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was driven by a higher average level of outstanding borrowings and higher interest rates during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.
Provision for (benefit from) income taxes. The provision for income taxes was $8.9 million for the three months ended March 31, 2023 as compared to a $2.9 million benefit from income taxes for the three months ended March 31, 2022. The effective tax rate was 24.4% and 7.0% for those same periods, respectively. The increase in provision for income taxes for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily driven by the increase in earnings before tax, offset by the decrease in valuation allowance associated with certain of our deferred tax assets. The effective tax rate applied to our pre-tax income for the three months ended March 31, 2023 is higher than our statutory rate of 21.0% and reflects an increase due to the deductibility limitations associated with executive compensation and state income tax provisions, partially offset by a decrease in the valuation allowance associated with certain of our deferred tax assets.
Net income (loss). As a result of the factors described above, net income was $27.5 million for the three months ended March 31, 2023 as compared to a net loss of $38.0 million for the three months ended March 31, 2022.
Liquidity and Capital Resources
Liquidity
Our principal liquidity needs include the development of new centers, lease requirements and debt service, investments in our business and technology and expenditures necessary to maintain and update or enhance our centers and associated fitness equipment and member experiences. We have primarily satisfied our historical liquidity needs with cash flow from operations, drawing on the Revolving Credit Facility and through sale-leaseback transactions.
One of our top priorities remains improving our balance sheet and reducing leverage. We have taken significant actions to improve our liquidity. During the three months ended March 31, 2023, we completed a sale-leaseback transaction
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associated with one property. During 2022, we completed sale-leaseback transactions associated with nine properties and also rewired our Company to improve the efficiency of our club operations and corporate office. We continue to explore potential sale-leaseback opportunities for a number of our properties. For more information regarding the sale-leaseback transaction that was consummated during the three months ended March 31, 2023, see Note 7, Leases, to our condensed consolidated financial statements included in this report. We believe the steps we have taken to strengthen our balance sheet and to reduce our cash outflows leave us well-positioned to manage our business.
As the opportunity arises or as our business needs require, we may seek to raise capital through additional debt financing or through equity financing. There can be no assurance that any such financing would be available on commercially acceptable terms, or at all. To date, we have not experienced difficulty accessing the credit and capital markets; however, volatility in these markets, particularly in light of the rising interest rate environment and any continued impacts of COVID-19, may increase costs associated with issuing debt instruments or affect our ability to access those markets, which could have an adverse impact on our ability to raise additional capital, to refinance existing debt and/or to react to changing economic and business conditions. In addition, it is possible that our ability to access the credit and capital markets could be limited at a time when we would like or need to do so.
As of March 31, 2023, there were $85.0 million of outstanding borrowings under our Revolving Credit Facility and there were $30.5 million of outstanding letters of credit, resulting in total availability under our Revolving Credit Facility of $359.5 million. Total cash and cash equivalents, exclusive of restricted cash, at March 31, 2023 was $23.2 million, resulting in total cash and availability under our Revolving Credit Facility of $382.7 million.
The following table sets forth our condensed consolidated statements of cash flows data (in thousands):
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net cash provided by operating activities | $ | 74,348 | $ | 9,062 | |||||||
| Net cash used in investing activities | (136,851) | (26,283) | |||||||||
| Net cash provided by financing activities | 72,325 | 26,619 | |||||||||
| Effect of exchange rates on cash and cash equivalents | 6 | 61 | |||||||||
| Increase in cash and cash equivalents | $ | 9,828 | $ | 9,459 | |||||||
Operating Activities
The $65.3 million increase in cash provided by operating activities for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily the result of higher profitability.
Investing Activities
Investing activities consist primarily of purchasing real property, constructing new centers, acquisitions and purchasing new fitness equipment. In addition, we invest in capital expenditures to maintain and update our existing centers. We finance the purchase of our property and equipment through operating cash flows, proceeds from sale-leaseback transactions, construction reimbursements and draws on our Revolving Credit Facility.
The $110.6 million increase in net cash used in investing activities for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily driven by a higher level of new center construction activity, partially offset by a lower amount of proceeds that we received from sale-leaseback transactions during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.
The following schedule reflects capital expenditures by type of expenditure (in thousands):
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
Growth capital expenditures, net of construction reimbursements (1)
|
$ | 123,049 | $ | 66,436 | |||||||
| Center maintenance capital expenditures | 32,899 | 16,396 | |||||||||
| Corporate capital expenditures | 14,866 | 27,922 | |||||||||
| Total capital expenditures | $ | 170,814 | $ | 110,754 | |||||||
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(1) Growth capital expenditures include new center land and construction, growth initiatives, major remodels of acquired centers and the purchase of previously leased centers.
The $60.1 million increase in total capital expenditures for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily driven by higher growth capital expenditures for new centers.
Financing Activities
The $45.7 million increase in cash provided by financing activities for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily driven by net proceeds we received from borrowings under our Revolving Credit Facility and Construction Loan and proceeds from stock option exercises during the three months ended March 31, 2023.
We expect to satisfy our short-term and long-term obligations through a combination of cash on hand, funds generated from operations, sale-leaseback transactions and the borrowing capacity available under our Revolving Credit Facility.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks in the ordinary course of our business that include changes in interest rates and changes in foreign currency exchange rates. Information relating to quantitative and qualitative disclosures about these market risks is set forth below.
Interest rate risk
Our cash consists primarily of an interest-bearing account at a large United States bank with limited interest rate risk. At March 31, 2023, we held no investments in marketable securities.
We incur interest at variable rates under our Revolving Credit Facility. At March 31, 2023, there were $85.0 million of outstanding borrowings under the Revolving Credit Facility and $30.5 million of outstanding letters of credit, resulting in total revolver availability of $359.5 million, which was available at intervals ranging from 30 to 180 days at interest rates ranging from LIBOR plus 4.00% or base rate plus 3.00%. Our Term Loan Facility is also subject to variable rates of LIBOR plus 4.75% or base rate plus 3.75% and had an outstanding balance of $273.6 million at March 31, 2023.
Assuming no prepayments of the Term Loan Facility and that the Revolving Credit Facility is fully drawn (and that LIBOR is in excess of the floor rate applicable to the Term Loan Facility), each one percentage point change in interest rates would result in an approximately $7.5 million change in annual interest expense on the indebtedness under the Credit Facilities. We plan to replace LIBOR with Term Secured Overnight Financing Rate (“SOFR”) no later than June 30, 2023, and our Credit Facilities have a built-in mechanism to transition automatically from LIBOR to SOFR.
Foreign currency exchange risk
We operate primarily in the United States with three centers operating in Canada. Given our limited amount of operations outside of the United States, fluctuations due to changes in foreign currency exchange rates would not have a material impact on our business.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our CEO and Chief Financial Officer, has carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our CEO and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are engaged in litigation or other proceedings incidental to the normal course of business, including investigations and claims regarding employment law including wage and hour and unfair labor practices; supplier, customer and service provider contract terms; products liability; and real estate. Other than as set forth in Note 10, Commitments and Contingencies, in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein, there are no pending material legal proceedings to which we are a party or to which our property is subject.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC, which could materially affect our business, financial condition or future results. There have been no material changes from the risk factors previously disclosed in that Annual Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 15, 2023, the Company acquired a business by way of merger for cash and shares of its common stock. In connection with the acquisition, the Company issued 90,000 shares of its common stock to stockholders of the business. No underwriters or placement agents were involved with this acquisition and there was no general solicitation or general advertising. The Company relied on an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Act”), pursuant to Section 4(2) of the Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
All exhibits as set forth on the Exhibit Index.
Exhibit Index
|
Exhibit
Number
|
Description of Exhibit | Form | File No. | Exhibit | Filing Date | |||||||||||||||||||||||||||
| 10.1 # | Filed herewith | |||||||||||||||||||||||||||||||
| 31.1 | Filed herewith | |||||||||||||||||||||||||||||||
| 31.2 | Filed herewith | |||||||||||||||||||||||||||||||
| 32.1 | Furnished herewith | |||||||||||||||||||||||||||||||
| 32.2 | Furnished herewith | |||||||||||||||||||||||||||||||
| 101.INS | Inline XBRL Instance Document –– the Instance Document does not appear in the interactive data file because its XBRL tags are Embedded within the Inline XBRL Document. |
Filed herewith | ||||||||||||||||||||||||||||||
| 101.SCH | Inline XBRL Schema Document. |
Filed herewith | ||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
Filed herewith | ||||||||||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
Filed herewith | ||||||||||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. |
Filed herewith | ||||||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
Filed herewith | ||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File –– the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
Filed herewith | ||||||||||||||||||||||||||||||
# Management contract, plan, or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Life Time Group Holdings, Inc. | ||||||||
Date: May 1, 2023 |
By: | /s/ Robert Houghton | ||||||
| Robert Houghton | ||||||||
| Executive Vice President & Chief Financial Officer | ||||||||
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