Life Time Group Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 30, 2021; comparisons are with the three and nine months ended September 30, 2020 unless noted. Life Time operated 155 centers across 29 U.S. states and one Canadian province. All centers were open at quarter-end. The company provides premium fitness, wellness, recreation, digital, and athletic-event offerings.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $385.0 million | $231.0 million | $957.5 million | $719.9 million |
| Operating loss | $17.5 million | $90.8 million | $156.9 million | $279.5 million |
| Net loss | $45.4 million | $93.6 million | $274.6 million | $276.3 million |
| Net loss margin | (11.8)% | (40.5)% | (28.7)% | (38.4)% |
| Adjusted EBITDA (non-GAAP) | $47.0 million | $(12.4) million | $32.3 million | $(44.9) million |
| Net cash used in operating activities | $(2.3) million | $(11.8) million | $(15.3) million | $(56.2) million |
| Free cash flow before growth capital expenditures (non-GAAP) | $(38.6) million | $(31.6) million | $(99.5) million | $(145.3) million |
- Q3 diluted loss per share was $0.36, versus $0.64; nine-month diluted loss per share was $2.00, versus $1.90.
- Q3 revenue increased 67% year over year, reflecting the reopening of centers after pandemic closures, new-member pricing, and the return of athletic events. Center revenue grew to $372.0 million from $228.3 million. Membership dues and enrollment fees were $261.0 million; in-center revenue was $111.0 million.
- Q3 operating expenses were $402.6 million, or 104.6% of revenue, compared with $321.8 million, or 139.3%. Center operations and staffing costs rose with reopened centers and new openings; rent and administrative costs also increased.
- Interest expense was $39.8 million in Q3 and $176.1 million for the first nine months. The nine-month amount included a $41.0 million noncash loss on conversion of related-party debt to preferred stock and $18.3 million of debt discount and issuance-cost write-offs.
- At September 30, cash was $44.8 million; current assets were $131.9 million and current liabilities $411.8 million. Debt totaled $2.40 billion before unamortized discounts and issuance costs. Operating lease liabilities were $1.95 billion.
- There were no revolver borrowings at quarter-end; $217.8 million of availability was reported, subject to a $100 million minimum-liquidity requirement. Cash plus reported revolver availability totaled $262.6 million.
- Nine-month capital expenditures were $201.7 million. Investing cash outflow was $138.2 million, while financing provided $165.1 million.
Material changes and significant events
- Membership recovery remained incomplete: 753,355 total memberships at September 30, down 20.7% from March 31, 2020. This included 668,310 Center memberships and 85,045 Digital On-hold memberships. Average Center revenue per Center membership was $555 for Q3 and $1,554 for the first nine months.
- The company refinanced debt in 2021, issuing $925 million of 5.75% secured notes and $475 million of 8.00% unsecured notes, and establishing an $850 million term loan facility maturing in December 2024. The refinancing replaced prior facilities and notes and increased borrowing costs.
- After quarter-end, the company completed its IPO at $18 per share. The filing reports approximately $706.2 million of net proceeds including the partial over-allotment exercise. On October 13, it repaid $570 million of term-loan principal, plus accrued interest and a prepayment penalty; the filing describes total cash used for the paydown as approximately $575.7 million. Preferred shares converted into common shares upon the IPO.
- Management reported $362.5 million of unrecognized share-based compensation at September 30 and expected a significant portion to be recognized in Q4 following the IPO-related vesting conditions. This may materially affect subsequent reported expenses.
- The company completed two sale-leaseback transactions during the first nine months, receiving $74.0 million net cash proceeds and recognizing a $2.6 million loss. It also acquired outdoor bicycling-event assets for approximately $10.2 million.
Outlook, commentary, and risks
- No formal revenue, profit, or cash-flow guidance is provided. Management said it planned at least 10 new centers annually for the foreseeable future and had 12 centers under construction at September 30.
- Management cited higher pricing, membership recovery, and increased center utilization as positive trends, while noting that operating performance varies by region and that the pandemic’s effects, including Delta-variant developments, remained uncertain. The company stated that further closures or operating restrictions could occur.
- Management believed cash, revolver availability, refinancing, the IPO, and cost-control measures positioned the company to manage through the pandemic. It cautioned that if liquidity proved insufficient, additional debt, sale-leasebacks, or equity financing might be needed, with no assurance such financing would be available on acceptable terms.
- A $100 million minimum-liquidity covenant applied during the covenant modification period, which ended no later than January 1, 2022. Thereafter, a first-lien net leverage covenant may apply under specified revolver usage conditions. The company reported compliance in all material respects, or that covenants were not applicable, at September 30.
- Risks include pandemic-related disruption, membership attraction and retention, competition, consumer preferences, center operating interruptions, substantial debt and lease commitments, and restricted access to capital markets. The company also has a pending insurance dispute with Zurich concerning COVID-19 business-interruption and construction-project coverage; the outcome is uncertain.
Important facts for investors to verify
- Whether membership levels, utilization, and pricing continued to recover after September 30, and how comparable-center sales perform beyond the reopening-driven rebound.
- The post-IPO debt balance, interest burden, covenant headroom, minimum-liquidity requirements, and remaining IPO proceeds after the term-loan repayment.
- The timing and amount of IPO-triggered share-based compensation expense, and the resulting dilution from converted preferred stock, options, and restricted awards.
- Cash generation after growth and maintenance capital expenditures, given negative operating cash flow and substantial lease obligations.
- Any material developments in COVID-19 restrictions, the Zurich insurance litigation, and the company’s planned center openings.