Life Time Group Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Life Time operates premium health, fitness and wellness clubs, digital offerings and related businesses. It reported 164 centers across 30 U.S. states and one Canadian province.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $561.7 million | $461.3 million | $1,072.6 million | $853.5 million |
| Operating income | $52.4 million | $20.8 million | $119.8 million | $9.9 million |
| Net income (loss) | $17.0 million | $(2.3) million | $44.5 million | $(40.3) million |
| Net income (loss) margin | 3.0% | (0.5)% | 4.1% | (4.7)% |
| Adjusted EBITDA (non-GAAP) | $136.0 million | $63.1 million | $256.1 million | $103.7 million |
| Adjusted EBITDA margin (non-GAAP) | 24.2% | 13.7% | 23.9% | 12.2% |
Q2 revenue increased 21.8% year over year; first-half revenue increased 25.7%. Growth reflected higher membership dues and enrollment fees, more memberships, pricing actions, increased use of in-center offerings, and new and ramping centers. Center memberships were 790,238 at June 30, up from 724,778 a year earlier; total memberships, including digital on-hold memberships, were 832,639.
Q2 operating expenses included $28.2 million of other operating expense, compared with $8.2 million of other operating income in Q2 2022. This swing primarily reflected sale-leaseback results: a $7.5 million Q2 2023 loss versus a $21.3 million gain in Q2 2022. First-half 2023 included a $0.8 million sale-leaseback loss, versus a $49.6 million gain in first-half 2022. Interest expense was $32.0 million in Q2 and $63.2 million for the first half, increasing year over year.
Cash flow, debt and liquidity
- First-half operating cash flow was $216.3 million, up from $80.3 million. Investing cash outflow was $259.5 million, including $337.1 million of capital expenditures; financing cash inflow was $48.4 million. Cash increased by $5.3 million during the period.
- First-half free cash flow before growth capital expenditures, a non-GAAP measure, was $109.3 million, compared with negative $1.9 million in 2022.
- At June 30, reported debt was $1.875 billion before unamortized discounts and issuance costs; long-term debt, net of current maturities and those costs, was $1.792 billion. Operating lease liabilities totaled approximately $2.271 billion. Current maturities of debt were $64.8 million.
- In May, the company refinanced its $273.6 million term loan into a $310.0 million facility maturing January 2026, extending the prior December 2024 maturity. The term loan bears a floating rate; its stated margin is 4.75% over SOFR, subject to specified terms. The company reported covenant compliance, or that covenants were not applicable.
- Revolver borrowings were $20.0 million, with $30.5 million of letters of credit and $424.5 million of stated availability. The filing gives two cash figures: the balance sheet reports $30.9 million of cash and cash equivalents, while MD&A cites $15.8 million of cash, exclusive of restricted cash, and total cash plus revolver availability of $440.3 million.
Outlook, risks and notable items
No quantified financial guidance is provided in the filing. Management said it expects continued growth as existing and new centers ramp, and described plans for 18–20 new centers during 2023 and 2024. Ten centers were under construction at June 30; management cited $327 million invested in new centers not yet open. It also identified opportunities for further margin and leverage improvement.
Management cited inflation in wages, construction and operating costs, labor and supply-chain issues, a potential recession, and higher interest rates as risks. Higher rates increase costs on variable-rate debt; assuming the term loan is not prepaid and the revolver is fully drawn, a one-percentage-point rate change would affect annual interest expense by approximately $7.9 million. Management also noted that a larger leased-center footprint increases rent expense and that investments in centers and member experiences may precede related revenue.
A lawsuit seeking insurance coverage and damages from Zurich American Insurance Company over COVID-19 business interruptions and construction suspensions remained in discovery; the outcome was described as uncertain. The company completed two sale-leaseback transactions in the first half, receiving $78.0 million net cash proceeds, and expected another property sale-leaseback to close by September 30, 2023. Management said other ordinary-course legal matters were not expected to materially affect the company. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Reconcile the $30.9 million balance-sheet cash amount with MD&A’s $15.8 million cash figure and confirm restricted-cash treatment.
- Assess the quality and sustainability of Adjusted EBITDA and free cash flow, including their exclusions and the high level of growth capital spending.
- Review floating-rate debt exposure, the 2026 maturity concentration, lease obligations and the availability and terms of revolver capacity.
- Track execution, costs and returns for the planned center openings and pipeline, as well as management’s membership, pricing and margin assumptions.
- Monitor the Zurich insurance litigation and the timing and economics of pending or future sale-leaseback transactions.