Life Time Group Holdings, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparison is with Q1 2023. Life Time operates premium health, fitness and wellness centers and digital offerings. It had 172 centers in 31 U.S. states and one Canadian province, 802,010 center memberships and 853,072 total memberships at quarter-end.
Financial performance
- Revenue: $596.7 million, up 16.8% from $510.9 million. Center revenue rose 16.6% to $580.5 million, including membership dues and enrollment fees of $425.4 million and in-center revenue of $155.1 million. Other revenue was $16.2 million.
- Membership and activity: Center memberships increased to 802,010 from 764,173; average center revenue per center membership rose to $745 from $667. Comparable center revenue growth was 11.1%, versus 24.6%. Club visits increased to 28 million from 26 million.
- Profit and margins: Operating income was $72.1 million, compared with $67.4 million; operating margin was 12.2%, down from 13.2%. Net income fell to $24.9 million from $27.5 million, and net margin declined to 4.2% from 5.4%. Diluted EPS was $0.12 versus $0.14. Adjusted EBITDA, a non-GAAP measure, rose to $146.0 million from $120.1 million; its margin increased to 24.5% from 23.5%. Adjusted net income was $30.5 million versus $23.2 million.
- Costs and interest: Center operations expense rose to $321.9 million from $274.1 million. Rent was $72.3 million, up from $66.5 million. Net interest expense increased to $37.4 million from $31.2 million, primarily reflecting higher average borrowings.
- Cash flow and capital spending: Operating cash flow was $90.4 million, up from $74.3 million. Capital expenditures were $156.8 million, down from $170.8 million; the resulting operating cash flow less capital expenditures was negative $66.4 million, compared with negative $96.5 million. Investing cash outflow was $158.6 million. Financing provided $75.0 million.
- Liquidity and debt: Cash and cash equivalents were $18.6 million, with $18.1 million of restricted cash. Revolver borrowings were $220.0 million, and $224.1 million remained available after letters of credit; the company reported $242.7 million of cash and revolver availability, excluding restricted cash. Total debt, before unamortized discounts and issuance costs, was $2.024 billion, up from $1.948 billion at year-end. Total debt less discounts and issuance costs was $2.010 billion. Long-term operating lease liabilities were $2.255 billion. The company was in material compliance with applicable debt covenants.
Material changes and notable items
- Revenue growth reflected higher dues and enrollment fees, membership growth, pricing, ramping centers and increased utilization of in-center offerings. Average monthly dues per center membership also increased.
- Net income declined despite higher revenue and operating income, as interest expense rose and operating margin narrowed. Other operating expense was $15.7 million versus $2.1 million; Q1 2023 included a $6.7 million sale-leaseback gain and a $4.8 million gain on the sale of two triathlon events.
- In February, the company repaid a $51.0 million mortgage note at maturity. Revolver borrowings increased by $130 million from December 31, 2023, while capital expenditures remained substantial.
- The company issued shares to settle an $18.1 million accrued compensation liability related to 2023 short-term incentive awards. Share-based compensation expense was $7.6 million, up from $5.6 million.
Outlook, risks and contingencies
- Management plans nine to 10 new centers in 2024. Seven centers were under construction at quarter-end, with $204 million of growth capital expenditures already invested in centers not yet open; 27 centers had been open for less than three years. New centers typically take three to four years to reach expected performance.
- Management says priorities include improving the balance sheet, reducing leverage and generating positive free cash flow. It expects to meet obligations using cash, operating cash flow, sale-leasebacks, revolver capacity and, if needed, additional financing. It expressed optimism about completing multiple sale-leasebacks in 2024; execution is not assured.
- Management cited elevated inflation affecting wages, construction and operating costs, and higher interest rates increasing costs on variable-rate debt and potentially delaying or making sale-leasebacks less attractive. With credit facilities fully drawn, a one-percentage-point rate change would change annual interest expense by approximately $7.9 million.
- Debt maturities are concentrated: $1.276 billion falls due April 2025 through March 2026 and $705.7 million April 2026 through March 2027. Interest-rate exposure, refinancing access, lease obligations, construction spending and the pace of center ramp-up are important risks.
- A COVID-related property/business interruption and builders’ risk insurance lawsuit against Zurich remains unresolved; management says the outcome is not predictable. The company reported no material subsequent events through issuance and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether membership growth, pricing and utilization can sustain revenue and comparable-center growth as the post-recovery growth rate moderates.
- Whether planned openings, construction spending and new-center ramp-ups deliver expected returns and improve free cash flow.
- How the company will address the 2025–2027 debt maturities, variable interest costs and leverage, including the availability and terms of refinancing or sale-leaseback financing.
- The composition and recurrence of adjustments in Adjusted EBITDA and Adjusted net income, which are non-GAAP measures, and the reasons GAAP net income declined.
- The status and potential financial impact of the Zurich insurance litigation; the filing states that its outcome cannot be predicted with assurance.