XNYS:LTM Life Time Fitness, Inc. Quarterly Report 10-Q Filing - 6/30/2012
Effective Date 6/30/2012
| • FORM 10-Q • EXHIBIT 10.2 • EXHIBIT 31.1 • EXHIBIT 31.2 • EXHIBIT 32 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________________________ FORM 10-Q _______________________________
For the quarterly period ended June 30, 2012 or
Commission File Number: 001-32230 _______________________________  Life Time Fitness, Inc. (Exact name of registrant as specified in its charter) _______________________________
952-947-0000 (Registrant's telephone number, including area code) _______________________________ 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 þ No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þ No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 þ The number of shares outstanding of the registrant's common stock as of July 18, 2012 was 43,501,691 common shares. TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Item 1. Financial Statements LIFE TIME FITNESS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data)
See notes to unaudited consolidated financial statements. 3 LIFE TIME FITNESS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
See notes to unaudited consolidated financial statements. 4 LIFE TIME FITNESS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited)
See notes to unaudited consolidated financial statements. 5 LIFE TIME FITNESS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
See notes to unaudited consolidated financial statements. 6 LIFE TIME FITNESS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Table amounts in thousands, except share and per share data)
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present financial position, results of operations and cash flows for the periods have been included. These interim consolidated financial statements and the related notes should be read in conjunction with the annual consolidated financial statements and notes included in the latest Form 10-K, as filed with the Securities and Exchange Commission (“SEC”), which includes audited consolidated financial statements for the three fiscal years ended December 31, 2011.
Stock Option and Incentive Plans We have four share-based compensation plans, the Life Time Fitness, Inc. 1998 Stock Option Plan (the “1998 Plan”), the Amended and Restated Life Time Fitness, Inc. 2004 Long-Term Incentive Plan (the “2004 Plan”), the Life Time Fitness, Inc. 2011 Long-Term Incentive Plan (the “2011 Plan”) and an Employee Stock Purchase Plan (the “ESPP”), collectively, the share-based compensation plans. We no longer make grants under the 1998 Plan and the 2004 Plan. There are 2,500,000 shares of common stock reserved for grant under the 2011 Plan and, as of June 30, 2012, there were 1,541,003 shares available for grant. The types of awards that may be granted under the 2011 Plan include incentive and non-qualified options to purchase shares of common stock, stock appreciation rights, restricted shares, restricted share units, performance awards and other types of share-based awards. As of June 30, 2012, we had granted a total of 5,587,165 options to purchase common stock under all of the share-based compensation plans, of which options to purchase 305,810 shares were outstanding and vested, and a total of 4,280,025 restricted shares were granted, of which 2,001,798 restricted shares were outstanding and unvested. We use the term “restricted shares” to define unvested shares granted to employees and non-employee directors, whereas applicable accounting guidance reserves that term for fully vested and outstanding shares whose sale is contractually or governmentally prohibited for a specified period of time. Total share-based compensation expense included in our consolidated statements of operations for the three and six months ended June 30, 2012 and 2011, was as follows:
7 LIFE TIME FITNESS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Table amounts in thousands, except share and per share data) Summary of Restricted Stock Activity
During the six months ended June 30, 2012 and 2011, we issued 955,026 and 359,550 shares of restricted stock, respectively, with an aggregate fair value of $45.4 million and $13.8 million, respectively. The grant date fair market value of restricted shares that vested during the six months ended June 30, 2012 and 2011 was $18.7 million and $7.7 million, respectively. The total value of each restricted stock grant, based on the fair market value of the stock on the date of grant, is amortized to compensation expense on a straight-line basis over the related vesting period. As of June 30, 2012, there was $32.6 million of unrecognized compensation expense related to restricted stock that is expected to be recognized over a weighted average period of 1.9 years. Special 2009 Restricted Stock Grant In June 2009, the Compensation Committee of our Board of Directors approved the grant of 996,000 shares of long-term performance-based restricted stock to serve as an incentive to our senior management team to achieve certain diluted earnings per share (“EPS”) targets in 2011 and 2012. In August 2010, an additional 20,000 shares of long-term performance-based restricted stock were granted to a new member of senior management using the same diluted EPS targets and vesting schedule. A specified diluted EPS target was achieved for fiscal 2011 and consequently, 50% of the then-outstanding restricted shares (representing 453,500 shares of restricted stock) vested. As of June 30, 2012, 448,000 of the remaining shares were still outstanding and unvested. The remaining shares will vest if a specified diluted EPS target is achieved for fiscal 2012. In the event that we do not achieve the specified diluted EPS target for fiscal 2012, the remaining restricted stock will be forfeited. In fourth quarter 2010, we determined that achieving the 2011 diluted EPS targets required for vesting of 50% of the restricted shares was probable. As a result, we recognized a cumulative, non-cash performance share-based compensation expense of $5.6 million in fourth quarter 2010 and $3.9 million in 2011. In accordance with the related accounting guidance, all of the vested restricted shares were included in our total diluted share count at December 31, 2011 and June 30, 2012. In fourth quarter 2011, we determined that achieving the 2012 diluted EPS targets required for vesting of the remaining restricted shares was probable. As a result, we recognized a cumulative, non-cash performance share-based compensation expense of $6.8 million in fourth quarter 2011 and $1.3 million in the first six months of 2012. We anticipate recognizing the remaining portion of performance share-based compensation expense of approximately $1.3 million (pretax) ratably in 2012. The probability of reaching the targets is evaluated each reporting period. If we later determine that it is not probable that the minimum diluted EPS performance threshold for 2012 will be met, no further compensation cost will be recognized and any recognized compensation cost relating to the shares that have not vested will be reversed. In accordance with the related accounting guidance, none of the remaining unvested restricted shares were included in our total diluted share count at June 30, 2012 or 2011. 8 LIFE TIME FITNESS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Table amounts in thousands, except share and per share data) Special 2012 Restricted Stock Grant In May 2012, the Compensation Committee of our Board of Directors approved the grant of 598,000 shares of long-term performance-based restricted stock to serve as an incentive to our senior management team to achieve certain cumulative diluted EPS and return on invested capital (“ROIC”) targets during performance periods that end on December 31, 2015 and December 31, 2016. These shares were included in the overall grant of 955,026 restricted shares granted in the first six months of 2012. The cumulative EPS target measures cumulative EPS for each quarter during the period from April 1, 2012 to the end of the applicable performance period. The ROIC target is measured in the last year of the applicable performance period. If the specified cumulative EPS and ROIC targets are met or exceeded for the performance period ending December 31, 2015, 50% of the restricted shares will vest. If the specified cumulative EPS and ROIC targets are met or exceeded for the performance period ending December 31, 2016, then all of the restricted shares will vest. For example, if the 2015 performance targets were satisfied and 50% of the shares vested, the remaining 50% of the restricted shares will vest in 2016 if the 2016 performance targets were satisfied. If the 2015 performance targets were not satisfied, but the 2016 performance targets are met, 100% of the restricted shares will vest. In the event that we do not achieve the specified cumulative EPS and ROIC targets for the performance period ending December 31, 2016, the restricted stock will be forfeited. A maximum of $27.6 million could be recognized as compensation expense under this grant if all EPS and ROIC targets are met. We consider the specific cumulative EPS and ROIC targets to be competitively sensitive information during the performance period. However, the Compensation Committee set the cumulative EPS targets at 1.5 times the compound annual growth rate under our current long range plan and the ROIC targets at 1.1 times the ROIC under our current long range plan. We do not believe that achievement of either the cumulative EPS or the ROIC targets is currently probable, and, therefore, we did not recognize any compensation expense associated with the grant during the six months ended June 30, 2012. If all of the targets had been considered probable at June 30, 2012, we would have recognized $1.1 million of compensation cost during the six months ended June 30, 2012. If it becomes probable that the EPS and ROIC performance targets will be achieved, a cumulative adjustment will be recorded and the remaining compensation expense will be recognized over the remaining performance period. The probability of reaching the targets is evaluated each reporting period. If we later determine that it is no longer probable that the minimum EPS and ROIC performance targets for the grants will be met, no further compensation cost will be recognized and any previously recognized compensation cost will be reversed. In accordance with the related accounting guidance, none of the unvested restricted shares were included in our total diluted share count at June 30, 2012. Summary of Stock Option Activity
No stock options have been granted since 2007. As of June 30, 2012, there was no unrecognized compensation expense related to stock options, and all outstanding stock options were vested. 9 LIFE TIME FITNESS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Table amounts in thousands, except share and per share data) The aggregate intrinsic values in the table above represent the total pretax intrinsic values (the differences between our closing stock price and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders, had all option holders exercised their options on that date. This amount changes based on the fair market value of our stock. Total intrinsic value of options exercised during the six months ended June 30, 2012 and 2011 was $3.0 million and $0.6 million, respectively. Our net cash proceeds from the exercise of stock options were $2.0 million and $1.0 million for the six months ended June 30, 2012 and 2011, respectively. The actual income tax benefit realized from stock option exercises and restricted stock vesting was $8.4 million and $2.8 million, respectively, for those same periods. In accordance with the related accounting guidance, this tax benefit is presented as a financing cash inflow. There is a corresponding cash outflow included in cash flows from operating activities. Employee Stock Purchase Plan Our ESPP provides for the sale of up to 1,500,000 shares of our common stock to our employees at discounted purchase prices. The cost per share under this plan is 90% of the fair market value of our common stock on the last day of the purchase period, as defined. The current purchase period for employees under the ESPP began January 1, 2012 and ends June 30, 2012. Compensation expense under the ESPP is estimated based on the discount of 10% at the end of the purchase period. During the six months ended June 30, 2012, $0.6 million was withheld from employees for the purpose of purchasing shares under the ESPP. There were 1,302,020 shares of common stock available for purchase under the ESPP as of June 30, 2012. Share Repurchase Plans In June 2006, our Board of Directors authorized the repurchase of up to 500,000 shares of our common stock from time to time in the open market or otherwise for the primary purpose of offsetting the dilutive effect of shares pursuant to our ESPP. During the first six months of 2012, we repurchased 12,650 shares for approximately $0.6 million. As of June 30, 2012, there were 302,020 remaining shares authorized to be repurchased for this purpose. The shares repurchased to date have been purchased in the open market and, upon repurchase, became authorized, but unissued shares of our common stock. In August 2011, our Board of Directors authorized the repurchase of up to $60 million of our outstanding common stock from time to time through open market or privately negotiated transactions. The authorization to repurchase shares terminates when the aggregate repurchase amount totals $60 million or at the close of business on August 17, 2013, whichever comes earlier. The share repurchase program does not obligate us to repurchase any dollar amount or number of shares of our common stock and the program may be extended, modified, suspended or discontinued at any time. As of June 30, 2012, no shares have been repurchased under this program. 3. Earnings per Share Basic EPS is computed by dividing net income applicable to common shareholders by the weighted average number of shares of common stock outstanding for each period. Diluted EPS is computed similarly to basic EPS, except that the denominator is increased for the assumed exercise of dilutive stock options and unvested restricted stock awards using the treasury stock method. Stock options excluded from the calculation of diluted EPS because the option exercise price was greater than the average market price of the common share were 30,037 and 54,277 for the three months ended June 30, 2012 and 2011, respectively and 2,477 and 42,277 for the six months ended June 30, 2012 and 2011, respectively. 10 LIFE TIME FITNESS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Table amounts in thousands, except share and per share data) The basic and diluted EPS calculations are shown below:
Our operations are conducted mainly through our distinctive and large, multi-use sports and athletic, professional fitness, family recreation and spa centers in a resort-like environment. We aggregate the activities of our centers and other ancillary products and services into one reportable segment. Each of the centers has similar economic characteristics, services, product offerings and customers, and in-center revenues are derived primarily from services to our members. Each of the other ancillary products and services either directly or indirectly, through advertising or branding, compliment the operations of the centers. Our chief operating decision maker uses EBITDA as the primary measure of operating segment performance. Our chief operating decision maker is our Chief Executive Officer. The following table presents revenue for the three and six months ended June 30, 2012 and 2011:
11 LIFE TIME FITNESS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Table amounts in thousands, except share and per share data)
Decreases (increases) in operating assets and increases (decreases) in operating liabilities are as follows:
We made cash payments for income taxes of $21.8 million and $21.7 million for the six months ended June 30, 2012 and 2011, respectively. We made cash payments for interest, net of capitalized interest, of $11.7 million and $8.8 million for the six months ended June 30, 2012 and 2011, respectively. Capitalized interest was $0.6 million and $0.5 million for the same periods. Construction accounts payable was $16.7 million and $20.0 million at June 30, 2012 and 2011, respectively.
Litigation — We are engaged in 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 have established reserves for matters that are probable and estimable in amounts we believe are adequate to cover reasonable adverse judgments not covered by insurance. These reserves are not material to our consolidated financial statements. 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 the consolidated financial position, results of operations or cash flows. Such matters are subject to many uncertainties, and the outcome of individual matters are not predictable with assurance.
In September 2011, the Financial Accounting Standards Board ("FASB") issued guidance on goodwill impairment testing. The guidance became effective for us in fiscal 2012. The guidance allows companies to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The guidance also includes examples of the types of factors to consider in conducting the qualitative assessment. We do not expect the implementation of the guidance to have a material impact on our consolidated financial statements. 12 LIFE TIME FITNESS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Table amounts in thousands, except share and per share data) In June 2011, the FASB updated guidance on presentation of comprehensive income. The FASB subsequently deferred the effective date of certain provisions of this standard pertaining to the reclassification of items out of accumulated other comprehensive income, pending the issuance of further guidance on that matter. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity is required to present either a continuous statement of net income and other comprehensive income or two separate but consecutive statements. As this guidance relates to presentation only, the adoption did not have a material impact on our consolidated financial statements.
As part of our risk management program, we may periodically use interest rate swaps to manage known market exposures. Terms of derivative instruments are structured to match the terms of the risk being managed and are generally held to maturity. In August 2011, we entered into an interest rate swap contract that effectively fixed the rates paid on a total of $200.0 million of variable rate borrowings at 1.32% plus the applicable spread (which depends on our EBITDAR leverage ratio) until June 2016. We pay 1.32% and receive LIBOR on the notional amount of $200.0 million. The contract has been designated a cash flow hedge against interest rate volatility. In accordance with applicable accounting guidance, changes in the fair market value of the swap contract are recorded in accumulated other comprehensive (loss) income, net of tax. As of June 30, 2012, the $3.3 million fair market value loss, net of tax, of the swap contract was recorded as accumulated other comprehensive loss in the shareholders' equity section of our consolidated balance sheets and the $5.4 million gross fair market value of the swap contract was included in long-term debt. On an ongoing basis, we assess whether the interest rate swap used in this hedging transaction is “highly effective” in offsetting changes in the fair value or cash flow of the hedged item by comparing the current terms of the swap and the debt to assure they continued to coincide and through an evaluation of the continued ability of the counterparty to the swap to honor its obligations under the swap. No ineffectiveness was experienced in the interest rate swap during the three and six months ended June 30, 2012. If it is determined that the derivative is not highly effective as a hedge or hedge accounting is discontinued, any change in fair value of the derivative since the last date at which it was determined to be effective would be recognized in earnings.
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: 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. 13 LIFE TIME FITNESS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Table amounts in thousands, except share and per share data) Fair Value Measurements on a Recurring Basis The fair value of the interest rate swap is determined using observable current market information such as the prevailing Eurodollar interest rates, Eurodollar yield curve rates and current fair values as quoted by recognized dealers, and also includes consideration of counterparty credit risk. The following table presents the fair value of our derivative financial instrument as of June 30, 2012 and December 31, 2011:
Fair Value Measurements on a Nonrecurring Basis Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to our tangible fixed assets, goodwill and other intangible assets, which are remeasured when the derived fair value is below carrying value on our 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 consolidated statements of operations. We had no remeasurements of such assets or liabilities to fair value during the three or six months ended June 30, 2012 or June 30, 2011. Financial Assets and Liabilities Not Measured at Fair Value The carrying amounts related to cash and cash equivalents, accounts receivable, income tax receivable, accounts payable and accrued liabilities approximate fair value due to the relatively short maturities of such instruments. The fair value of our long-term debt and capital leases are estimated based on estimated current rates for debt with similar terms, credit worthiness and the same remaining maturities. For variable rate loans that re-price frequently, fair values are based on carrying values. The fair value of fixed rate loans is estimated based on the discounted cash flows of the loans using current market rates, which are estimated based on recent financing transactions (Level 3). The fair value estimates presented are based on information available to us as of June 30, 2012. These fair value estimates have not been comprehensively revalued for purposes of these consolidated financial statements since that date, and current estimates of fair values may differ significantly. The following table presents the carrying value and the estimated fair value of our financial liabilities:
14 LIFE TIME FITNESS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Table amounts in thousands, except share and per share data) 10. Acquisitions We account for business acquisitions in accordance with ASC 805, Business Combinations. This standard requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard prescribe, among other things, the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration) and the exclusion of transaction and acquisition-related restructuring costs from acquisition accounting. In April 2012, we acquired all of the outstanding shares of ChronoTrack Systems LLC, a transponder timing company that has developed a radio frequency identification timing system for athletic and endurance events including run, bike and multi-sport races. Simultaneous with the acquisition of ChronoTrack Systems LLC, we merged Bazu Media, Inc. (“Bazu”), in which we previously owned 55%, with ChronoTrack Systems LLC to form ChronoTrack Systems Corp., a portion of which is owned by third parties. We are currently in the process of finalizing the valuation of the assets acquired and liabilities assumed. During the three months ended June 30, 2012, we also acquired three small athletic event companies which compliment our existing portfolio of athletic events. We recorded the fair value of these acquisitions as identifiable intangibles. Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements The following discussion may contain forward-looking statements regarding us and our business, prospects and results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that advise interested parties of the risks and factors that may affect our business. The interim consolidated financial statements filed on this Form 10-Q and the discussions contained herein should be read in conjunction with the annual consolidated financial statements and notes included in the latest Annual Report on Form 10-K, as filed with the SEC, which includes audited consolidated financial statements for the three fiscal years ended December 31, 2011. Overview We operate distinctive and large, multi-use sports and athletic, professional fitness, family recreation and spa centers in a resort-like environment. As of July 30, 2012, we operated 105 centers primarily in residential locations across 28 markets in 22 states and one Canadian province under the LIFE TIME FITNESS and LIFE TIME ATHLETIC brands. We compare the results of our centers based on how long the centers have been open at the most recent measurement period. We include a center's revenue in the same center revenue category for comparison purposes beginning on the first day of the thirteenth full calendar month of the center's operations, prior to which time we refer to the center as a new center. We include an acquired center's revenue in the same center revenue category for comparison purposes beginning on the first day of the thirteenth full calendar month after we assumed the center's operations. We also include a center's revenue in the same center revenue category for comparison purposes beginning on the first day of the thirty-seventh full calendar month of the center's operations, prior to which time we refer to the center as a new center. 15 As we grow our presence in existing markets by opening new centers, we expect to attract some memberships away from our other existing centers in those markets, reducing revenue and initially lowering the memberships of those existing centers. In addition, as a result of new center openings in existing markets, and because older centers will represent an increasing proportion of our center base over time, our same center revenue may be lower in future periods than in the past. Of the three new large format centers we have opened or plan to open in 2012, one will be in an existing market. In addition, in January 2012, we acquired Racquet Club of the South, a tennis facility in the Atlanta market, which we rebranded as Life Time Tennis Atlanta. We do not expect that operating costs of our planned new centers will be significantly higher than centers opened in the past, and we also do not expect that the planned increase in the number of centers will have a material adverse effect on the overall financial condition or results of operations of existing centers. We measure performance using such key operating statistics as member satisfaction ratings, return on investment, average revenue per membership, including membership dues and enrollment fees, average in-center revenue per membership and center operating expenses, with an emphasis on payroll and occupancy costs, as a percentage of sales and same center revenue growth. We use center revenue and EBITDA margins to evaluate overall performance and profitability on an individual center basis. In addition, we focus on several membership statistics on a center-level and system-wide basis. These metrics include change in center membership levels and growth of system-wide memberships; percentage center membership to target capacity; center membership usage; center membership mix among individual, couple and family memberships; Flex memberships and center attrition rates. During 2010, our annual attrition rate decreased from 40.6% to 36.3%. During 2011, our annual attrition rate decreased from 36.3% to 35.0%. At June 30, 2012, our annual (or trailing twelve month) attrition rate was 36.0%. In 2010 and 2011, we saw our attrition rate decrease due in part to increased programming focused on member engagement and center utilization. The attrition rate increased slightly during the first six months of 2012 due primarily to membership transitions in centers we acquired in late 2011 and a dues price increase in late 2011 and early 2012. We have three primary sources of revenue:
We have five primary sources of operating expenses:
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Our total operating expenses may vary from period to period depending on the number of new centers opened during that period, the number of centers engaged in presale activities and the performance of our in-center and corporate businesses. Our primary capital expenditures relate to the construction of new centers and updating and maintaining our existing centers. The land acquisition, construction and equipment costs for a current model center can vary considerably based on variability in land cost, the cost of construction labor and the size or amenities of the center, including the addition of tennis facilities, an expanded gymnasium or other facilities. We perform maintenance and make improvements on our centers and equipment throughout each year. We conduct a more thorough remodeling project at each center approximately every four to six years. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the U.S., or 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 use estimates for such items as depreciable lives, probability of meeting certain performance targets and tax provisions. We also use estimates for calculating the amortization period for deferred enrollment fee revenue and associated direct costs, which are based on the historical estimated average membership life. We revise the recorded estimates when better information is available, facts change or we can determine actual amounts. Our critical accounting policies and use of estimates are discussed in and should be read in conjunction with the annual consolidated financial statements and notes included in the latest Form 10-K, as filed with the SEC, which includes audited consolidated financial statements for our three fiscal years ended December 31, 2011. 17 Results of Operations The following table sets forth our statements of operations data as a percentage of total revenue and also sets forth other financial and operating data:
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The following table provides a reconciliation of net income, the most directly comparable GAAP measure, to EBITDA and EBITDAR (in thousands):
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The following table provides a reconciliation of net cash provided by operating activities to free cash flow (in thousands):
Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011 Total revenue. Total revenue increased $31.6 million, or 12.3%, to $288.3 million for the three months ended June 30, 2012, from $256.7 million for the three months ended June 30, 2011. Total center revenue grew $26.9 million, or 10.7%, to $278.9 million for the three months ended June 30, 2012, from $252.0 million for the three months ended June 30, 2011. Of the $26.9 million increase in total center revenue,
20 months ended June 30, 2012 to $3.9 million. The revenue recognized from enrollment fees was lower in the second quarter of 2012 as compared to the second quarter of 2011 primarily due to lower total enrollment fees over the deferral period. Other revenue increased $4.7 million, or 99.4%, to $9.4 million for the three months ended June 30, 2012, which was primarily due to growth in athletic events and revenue associated with the ChronoTrack acquisition. Center operations expenses. Center operations expenses totaled $166.6 million, or 59.7% of total center revenue (or 57.8% of total revenue), for the three months ended June 30, 2012 compared to $156.7 million, or 62.2% of total center revenue (or 61.0% of total revenue), for the three months ended June 30, 2011. This $9.9 million increase primarily consisted of an increase of $7.3 million in additional payroll-related costs to support increased memberships and in-center revenue growth at our centers. Center operations expenses decreased as a percent of total revenue due primarily to leverage provided by dues growth. Advertising and marketing expenses. Advertising and marketing expenses were $9.7 million, or 3.4% of total revenue, for the three months ended June 30, 2012, compared to $9.0 million, or 3.5% of total revenue, for the three months ended June 30, 2011. These expenses increased primarily due to increased marketing activity to drive memberships and in-center businesses. General and administrative expenses. General and administrative expenses were $13.9 million, or 4.8% of total revenue, for the three months ended June 30, 2012, compared to $12.1 million, or 4.7% of total revenue, for the three months ended June 30, 2011. This increase of $1.8 million is primarily related to corporate initiatives to support our continued growth. For the three months ended June 30, 2012, share-based compensation expense related to the special 2009 restricted stock grant totaled $0.6 million of which $0.5 million was reported in general and administrative expenses. Other operating expenses. Other operating expenses were $12.8 million for the three months ended June 30, 2012, compared to $8.0 million for the three months ended June 30, 2011. This increase is primarily due to growth in infrastructure and operating costs of approximately $2.2 million in our media, athletic events and health divisions and costs associated with the ChronoTrack business which was acquired during the quarter. Depreciation and amortization. Depreciation and amortization was $28.9 million for the three months ended June 30, 2012, compared to $24.7 million for the three months ended June 30, 2011. This increase was primarily due to the depreciation on the six formerly leased facilities which we acquired in December 2011 and the three new facilities opened in the first six months of 2012. Interest expense, net. Interest expense, net of interest income, was $6.5 million for the three months ended June 30, 2012, compared to $4.7 million for the three months ended June 30, 2011. This $1.8 million increase was primarily the result of an increase in debt levels over the three months ended June 30, 2011. Provision for income taxes. The provision for income taxes was $20.1 million for the three months ended June 30, 2012, compared to $16.9 million for the three months ended June 30, 2011. This $3.2 million increase was due to an increase in income before income taxes of $8.5 million. Net income. As a result of the factors described above, net income was $30.3 million, or 10.4% of total revenue, for the three months ended June 30, 2012 compared to $24.9 million, or 9.7% of total revenue, for the three months ended June 30, 2011. 21 Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011 Total revenue. Total revenue increased $59.5 million, or 11.9%, to $556.8 million for the six months ended June 30, 2012, from $497.3 million for the six months ended June 30, 2011. Total center revenue grew $54.1 million, or 11.1%, to $543.0 million for the six months ended June 30, 2012, from $488.9 million for the six months ended June 30, 2011. Of the $54.1 million increase in total center revenue,
Other revenue increased $5.3 million, or 63.2%, to $13.8 million for the six months ended June 30, 2012, which was primarily due to growth in athletic events and revenue associated with the ChronoTrack acquisition. Center operations expenses. Center operations expenses totaled $327.3 million, or 60.3% of total center revenue (or 58.8% of total revenue), for the six months ended June 30, 2012 compared to $306.2 million, or 62.6% of total center revenue (or 61.6% of total revenue), for the six months ended June 30, 2011. This $21.1 million increase primarily consisted of an increase of $14.9 million in additional payroll-related costs to support increased memberships and in-center revenue growth at our centers. Center operations expenses decreased as a percent of total revenue due primarily to leverage provided by dues growth. Advertising and marketing expenses. Advertising and marketing expenses were $20.0 million, or 3.6% of total revenue, for the six months ended June 30, 2012, compared to $17.6 million, or 3.5% of total revenue, for the six months ended June 30, 2011. These expenses increased primarily due to increased marketing activity to drive memberships and in-center businesses. General and administrative expenses. General and administrative expenses were $27.6 million, or 4.9% of total revenue, for the six months ended June 30, 2012, compared to $24.8 million, or 5.0% of total revenue, for the six months ended June 30, 2011. This increase of $2.8 million is primarily related to corporate initiatives to support our continued growth. For the six months ended June 30, 2012, share-based compensation expense related to the special 2009 restricted stock grant totaled $1.3 million of which $1.0 million was reported in general and administrative expenses. Other operating expenses. Other operating expenses were $21.2 million for the six months ended June 30, 2012, compared to $14.0 million for the six months ended June 30, 2011. This increase is primarily due to growth in infrastructure and operating costs of approximately $3.7 million in our media, athletic events and health divisions and costs associated with the ChronoTrack business which was acquired during the second quarter. Depreciation and amortization. Depreciation and amortization was $55.8 million for the six months ended June 30, 2012, compared to $48.3 million for the six months ended June 30, 2011. This increase was primarily due to the depreciation on the six formerly leased facilities which we acquired in December 2011 and the three new facilities opened in the first six months of 2012. 22 Interest expense, net. Interest expense, net of interest income, was $12.8 million for the six months ended June 30, 2012, compared to $10.2 million for the six months ended June 30, 2011. This $2.6 million increase was primarily the result of an increase in debt levels over the six months ended June 30, 2011. Provision for income taxes. The provision for income taxes was $36.9 million for the six months ended June 30, 2012, compared to $31.2 million for the six months ended June 30, 2011. This $5.7 million increase was due to an increase in income before income taxes of $15.9 million. Net income. As a result of the factors described above, net income was $56.0 million, or 10.1% of total revenue, for the six months ended June 30, 2012 compared to $45.8 million, or 9.2% of total revenue, for the six months ended June 30, 2011. Liquidity and Capital Resources Liquidity Historically, we have satisfied our liquidity needs through various debt arrangements, sales of equity and cash flow provided by operations. Our principal liquidity needs have included the development of new centers, debt service requirements and expenditures necessary to maintain and update our existing centers and associated fitness equipment and may include the acquisition and remodeling of centers we acquire from time to time, as well as acquisitions to support our in-center and corporate businesses. We believe that we can satisfy our current and longer-term debt service obligations and capital expenditure requirements primarily with cash flow from operations, by the extension of the terms of or refinancing our existing debt facilities, through sale-leaseback transactions and by continuing to raise long-term debt or equity capital, although there can be no assurance that such actions can or will be completed. In the second quarter of 2011, we retired mortgage debt scheduled to mature in July 2011. We also amended, enlarged and extended our revolving credit facility, previously scheduled to mature in May 2012, now scheduled to mature on June 30, 2016. We expect to use the proceeds from the amended revolving credit facility for general corporate purposes, future center expansion and to help fund other growth initiatives. Our business model operates with negative working capital primarily for three reasons. First, we carry minimal accounts receivable due to our ability to have monthly membership dues paid by electronic draft. Second, we defer enrollment fee revenue. Third, we fund the construction of our new centers under standard arrangements with our vendors that are paid with cash flows from operations or the revolving credit facility. The following table summarizes our capital structure as of June 30, 2012 and December 31, 2011.
23 Operating Activities As of June 30, 2012, we had total cash and cash equivalents of $15.5 million. We also had $229.9 million available under the existing terms of our revolving credit facility as of June 30, 2012. Net cash provided by operating activities was $142.2 million for the six months ended June 30, 2012 compared to $118.5 million for the six months ended June 30, 2011. This increase is primarily due to increased net income and changes in working capital. Investing Activities Investing activities consist primarily of purchasing real property, constructing new centers 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 by cash payments or by financing through notes payable or capital lease obligations. Net cash used in investing activities was $131.0 million for the six months ended June 30, 2012 compared to $87.9 million for the six months ended June 30, 2011. The increase of $43.1 million was primarily due to acquisitions. Our capital expenditures were as follows:
The following schedule reflects capital expenditures by type of expenditure:
At June 30, 2012, we had purchased the real property for one and entered into ground leases for two of the three large format centers we have opened in 2012, we had purchased the real property for one large format center we plan to open after 2012, and we had entered into a ground lease for one of the large format centers that we plan to open after 2012. Construction in progress, including land purchased for future development, totaled $40.6 million at June 30, 2012 and $36.8 million at June 30, 2011. We expect our capital expenditures to be approximately $220 million to $250 million in 2012, including approximately $114 million to $144 million in the remaining six months of 2012. Of this approximately $114 million to $144 million, we expect to incur approximately $82 million to $102 million for new center construction and approximately $32 million to $42 million for the updating of existing centers and corporate infrastructure. We plan to fund these capital expenditures primarily with cash flow from operations. 24 Financing Activities Net cash used in financing activities was $3.5 million for the six months ended June 30, 2012 compared to $32.6 million for the six months ended June 30, 2011. The decrease of $29.1 million was primarily due to a large debt retirement made in the second quarter of 2011. Long-term debt consists of the following:
Revolving Credit Facility The amount of our revolving credit facility is $660.0 million. We may increase the total amount of the facility up to $900.0 million through the exercise of an accordion feature by us if one or more lenders commit the additional $240.0 million. As of June 30, 2012, $422.0 million was outstanding on the revolving credit facility at a weighted average interest rate of 2.6%, plus $8.1 million related to letters of credit, leaving $229.9 million available for additional borrowing under the revolving credit facility. The weighted average interest rate and debt outstanding under the revolving credit facility for the six months ended June 30, 2012 was 2.6% and $390.3 million, respectively. The maximum month-end balance during the six months ended June 30, 2012 was $427.7 million. As of June 30, 2011, $395.8 million was outstanding on the revolving credit facility at a weighted average interest rate of 1.5%. The weighted average interest rate and debt outstanding under the revolving credit facility for the six months ended June 30, 2011 was 1.5% and $343.5 million, respectively. The maximum month-end balance during the six months ended June 30, 2011 was $394.9 million. Debt Covenants We are in compliance in all material respects with all restrictive and financial covenants under our various credit facilities as of June 30, 2012. Our primary financial covenants under the revolving credit facility are:
25 The formulas for these covenants are specifically defined in the Third Amended and Restated Credit Agreement and include, among other things, an add back of share-based compensation expense to EBITDAR. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We invest our excess cash in highly liquid short-term investments. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the investment income we earn on our cash and cash equivalents and, therefore, impact our consolidated cash flows and consolidated results of operations. As of June 30, 2012 and December 31, 2011, our net floating rate indebtedness was approximately $259.8 million and $267.9 million, respectively. If long-term floating interest rates were to have increased by 100 basis points during the six months ended June 30, 2012, our interest costs would have increased by approximately $1.1 million. If short-term interest rates were to have increased by 100 basis points during the six months ended June 30, 2012, our interest income from cash equivalents would have increased by less than $0.1 million. These amounts are determined by considering the impact of the hypothetical interest rates on our floating rate indebtedness and cash equivalents balances at June 30, 2012. Item 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15 or 15d-15 of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 1A. RISK FACTORS Not applicable. 26 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Issuer Purchases of Equity Securities in Second Quarter 2012
ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. ITEM 5. OTHER INFORMATION Not applicable. 27 ITEM 6. EXHIBITS Exhibits filed with this report
28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Life Time Fitness, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on July 30, 2012.
29 INDEX TO EXHIBITS
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