LTM-2014-Q1 10Q
 




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
_______________________________
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-32230
_______________________________


Life Time Fitness, Inc.
(Exact name of registrant as specified in its charter)
_______________________________
Minnesota
(State or other jurisdiction of incorporation or organization)
41-1689746
(I.R.S. Employer Identification No.)
 
 
2902 Corporate Place
Chanhassen, Minnesota
(Address of principal executive offices)
55317
(Zip Code)

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.    
Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨

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 April 18, 2014 was 40,870,982 common shares.
 




TABLE OF CONTENTS

 
 
Page
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 






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)
(Unaudited)
 
March 31,
 
December 31,
 
2014
 
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
12,540

 
$
8,334

Accounts receivable, net
12,114

 
8,298

Center operating supplies and inventories
33,495

 
32,778

Prepaid expenses and other current assets
32,330

 
25,802

Deferred membership origination costs
9,549

 
9,945

Deferred income taxes
3,644

 
6,881

Income tax receivable

 
6,698

Total current assets
103,672

 
98,736

Property and equipment, net
2,147,753

 
2,105,077

Restricted cash
1,137

 
850

Deferred membership origination costs
4,980

 
5,210

Goodwill
59,195

 
49,195

Intangible assets, net
34,783

 
29,299

Other assets
42,370

 
42,684

Total assets
$
2,393,890

 
$
2,331,051

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
27,095

 
$
24,505

Accounts payable
29,082

 
28,645

Construction accounts payable
39,116

 
47,342

Accrued expenses
73,117

 
67,435

Deferred revenue
45,198

 
35,032

Total current liabilities
213,608

 
202,959

Long-term debt, net of current portion
902,023

 
824,093

Deferred rent liability
33,070

 
28,933

Deferred income taxes
97,423

 
100,504

Deferred revenue
5,013

 
5,246

Other liabilities
21,278

 
21,287

Total liabilities
1,272,415

 
1,183,022

Commitments and contingencies (Note 6)


 


Shareholders' equity:
 
 
 
Undesignated preferred stock, 10,000,000 shares authorized; none issued or outstanding

 

Common stock, $.02 par value, 75,000,000 shares authorized; 41,277,944 and 42,115,549 shares issued and outstanding, respectively
826

 
843

Additional paid-in capital
347,964

 
402,147

Retained earnings
778,969

 
750,654

Accumulated other comprehensive loss
(6,284
)
 
(5,615
)
Total shareholders’ equity
1,121,475

 
1,148,029

Total liabilities and shareholders' equity
$
2,393,890

 
$
2,331,051

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)

 
For the Three Months Ended
 
March 31,
 
2014
 
2013
Revenue:
 
 
 
Membership dues
$
196,815

 
$
186,374

Enrollment fees
3,123

 
3,396

In-center revenue
98,405

 
91,971

Total center revenue
298,343

 
281,741

Other revenue
13,612

 
9,006

Total revenue
311,955

 
290,747

Operating expenses:
 
 
 
Center operations
183,118

 
169,962

Advertising and marketing
12,339

 
10,959

General and administrative
15,864

 
15,356

Other operating
14,422

 
12,834

Depreciation and amortization
32,138

 
29,262

Total operating expenses
257,881

 
238,373

Income from operations
54,074

 
52,374

Other income (expense):
 
 
 
Interest expense, net of interest income
(7,851
)
 
(6,129
)
Equity in earnings of affiliate
297

 
346

Total other expense
(7,554
)
 
(5,783
)
Income before income taxes
46,520

 
46,591

Provision for income taxes
18,205

 
18,490

Net income
$
28,315

 
$
28,101

 
 
 
 
Basic earnings per common share
$
0.70

 
$
0.68

Diluted earnings per common share
$
0.69

 
$
0.67

Weighted average number of common shares outstanding – basic
40,603

 
41,295

Weighted average number of common shares outstanding – diluted
40,870

 
41,646


See notes to unaudited consolidated financial statements.



4



LIFE TIME FITNESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

 
For the Three Months Ended
 
March 31,
 
2014
 
2013
Net income
$
28,315

 
$
28,101

Other comprehensive income (loss), net of income tax:
 
 
 
Foreign currency translation adjustments, net of income tax benefit of $609 and $385, respectively
(884
)
 
(584
)
Unrealized gains on cash flow hedges, net of income taxes of $(143) and $(214), respectively
215

 
321

Other comprehensive loss, net of income tax:
(669
)
 
(263
)
Comprehensive income
$
27,646

 
$
27,838


See notes to unaudited consolidated financial statements.



5



LIFE TIME FITNESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
For the Three Months Ended
 
March 31,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
28,315

 
$
28,101

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
32,138

 
29,262

Deferred income taxes
(77
)
 
4,582

Gain on disposal of property and equipment, net
(416
)
 
(228
)
Amortization of deferred financing costs
577

 
505

Share-based compensation
3,286

 
2,830

Excess tax benefit related to share-based compensation
(846
)
 
(4,657
)
Changes in operating assets and liabilities
14,889

 
16,645

Other
(206
)
 
(809
)
Net cash provided by operating activities
77,660

 
76,231

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(82,826
)
 
(59,145
)
Acquisitions, net of cash acquired
(12,400
)
 

Proceeds from sale of property and equipment
447

 
555

Proceeds from property insurance settlements

 
121

Increase in other assets
(33
)
 
(730
)
Increase in restricted cash
(287
)
 
(275
)
Net cash used in investing activities
(95,099
)
 
(59,474
)
Cash flows from financing activities:
 
 
 
Proceeds from long-term borrowings
80,000

 
75,000

Repayments of long-term borrowings
(4,909
)
 
(1,696
)
Proceeds from (repayments of) credit facility, net
5,300

 
(78,400
)
Increase in deferred financing costs
(947
)
 
(465
)
Excess tax benefit related to share-based compensation
846

 
4,657

Proceeds from stock option exercises
2,139

 
872

Proceeds from employee stock purchase plan
483

 
414

Stock purchased for employee stock purchase plan
(701
)
 
(569
)
Repurchases of common stock
(60,498
)
 
(19,349
)
Net cash provided by (used in) financing activities
21,713

 
(19,536
)
Effect of exchange rates on cash and cash equivalents
(68
)
 
(26
)
Increase (decrease) in cash and cash equivalents
4,206

 
(2,805
)
Cash and cash equivalents – beginning of period
8,334

 
16,499

Cash and cash equivalents – end of period
$
12,540

 
$
13,694

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)




1.
Basis of Presentation
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 our consolidated 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, 2013.
2.
Share-Based Compensation
Stock Option and Incentive Plans
We have three share-based compensation plans: 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 2004 Plan. There are 2,500,000 shares of common stock reserved for grant under the 2011 Plan and, as of March 31, 2014, there were 933,817 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 March 31, 2014, we had granted a total of 1,929,665 options to purchase common stock under all of the share-based compensation plans, of which options to purchase 98,954 shares were outstanding and vested, and a total of 5,132,304 restricted shares were granted, of which 1,440,460 restricted shares were outstanding and unvested. We use the term “restricted shares” to define unvested shares granted to employees and non-employee directors. We use the term "vest" to define the lapse of vesting restrictions on restricted shares.
Total share-based compensation expense included in our consolidated statements of operations for the three months ended March 31, 2014 and 2013, was as follows:
 
For the Three Months Ended
 
March 31,
 
2014
 
2013
Share-based compensation expense related to restricted shares
$
3,256

 
$
2,800

Share-based compensation expense related to ESPP
30

 
30

Total share-based compensation expense
$
3,286

 
$
2,830



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


Shares
 
Weighted Average Grant Date Fair Value
Outstanding at December 31, 2013
1,429,730

 
$44.19
Granted
391,733

 
$44.38
Canceled
(91,013
)
 
$45.30
Vested
(289,990
)
 
$40.31
Outstanding at March 31, 2014
1,440,460

 
$44.95

During the three months ended March 31, 2014 and 2013, we issued 391,733 and 328,550 shares of restricted stock, respectively, with an aggregate grant date fair value of $17.4 million and $13.8 million, respectively. The grant date fair value of restricted shares that vested during the three months ended March 31, 2014 and 2013 was $11.7 million and $20.1 million, respectively. The total value of each restricted stock grant, based on the fair 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 March 31, 2014, there was $35.3 million of unrecognized compensation expense related to restricted stock that is expected to vest. We plan to recognize this amount over a weighted average period of 2.9 years.
Special 2012 Long-Term Performance-Based Restricted Stock Grant
In May, July and August 2012, the Compensation Committee of our Board of Directors approved the grant of a total of 658,500 shares of long-term performance-based restricted stock to serve as an incentive to our senior management team to achieve certain cumulative diluted earnings per share ("EPS") and return on invested capital ("ROIC") targets during performance periods that end on December 31, 2015 and December 31, 2016. On March 31, 2014, 576,500 shares remained outstanding under this grant.
The Compensation Committee set the cumulative diluted EPS targets at 1.5 times the compound annual growth rate under our then-current long range plan and the ROIC targets at 1.1 times the ROIC under our then-current long range plan. The following are the performance metrics underlying the targets:
 
Cumulative Diluted EPS
 
ROIC
 
Measurement Period
 
EPS Target
 
Measurement Period
 
ROIC Target
2015 Performance Period
4/1/2012
 
 
 
1/1/2015
 
 
50% vest if we achieve both performance targets
through
 
 
 
through
 
 
12/31/2015
 
$
13.68

 
12/31/2015
 
8.9
%
2016 Performance Period
4/1/2012
 
 
 
1/1/2016
 
 
All/remaining vest if we achieve both performance targets
through
 
 
 
through
 
 
12/31/2016
 
$
18.96

 
12/31/2016
 
9.0
%
A maximum of $26.5 million could be recognized as compensation expense under this grant if all cumulative diluted EPS and ROIC targets are met. We do not believe that achievement of either the cumulative diluted EPS or the ROIC targets is currently probable, and, therefore, we have not recognized any compensation expense associated with the grant.
If it becomes probable that the cumulative diluted 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. If all of the targets had been considered probable at March 31, 2014, we would have recognized $12.3 million of non-cash performance share-based compensation expense during the period ended March 31, 2014. The probability of reaching the targets is evaluated each reporting period. If we later determined


8


LIFE TIME FITNESS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)



that it is no longer probable that the minimum cumulative diluted EPS and ROIC performance targets for the grants will be met, no further compensation expense would be recognized and any previously recognized compensation expense would be reversed. In the event that we do not achieve the specified cumulative diluted EPS and ROIC targets for the performance period ending December 31, 2016, the restricted shares will be forfeited. None of these shares were included in our total diluted share count at March 31, 2014 or 2013.
Summary of Stock Option Activity
 
Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (Years)
 
Aggregate Intrinsic Value
Outstanding at December 31, 2013
215,668

 
$25.64
 
1.1
 
$4,616
Exercised
(111,675
)
 
$19.16
 
 
 
 
Canceled
(5,039
)
 
$44.66
 
 
 
 
Outstanding at March 31, 2014
98,954

 
$31.99
 
1.4
 
$1,601
Vested at March 31, 2014
98,954

 
$31.99
 
1.4
 
$1,601
No stock options have been granted since 2007. As of March 31, 2014, there was no unrecognized compensation expense related to stock options.
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 three months ended March 31, 2014 and 2013 was $3.2 million and $0.9 million, respectively.
Our net cash proceeds from the exercise of stock options were $2.1 million and $0.9 million for the three months ended March 31, 2014 and 2013, respectively. The excess income tax benefit realized from stock option exercises and restricted stock vesting was $0.8 million and $4.7 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, 2014 and ends June 30, 2014. Compensation expense under the ESPP is estimated based on the discount of 10% at the end of the purchase period. During the three months ended March 31, 2014, $0.5 million was withheld from employees for the purpose of purchasing shares under the ESPP. There were 1,245,581 shares of common stock available for purchase under the ESPP as of March 31, 2014.
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 issued under our ESPP. During the three months ended March 31, 2014, we repurchased 15,146 shares under this authorization for approximately $0.7 million. As of March 31, 2014, there were 245,581 remaining shares authorized to be repurchased for this purpose.
In August 2013, our Board of Directors authorized the repurchase of up to $200.0 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 $200.0 million or at the close of business on August 16, 2015, whichever occurs first. The share repurchase program does not obligate us to repurchase any


9


LIFE TIME FITNESS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)



dollar amount or number of shares of our common stock and the program may be extended, modified, suspended or discontinued at any time. During the three months ended March 31, 2014, we repurchased 1,250,000 shares under this program for approximately $60.5 million. As of March 31, 2014, $108.5 million remained authorized 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 year. Diluted EPS is computed similarly to basic EPS, except that the denominator is increased for the conversion of any dilutive common stock equivalents, the assumed exercise of dilutive stock options using the treasury stock method 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 15,540 and 20,037 for the three months ended March 31, 2014 and 2013, respectively.
The basic and diluted EPS calculations are shown below:
 
For the Three Months Ended
 
March 31,
 
2014
 
2013
Net income
$
28,315

 
$
28,101

Weighted average number of common shares outstanding – basic
40,603

 
41,295

Effect of dilutive stock options
19

 
93

Effect of dilutive restricted stock awards
248

 
258

Weighted average number of common shares outstanding – diluted
40,870

 
41,646

Basic earnings per common share
$
0.70

 
$
0.68

Diluted earnings per common share
$
0.69

 
$
0.67

4.
Operating Segment
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, complement 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.


10


LIFE TIME FITNESS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)



The following table presents revenue for the three months ended March 31, 2014 and 2013:
 
For the Three Months Ended
 
March 31,
 
2014
 
2013
Membership dues
$
196,815

 
$
186,374

Enrollment fees
3,123

 
3,396

Personal training
48,883

 
46,014

Other in-center revenue
49,522

 
45,957

Total center revenue
298,343

 
281,741

Other revenue
13,612

 
9,006

Total revenue
$
311,955

 
$
290,747

5.
Supplemental Cash Flow Information
Decreases (increases) in operating assets and increases (decreases) in operating liabilities are as follows:
 
For the Three Months Ended
 
March 31,
 
2014
 
2013
Accounts receivable, net
$
(3,943
)
 
$
794

Center operating supplies and inventories
(724
)
 
(1,899
)
Prepaid expenses and other current assets
(5,539
)
 
(2,146
)
Deferred membership origination costs
626

 
602

Income tax receivable
6,698

 

Accounts payable
684

 
2,723

Accrued expenses
6,513

 
8,921

Deferred revenue
6,336

 
6,543

Deferred rent liability
4,150

 
641

Other liabilities
88

 
466

Changes in operating assets and liabilities
$
14,889

 
$
16,645

We made cash payments for income taxes of $1.3 million and $8.9 million for the three months ended March 31, 2014 and 2013, respectively.
We made cash payments for interest, net of capitalized interest, of $7.1 million and $5.1 million for the three months ended March 31, 2014 and 2013, respectively. Capitalized interest was $0.8 million and $0.5 million for the same periods.
Construction accounts payable was $39.1 million and $34.9 million at March 31, 2014 and 2013, respectively.
6.
Commitments and Contingencies
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


11


LIFE TIME FITNESS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)



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 outcome of individual matters are not predictable with assurance.
7.
Derivative Instruments
As part of our financial 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. EBITDAR is a non-GAAP, non-cash measure which consists of net income plus interest expense, net, provision for income taxes, depreciation and amortization and rent expense. 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 value of the swap contract are recorded in accumulated other comprehensive (loss) income, net of tax. As of March 31, 2014, the $2.0 million fair 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 $3.4 million gross fair 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 continue 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 months ended March 31, 2014. 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.
For more information on the swap contract, see Notes 8 and 9.
8.
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:
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.
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 March 31, 2014 and December 31, 2013:


12


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 Using:
 
 
 
Quoted Prices in
 
Significant
 
Significant
 
Total
 
Active Markets for
 
Other Observable
 
Unobservable
 
Fair
 
Identical Assets
 
Inputs
 
Inputs
 
Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
Interest rate swap liability as of
 
 
 
 
 
 
 
March 31, 2014
$3,400
 
$—
 
$3,400
 
$—
Interest rate swap liability as of
 
 
 
 
 
 
 
December 31, 2013
$3,762
 
$—
 
$3,762
 
$—
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 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 months ended March 31, 2014 or March 31, 2013.
Financial Assets and Liabilities Not Measured at Fair Value
The carrying amounts related to cash and cash equivalents (Level 1), 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 March 31, 2014. 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 long-term debt:
 
March 31, 2014
 
December 31, 2013
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
Fixed-rate debt
$
564,506

 
$
569,344

 
$
487,556

 
$
488,441

Obligations under capital leases
14,843

 
15,044

 
14,965

 
15,150

Floating-rate debt
349,769

 
349,769

 
346,077

 
346,077

Total
$
929,118

 
$
934,157

 
$
848,598

 
$
849,668



13


LIFE TIME FITNESS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)



9.
Changes in Accumulated Other Comprehensive Income by Component
The following table presents information about accumulated other comprehensive income (loss) by component (net of tax):
 
Gains (Losses) on Cash Flows Hedge
 
Foreign Currency Translation Adjustments
 
Accumulated Other Comprehensive Loss
Balance at December 31, 2013
$
(2,257
)
 
$
(3,358
)
 
$
(5,615
)
Other comprehensive income (loss)
215

 
(884
)
 
(669
)
Balance at March 31, 2014
$
(2,042
)
 
$
(4,242
)
 
$
(6,284
)
10.
Long-Term Debt
In January 2014, a wholly owned subsidiary obtained a mortgage loan in the original principal amount of $80.0 million from Well Fargo Bank, N.A. pursuant to a promissory note and related agreements dated January 28, 2014. The mortgage financing is secured by mortgages on five properties and matures in March 2023. Interest on the amounts borrowed is 5.06% per annum, with a constant monthly debt service payment of $0.5 million.
11.
Goodwill and Intangible Assets
The change in the gross amounts of goodwill and intangible assets are as follows:
 
Goodwill
 
Intangible Assets
Balance at December 31, 2013
$
49,195

 
$
33,978

Acquisitions
10,000

 
6,000

Balance at March 31, 2014
$
59,195

 
$
39,978

The goodwill and trade/brand names acquired during the three months ended March 31, 2014 are related to the acquisition of certain athletic events. We are currently in the process of finalizing the valuation of the assets acquired and liabilities assumed.
At March 31, 2014, intangible assets consisted of the following:
 
Gross
 
Accumulated Amortization
 
Net
Leasehold rights
$
6,392

 
$
1,545

 
$
4,847

Trade/brand names
21,479

 
1,137

 
20,342

Curriculum- and technology-based intangibles
6,695

 
1,431

 
5,264

Customer relationships
5,412

 
1,082

 
4,330

Total intangible assets
$
39,978

 
$
5,195

 
$
34,783

Amortization expense for intangible assets was $0.5 million for each of the three months ended March 31, 2014 and 2013.


14


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can usually be identified by the use of terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “evolve,” “expect,” “forecast,” “intend,” “looking ahead,” “may,” “opinion,” “plan,” “possible,” “potential,” “project,” “should,” “will” and similar words or expressions. Forward-looking statements are subject to certain risks and uncertainties that could cause our actual results in the future to differ materially from our historical results and those presently anticipated or projected. Among these factors are attracting and retaining members, risks related to our debt levels and debt covenants, the ability to access our existing credit facility and obtain additional financing, strains on our business from continued and future growth, including potential acquisitions and other strategic initiatives, risks related to maintenance and security of our data, potential recognition of compensation expense related to performance-based stock grants, competition from other health and fitness centers, identifying and acquiring suitable sites for new centers, delays in opening new centers and other factors set forth in the risk factor section of our annual report on Form 10-K filed with the SEC.
We caution investors not to place undue reliance on any such forward-looking statements, which speak only as of the date on which such statements were made. We undertake no obligation to update such statements to reflect events or circumstances arising after such date.
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 April 29, 2014, we operated 110 centers in 24 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 for same center revenue purposes beginning on the first day of the thirteenth full calendar month of the center’s operation, prior to which time we refer to the center as a new center. We include an acquired center for same center revenue purposes beginning on the first day of the thirteenth full calendar month after we assumed the center’s operations.
Our new center expansion focuses on strategic locations which we believe will generate higher average dues, higher in-center revenue per membership and higher revenue per square foot. These locations typically represent our Life Time Athletic centers, which include all centers under our Onyx and Diamond membership plans, and will be located in areas with higher demographic profiles. Of the six new centers we plan to open in 2014, five are Life Time Athletic centers and one is a Life Time Fitness center.
As we grow our presence in existing markets by opening new centers, we anticipate attracting some memberships away from our other existing centers in those markets, reducing revenue and initially lowering the memberships of those existing centers. However, based on the strategic locations of the new Life Time Athletic centers in existing markets, we expect most of the new Athletic center memberships will be new Life Time members.
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 six new centers we plan to open in 2014, three of which are already open, four are in existing markets. We do not expect operating costs of our planned new centers to be significantly higher than current centers, and we also do not expect the new centers to have a material adverse effect on the overall financial condition or results of operations of existing centers.


15


Although our overall membership growth rate may be less than in prior years, we expect our average dues and in-center revenue per membership to increase as a result of our focus on increasing our number of Life Time Athletic centers.
Our categories of new centers and existing centers do not include the center owned by Bloomingdale LIFE TIME FITNESS, L.L.C. ("Bloomingdale LLC") because it is accounted for as an investment in an unconsolidated affiliate and is not consolidated in our financial statements.
We measure performance using such key operating statistics as member satisfaction ratings, return on invested capital, average revenue per membership, average in-center revenue per membership and center operating expenses, with an emphasis on payroll, as a percentage of sales and same center revenue growth. We use membership dues, total center revenue, average revenue per Access membership, EBITDA 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 and total center basis. These metrics include change in center Access membership levels and growth of total center memberships; percentage center Access membership to target capacity; center Access membership usage; and center attrition rates. Non-Access membership option is for members who do not access the center, but still want to maintain certain member benefits.
Attrition for the three months ended March 31, 2014 was 8.2% compared to 8.2% for the three months ended March 31, 2013. Attrition for the trailing 12-months ended March 31, 2014, was 35.7% compared to 33.9% for the trailing 12-months at March 31, 2013. The increase in the trailing 12-months attrition rate was driven primarily by growth in Non-Access membership terminations and membership pricing adjustments.
We have three primary sources of revenue:
First, our largest source of revenue is membership dues (63.1% of total revenue for the three months ended March 31, 2014, compared to 64.1% for the three months ended March 31, 2013) and enrollment fees (1.0% of total revenue for the three months ended March 31, 2014, down from 1.2% for the three months ended March 31, 2013).
Second, we generate revenue within a center, which we refer to as in-center revenue or in-center businesses (31.5% of total revenue for the three months ended March 31, 2014, compared to 31.6% for the three months ended March 31, 2013), including fees for personal training, registered dietitians, group fitness training and other member activities, sales of products at our cafés, sales of products and services offered at our spas and tennis programs.
Third, we have expanded the LIFE TIME FITNESS® brand into two other offerings: health, and events and media. These offerings generate revenue, which we refer to as other revenue or ancillary businesses (4.4% of total revenue for the three months ended March 31, 2014, up from 3.1% for the three months ended March 31, 2013). Our health offering includes health promotion programs for members, non-members and corporations. Our events and media offerings include athletic events and related services, which includes our race registration and timing businesses, and media which includes our magazine, Experience Life®.
We have five primary sources of operating expenses:
Center operations expenses (58.7% of total revenue for the three months ended March 31, 2014, up from 58.5% for the three months ended March 31, 2013) consist primarily of salaries, commissions, payroll taxes, benefits, real estate taxes and other occupancy costs, utilities, repairs and maintenance, supplies, administrative support and communications to operate our centers.
Advertising and marketing expenses (4.0% of total revenue for the three months ended March 31, 2014, up from 3.8% for the three months ended March 31, 2013) consist of our marketing department costs and media and advertising costs to support and grow center membership levels, in-center businesses, new center openings and our ancillary businesses.


16


General and administrative expenses (5.1% of total revenue for the three months ended March 31, 2014, down from 5.2% for the three months ended March 31, 2013) include costs relating to our centralized support functions, such as accounting, information systems, procurement, real estate and development and member relations.
Other operating expenses (4.6% of total revenue for the three months ended March 31, 2014, up from 4.4% for the three months ended March 31, 2013) include the costs associated with our health and our events and media businesses and other corporate expenses, as well as gains or losses on our disposal of assets.
Depreciation and amortization (10.3% of total revenue for the three months ended March 31, 2014, up from 10.1% for the three months ended March 31, 2013) are computed primarily using the straight-line method over estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the improvement.
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 pre-opening activities and the performance of our in-center and ancillary 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 location, 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, tax provisions and deferred personal training revenue. 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. These revisions can affect operating results.
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, 2013.


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:
 
For the Three Months Ended
 
March 31,
 
2014
 
2013
REVENUE:
 
 
 
Membership dues
63.1
 %
 
64.1
 %
Enrollment fees
1.0

 
1.2

In-center revenue
31.5

 
31.6

Total center revenue
95.6

 
96.9

Other revenue
4.4

 
3.1

Total revenue
100.0

 
100.0

OPERATING EXPENSES:


 


Center operations
58.7

 
58.5

Advertising and marketing
4.0

 
3.8

General and administrative
5.1

 
5.2

Other operating
4.6

 
4.4

Depreciation and amortization
10.3

 
10.1

Total operating expenses
82.7

 
82.0

Income from operations (operating profit)
17.3

 
18.0

OTHER INCOME (EXPENSE):


 


Interest expense, net
(2.5
)
 
(2.1
)
Equity in earnings of affiliate
0.1

 
0.1

Total other income (expense)
(2.4
)
 
(2.0
)
INCOME BEFORE INCOME TAXES
14.9

 
16.0

PROVISION FOR INCOME TAXES
5.8

 
6.3

NET INCOME
9.1
 %
 
9.7
 %
Other financial data:
 
 
 
Same-center revenue growth (open 13 months or longer) (1)
1.5
 %
 
3.5
 %
Same-center revenue growth (open 37 months or longer) (1)
1.1
 %
 
3.0
 %
Average center revenue per Access membership (2)
$
429

 
$
404

Average in-center revenue per Access membership (3)
$
144

 
$
134

Trailing 12-month attrition rate (4)
35.7
 %
 
33.9
 %
Quarterly attrition rate (5)
8.2
 %
 
8.2
 %
EBITDA (in thousands) (6)
$
86,509

 
$
81,982

EBITDA margin (7)
27.7
 %
 
28.2
 %
EBITDAR (in thousands) (6)
$
96,873

 
$
91,721

EBITDAR margin (8)
31.1
 %
 
31.5
 %
Capital expenditures (in thousands) (9)
$
82,826

 
$
59,145

 
 
 
 
 
 
 
 
 
 
 
 


18


Results of Operations (continued)
For the Three Months Ended
 
March 31,
 
2014
 
2013
Operating data (end of period) (10):
 
 
 
Centers open (11)
108

 
105

Center square footage (12)
10,345,779

 
9,901,108

Memberships:
 
 
 
Access memberships
702,011

 
708,563

Non-Access memberships
110,000

 
101,250

Total memberships
812,011

 
809,813

(1)
Membership dues, enrollment fees and in-center revenue for a center are included in same-center revenue growth – 13 month beginning on the first day of the thirteenth full calendar month of the center’s operation and are included in same-center revenue growth – 37 month beginning on the first day of the thirty-seventh full calendar month of the center’s operation.
(2)
Average center revenue per Access membership is total center revenue derived from Access memberships for the period divided by the average number of Access memberships for the period, where the average number of Access memberships for the period is an average derived from dividing the sum of the total Access 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.
(3)
Average in-center revenue per Access membership is total in-center revenue derived from Access memberships for the period divided by the average number of Access memberships for the period, where the average number of Access memberships for the period is an average derived from dividing the sum of the total Access 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.
(4)
Trailing 12-month attrition rate (or annual attrition rate) is calculated as follows: total membership terminations (Access and Non-Access) for the trailing 12 months divided into the average beginning month total membership (Access and Non-Access) balance for the trailing 12 months.
(5)
Quarterly attrition rate is calculated as follows: total membership terminations for the quarter divided into the average beginning month total membership (Access and Non-Access) balance for the quarter.
(6)
EBITDA is a non-GAAP, non-cash measure which consists of net income plus interest expense, net, provision for income taxes and depreciation and amortization. EBITDAR adds rent expense to EBITDA. These terms, as we define them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with GAAP. We use EBITDA and EBITDAR as measures of operating performance. EBITDA or EBITDAR should not be considered as a substitute for net income, cash flows provided by operating activities or other income or cash flow data prepared in accordance with GAAP. The funds depicted by EBITDA and EBITDAR are not necessarily available for discretionary use if they are reserved for particular capital purposes, to maintain debt covenants, to service debt or to pay taxes.
The following table provides a reconciliation of net income, the most directly comparable GAAP measure, to EBITDA and EBITDAR (in thousands):


19


 
For the Three Months Ended
 
March 31,
 
2014
 
2013
Net income
$
28,315

 
$
28,101

Interest expense, net
7,851

 
6,129

Provision for income taxes
18,205

 
18,490

Depreciation and amortization
32,138

 
29,262

EBITDA
$
86,509

 
$
81,982

Rent expense
10,364

 
9,739

EBITDAR
$
96,873

 
$
91,721

(7)
EBITDA margin is the ratio of EBITDA to total revenue.
(8)
EBITDAR margin is the ratio of EBITDAR to total revenue.
(9)
Capital expenditures represent investments in our new centers, costs related to updating and maintaining our existing centers and other infrastructure investments. For purposes of deriving capital expenditures from our cash flows statement, capital expenditures include our purchases of property and equipment, excluding purchases of property and equipment in accounts payable at period-end; property and equipment purchases financed through notes payable and capital lease obligations; and non-cash share-based compensation capitalized to projects under development.
(10)
The operating data presented in these items includes the center owned by Bloomingdale LLC, which is jointly-owned with two unrelated organizations. The data presented elsewhere in this section excludes the center owned by Bloomingdale LLC.
(11)
During the first quarter of 2014, we closed one small, leased Minneapolis center and transferred all member programming and equipment to our other Minneapolis centers. We plan to use the space for corporate purposes for the foreseeable future.
(12)
The square footage presented in this table reflects fitness square footage, which we believe is the best metric for the efficiencies of a facility. We exclude outdoor swimming pools, outdoor play areas, tennis courts and satellite facility square footage. These figures are approximations.
Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013
Total revenue. Total revenue increased $21.3 million, or 7.3%, to $312.0 million for the three months ended March 31, 2014 from $290.7 million for the three months ended March 31, 2013.
Total center revenue grew $16.6 million, or 5.9%, to $298.3 million for the three months ended March 31, 2014 from $281.7 million for the three months ended March 31, 2013. Of the $16.6 million increase in total center revenue,
62.9% was from membership dues, which increased $10.4 million, or 5.6%, due primarily to higher average dues. Our number of Access memberships decreased 0.9% to 702,011 at March 31, 2014, from 708,563 at March 31, 2013.
38.7% was from in-center revenue, which increased $6.4 million, or 7.0%, primarily as a result of a $2.9 million increase in personal training revenue, a $2.0 million increase in sales of our spa and cafe products and services and a $0.8 million increase in our tennis revenue. Average in-center revenue per Access membership increased to $144 for the three months ended March 31, 2014 from $134 for the three months ended March 31, 2013.
(1.6)% was from enrollment fees, which declined $0.3 million to $3.1 million, are deferred until a center opens and recognized on a straight-line basis over our estimated average membership life. The estimated


20


average membership life is 33 months. The revenue recognized from enrollment fees was lower in the first quarter of 2014 as compared to the first quarter of 2013 primarily due to lower average enrollment fees over the deferral period.
Other revenue increased $4.6 million, or 51.1%, to $13.6 million for the three months ended March 31, 2014 from $9.0 million for the three months ended March 31, 2013. This increase was primarily due to athletic events acquired during the quarter.
Center operations expenses. Center operations expenses totaled $183.1 million, or 61.4% of total center revenue (or 58.7% of total revenue), for the three months ended March 31, 2014 compared to $170.0 million, or 60.3% of total center revenue (or 58.5% of total revenue), for the three months ended March 31, 2013. This $13.1 million increase primarily consisted of an increase of $8.1 million in additional payroll-related costs to support increased memberships and in-center revenue growth at our centers and a $2.2 million increase in pre-opening center related costs.
Advertising and marketing expenses. Advertising and marketing expenses were $12.3 million, or 4.0% of total revenue, for the three months ended March 31, 2014 compared to $11.0 million, or 3.8% of total revenue, for the three months ended March 31, 2013. These expenses increased primarily due to increased marketing activity to drive memberships and athletic events businesses.
General and administrative expenses. General and administrative expenses were $15.9 million, or 5.1% of total revenue, for the three months ended March 31, 2014 compared to $15.4 million, or 5.2% of total revenue, for the three months ended March 31, 2013. This increase of $0.5 million is primarily related to information technology initiatives to support our continued growth.
Other operating expenses. Other operating expenses were $14.4 million for the three months ended March 31, 2014 compared to $12.8 million for the three months ended March 31, 2013. This increase is primarily due to growth in operating costs to support the $4.6 million increase in other revenue.
Depreciation and amortization. Depreciation and amortization was $32.1 million for the three months ended March 31, 2014 compared to $29.3 million for the three months ended March 31, 2013. This increase was primarily due to the depreciation on the three new facilities opened in 2013 and one new facility opened in the first three months of 2014.
Interest expense, net. Interest expense, net of interest income, was $7.9 million for the three months ended March 31, 2014 compared to $6.1 million for the three months ended March 31, 2013. This $1.7 million increase was primarily a result of an increase in debt levels during 2013 and 2014 to fund future center expansion, other growth initiatives and share repurchases.
Provision for income taxes. The provision for income taxes was $18.2 million for the three months ended March 31, 2014 compared to $18.5 million for the three months ended March 31, 2013. This $0.3 million decrease and the resulting lower effective income tax rate for the three months ended March 31, 2014 of 39.1% compared to 39.7% for the three months ended March 31, 2013 is primarily due to increased foreign operations and the impact of certain compensation-related deductions.
Net income. As a result of the factors described above, net income was $28.3 million, or 9.1% of total revenue, for the three months ended March 31, 2014 compared to $28.1 million, or 9.7% of total revenue, for the three months ended March 31, 2013.
Liquidity and Capital Resources
Liquidity
Historically, we have satisfied our liquidity needs through cash flow provided by operations, various debt arrangements and sales of equity. Our principal liquidity needs have included the development of new centers, debt service requirements, share repurchases 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 ancillary businesses. We believe that we can satisfy our


21



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 January 2014, we obtained a mortgage loan in the original principal amount of $80.0 million on five of our facilities. We expect to use the proceeds from the mortgage financing for general corporate purposes, future center expansion and to help fund other growth initiatives.
Our business model operates with negative working capital primarily for two reasons. First, we carry minimal accounts receivable due to our members' monthly membership dues paid by electronic draft. Second, we fund the construction of our new centers under standard arrangements with our vendors that are paid with cash flows from operations or the credit facility.
As of March 31, 2014, we had total cash and cash equivalents of $12.5 million. We also had $330.1 million available under the existing terms of our credit facility as of March 31, 2014.
The following table summarizes our capital structure as of March 31, 2014 and December 31, 2013.
 
March 31,
 
December 31,
 
2014
 
2013
 
(In thousands)
Long-term debt
$
902,023

 
$
824,093

Current maturities of long-term debt
27,095

 
24,505

Total debt
929,118

 
848,598

Total shareholders’ equity
1,121,475

 
1,148,029

Total capitalization
$
2,050,593

 
$
1,996,627


Operating Activities
Net cash provided by operating activities was $77.7 million for the three months ended March 31, 2014, compared to $76.2 million for the three months ended March 31, 2013.
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 by cash payments or by financing through notes payable or capital lease obligations.
Net cash used in investing activities was $95.1 million for the three months ended March 31, 2014, compared to $59.5 million for the three months ended March 31, 2013. The increase of $35.6 million was primarily due to an increase in capital expenditures related to new center construction and acquisitions.


22



Our capital expenditures were as follows:
 
For the Three Months Ended
 
March 31,
 
2014
 
2013
 
(In thousands)
Cash purchases of property and equipment
$
82,826

 
$
59,145

Non-cash change in construction accounts payable
(8,226
)
 
9,690

Other non-cash changes to property and equipment
(319
)
 
(443
)
Total capital expenditures
$
74,281

 
$
68,392

The following schedule reflects capital expenditures by type of expenditure:
 
For the Three Months Ended
 
March 31,
 
2014
 
2013
 
(In thousands)
New center land and construction, growth initiatives, major remodels and remodels of acquired centers
$
60,711

 
$
49,794

Maintenance of existing facilities and corporate capital expenditures
13,570

 
18,598

Total capital expenditures
$
74,281

 
$
68,392

At March 31, 2014, we had purchased the real property for three centers we plan to open in 2014, one of which has opened, and two centers we plan to open after 2014. We had also entered into a ground lease for one center, and entered into leases for two centers, that we plan to open during 2014. Construction in progress, including land purchased for future development, totaled $185.7 million and $202.8 million at March 31, 2014 and December 31, 2013, respectively.
During the quarter ended March 31, 2014, we spent approximately $16.0 million to acquire several major-market athletic events.

We expect our cash capital expenditures to be approximately $390 million to $425 million in 2014, including approximately $305 million to $340 million in the remaining nine months of 2014. Of this approximately $305 million to $340 million, we expect to incur approximately $250 million to $265 million for new center construction and approximately $55 million to $75 million for the updating of existing centers and corporate infrastructure. We plan to fund these capital expenditures primarily with cash flow from operations and our credit facility.
Financing Activities
Financing activities consist primarily of proceeds from long-term debt, repayments of and proceeds from our credit facility, payments on debt obligations and repurchases of common stock.
Net cash provided by financing activities was $21.7 million for the three months ended March 31, 2014 compared to $19.5 million used in financing activities for the three months ended March 31, 2013. This change of $41.2 million was primarily due to an increase of $83.7 million in proceeds from our credit facility, net. These proceeds funded the increase in capital expenditures and a $41.1 million increase in share repurchases.


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Long-term debt consisted of the following:
 
March 31,
 
December 31,
 
2014
 
2013
 
(In thousands)
Credit facility, interest only due monthly at interest rates ranging from LIBOR plus 1.25% to 2.25% or base plus 0.25% to 1.25%, facility expires July 2018
$
514,550

 
$
510,500

Commercial mortgage-backed notes payable with monthly interest and principal payments totaling $632 including interest at 6.03% to February 2017
94,746

 
95,207

Commercial mortgage-backed notes payable with monthly interest and principal payments totaling $531 including interest at 5.06% to February 2024
79,784

 

Mortgage notes payable with monthly interest and principal payments totaling $775 including interest at 4.45% to March 2023
68,908

 
70,457

Mortgage notes payable with monthly interest and principal payments totaling $503 including interest at 5.75% to December 2016
67,641

 
68,173

Mortgage notes payable with monthly interest and principal payments totaling $423 including interest at 4.48% to September 2026
48,566

 
49,287

Other
40,080

 
40,009

Total debt (excluding obligations under capital leases)
914,275

 
833,633

Obligations under capital leases
14,843

 
14,965

Total debt
929,118

 
848,598

Less current maturities
27,095

 
24,505

Total long-term debt
$
902,023

 
$
824,093

Credit Facility
In July 2013, we amended, enlarged and extended our credit facility. The amount of our credit facility was increased from $660.0 million to $760.0 million and a new $100.0 million term loan was added. We may increase the facility by an additional $240.0 million through the exercise of an accordion feature if one or more lenders commit the additional $240.0 million. The term of the facility was extended to July of 2018.
As of March 31, 2014, $514.6 million was outstanding on the credit facility at a weighted average interest rate of 2.4%, plus $11.6 million related to letters of credit, leaving $330.1 million available for additional borrowing under the credit facility. The weighted average interest rate and debt outstanding under the credit facility for the three months ended March 31, 2014 was 2.4% and $470.5 million, respectively. The maximum month-end balance during the three months ended March 31, 2014 was $514.6 million.
As of March 31, 2013, $375.6 million was outstanding on the credit facility at a weighted average interest rate of 2.6%. The weighted average interest rate and debt outstanding under the credit facility for the three months ended March 31, 2013 was 2.4% and $391.9 million, respectively. The maximum month-end balance during the three months ended March 31, 2013 was $479.6 million.
Other Financing
In January 2014, a wholly owned subsidiary obtained a mortgage loan in the original principal amount of $80.0 million from Well Fargo Bank, N.A. pursuant to a promissory note and related agreements dated January 28, 2014. The mortgage financing is secured by mortgages on five properties and matures in March 2023. Interest on the amounts borrowed is 5.06% per annum, with a constant monthly debt service payment of $0.5 million.


24



Debt Covenants
We are in compliance in all material respects with all restrictive and financial covenants under our various credit facilities as of March 31, 2014.
Our primary financial covenants under the credit facility are:
 
 
 
 
Actual as of
 
Actual as of
 
 
 
 
March 31,
 
December 31,
Covenant
 
Requirement
 
2014
 
2013
Total Consolidated Debt to Adjusted EBITDAR
 
Not more than 4.00 to 1.00
 
 2.97 to 1.00
 
2.79 to 1.00
Fixed Charge Coverage Ratio
 
Not less than 1.50 to 1.00
 
3.45 to 1.00
 
3.58 to 1.00
Unencumbered Asset Ratio
 
Not less than 1.30 to 1.00
 
2.57 to 1.00
 
2.62 to 1.00
The formulas for these covenants are specifically defined in the credit agreement for our credit facility 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 March 31, 2014 and December 31, 2013, our net floating rate indebtedness was approximately $349.8 million and $346.1 million, respectively. If long-term floating interest rates were to have increased by 100 basis points during the three months ended March 31, 2014, our interest costs would have increased by approximately $0.7 million. If short-term interest rates were to have increased by 100 basis points during the three months ended March 31, 2014, 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 March 31, 2014.
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 Interim 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 Interim 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 Interim 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.


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ITEM 1A. RISK FACTORS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities in First Quarter 2014
In June 2006, our Board of Directors authorized the repurchase of 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 issued under our ESPP (the "ESPP Authorization"). From June 2006 through March 31, 2014, we repurchased 254,581 shares pursuant to the ESPP Authorization, of which 15,146 shares were repurchased during 2014. The shares repurchased to date have been purchased in the open market and, upon repurchase, became unissued shares of our common stock.
The following table presents the repurchases of stock under the ESPP Authorization in the first quarter of 2014:
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Maximum Number of Shares that May Yet be Purchased
January 1-31, 2014
 
 
15,146

 
 
$46.26
 
245,581
February 1-28, 2014
 
 

 
 
$—
 
245,581
March 1-31, 2014
 
 

 
 
$—
 
245,581
Total
 
 
15,146

 
 
$46.26
 
245,581
On August 15, 2013, our Board of Directors authorized the repurchase of up to $200.0 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 $200.0 million or at the close of business on August 16, 2015, whichever occurs first. 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 March 31, 2014, 1,896,701 shares have been repurchased under this program for approximately $91.5 million. The shares repurchased to date have been purchased in the open market and, upon repurchase, became unissued shares of our common stock.
The following table presents the repurchases of stock under the Stock Repurchase Authorization in the first quarter of 2014:
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Maximum Dollar Value of Shares that May Yet be Purchased
January 1-31, 2014
 
 

 
 
$—
 
$169,038,670
February 1-28, 2014
 
 
10,000

 
 
$45.76
 
$168,581,070
March 1-31, 2014
 
 
1,240,000

 
 
$48.42
 
$108,540,338
Total
 
 
1,250,000

 
 
$48.40
 
$108,540,338
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.


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ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
Exhibits filed with this report
Exhibit No.
 
Description
 
Method of Filing
3.1
 
Amended and Restated Articles of Incorporation of the Registrant.
 
Incorporated by reference to Exhibit 3.1 to the Registrant's Form 8-K dated April 20, 2009 (File No. 001-32230).
3.2
 
Amended and Restated By-Laws of the Registrant.
 
Incorporated by reference to Exhibit 3.1 to the Registrant's Form 8-K dated July 17, 2012 (File No. 001-32230).
4
 
Specimen of common stock certificate.
 
Incorporated by reference to Exhibit 4 to Amendment No. 4 to the Registrant's Registration Statement on Form S-1 (File No. 333-113764), filed with the Commission on June 23, 2004.
10.1
 
Form of 2014 Restricted Stock Agreement (Diluted EPS Forfeiture Component) for 2011 Long-Term Incentive Plan with performance vesting component.
 
Filed Electronically.
10.2
 
Form of 2014 Restricted Stock Agreement (TSR, Diluted EPS, Revenue and EBITDA Forfeiture Component) for 2011 Long-Term Incentive Plan with performance vesting component.
 
Filed Electronically.
31.1
 
Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer.
 
Filed Electronically.
31.2
 
Rule 13a-14(a)/15d-14(a) Certification by Principal Financial Officer.
 
Filed Electronically.
32
 
Section 1350 Certifications.
 
Filed Electronically.
101
 
The following materials from Life Time Fitness's Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, formatted in eXtensible Business Reporting Language (XBRL): (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of cash flows, and (v) notes to the unaudited consolidated financial statements.
 
Filed Electronically.




27



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 April 29, 2014.

LIFE TIME FITNESS, INC.
By:

/s/ Bahram Akradi
 
Name: Bahram Akradi
Title: Chairman of the Board of Directors, President and Chief Executive Officer
(Principal Executive Officer and Director)
 
 
By:

/s/ Eric J. Buss
 
Name: Eric J. Buss
Title: Executive Vice President and Interim Chief Financial Officer
(Principal Financial Officer)
 
 
By:

/s/ John M. Hugo
 
Name: John M. Hugo
Title: Senior Vice President and Corporate Controller
(Principal Accounting Officer)




28



INDEX TO EXHIBITS
Exhibit No.
 
Description
 
Method of Filing
3.1
 
Amended and Restated Articles of Incorporation of the Registrant.
 
Incorporated by reference to Exhibit 3.1 to the Registrant's Form 8-K dated April 20, 2009 (File No. 001-32230).
3.2
 
Amended and Restated By-Laws of the Registrant.
 
Incorporated by reference to Exhibit 3.1 to the Registrant's Form 8-K dated July 17, 2012 (File No. 001-32230).
4
 
Specimen of common stock certificate.
 
Incorporated by reference to Exhibit 4 to Amendment No. 4 to the Registrant's Registration Statement on Form S-1 (File No. 333-113764), filed with the Commission on June 23, 2004.
10.1
 
Form of 2014 Restricted Stock Agreement (Diluted EPS Forfeiture Component) for 2011 Long-Term Incentive Plan with performance vesting component.
 
Filed Electronically.
10.2
 
Form of 2014 Restricted Stock Agreement (TSR, Diluted EPS, Revenue and EBITDA Forfeiture Component) for 2011 Long-Term Incentive Plan with performance vesting component.
 
Filed Electronically.
31.1
 
Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer.
 
Filed Electronically.
31.2
 
Rule 13a-14(a)/15d-14(a) Certification by Principal Financial Officer.
 
Filed Electronically.
32
 
Section 1350 Certifications.
 
Filed Electronically.
101
 
The following materials from Life Time Fitness's Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, formatted in eXtensible Business Reporting Language (XBRL): (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) consolidated statements of comprehensive income (iv) consolidated statements of cash flows, and (v) notes to the unaudited consolidated financial statements.
 
Filed Electronically.



29