TIVITY HEALTH, INC. As used throughout this Quarterly Report on Form 10-Q, unless the context
otherwise indicates, the terms "we," "us," "our," "
COVID-19
In
As fitness locations closed as a result of the pandemic, we quickly adapted to the changing needs of our members and clients by launching a new and dynamic suite of virtual offerings, which we will continue to offer. Virtual visits grew significantly, from 12,000 for the first quarter of 2020 to 1.2 million for the first quarter of 2021. We believe these digital offerings not only allow our currently homebound members to stay active and connected with the help of SilverSneakers but that they will also be a critical contributor to our new digitally-enabled member engagement platform going forward.
Overview
We offer SilverSneakers to members of Medicare Advantage, Medicare Supplement,
and group retiree plans. We also offer
Effective as of
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Agreement. Results of operations for
Forward-Looking Statements
This report contains forward-looking statements, which are based upon current expectations, involve a number of risks and uncertainties, and are subject to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that are not historical statements of fact and those regarding the intent, belief, or expectations of the Company, including, without limitation, all statements regarding the Company's future earnings, revenues, and results of operations. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may vary from those in the forward-looking statements as a result of various factors, including, but not limited to:
• impacts from the COVID-19 pandemic (including the response of governmental
authorities to combat and contain the pandemic, the closure of fitness
centers in our national network (or operational restrictions imposed on such
fitness centers), reclosures, and potential additional reclosures as a
result of surges in positive COVID-19 cases) on our business, operations or
liquidity;
• the risks associated with changes in macroeconomic conditions (including the
impacts of any recession or changes in consumer spending resulting from the
COVID-19 pandemic), widespread epidemics, pandemics (such as the current
COVID-19 pandemic) or other outbreaks of disease, geopolitical turmoil, and
the continuing threat of domestic or international terrorism;
• our ability to collect accounts receivable from our customers and amounts
due under our sublease agreements;
• the market's acceptance of our new products and services;
• our ability to develop and implement effective strategies and to anticipate
and respond to strategic changes, opportunities, and emerging trends in our
industry and/or business, as well as to accurately forecast the related
impact on our revenues and earnings;
• the impact of any impairment of our goodwill, intangible assets, or other
long-term assets;
• our ability to attract, hire, or retain key personnel or other qualified
employees and to control labor costs;
• the effectiveness of the reorganization of our business and our ability to
realize the anticipated benefits;
• our ability to effectively compete against other entities, whose financial,
research, staff, and marketing resources may exceed our resources;
• the impact of legal proceedings involving us and/or our subsidiaries,
products, or services, including any claims related to intellectual property
rights, as well as our ability to maintain insurance coverage with respect
to such legal proceedings and claims on terms that would be favorable to us;
• the impact of severe or adverse weather conditions, the current COVID-19
pandemic, and the potential emergence of additional health pandemics or
infectious disease outbreaks on member participation in our programs;
• the risks associated with deriving a significant concentration of our
revenues from a limited number of our customers, many of whom are health
plans;
• our ability and/or the ability of our customers to enroll participants and
to accurately forecast their level of enrollment and participation in our
programs in a manner and within the timeframe we anticipate;
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• our ability to sign, renew and/or maintain contracts with our customers
and/or our fitness partner locations under existing terms or to restructure
these contracts on terms that would not have a material negative impact on
our results of operations;
• the ability of our health plan customers to maintain the number of covered
lives enrolled in those health plans during the terms of our agreements;
• our ability to add and/or retain active subscribers in our Prime Fitness
program;
• the impact of any changes in tax rates, enactment of new tax laws, revisions
of tax regulations, or any claims or litigation with taxing authorities;
• the impact of a reduction in Medicare Advantage health plan reimbursement
rates or changes in plan design;
• the impact of any new or proposed legislation, regulations and
interpretations relating to Medicare, Medicare Advantage, Medicare
Supplement and privacy and security laws;
• the impact of healthcare reform on our business;
• the risks associated with potential failures of our information systems or
those of our third-party vendors, including as a result of telecommuting
issues associated with personnel working remotely, which may include a
failure to execute on policies and processes in a work-from-home or remote
model;
• the risks associated with data privacy or security breaches, computer
hacking, network penetration and other illegal intrusions of our information
systems or those of third-party vendors or other service providers,
including those risks that result from the increase in personnel working
remotely, which may result in unauthorized access by third parties, loss,
misappropriation, disclosure or corruption of customer, employee or our
information, or other data subject to privacy laws and may lead to a
disruption in our business, costs to modify, enhance, or remediate our
cybersecurity measures, enforcement actions, fines or litigation against us,
or damage to our business reputation;
• the risks associated with changes to traditional office-centered business
processes and/or conducting operations out of the office in a work-from-home
or remote model by us or our third-party vendors during adverse situations
(e.g., during a crisis, disaster, or pandemic), which may result in
additional costs and/or may negatively impact productivity and cause other
disruptions to our business;
• our ability to enforce our intellectual property rights;
• the risk that our indebtedness may limit our ability to adapt to changes in
the economy or market conditions, expose us to interest rate risk for the
variable rate indebtedness and require a substantial portion of cash flows
from operations to be dedicated to the payment of indebtedness;
• our ability to service our debt, make principal and interest payments as
those payments become due, and remain in compliance with our debt covenants;
• our ability to obtain adequate financing to provide the capital that may be
necessary to support our current or future operations;
• counterparty risk associated with our interest rate swap agreements; and
• other risks detailed in this report and our other filings with the
Securities and Exchange Commission .
We undertake no obligation to update or revise any such forward-looking statements.
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Business Strategy
Our strategy is to become the modern destination for healthy living. We will
expand beyond fitness by establishing an engagement platform that enables
personalized member interaction with all of our offerings, and we will partner
with other payors and service providers to aggregate services to members under
the SilverSneakers umbrella. We plan to accelerate growth in our core
SilverSneakers and
Critical Accounting Policies
We describe our significant accounting policies in Note 1 to the consolidated
financial statements in our Annual Report on Form 10-K for the fiscal year ended
We believe the following accounting policies are the most critical in understanding the estimates and judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition, and cash flows.
Revenue Recognition
We account for revenue from contracts with customers in accordance with Accounting Standards Codification ("ASC") Topic 606 "Revenue from Contracts with Customers" ("ASC Topic 606"). The unit of account in ASC Topic 606 is a performance obligation, which is a promise in a contract to transfer to a customer either a distinct good or service (or bundle of goods or services) or a series of distinct goods or services provided over a period of time. ASC Topic 606 requires that a contract's transaction price, which is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, is to be allocated to each performance obligation in the contract based on relative standalone selling prices and recognized as revenue when or as the performance obligation is satisfied.
We earn revenue from continuing operations primarily from three programs:
SilverSneakers senior fitness,
The significant majority of our customer contracts contain one performance
obligation - to stand ready to provide access to our network of fitness
locations and fitness programming - which is satisfied over time as services are
rendered each month over the contract term. Unsatisfied performance obligations
at the end of a particular month primarily relate to certain monthly memberships
for our
Our fees are variable month to month and are generally billed per member per month ("PMPM") or billed based on a combination of PMPM and member visits to a network location. We bill PMPM fees by multiplying the contractually negotiated PMPM rate by the number of members eligible for or receiving our services during the month. We bill for member visits approximately one month in arrears once actual member visits are known. Payments from customers are typically due within 30 days of invoice date. When material, we capitalize costs to obtain contracts with customers and amortize them over the expected recovery period.
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Our customer contracts include variable consideration, which is allocated to each distinct month over the contract term based on eligible members and/or member visits each month. The allocated consideration corresponds directly with the value to our customers of our services completed for the month. Under the majority of our contracts, we recognize revenue each month using the practical expedient available under ASC 606-10-55-18, which provides that revenue is recognized in the amount for which we have the right to invoice. ASC 606-10-50-14(b) provides an optional exemption, which we have elected to apply, from disclosing remaining performance obligations when revenue is recognized from the satisfaction of the performance obligation in accordance with the "right to invoice" practical expedient.
Although we evaluate our financial performance and make resource allocation
decisions based upon the results of our single operating and reportable segment,
we believe the following information depicts how our revenues and cash flows are
affected by economic factors. For the three months ended
Sales and usage-based taxes are excluded from revenues.
Impairment of Intangible Assets and
We review goodwill for impairment at the reporting unit level
(operating segment or one level below an operating segment) on an annual basis
(during the fourth quarter of our fiscal year) or more frequently whenever
events or circumstances indicate that
the carrying value may not be recoverable. Following the sale of
As part of the annual impairment test, we may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If we elect not to perform a qualitative assessment or we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying value, we perform a quantitative review as described below.
During a quantitative review of goodwill, we estimate the fair value of the reporting unit based on our market capitalization and compare such fair value to the carrying value of the reporting unit. If the fair value of the reporting unit exceeds its carrying amount, no impairment is indicated. If the fair value of the reporting unit is less than its carrying amount, impairment of goodwill is measured as the excess of the carrying amount over fair value.
Except for a tradename that has an indefinite life and is not subject to amortization, we amortize identifiable intangible assets over their estimated useful lives on a straight-line or accelerated basis based on the period for which the economic benefits of the asset are expected to be realized. We assess the potential impairment of intangible assets subject to amortization whenever events or changes in circumstances indicate that the carrying values may not be recoverable. If we determine that the carrying value of other identifiable intangible assets may not be recoverable, we calculate any impairment using an estimate of the asset's fair value based on the estimated price that would be received to sell the asset in an orderly transaction between market participants.
We review indefinite-lived intangible assets for impairment on an annual basis (during the fourth quarter of our fiscal year) or more frequently whenever events or circumstances indicate that the carrying value may not be recoverable. We estimate the fair value of our indefinite-lived tradename using the relief-from-royalty method, which requires us to estimate significant assumptions such as the long-term growth rates of future revenues associated with the tradename, the royalty rate for such revenue, the terminal growth rate of revenue, the tax rate, and a discount rate. Changes in these estimates and assumptions could materially affect the estimates of fair value for the tradename.
Key Performance Indicators
In managing our business, we regularly review and analyze a number of key performance indicators ("KPIs"), including revenues, adjusted EBITDA (both in dollars and as a percentage of revenues), and free cash flow.
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Adjusted EBITDA and free cash flow are not calculated in accordance with
Following the divestiture of
Additionally, beginning in the fourth quarter of 2020, we revised the definition of free cash flow such that it is reduced by settlement on derivatives not designated as hedges, a new item for 2020 that did not exist in prior periods. Settlement on derivatives not designated as hedges arose in 2020 due to the de-designation of certain interest rate swaps in the fourth quarter of 2020 in connection with the repayment of a portion of the principal on the term loans under our Credit Agreement, as further described in Note 11 of the notes to consolidated financial statements included in this report. We believe it is appropriate to exclude settlement on derivatives not designated as hedges from free cash flow because these payments are similar to interest payments (which are reflected in cash flow from operating activities) and they reduce our cash available to repay debt or make other investments.
Three Months Ended
(In $000s) March 31,
2021 2020
Revenues from continuing operations $ 108,085 $ 159,692
Adjusted EBITDA from continuing operations 41,194 30,242
Adjusted EBITDA as a percentage of revenues from
continuing operations 38.1 % 18.9 %
• Revenues - we review year-over-year changes in revenue from continuing
operations as a key measure of our success in growing our business. In
addition to measuring revenue in total, we also measure and report revenue
by program type or source of revenue, as detailed in Note 4 of the notes to
the consolidated financial statements included in this report, i.e.,
SilverSneakers, Prime Fitness , WholeHealth Living, and Other. Evaluating
revenue by program type or source helps us identify and address changes in
product mix, broad market factors that may affect our revenues, and
opportunities for future growth.
• Adjusted EBITDA is a non-GAAP measure and is defined by the Company as
earnings before interest, taxes, depreciation and amortization, acquisition,
integration, and project costs, CEO transition costs, restructuring charges,
and other (income)/expense. We believe adjusted EBITDA provides investors a
helpful measure for comparing our operating performance with our historical
operating results as well as the performance of other companies that may
have different financing and capital structures or tax rates. We believe it
is a useful indicator of the operational strength and performance of our
business. Because adjusted EBITDA may be defined differently by other
companies in our industry, the financial measure presented herein may not be
comparable to similarly titled measures of other companies. A reconciliation
of adjusted EBITDA to net income (the most comparable U.S. GAAP measure) is
set forth below.
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Year Ended March 31,
(In thousands) 2021 2020
Income from continuing operations, GAAP basis
7,620 3,136
Interest expense 10,756 11,270
Depreciation expense 2,683 2,030
EBITDA from continuing operations, non-GAAP basis
(1) $ 41,003 $ 24,711
Acquisition, integration, project and CEO
transition costs (2) 1,321 5,049
Restructuring charges (3) - 482
Other (income)/expense (4) (1,130 ) -
Adjusted EBITDA from continuing operations,
non-GAAP basis (5) $ 41,194 $ 30,242
(1) EBITDA from continuing operations is a non-GAAP financial measure. We
believe it is useful to investors to provide disclosures of our operating
results and guidance on the same basis as that used by management. You
should not consider EBITDA from continuing operations in isolation or as a
substitute for income from continuing operations determined in accordance
with U.S. GAAP.
(2) Acquisition, integration, project, and CEO transition costs consist of
pre-tax charges of $1,321 and $5,049 for the three months ended March 31,
2021 and 2020, respectively, primarily incurred in connection with the
acquisition and integration of Nutrisystem and with the termination of our
former CEO in February 2020 and the hiring of our new CEO in June 2020 .
(3) Restructuring charges consist of pre-tax charges of $482 for the three
months ended March 31, 2020 , primarily related to a restructuring of
corporate support infrastructure and of executive leadership.
(4) Other (income)/expense consists of pre-tax income of $1,130 related to
certain interest rate swap agreements that no longer qualify for hedge
accounting treatment ("de-designated swaps") and require changes in fair
value to be recognized each period in current earnings, as further
described in Note 11 of the notes to consolidated financial statements
included in this report.
(5) Adjusted EBITDA from continuing operations is a non-GAAP financial
measure. We exclude acquisition, integration, project, and CEO transition
costs, restructuring charges, and other (income)/expense from this measure
because of its comparability to our historical operating results. We
believe it is useful to investors to provide disclosures of our operating
results on the same basis as that used by management. You should not
consider Adjusted EBITDA from continuing operations in isolation or as a
substitute for income from continuing operations determined in accordance
with U.S. GAAP. Additionally, because Adjusted EBITDA from continuing
operations may be defined differently by other companies in the Company's
industry, the non-GAAP financial measure presented here may not be
comparable to similarly titled measures of other companies.
• Free cash flow is a non-GAAP measure and is defined by the Company as net
cash flows provided by operating activities less acquisition of property and
equipment and settlement on derivatives not designated as hedges. We
believe free cash flow is useful to management and investors to measure (i)
our performance, (ii) the strength of the Company and its ability to
generate cash, and (iii) the amount of cash that is available to repay debt
or make other investments. A reconciliation of free cash flow to cash flows
from operating activities (the most comparable GAAP measure) is set forth
below.
Three Months Ended
(In thousands) March 31,
2021 2020
Net cash flows provided by operating activities
(1,561 ) (4,875 )
Settlement on derivatives not designated as hedges (1,633 ) -
Free cash flow $ 19,424 $ 42,148
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Outlook
Although there is significant uncertainty relating to the potential impacts of
the COVID-19 pandemic on our business going forward, including the duration of
the outbreak, the timing and duration of any operational restrictions applicable
to our fitness partner locations, the impact on member participation in our
SilverSneakers programs, our ability to continue to attract subscribers for our
Executive Overview of Results
The key financial results for the three months ended
• Revenues from continuing operations of$108.1 million compared to$159.7 million for the three months endedMarch 31, 2020 ; and • Pre-tax income from continuing operations of$19.9 million compared to$8.3 million for the three months endedMarch 31, 2020 . Pre-tax income for the three months endedMarch 31, 2021 includes: o$10.8 million of interest expense compared to$11.3 million for the same period in 2020; o$1.3 million of acquisition, integration, project, and CEO transition costs compared to$5.0 million for the same period in 2020; o$1.2 million of marketing expenses compared to$7.3 million for the same period in 2020; and o$0.0 million of restructuring and related charges compared to$0.5 million for the same period in 2020. Results of Operations
The following table sets forth the components of the consolidated statements of
operations for the three months ended
Three Months Ended March 31,
2021 2020
Revenues 100.0 % 100.0 %
Cost of revenue (exclusive of depreciation included below) 53.0 % 72.1 %
Marketing expenses 1.1 % 4.6 %
Selling, general and administrative expenses 9.0 % 7.5 %
Depreciation expense 2.5 % 1.3 %
Restructuring and related charges 0.0 % 0.3 %
Operating income (1) 34.4 % 14.2 %
Interest expense 10.0 % 7.1 %
Other (income) expense, net (1.0 )% 0.0 %
Total non-operating expense, net (1) 8.9 % 7.1 %
Income before income taxes (1) 25.5 % 7.1 %
Income tax expense 7.1 % 2.0 %
Income from continuing operations (1) 18.5 % 5.2 %
(1) Figures may not add due to rounding.
Revenues
Revenues from continuing operations were
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in
Cost of Revenue
Cost of revenue from continuing operations (excluding depreciation) as a
percentage of revenues decreased from the three months ended
Marketing Expenses
Marketing expenses from continuing operations as a percentage of revenues
decreased from the three months ended
Selling, General and Administrative Expenses
Selling, general and administrative expenses from continuing operations as a
percentage of revenues increased from the three months ended
Restructuring and Related Charges
During the first quarter of 2019, we began a reorganization primarily related to
integrating the
Depreciation Expense
Depreciation expense from continuing operations increased
Interest Expense
Interest expense from continuing operations did not change materially from the
three months ended
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Other (Income) Expense, Net
Other (income) expense, net increased
Income Tax Expense
See Note 6 of the notes to consolidated financial statements in this report for a discussion of income tax expense from continuing operations.
Liquidity and Capital Resources
Overview
As of
As of
Credit Facility
In connection with the consummation of the acquisition of
We are required to repay Term Loan A loans in consecutive quarterly
installments, each in the amount of 2.50% of the aggregate initial amount of
such loans, payable beginning on
We are required to repay Term Loan B loans in consecutive quarterly
installments, each in the amount of 0.75% of the aggregate initial amount of
such loans, payable beginning on
We are permitted to make voluntary prepayments of borrowings under the Term
Loans at any time without penalty. From
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Payments that may be required, as described below. In addition, in
We are required to repay in full any outstanding swingline loans and revolving
loans under the Revolving Credit Facility on
The Credit Agreement contains a financial covenant that requires us to maintain
maximum ratios or levels of consolidated total net debt to consolidated adjusted
EBITDA, calculated as provided in the Credit Agreement (the "Net Leverage
Ratio"), of 5.25:1.00 for all test dates occurring on or after
Based on our current assumptions with respect to the COVID-19 pandemic, including, among other things, the outstanding principal on the term loans under our Credit Agreement and the average monthly total participation levels of our members at our fitness partner locations, we currently believe we will be in compliance with the Net Leverage Ratio covenant over the next 12 months. We will continue to monitor our projected ability to comply with all covenants under the Credit Agreement, including the Net Leverage Ratio.
Cash Flows Provided by Operating Activities
Operating activities during the three months ended
Cash Flows Used in Investing Activities
Investing activities during the three months ended
Cash Flows Provided by Financing Activities
Financing activities during the three months ended
Recent Relevant Accounting Standards
See Note 2 of the notes to consolidated financial statements included in this report for discussion of recent relevant accounting standards.
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