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Town Sports International Holdings, Inc. Announces Second Quarter 2011 Financial Results

Town Sports International Holdings, Inc. (“TSI” or the “Company”) (NASDAQ: CLUB), a leading owner and operator of health clubs located primarily in major cities from Washington, DC north through New England, operating under the brand names “New York Sports Clubs,” “Boston Sports Clubs,” “Washington Sports Clubs” and “Philadelphia Sports Clubs,” announced its results for the second quarter ended June 30, 2011.

Second Quarter Overview:

  • Revenue increased 0.7% in Q2 2011 compared to Q2 2010.
  • Comparable club revenue increased 1.5% in Q2 2011 compared to Q2 2010.

  • Ancillary club revenue increased 11.4% in Q2 2011 compared to Q2 2010.
  • Total member count increased 7,000 to 517,000 in Q2 2011 compared to a 1,000 increase to 496,000 in Q2 2010.
  • Membership attrition averaged 3.2% per month in Q2 2011 compared to 3.3% per month in Q2 2010.
  • Q2 2011 results reflected loss on extinguishment of debt, net of taxes of $2.8 million, or ($0.12) per share and incremental interest expense reflecting the 30 day call period on our 11% Senior Discount Notes of $855,000, net of taxes, or ($0.04) per share. Together the refinancing related effects total approximately ($0.16) per share. Also in Q2 2011, we recorded $549,000, or ($0.02) per share, of discrete income tax charges.
  • Loss per share was $(0.02) in Q2 2011 compared to loss per share of ($0.04) in Q2 2010. Removing the ($0.16) per share of charges related to the Q2 2011 debt refinancing and the ($0.02) per share of discrete income tax charges, net earnings per share total $0.16.
  • Adjusted EBITDA was $24.3 million in Q2 2011, an increase of $5.0 million, or 26.3% when compared to Adjusted EBITDA of $19.3 million in Q2 2010.

Robert Giardina, Chief Executive Officer of TSI, commented: “The second quarter operating results were our best since Q4 2008, and were ahead of our plan. Our comparable club sales turned positive sooner than we had expected, and we also experienced strong membership and personal training growth and produced improved expense leverage. We are raising our outlook for the balance of the year, and are looking forward to continuing to implement new programs that drive membership and club usage. We are also excited to be opening two clubs in the second half of this year, our first new clubs since the first quarter of 2009. However, our principal goals remain to continue to improve earnings and to increase free cash flow from our existing club base.”

Quarter Ended and Year to Date June 30, 2011 Financial Results:

 
Revenue (in thousands):
 
  Quarter Ended June 30,  
2011   2010
Revenue   % Revenue Revenue   % Revenue % Variance
Membership dues $ 91,409 77.3 % $ 91,987 78.3 % (0.6 )%
Joining fees   1,534 1.3 %   2,432 2.1 % (36.9 )%
Membership revenue   92,943 78.6 %   94,419 80.4 % (1.6 )%
Personal training revenue 16,708 14.1 % 15,582 13.2 % 7.2 %
Other ancillary club revenue   7,534 6.4 %   6,171 5.3 % 22.1 %
Ancillary club revenue 24,242 20.5 % 21,753 18.5 % 11.4 %
Fees and other revenue   1,100 0.9 %   1,264 1.1 % (13.0 )%
Total revenue $ 118,285 100.0 % $ 117,436 100.0 % 0.7 %
 

Total revenue for Q2 2011 increased $0.8 million, or 0.7%, compared to Q2 2010. Revenue at clubs operated for over 12 months (“comparable club revenue”) increased 1.5% in Q2 2011 compared to Q2 2010 .

Operating expenses:

      Quarter Ended June 30,  
2011   2010
Expense % of Revenue

Expense % Variance

Payroll and related 38.1 % 41.4 % (7.2) %
Club operating 36.7 % 37.3 % (1.0) %
General and administrative 5.2 % 5.4 % (3.1) %
Depreciation and amortization 11.1 % 11.4 % (1.7) %
Impairment of fixed assets - % 2.4 % (100.0) %
Operating expenses 91.1 % 97.9 % (6.3) %
 

Total operating expenses decreased $7.2 million, or 6.3%, for Q2 2011 compared to Q2 2010. Operating margin was 8.9% for Q2 2011 compared to 2.1% for Q2 2010.

Payroll and related . The decrease in payroll and related expenses in Q2 2011 compared to Q2 2010 was principally driven by payroll related to membership consultants. The payroll costs we defer are limited to the amount of joining fees collected. Total joining fees collected in recent years prior to the second half of 2010 were at reduced amounts; therefore the payroll charges expensed in those periods were higher and amounts deferred were reduced. Given the fact the amounts deferred in the past periods were at reduced amounts, the amounts amortized into the current period are at lower levels. Conversely, in 2011 we are collecting higher average joining fees than in recent years and therefore we are currently deferring a higher proportion of membership consultant compensation, which will be amortized and expensed in future periods. Additionally, payroll related to club staffing, excluding membership consultants, decreased as we realized efficiencies from programs put in place in the second half of 2010.

Club operating . In Q2 2011, utilities and repairs and maintenance expenses decreased, which was partially offset by the increase in occupancy related expenses.

Impairment of fixed assets. In Q2 2010, we recorded fixed asset impairment charges of $2.9 million, representing the write-off of fixed assets of one underperforming club and the planned closure of one club prior to its lease expiration date. There were no fixed asset impairment charges in Q2 2011.

Loss on extinguishment of debt was $4.9 million in Q2 2011 resulting from our debt refinancing on May 11, 2011. We incurred $2.5 million of call premium on the Senior Discount Notes together with the write-off of $2.4 million of net deferred financing costs related to the debt extinguishment. There were no such costs in the three months ended June 30, 2010.

Interest Expense increased in Q2 2011 compared to Q2 2010 primarily as a result of the payment of $1.3 million of incremental interest in connection with the redemption of the 11% Senior Discount Notes.

Net loss for Q2 2011 was $410,000 compared to net loss of $815,000 for Q2 2010.

Cash flow from operating activities for year to date 2011 totaled $35.1 million, an increase of $5.6 million from year to date 2010, which was partially related to the increase in overall earnings. Also in year to date 2011, due to the timing of payments, prepaid rent decreased $5.0 million, while in year to date 2010 there was no cash effect from prepaid rent. The effect of the change in deferred revenue and deferred membership costs increased cash by $1.4 million in the aggregate. In addition, income tax refunds, net of cash paid for income taxes increased $4.0 million in year to date 2011, compared to year to date 2010. Partially offsetting the operating cash increases was the increase in cash paid for interest of $7.4 million, excluding the $2.5 million of call premium paid on the redemption of the Senior Discount Notes. Cash paid for interest increased principally because the interest paid on our Senior Discount Notes was at the time of our May 11, 2011 debt refinancing, while in 2010, the semi-annual interest payment was not made until August.

Net cash used in financing activities increased $27.2 million for the year to date 2011 compared to year to date 2010. In 2011, we made principal payments of $14.1 million on the 2007 Term Loan Facility and in 2010, we made principal payments of $925,000. On May 11, 2011, we refinanced our long-term debt. In accordance with the refinancing, we repaid the remaining principal amounts of the 2007 Term Loan Facility of $164.0 million and the Senior Discount Notes of $138.5 million and received $297.0 million under the 2011 Term Loan Facility, net of the original issue discount of $3.0 million. In connection with the refinancing, we paid $8.1 million in debt issuance costs.

Third Quarter 2011 Business Outlook:

Based on the current business environment, recent performance and current trends in the marketplace and subject to the risks and uncertainties inherent in forward-looking statements, our outlook for the third quarter of 2011 includes the following:

  • Revenue for Q3 2011 is expected to be between $116.0 million and $117.0 million versus $113.1 million for Q3 2010.
  • In Q3 2011, as a percentage of revenue, we expect payroll and related expenses to approximate 38% and club operating expenses to approximate 38.4%. Club operating expenses as a percent of revenue in Q3 2011 are expected to increase from Q2 2011 levels in part due to seasonal increases in utilities and marketing costs. General and administrative expenses are expected to be approximately $7.4 million and depreciation and amortization expenses are expected to be similar to Q2 2011 amounts in total dollars.
  • EBITDA is expected to improve $3.3 million, or 18.5%, to $21.0 million in Q3 2011 compared to Q3 2010.
  • We estimate that net income for Q3 2011 will be between $1.2 million and $1.7 million, and earnings per share will be in the range of $0.05 per share to $0.07 per share, assuming a 26% effective tax rate and 23.3 million weighted average fully diluted shares outstanding.

Investing Activities Outlook:

For the year ending December 31, 2011, we currently plan to invest $29.0 million to $32.0 million in capital expenditure, which represents an increase from $22.0 million of capital expenditures in 2010. This amount includes approximately $7.5 million to $8.5 million related to the two planned club openings in the second half of 2011, approximately $15.5 million for the upgrade of existing clubs and $4.3 million principally related to major renovations at clubs with recent lease renewals and upgrading our in-club entertainment system network. We also expect to invest $2.0 million to $3.0 million to enhance our management information and communication systems.

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