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Town Sports International Holdings, Inc. Announces Third Quarter 2012 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 third quarter ended September 30, 2012.

Third Quarter Overview:
  • Membership attrition averaged 3.7% per month in both Q3 2012 and Q3 2011.
  • Total member count decreased 1.3%, or 7,000 members, to 522,000 in Q3 2012.
  • Revenue increased 3.0% in Q3 2012 compared to Q3 2011.
  • Comparable club revenue increased 1.0%.
  • Ancillary club revenue increased 3.2% in Q3 2012 compared to Q3 2011.
  • Diluted earnings per share were $0.13 in Q3 2012 compared to diluted earnings per share of $0.08 in Q3 2011.
  • Q3 2012 results reflected the following items amounting to a net charge of $1.2 million ($530,000 net of taxes) or approximately $(0.02) per diluted share:
    • Charges incurred related to the Q3 2012 re-pricing of our term loan and the voluntary principal prepayment of $15.0 million that collectively totaled $2.4 million ($1.4 million net of taxes), or approximately $(0.06) per diluted share. $1.4 million of these charges are included within interest expense and $1.0 million have been charged to loss on extinguishment of debt.
    • Additional fees and other revenue of $1.2 million ($711,000 net of taxes), or approximately $0.03 per diluted share, were realized in connection with the termination of a long-term marketing arrangement with a third party in-club advertiser.
    • Also in Q3 2012, we recorded $182,000, or approximately $0.01 per share, of discrete tax benefits.
  • Adjusted EBITDA was $24.7 million in Q3 2012, an increase of $2.9 million, or 13.2%, when compared to Adjusted EBITDA of $21.8 million in Q3 2011 (Refer to the reconciliation below).

Robert Giardina, Chief Executive Officer of TSI, commented: “We were disappointed with our net member results, but were pleased to deliver on our earnings and cash flow for the quarter. We are excited about the changes taking place in the fitness industry, with consumers searching for more fitness offerings and often willing to pay additional fees to enhance their fitness experience. With the recent launch of our UXF products and the expansion of our personal training membership plans, we have positioned ourselves nicely to grow our ancillary revenue streams.”

Third Quarter Ended September 30, 2012 Financial Results:
Revenue (in thousands):
Quarter Ended September 30,
2012 2011
Revenue % Revenue Revenue % Revenue % Variance
Membership dues $ 90,661 75.8 % $ 90,323 77.8 % 0.4 %
Joining fees   3,014 2.5 %   1,602 1.3 % 88.1 %
Membership revenue   93,675 78.3 %   91,925 79.1 % 1.9 %
Personal training revenue 15,623 13.1 % 14,852 12.8 % 5.2 %
Other ancillary club revenue   8,067 6.7 %   8,105 7.0 % (0.5) %
Ancillary club revenue 23,690 19.8 % 22,957 19.8 % 3.2 %
Fees and other revenue   2,247 1.9 %   1,256 1.1 % 78.9 %
Total revenue $ 119,612 100.0 % $ 116,138 100.0 % 3.0 %

Total revenue for Q3 2012 increased $3.5 million, or 3.0%, compared to Q3 2011, including a benefit from an acceleration of in-club advertising revenue which added approximately $1.2 million to Q3 2012 revenue. Revenue at clubs operated for over 12 months (“comparable club revenue”) increased 1.0% in Q3 2012, excluding the $1.2 million of accelerated in-club advertising revenue. Memberships in our comparable clubs increased 0.2% and ancillary club revenue, initiation fees and other revenue increased 1.3%. These increases were partially offset by a 0.5% decrease in the price of our dues and fees.

Operating expenses:
    Quarter Ended September 30,  
2012   2011
Expense % of Revenue Expense % Variance
Payroll and related 36.5 %   37.3 % 0.9 %
Club operating 38.7 % 39.1 % 1.7 %
General and administrative 4.7 % 5.3 % (8.1 ) %
Depreciation and amortization 10.2 % 10.9 % (3.9 ) %
Impairment of fixed assets 0.2 % % 100.0 %
Operating expenses 90.3 % 92.6 % 0.4 %

Total operating expenses increased $389,000, or 0.4%, in Q3 2012 compared to Q3 2011. Operating margin was 9.7% for Q3 2012 compared to 7.4% in Q3 2011.

Payroll and related . Payroll and related expenses increased $368,000, or 0.9%, to $43.7 million in Q3 2012 compared to $43.3 million in Q3 2011, driven by payroll related to ancillary revenue growth.

Club operating . Club operating expenses increased $774,000, or 1.7%, to $46.3 million in Q3 2012 compared to $45.5 million in Q3 2011, primarily due to increases in occupancy related expenses.

Depreciation and amortization . Depreciation and amortization expense for Q3 2012 decreased primarily due to a decline in our depreciable fixed asset base.

Impairment of fixed assets. In Q3 2012, we recorded fixed asset impairment charges of $239,000, representing the write-off of fixed assets of one underperforming club. There were no fixed asset impairment charges in Q3 2011.

Loss on extinguishment of debt in Q3 2012 totaled $1.0 million resulting from our debt repricing in August 2012 and a $15.0 million voluntary prepayment on our term loan facility. There was no loss on extinguishment of debt in Q3 2011.

Net income for Q3 2012 was $3.2 million compared to net income of $1.9 million for Q3 2011.

Cash flow from operating activities for the nine months ended September 30, 2012 totaled $43.9 million, a decrease of $9.3 million from the corresponding period in 2011. This decrease was primarily driven by reductions in cash flows resulting from the timing of payments and collections made associated with prepaid expenses and deferred revenues, partially offset by the overall increase in earnings.

Fourth Quarter 2012 Financial 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 fourth quarter of 2012 includes the following:
  • Revenue for Q4 2012 is expected to be between $116.5 million and $117.5 million versus $115.8 million for Q4 2011. As percentages of revenue, we expect Q4 2012 payroll and related expenses to be approximately 37.8% and club operating expenses to approximate 37.8%. We expect general and administrative expenses to approximate $6.6 million, depreciation and amortization to approximate $12.3 million and net interest expense to approximate $4.6 million.
  • We expect net income for Q4 2012 to be between $3.0 million and $3.5 million, and diluted earnings per share to be in the range of $0.13 per share to $0.15 per share, assuming a 39% effective tax rate and 24.0 million weighted average fully diluted shares outstanding.
  • We estimate that EBITDA will approximate $22.5 million in Q4 2012.

Investing Activities Outlook:

For the year ending December 31, 2012, we currently plan to invest between $24.0 million to $26.0 million in capital expenditures compared to $30.9 million of capital expenditures in 2011. This amount includes approximately $500,000 to $1.0 million related to potential 2013 club openings, approximately $19.0 million to $20.0 million to continue upgrading existing clubs, and approximately $1.0 million to $2.0 million principally related to major renovations at clubs with recent lease renewals and to upgrade our in-club entertainment system network. We also expect to invest approximately $2.5 million to $3.0 million to enhance our management information systems. These capital expenditures will be funded by cash flow provided by operations and available cash on hand.

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