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, 2011.

Third Quarter Overview:
  • Total member count increased 5,000 to 522,000 in Q3 2011.
  • Membership attrition averaged 3.7% per month in Q3 2011 compared to 3.8% per month in Q3 2010.
  • Revenue increased 2.7% in Q3 2011 compared to Q3 2010.
  • Comparable club revenue increased 3.0% in Q3 2011 compared to Q3 2010.
  • Ancillary club revenue increased 8.3% in Q3 2011 compared to Q3 2010.
  • Diluted earnings per share were $0.08 in Q3 2011 compared to loss per share of ($0.00) in Q3 2010.
  • EBITDA was $21.8 million in Q3 2011, an increase of $4.1 million, or 23.0%, when compared to EBITDA of $17.7 million in Q3 2010.

Robert Giardina, Chief Executive Officer of TSI, commented: “We were very pleased to have continued to build on our momentum from the first half of the year in the third quarter. Comparable club revenue, new member signups, and attrition were all on or ahead of plan, and memberships at our two new clubs that open for workouts in the fourth quarter are running nicely ahead of plan. When combined with tight expense controls, these revenue drivers translated into EBITDA for the quarter that was up 23%; and overall, this was one of our best quarters in years. We are also on track to add more members in the fourth quarter and exceed our membership goals for the year. We also believe we are much better positioned than we were a couple years ago on a number of fronts, and even if the current weak economy persists we believe we can continue to make progress next year toward our target of a 20% EBITDA margin.”

Quarter Ended and Year to Date September 30, 2011 Financial Results:
Revenue (in thousands):
Quarter Ended September 30,
2011 2010
Revenue % Revenue Revenue % Revenue % Variance
Membership dues $ 89,816 77.3 % $ 89,075 78.8 % 0.8 %
Joining fees   1,602 1.4 %   1,239 1.0 % 29.3 %
Membership revenue   91,418 78.7 %   90,314 79.8 % 1.2 %
Personal training revenue 14,852 12.8 % 13,837 12.2 % 7.3 %
Other ancillary club revenue   8,612 7.4 %   7,819 7.0 % 10.1 %
Ancillary club revenue 23,464 20.2 % 21,656 19.2 % 8.3 %
Fees and other revenue   1,256 1.1 %   1,157 1.0 % 8.6 %
Total revenue $ 116,138 100.0 % $ 113,127 100.0 % 2.7 %

Total revenue for Q3 2011 increased $3.0 million, or 2.7%, compared to Q3 2010. Revenue at clubs operated for over 12 months (“comparable club revenue”) increased 3.0% in Q3 2011 compared to Q3 2010 .

Operating expenses:
  Quarter Ended September 30,  
2011   2010
Expense % of Revenue Expense % Variance
Payroll and related 37.3 %   39.3 % (2.5) %
Club operating 39.1 % 39.3 % 2.4 %
General and administrative 5.3 % 6.2 % (12.9) %
Depreciation and amortization 10.9 % 11.6 % (3.9) %
Operating expenses 92.6 % 96.4 % (1.4) %

Total operating expenses decreased $1.5 million, or 1.4%, in Q3 2011 compared to Q3 2010. Operating margin was 7.4% for Q3 2011 compared to 3.6% in Q3 2010.

Payroll and related . Payroll related to club staffing decreased as we continued to realize efficiencies from programs put in place in the second half of 2010.

Club operating . In Q3 2011, occupancy-related expenses and laundry and towels expenses increased, which was partially offset by a decrease in utilities expenses.

General and administrative. In Q3 2011, general liability insurance decreased due to a further reduction in claims activity and a related reduction in claims reserves. Consulting and legal expenses also decreased.

Depreciation and amortization . In Q3 2011 compared to Q3 2010, depreciation and amortization decreased primarily due to the closing of two clubs subsequent to September 30, 2010.

Net income for Q3 2011 was $1.9 million compared to net loss of $18,000 for Q3 2010.

Cash flow from operating activities for the nine months ended 2011 totaled $53.2 million, an increase of $15.2 million from the corresponding period in 2010, which was partially related to the increase in overall earnings. Also, in the nine months ended 2011, due to the timing of payments affecting working capital, prepaid rent decreased $4.1 million, while in the corresponding period in 2010 there was minimal cash effect from prepaid rent. In addition, income tax refunds, net of cash paid for income taxes, increased $9.4 million in the nine months ended 2011, compared to year to date 2010. Partially offsetting the operating cash increases was the increase in cash paid for interest of $4.4 million and $2.5 million of call premium paid on the redemption of our Senior Discount Notes in May 2011.

Fourth 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 fourth quarter of 2011 includes the following:
  • Revenue for Q4 2011 is expected to be between $114.5 million and $115.5 million versus $111.4 million for Q4 2010, after adjusting Q4 2010 revenue downward for $2.7 million of expired personal training sessions recognized in Q4 2010.
  • In Q4 2011, as a percentage of revenue, we expect payroll and related expenses to be approximately 50 basis points higher than Q3 2011 and club operating expenses to approximate 38%. General and administrative expenses are expected to be approximately $7.0 million, while depreciation and amortization and interest expenses are expected to be similar to Q3 2011 amounts in total dollars.
  • Adjusted EBITDA is expected to improve $2.5 million, or 13.2%, to $21.5 million in Q4 2011 compared to Q4 2010, after adjusting Q4 2010 Adjusted EBITDA downward for $2.7 million of expired personal training sessions recognized in Q4 2010.
  • We estimate that net income for Q4 2011 will be between $1.6 million and $2.1 million, and earnings per share will be in the range of $0.07 per share to $0.09 per share, assuming a 34% effective tax rate and 23.5 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 expenditures, 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 two new club openings in Q4 2011, approximately $15.0 million to $16.0 million for the upgrade of existing clubs and approximately $3.5 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 $3.0 million to $3.5 million to enhance our management information and communication systems.

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