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 first
quarter ended March 31, 2011.
First Quarter Overview:
- Revenue decreased 0.9% in Q1 2011
compared to Q1 2010.
- Comparable club revenue decreased 0.5%
in Q1 2011 compared to Q1 2010.
- Total member count increased 17,000 to
510,000 in Q1 2011 compared to a 9,000 increase to 495,000 in Q1
2010.
- Membership attrition averaged 3.2% per
month in Q1 2011 compared to 3.5% per month in Q1 2010.
- Earnings per share were $0.07 in Q1
2011 compared to loss per share of ($0.03) in Q1 2010. Q1 2010
results included fixed asset impairment and severance charges, net
of taxes, of ($0.02) per share.
- EBITDA was $20.6 million in Q1 2011, an
increase of $3.2 million, or 18.4% when compared to Adjusted EBITDA
of $17.4 million in Q1 2010.
Robert Giardina, Chief Executive Officer of TSI, commented: “We
were pleased to see our business continue to gain momentum in the
first quarter and exceed our expectations. We added 17,000 net new
members in the quarter, which is our biggest increase since the
first quarter of 2008. We believe that the initiatives we have put
in place over the past year to drive more member signups, continue
to reduce attrition, and streamline the sales process to make it
more productive and also more profitable, are now being reflected
solidly in our results. We expect that these and other initiatives,
combined with an improving economy, will continue to benefit our
bottom line.”
Quarter Ended
March 31, 2011 Financial Results:
Revenue (in
thousands): Quarter Ended March 31, 2011
2010 Revenue % Revenue Revenue %
Revenue % Variance Membership dues $ 90,599 77.6 % $
92,809 78.8 % (2.4) % Joining fees 1,447 1.3 % 2,024
1.7 % (28.5) % Membership revenue 92,046 78.9 %
94,833 80.5 % (2.9) % Personal training revenue 15,692 13.4 %
14,799 12.6 % 6.0 % Other ancillary club revenue 7,854 6.7 %
6,963 5.9 % 12.8 % Ancillary club revenue 23,546 20.1 %
21,762 18.5 % 8.2 % Fees and other revenue 1,113 1.0 %
1,164 1.0 % (4.4) % Total revenue $ 116,705 100.0 % $
117,759 100.0 % (0.9) %
Total revenue for Q1 2011 decreased $1.1 million, or
0.9%, compared to Q1 2010. This decrease in revenue was driven
primarily by the decline in membership dues, reflecting price
decreases. The price decline is, in large part, due to the
introduction of restricted memberships; including the new student
membership in April 2010, as well as the effect of promotions.
Revenue at clubs operated for over 12 months (“comparable club
revenue”) decreased 0.5% in Q1 2011 compared to Q1 2010.
Operating expenses:
Quarter Ended March 31,
2011 2010 Expense % Expense % of
Revenue Variance Payroll and related 38.8 % 41.2
% (6.7) % Club operating 37.8 % 36.9 % 1.5 % General and
administrative 6.4 % 7.6 % (17.0) % Depreciation and amortization
11.1 % 11.6 % (4.8) % Impairment of fixed assets - % 0.3 % (100.0)
% Operating expenses 94.1 % 97.6 % (4.5) %
Total operating expenses decreased $5.2 million, or 4.5%,
for Q1 2011 compared to Q1 2010. Operating margin was 5.9% for Q1
2011 compared to 2.4% for Q1 2010.
Payroll and related. The decreases in payroll and related
expenses in Q1 2011 compared to Q1 2010 were principally driven by
payroll related to membership consultants. The amount of membership
consultant payroll deferred over the past two years has been
declining with our decline in joining fees collected. Our payroll
costs that we defer are limited to the amount of these fees.
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 Q1 2011, occupancy expenses increased,
which was partially offset by decreases related to marketing costs
due to our efforts in 2010 to spend more productively in this area
and adjusting our focus toward media advertising.
General and administrative. Decreases in Q1 2011 general
and administrative expenses compared to Q1 2010 were principally
attributable to decreases in legal costs and continued decreases in
general liability insurance expense due to a further reduction in
claims activity and therefore a reduction in claims reserves.
Depreciation and amortization. Depreciation and
amortization decreased in Q1 2011 due to the closing of two clubs
subsequent to March 31, 2010 and the effect of previous fixed asset
impairment charges, decreasing the balance of fixed assets to be
depreciated.
Impairment of fixed assets. In Q1 2010, we recorded fixed
asset impairment charges of $389,000, representing the write-off of
fixed assets of two underperforming clubs. There were no fixed
asset impairment charges in Q1 2011.
Net income for Q1 2011 was $1.5 million compared to net
loss of $732,000 for Q1 2010.
Cash flow from operating activities for Q1 2011 totaled
$25.4 million, an increase of $7.8 million from the Q1 2010, which
was partially related to the increase in overall earnings. Also in
Q1 2011, due to the timing of payments, prepaid rent decreased $5.0
million, while in Q1 2010 there was no cash flow effect from
prepaid rent. The effect of the change in deferred revenue and
deferred membership costs increased cash by $1.5 million in
the aggregate. In addition, income tax refunds, net of cash paid
for income taxes increased $1.4 million in Q1 2011, compared to Q1
2010.
Second 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 second quarter of 2011 includes the following:
- Revenue for Q2 2011 is expected to be
between $117.0 million and $118.0 million versus $117.4 million for
Q2 2010.
- In Q2 2011, as a percentage of revenue,
payroll and related expenses and club operating expenses are
expected to be approximately 50 basis points below Q1 2011 levels.
General and administrative expenses and depreciation and
amortization expenses are expected to be similar to Q1 2011 amounts
in total dollars.
- EBITDA is expected to be $21.3 million
in Q2 2011.
- We expect net income for Q2 2011 of
between $2.0 million and $2.5 million, and earnings per share to be
in the range of $0.09 per share to $0.11 per share, assuming a 26%
effective tax rate and 23.2 million weighted average fully diluted
shares outstanding. See “Refinancing Activities” below for the
estimated effects of a refinancing on our Q2 2011 net income.
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.
Refinancing Activities:
On April 7, 2011, we commenced soliciting lenders to
participate in a new $350.0 million senior secured credit facility
consisting of a term loan facility and a revolving credit facility
using commercially reasonable efforts. We expect the facility to be
arranged by Deutsche Bank Securities Inc. and KeyBanc Capital
Markets Inc. We will use the proceeds from the credit facility
principally to repay the 2007 Senior Credit Facility and to redeem
in full all of our outstanding Senior Discount Notes in accordance
with their terms. We are seeking to complete the transaction during
the second quarter, subject to, among other factors, receipt of
satisfactory pricing and market conditions.
- If a refinancing is consummated in Q2
2011, we expect that we would incur early pre-payment penalties on
our existing 11% Senior Discount Notes of approximately $2.5
million, existing deferred financing costs of approximately $1.8
million would be written off and we would likely incur at least 30
days, or $1.3 million of interest, on these notes during the
redemption period. These charges total $5.6 million, or $4.1,
million net of taxes, at a tax rate of 26%.
Forward-Looking Statements:
Statements in this release that do not constitute historical
facts, including, without limitation, statements under the captions
“Second Quarter 2011 Business Outlook,” “Investing Activities
Outlook,” and “Refinancing Activities”, other statements regarding
future financial results and performance and potential sales
revenue and other statements that are predictive in nature or
depend upon or refer to events or conditions, or that include words
such as “expects,” “anticipated,” “intends,” “plans,” “believes,”
“estimates” or “could”, are “forward-looking” statements made
pursuant to the safe harbor provision of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are
subject to various risks and uncertainties, many of which are
outside the Company’s control, including, among others, the level
of market demand for the Company’s services, economic conditions
affecting the Company’s business, the geographic concentration of
the Company’s clubs, competitive pressures, the ability to achieve
reductions in operating costs and to continue to integrate
acquisitions, environmental initiatives, any security and privacy
breaches involving customer data, the application of Federal and
state tax laws and regulations, the levels and terms of the
Company’s indebtedness, and other specific factors discussed herein
and in other releases and public filings made by the Company
(including the Company’s reports on Forms 10-K and 10-Q filed with
the Securities and Exchange Commission). The Company believes that
all forward-looking statements are based on reasonable assumptions
when made; however, the Company cautions that it is impossible to
predict actual results or outcomes or the effects of risks,
uncertainties or other factors on anticipated results or outcomes
and that, accordingly, one should not place undue reliance on these
statements. Forward-looking statements speak only as of the date
they were made, and the Company undertakes no obligation to update
these statements in light of subsequent events or developments.
Actual results may differ materially from anticipated results or
outcomes discussed in any forward-looking statement.
About Town Sports International Holdings, Inc.:
New York-based Town Sports International Holdings, Inc. is a
leading owner and operator of fitness clubs in the Northeast and
mid-Atlantic regions of the United States and, through its
subsidiaries, operated 159 fitness clubs as of March 31, 2011,
comprising 107 New York Sports Clubs, 25 Boston Sports Clubs, 18
Washington Sports Clubs (two of which are partly-owned), six
Philadelphia Sports Clubs, and three clubs located in Switzerland.
These clubs collectively served approximately 510,000 members. For
more information on TSI, visit http://www.mysportsclubs.com.
The Company will hold a conference call on Tuesday, April 26,
2011 at 4:30 PM (Eastern) to discuss the first quarter results.
Robert Giardina, Chief Executive Officer, and Dan Gallagher, Chief
Financial Officer, will host the conference call. The conference
call will be Web cast and may be accessed via the Company's
Investor Relations section of its Web site at
www.mysportsclubs.com. A replay and transcript of the call will be
available via the Company's Web site beginning April 27, 2011.
From time to time we may use our Web site as a channel of
distribution of material company information. Financial and other
material information regarding the Company is routinely posted on
and accessible at http://www.mysportsclubs.com. In addition, you
may automatically receive email alerts and other information about
us by enrolling your email by visiting the “Email Alert” section at
http://www.mysportsclubs.com.
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE
SHEETS March 31, 2011 and December 31, 2010 (All
figures in thousands) (Unaudited) March
31, December 31, 2011 2010
ASSETS Current assets: Cash and cash equivalents $ 45,233 $
38,803 Accounts receivable, net 6,932 5,258 Inventory 337 217
Prepaid corporate income taxes 5,905 7,342 Prepaid expenses and
other current assets 8,323 13,213 Total
current assets 66,730 64,833 Fixed assets, net 303,039 309,371
Goodwill 32,820 32,794 Intangible assets, net 28 44 Deferred tax
assets, net 41,365 41,883 Deferred membership costs 7,134 5,934
Other assets 8,909 9,307 Total assets $
460,025 $ 464,166
LIABILITIES AND
STOCKHOLDERS’ DEFICIT Current liabilities: Current portion of
long-term debt $ 1,850 14,550 Accounts payable 8,268 4,008 Accrued
expenses 28,525 27,477 Accrued interest 3,153 6,579 Deferred
revenue 40,318 35,106 Total current
liabilities 82,114 87,720 Long-term debt 300,601 301,963 Deferred
lease liabilities 66,186 67,180 Deferred revenue 5,455 3,166 Other
liabilities 10,374 11,082 Total
liabilities 464,730 471,111 Stockholders’ deficit: Common stock 23
23 Paid-in capital (21,303 ) (21,788 )
Accumulated other comprehensive income
(currency translation adjustment)
2,343 2,121 Retained earnings 14,232 12,699
Total stockholders’ deficit (4,705 ) (6,945 )
Total liabilities and stockholders’ deficit $ 460,025 $
464,166
TOWN SPORTS INTERNATIONAL HOLDINGS,
INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months
Ended March 31, 2011 and 2010 (All figures in thousands
except share and per share data) (Unaudited)
Three Months Ended March 31, 2011 2010
Revenues: Club operations $ 115,592 $ 116,595 Fees
and other 1,113 1,164 116,705
117,759
Operating Expenses: Payroll and
related 45,252 48,511 Club operating 44,102 43,468 General and
administrative 7,420 8,939 Depreciation and amortization 13,002
13,654 Impairment of fixed assets ― 389
109,776 114,961 Operating income 6,929
2,798 Interest expense 5,582 5,184 Interest income (71 ) (18 )
Equity in the earnings of investees and rental income (644 )
(536 ) Income (loss) before benefit for corporate income
taxes 2,062 (1,832 ) Provision (benefit) for corporate income taxes
529 (1,100 ) Net income (loss) $ 1,533
$ (732 ) Earnings (loss) per share: Basic $ 0.07 $ (0.03 )
Diluted $ 0.07 $ (0.03 )
Weighted average number of shares used in
calculating earnings (loss) per share:
Basic 22,710,996 22,605,236 Diluted 23,073,147 22,605,236
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND
SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months
Ended March 31, 2011 and 2010 (All figures in thousands)
(Unaudited) Three Months Ended March 31,
2011 2010 Cash flows from operating
activities: Net income (loss) $ 1,533 $ (732 ) Adjustments to
reconcile net income to net cash provided by operating activities:
Depreciation and amortization 13,002 13,654 Impairment of fixed
assets - 389 Amortization of debt issuance costs 282 253 Non-cash
rental expense, net of non-cash rental income (1,120 ) (934 )
Compensation expense incurred in connection with stock options and
common stock grants 348 369 Decrease (increase) in deferred tax
asset 518 (1,899 ) Net change in certain operating assets and
liabilities 12,594 5,485 (Increase) decrease in deferred membership
costs (1,200 ) 990 Landlord contributions to tenant improvements
149 100 Decrease in insurance reserves (330 ) (229 ) Other
(368 ) 172 Total adjustments 23,875
18,350 Net cash provided by operating activities
25,408 17,618
Cash flows from
investing activities: Capital expenditures (5,335 )
(2,809 ) Net cash used in investing activities (5,335
) (2,809 )
Cash flows from financing
activities: Repayment of long term borrowings (14,062 ) (463 )
Proceeds from exercise of stock options 117 - Tax benefit from
stock option exercises 20 18 Net cash
used in financing activities (13,925 ) (445 ) Effect
of exchange rate changes on cash 282 (76 ) Net
increase in cash and cash equivalents 6,430 14,288 Cash and cash
equivalents beginning of period 38,803 10,758
Cash and cash equivalents end of period $ 45,233 $
25,046
Summary of the change in certain operating
assets and liabilities: Increase in accounts receivable (1,729
) (752 ) Increase in inventory (120 ) (74 ) Decrease in prepaid
expenses and other current assets 4,589 2,740 Increase in accounts
payable, accrued expenses and accrued interest 4,494 2,527 Decrease
in accrued interest on Senior Discount Notes (3,807 ) (3,807 )
Decrease in prepaid corporate income taxes 1,437 831 Increase in
deferred revenue 7,730 4,020 Net change
in certain working capital components $ 12,594 $ 5,485
TOWN SPORTS INTERNATIONAL HOLDINGS, INC.
AND SUBSIDIARIES
Reconciliation of Net Cash Provided by Operating Activities to
Adjusted EBITDA and EBITDA For the Three Months Ended March
31, 2011 and 2010 (All figures in thousands)
(Unaudited) Three Months Ended March 31,
2011 2010 % Chg. Net cash provided by
operating activities $ 25,408 $ 17,618 Interest expense, net of
interest income 5,511 5,166 Provision (benefit) for corporate
income taxes 529 (1,100 ) Changes in operating assets and
liabilities (12,594 ) (5,485 ) Amortization of debt issuance costs
(282 ) (253 )
Compensation expense incurred in
connection with stock options and common stock grants
(348 ) (369 ) Landlord contributions to tenant improvements (149 )
(100 ) Non-cash rental expense, net of non-cash rental income 1,120
934 Decrease in insurance reserves 330 229 (Decrease) increase in
deferred tax asset (518 ) 1,899 Increase (decrease) in deferred
membership costs 1,200 (990 ) Other 368 (172 )
Adjusted EBITDA 20,575 17,377 18.4 % Impairment of fixed assets
- (389 ) EBITDA $ 20,575 $ 16,988
21.1 %
TOWN SPORTS INTERNATIONAL HOLDINGS,
INC. AND SUBSIDIARIES Reconciliation of Net Cash
Provided by Operating Activities (estimated) to EBITDA
(estimated) For the Three Months Ending June 30, 2011
(All figures in thousands) (Estimated)
Q2 2011 Net cash provided by operating
activities (estimated) $ 22,150 Interest expense, net of interest
income 5,450 Provision for corporate income taxes 800 Changes in
operating assets and liabilities (8,248) Amortization of debt
issuance costs (252) Compensation expense incurred in connection
with stock options and common stock grants (350) Non-cash rental
expense, net of non-cash rental income 900 Decrease in deferred tax
asset (270) Increase in deferred member costs 1,070 Other 50
EBITDA (estimated) $ 21,300
Note: The calculation of EBITDA (estimated) above excludes any
effects of a refinancing of our debt.
Non-GAAP Financial Measures – EBITDA and Adjusted
EBITDA
EBITDA consists of net income (loss) plus interest expense
(net of interest income), provision for corporate income taxes, and
depreciation and amortization. Adjusted EBITDA is the Company’s
EBITDA, excluding any fixed asset or goodwill impairments. EBITDA
is not a measure of liquidity or financial performance presented in
accordance with GAAP. EBITDA, as we define it, may not be identical
to similarly titled measures used by some other companies.
EBITDA has material limitations as an analytical tool and should
not be considered in isolation or as a substitute for cash flows
from operating activities, operating income or other cash flow or
income data prepared in accordance with GAAP. The items excluded
from EBITDA, but included in the calculation of reported net
income, are significant components of the consolidated statements
of cash flows and income, and must be considered in performing a
comprehensive assessment of our liquidity.
EBITDA excludes, among other items, the effect of depreciation
and amortization, which is a significant component of our reported
GAAP data. Depreciation and amortization, which is a non-cash item,
totaled $13.0 million in the quarter ended March 31, 2011.
Although a premise underlying depreciation and amortization is that
it will be reinvested in our business to restore, replenish or
purchase property, equipment and other related assets, the funds
represented by depreciation and amortization could, in the
Company’s discretion, be utilized for other purposes (e.g., debt
service). Accordingly, EBITDA may be useful as a supplemental
measure to GAAP financial data for demonstrating our ability to
satisfy our liquidity and capital resource requirements.
Investors or prospective investors in the Company regularly
request EBITDA as a supplemental analytical measure to, and in
conjunction with, our GAAP financial data. We understand that these
investors use EBITDA, among other things, to assess our ability to
service our existing debt and to incur debt in the future, to
evaluate our executive compensation programs, to assess our ability
to fund our capital expenditure program, and to gain insight into
the manner in which the Company’s management and board of directors
analyze our liquidity. We believe that investors find the inclusion
of EBITDA in our press releases to be useful and helpful to
them.
Our management and board of directors also use EBITDA as a
supplemental measure to our GAAP financial data for purposes
broadly similar to those used by investors.
The purposes to which EBITDA may be used by investors, and is
used by our management and board of directors, include the
following:
• The Company is required to comply with
financial covenants and borrowing limitations that are based on
variations of EBITDA as defined in our debt agreements, including
our 2007 Senior Credit Facility and our Senior Discount Notes.
• Our discussions with prospective lenders and
investors in recent years, including in relation to our 2007 Senior
Credit Facility and our Senior Discount Notes, have confirmed the
importance of EBITDA in their decision-making processes relating to
the making of loans to us or investing in our debt securities.
• The Company uses EBITDA as a key factor in
determining annual incentive bonuses for executive officers (as
discussed in our proxy statement).
• The Company
considers EBITDA to be a useful supplemental measure to GAAP
financial data because it indicates our ability to generate funds
sufficient to make capital expenditures (including for the opening
of new clubs and the upgrading of existing clubs) as well as to
undertake initiatives to enhance our business by offering new
products and services in accordance with our strategy.
• Quarterly, our equity analysts often report on our EBITDA
with respect to valuation commentary.
We do not, and investors should not, place undue reliance on
EBITDA or Adjusted EBITDA as a measure of our liquidity.
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