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:
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.
Forward-Looking Statements:
Statements in this release that do not constitute historical
facts, including, without limitation, statements under the captions
“Third Quarter 2011 Business Outlook” and “Investing Activities
Outlook”, 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 158 fitness clubs as of June 30, 2011,
comprising 106 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 517,000 members. For
more information on TSI, visit http://www.mysportsclubs.com.
The Company will hold a conference call on Wednesday July 27,
2011 at 4:30 PM (Eastern) to discuss the second 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 July 28, 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 June 30,
2011 and December 31, 2010 (All figures in thousands)
(Unaudited) June 30, December
31, 2011 2010 ASSETS Current
assets: Cash and cash equivalents $ 34,512 $ 38,803 Accounts
receivable, net 6,475 5,258 Inventory 269 217 Prepaid corporate
income taxes 6,784 7,342 Prepaid expenses and other current assets
9,758 13,213 Total current
assets 57,798 64,833 Fixed assets, net 296,605 309,371 Goodwill
32,940 32,794 Intangible assets, net 11 44 Deferred tax assets, net
40,863 41,883 Deferred membership costs 8,171 5,934 Other assets
14,197 9,307 Total assets $
450,585 $ 464,166
LIABILITIES AND
STOCKHOLDERS’ DEFICIT Current liabilities: Current portion of
long-term debt $ 15,000 14,550 Accounts payable 6,949 4,008 Accrued
expenses 29,041 27,477 Accrued interest 1,040 6,579 Deferred
revenue 41,151 35,106 Total
current liabilities 93,181 87,720 Long-term debt 281,302 301,963
Deferred lease liabilities 65,627 67,180 Deferred revenue 5,815
3,166 Other liabilities 8,999 11,082
Total liabilities 454,924 471,111 Stockholders’ deficit:
Common stock 23 23 Paid-in capital (20,849 ) (21,788 )
Accumulated other comprehensive income
(currency translation adjustment)
2,665 2,121 Retained earnings 13,822
12,699 Total stockholders’ deficit (4,339 )
(6,945 ) Total liabilities and stockholders’ deficit $
450,585 $ 464,166
TOWN SPORTS
INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the
Quarters and Six Months Ended June 30, 2011 and 2010 (All
figures in thousands except share and per share data)
(Unaudited) Three Months Ended June 30,
Six Months Ended June 30, 2011
2010 2011 2010 Revenues:
Club operations $ 117,185 $ 116,172 $ 232,777 $ 232,767 Fees and
other 1,100 1,264 2,213
2,428 118,285 117,436
234,990 235,195
Operating
Expenses: Payroll and related 45,101 48,605 90,353 97,116 Club
operating 43,385 43,804 87,487 87,272 General and administrative
6,096 6,292 13,516 15,231 Depreciation and amortization 13,185
13,407 26,187 27,061 Impairment of fixed assets
―
2,865 ― 3,254
107,767 114,973 217,543
229,934 Operating income 10,518 2,463 17,447 5,261
Loss on extinguishment of debt 4,865 ― 4,865 ― Interest expense
6,621 5,179 12,203 10,363 Interest income (19 ) (17 ) (90 ) (35 )
Equity in the earnings of investees and
rental income
(611 ) (518 ) (1,255 ) (1,054 )
(Loss) income before benefit for corporate
income taxes
(338 ) (2,181 ) 1,724 (4,013 )
Provision (benefit) for corporate income
taxes
72 (1,366 ) 601 (2,466 )
Net (loss) income $ (410 ) $ (815 ) $ 1,123 $ (1,547 )
(Loss) earnings per share: Basic $ (0.02 ) $ (0.04 ) $ 0.05
$ (0.07 ) Diluted $ (0.02 ) $ (0.04 ) $ 0.05 $ (0.07 ) Weighted
average number of shares used in calculating (loss) earnings per
share: Basic 22,799,816 22,625,137 22,755,651 22,615,241 Diluted
22,799,816 22,625,137 23,211,425 22,615,241
TOWN SPORTS
INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the
Six Months Ended June 30, 2011 and 2010 (All figures in
thousands) (Unaudited) Six Months Ended
June 30, 2011 2010 Cash flows from
operating activities: Net income (loss) $ 1,123 $ (1,547 )
Adjustments to reconcile net income to net cash provided by
operating activities: Depreciation and amortization 26,187 27,061
Impairment of fixed assets - 3,254 Loss on extinguishment of debt
4,865 - Call premium on redemption of Senior Discount Notes (2,538
) - Amortization of debt discount 52 - Amortization of debt
issuance costs 553 506 Non-cash rental expense, net of non-cash
rental income (2,082 ) (2,171 ) Compensation expense incurred in
connection with stock options and common stock grants 658 737
Decrease (increase) in deferred tax asset 1,020 (4,171 ) Net change
in certain operating assets and liabilities 8,132 4,409 (Increase)
decrease in deferred membership costs (2,237 ) 1,890 Landlord
contributions to tenant improvements 149 100 Decrease in insurance
reserves (984 ) (1,081 ) Other 184 485
Total adjustments 33,959 31,019 Net
cash provided by operating activities 35,082
29,472
Cash flows from investing activities:
Capital expenditures (11,719 ) (6,262 ) Net cash used
in investing activities (11,719 ) (6,262 )
Cash flows from financing activities: Proceeds from 2011
Senior Credit Facility, net of original issue discount 297,000 -
Debt issuance costs (8,065 ) - Repayment of 2007 Term Loan Facility
(178,063 ) (925 ) Repayment of Senior Discount Notes (138,450 ) -
Principal payment on 2011 Term Loan Facility (750 ) - Proceeds from
exercise of stock options 225 76 Tax benefit from stock option
exercises 56 - Net cash used in
financing activities (28,047 ) (849 ) Effect of
exchange rate changes on cash 393 (181 ) Net
(decrease) increase in cash and cash equivalents (4,291 ) 22,180
Cash and cash equivalents beginning of period 38,803
10,758 Cash and cash equivalents end of period $
34,512 $ 32,938
Summary of the change in
certain operating assets and liabilities: Increase in accounts
receivable (1,188 ) (1,090 ) (Increase) decrease in inventory (50 )
3 Decrease in prepaid expenses and other current assets 3,226 1,084
(Decrease) increase in accounts payable, accrued expenses and
accrued interest (3,337 ) 2,352 Change in prepaid corporate income
taxes and corporate income taxes payable 558 (1,342 ) Increase in
deferred revenue 8,923 3,402 Net change
in certain working capital components $ 8,132 $ 4,409
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 June 30, 2011 and 2010 (All figures in
thousands) (Unaudited) Three Months
Ended June 30, 2011 2010 Net cash
provided by operating activities $ 9,674 $ 11,854 Interest expense,
net of interest income 6,602 5,162 Provision (benefit) for
corporate income taxes 438 (1,366 ) Changes in operating assets and
liabilities 4,096 1,076 Call premium on Senior Discount Notes 2,538
- Amortization of debt discount (52 ) - Amortization of debt
issuance costs (271 ) (253 )
Compensation expense incurred in
connection with stock options and common stock grants
(310 ) (368 ) Non-cash rental expense, net of non-cash rental
income 962 1,237 Decrease in insurance reserves 654 852 (Decrease)
increase in deferred tax asset (502 ) 2,272 Increase (decrease) in
deferred membership costs 1,037 (900 ) Other (552 )
(313 ) Adjusted EBITDA 24,314 19,253 Loss on extinguishment of debt
(4,865 ) - Impairment of fixed assets - (2,865
) EBITDA $ 19,449 $ 16,388
TOWN SPORTS
INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
Reconciliation of Net Cash Provided by Operating Activities to
EBITDA For the Three Months Ending September 30, 2011
(All figures in thousands) (Estimated)
Q3 2011 Net cash provided by operating activities
(estimated) $ 18,950 Interest expense, net of interest
income 5,900 Provision for corporate income taxes 377 Changes in
operating assets and liabilities (5,400 ) Amortization of debt
issuance costs (390 ) Compensation expense incurred in connection
with stock options and common stock grants (320 ) Non-cash rental
expense, net of non-cash rental income 680 Decrease in deferred tax
asset (270 ) Increase in deferred member costs 1,400 Other
73 EBITDA (estimated) $ 21,000
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 loss on extinguishment of debt and 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 $13.2 million in the quarter ended June 30, 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 2011 Senior Credit Facility.
• Our discussions with prospective lenders and
investors in recent years, including in relation to our 2011 Senior
Credit Facility, 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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