Town Sports International Holdings, Inc. Announces First Quarter 2012 Financial Results

NEW YORK-( Business Wire )-

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, 2012.

First Quarter Overview:

  • Total member count increased 10,000 to 533,000 in Q1 2012.
  • Membership attrition averaged 3.4% per month in Q1 2012 compared to 3.2% per month in Q1 2011.
  • Revenue increased 5.3% in Q1 2012 compared to Q1 2011.
  • Comparable club revenue increased 4.5% in Q1 2012 versus a decrease of 0.5% in Q1 2011.

  • Ancillary club revenue increased 12.3% in Q1 2012 compared to Q1 2011.
  • Diluted earnings per share were $0.16 in Q1 2012 compared to diluted earnings per share of $0.07 in Q1 2011.
  • EBITDA was $25.1 million in Q1 2012, an increase of $4.5 million, or 21.9%, when compared to EBITDA of $20.6 million in Q1 2011.

Robert Giardina, Chief Executive Officer of TSI, commented: “The many improvements we have made to drive profitability in 2011 have carried into the first quarter of 2012, producing double digit percentage growth of ancillary revenue and our highest same club sales growth in 4 years. With strong membership gains over the past year, we can now be even more focused on increasing revenue per member, as well as putting leases in place to resume club growth. Finally, the hiring of our new Chief Operating Officer in March adds a very experienced industry executive to this effort and gives us all even more confidence that we will continue to move ahead successfully.”

Quarter Ended March 31, 2012 Financial Results:

           
Revenue (in thousands):
 
Quarter Ended March 31,
2012 2011
Revenue % Revenue Revenue % Revenue % Variance
Membership dues $ 93,263 75.9 % $ 91,080 78.0 % 2.4 %
Joining fees   2,566 2.1 %   1,447 1.3 % 77.3 %
Membership revenue   95,829 78.0 %   92,527 79.3 % 3.6 %
Personal training revenue 17,621 14.3 % 15,692 13.4 % 12.3 %
Other ancillary club revenue   8,284 6.7 %   7,373 6.3 % 12.4 %
Ancillary club revenue 25,905 21.0 % 23,065 19.7 % 12.3 %
Fees and other revenue   1,178 1.0 %   1,113 1.0 % 5.9 %
Total revenue $ 122,912 100.0 % $ 116,705 100.0 % 5.3 %

Total revenue for Q1 2012 increased $6.2 million, or 5.3%, compared to Q1 2011. Revenue at clubs operated for over 12 months (“comparable club revenue”) increased 4.5% in Q1 2012 compared to Q1 2011. Memberships in our comparable clubs increased 3.2% with ancillary club revenue, initiation fees and other revenue increasing 3.1%. These increases were partially offset by a 1.8% decrease in the price of our dues and fees.

Operating expenses:

  Quarter Ended March 31,  
2012   2011
Expense % of Revenue

Expense %

Variance

Payroll and related 38.5 % 38.8 % 4.7 %
Club operating 36.7 % 37.8 % 2.3 %
General and administrative 4.8 % 6.4 % (20.0 ) %
Depreciation and amortization 10.5 % 11.1 % (1.1 ) %
Operating expenses 90.5 % 94.1 % 1.4 %

Total operating expenses increased $1.5 million, or 1.4%, in Q1 2012 compared to Q1 2011. Operating margin was 9.5% for Q1 2012 compared to 5.9% in Q1 2011.

Payroll and related. Payroll and related expenses increased 4.7% or $2.1 million to $47.4 million in Q1 2012 compared to $45.3 million in Q1 2011, driven by payroll related to ancillary revenue growth.

Club operating. Club operating expenses increased $1.0 million or 2.3% to $45.1 million in Q1 2012 compared to $44.1 million in Q1 2011 primarily due to increases in occupancy related expenses.

General and administrative. In Q1 2012 general and administrative expenses decreased compared to Q1 2011, primarily attributable to decreases in consulting and legal expenses and continued decreases in general liability insurance expense.

Depreciation and amortization. Depreciation and amortization expense for Q1 2012 was relatively flat versus the prior year.

Net income for Q1 2012 was $3.9 million compared to net income of $1.5 million for Q1 2011.

Cash flow from operating activities for the three months ended March 31, 2012 totaled $16.4 million, a decrease of $9.0 million from the corresponding period in 2011, driven primarily by the timing of payments made associated with our accounts payable, accrued expenses and prepaid rent, partially offset by the overall increase in earnings.

Second 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 second quarter of 2012 includes the following:

  • Revenue for Q2 2012 is expected to be between $123.0 million and $124.0 million versus $118.3 million for Q2 2011. As percentages of revenue, we expect Q2 2012 payroll and related expenses to be approximately 37.8% and club operating expenses to approximate 36.0%. We expect general and administrative expenses to approximate $6.9 million, depreciation and amortization to approximate $12.8 million and net interest expense to approximate $5.6 million.
  • We expect net income for Q2 2012 to be between $4.25 million and $4.75 million, and diluted earnings per share to be in the range of $0.18 per share to $0.20 per share, assuming a 39% effective tax rate and 23.9 million weighted average fully diluted shares outstanding.
  • We estimate that EBITDA will approximate $26.0 million in Q2 2012.

Investing Activities Outlook:

For the year ending December 31, 2012, we currently plan to invest $25.0 million to $28.0 million in capital expenditures compared to $30.9 million of capital expenditures in 2011. This amount includes approximately $2.5 million to $3.0 million related to potential 2012 and 2013 club openings, approximately $16.0 million to $17.0 million to continue upgrading existing clubs, and approximately $4.0 million to $5.0 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.

Forward-Looking Statements:

Statements in this release that do not constitute historical facts, including, without limitation, statements under the captions “Second Quarter 2012 Financial 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 160 fitness clubs as of March 31, 2012, comprising 108 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 533,000 members. For more information on TSI, visit http://www.mysportsclubs.com.

The Company will hold a conference call on Tuesday, April 24, 2012 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 25, 2012.

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, 2012 and December 31, 2011
(All figures in thousands)
(Unaudited)
 
March 31, December 31,
2012   2011  
 
ASSETS
Current assets:
Cash and cash equivalents $ 42,391 $ 47,880
Accounts receivable, net 8,294 5,857
Inventory 163 290
Prepaid corporate income taxes 381 73
Prepaid expenses and other current assets   9,001     10,599  
Total current assets 60,230 64,699
Fixed assets, net 275,884 286,041
Goodwill 32,843 32,799
Deferred tax assets, net 37,603 40,000
Deferred membership costs 10,867 10,117
Other assets   15,858     15,886  
Total assets $ 433,285   $ 449,542  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt $ 9,800 25,507
Accounts payable 6,930 9,180
Accrued expenses 22,052 26,575
Accrued interest 728 950
Deferred revenue   46,827     40,822  
Total current liabilities 86,337 103,034
Long-term debt 259,034 263,487
Deferred lease liabilities 64,482 65,119
Deferred revenue 6,122 5,338
Other liabilities   12,004     12,210  
Total liabilities 427,979 449,188
Stockholders’ equity:
Common stock 23 23
Additional paid-in capital (18,930 ) (19,934 )
Accumulated other comprehensive income 1,349 1,251
Retained earnings   22,864     19,014  
Total stockholders’ equity   5,306     354  
Total liabilities and stockholders’ equity $ 433,285   $ 449,542  
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
       
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2012 and 2011
(All figures in thousands except share and per share data)
(Unaudited)
 
Three Months Ended
March 31,
2012 2011
 
Revenues:
Club operations $ 121,734 $ 115,592
Fees and other   1,178     1,113  
  122,912     116,705  
Operating Expenses:
Payroll and related 47,359 45,252
Club operating 45,131 44,102
General and administrative 5,933 7,420
Depreciation and amortization   12,860     13,002  
  111,283     109,776  
Operating income 11,629 6,929
Interest expense 5,931 5,582
Interest income (10 ) (71 )
Equity in the earnings of investees and

rental income

  (588 )   (644 )
Income before provision for corporate income taxes 6,296 2,062
Provision for corporate income taxes   2,446     529  
Net income $ 3,850   $ 1,533  
 
Earnings per share:
Basic $ 0.17 $ 0.07
Diluted $ 0.16 $ 0.07
Weighted average number of shares used in calculating earnings per share:
Basic 23,118,028 22,710,996
Diluted 23,840,907 23,073,147
TOWN SPORTS INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
       
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2012 and 2011
(All figures in thousands)
(Unaudited)
 
Three Months Ended March 31,
2012   2011  
Cash flows from operating activities:
Net income $ 3,850 $ 1,533
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 12,860 13,002
Amortization of debt discount 97 -
Amortization of debt issuance costs 288 282
Non-cash rental expense, net of non-cash rental income (859 ) (1,120 )
Compensation expense incurred in connection with stock options and common stock grants 329 348
Decrease in deferred tax asset 2,413 518
Net change in certain operating assets and liabilities (1,451 ) 12,594
Increase in deferred membership costs (750 ) (1,200 )
Landlord contributions to tenant improvements 663 149
Decrease in insurance reserves (589 ) (330 )
Other   (447 )   (368 )
Total adjustments   12,554     23,875  
Net cash provided by operating activities   16,404     25,408  
 
Cash flows from investing activities:
Capital expenditures   (2,348 )   (5,335 )
Net cash used in investing activities   (2,348 )   (5,335 )
 
Cash flows from financing activities:
Principal payments on 2011 Term Loan Facility (20,257 ) -
Principal payments on 2007 Term Loan Facility - (14,062 )
Proceeds from exercise of stock options 349 117
Tax benefit from stock option exercises   326     20  
Net cash used in financing activities (19,582 ) (13,925 )
Effect of exchange rate changes on cash   37     282  
Net (decrease) increase in cash and cash equivalents (5,489 ) 6,430
Cash and cash equivalents beginning of period $ 47,880   $ 38,803  
Cash and cash equivalents end of period $ 42,391   $ 45,233  
 
Summary of the change in certain operating assets and liabilities:
Increase in accounts receivable $ (2,421 ) $ (1,729 )
Decrease (increase) in inventory 128 (120 )
Decrease in prepaid expenses and other current assets 1,215 4,589
(Decrease) increase in accounts payable, accrued expenses and accrued interest (7,082 ) 687
Change in prepaid corporate income taxes and corporate income taxes payable (308 ) 1,437
Increase in deferred revenue   7,017     7,730  
Net change in certain operating assets and liabilities $ (1,451 ) $ 12,594  
 
Supplemental disclosures of cash flow information:
Cash payments for interest $ 5,747   $ 9,012  
Cash payments for income taxes $ 14   $ 66  
 
See notes to condensed consolidated financial statements.
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, 2012 and 2011
(All figures in thousands)
(Unaudited)
Three Months Ended
March 31
2012 2011
Net cash provided by operating activities $ 16,404 $ 25,408
Interest expense, net of interest income 5,921 5,511
Provision for corporate income taxes 2,446 529
Changes in operating assets and liabilities 1,451 (12,594 )
Amortization of debt discount (97 ) -
Amortization of debt issuance costs (288 ) (282 )
Compensation expense incurred in connection with stock options and

common stock grants

(329 ) (348 )
Landlord contributions to tenant improvements (663 ) (149 )
Non-cash rental expense, net of non-cash rental income 859 1,120
Decrease in insurance reserves 589 330
Decrease in deferred tax asset (2,413 ) (518 )
Increase in deferred membership costs 750 1,200
Other   447     368  
Adjusted EBITDA   25,077     20,575  
EBITDA $ 25,077   $ 20,575  

Note: We define Adjusted EBITDA as EBITDA excluding loss on extinguishment of debt and any fixed asset or goodwill impairments. For the quarters ended March 31, 2012 and 2011, we did not incur any loss on extinguishment of debt or any fixed asset or goodwill impairments. Accordingly, EBITDA and Adjusted EBITDA are identical for these quarters.

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, 2012 and 2011
(All figures in thousands)
(Unaudited)
Estimated
Q2 2012 Q2 2011
Net cash provided by operating activities $ 21,370 $ 9,674
Interest expense, net of interest income 5,600 6,602
Provision for corporate income taxes 3,000 438
Changes in operating assets and liabilities (4,000 ) 4,096
Call premium on Senior Discount Notes - 2,538
Amortization of debt discount (97 ) (52 )
Amortization of debt issuance costs (288 ) (271 )
Compensation expense incurred in connection with stock options and common stock grants (250 ) (310 )
Non-cash rental expense, net of non-cash rental income 800 962
Decrease in deferred tax asset (500 ) (502 )
Decrease in insurance reserves 500 654
Increase in deferred member costs 100 1,037
Other   (235 )   (552 )
Adjusted EBITDA 26,000 24,314
Loss on extinguishment of debt (1)   -     (4,865 )
EBITDA $ 26,000   $ 19,449  
(1)   In Q2 2011, we recognized loss on extinguishment of debt of $4,865 in connection with the our debt refinancing on May 11, 2011.

Non-GAAP Financial Measures – EBITDA and Adjusted EBITDA

EBITDA consists of net income 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 $12.9 million in the quarter ended March 31, 2012. 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, equity analysts who follow our company 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.

Town Sports International Holdings, Inc., New YorkInvestor Contact:212-246-6700 extension 1650Investor.relations@town-sports.comorICR, Inc.Joseph Teklits / Farah This e-mail address is being protected from spambots. You need JavaScript enabled to view it.

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