Business Context and Reporting Period
Madison Square Garden Sports Corp. filed this unaudited Form 10-Q for the quarter and nine months ended March 31, 2020. Although the request metadata identifies “2019 Q3,” the filing is for fiscal 2020 third quarter, with comparisons to March 31, 2019.
As of March 31, 2020, the Company reported two segments: MSG Entertainment and MSG Sports. On April 17, 2020, it completed the distribution of Madison Square Garden Entertainment Corp., which received the former entertainment business, including MSG Entertainment and the sports booking business. Future filings will present those activities as discontinued operations; therefore, the reported periods are not indicative of the post-distribution Company.
Key Financial Metrics
| Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Nine months ended March 31, 2020 | Nine months ended March 31, 2019 |
|---|---|---|---|---|
| Revenue | $424.0 million | $517.2 million | $1.268 billion | $1.368 billion |
| Operating income (loss) | $(135.2) million | $38.5 million | $(143.7) million | $66.0 million |
| Net income (loss) | $(141.1) million | $34.2 million | $(129.4) million | $76.1 million |
| Net income (loss) attributable to shareholders | $(118.0) million | $35.3 million | $(103.9) million | $84.7 million |
| Diluted EPS | $(4.92) | $1.48 | $(4.34) | $3.55 |
| Adjusted operating income | $11.6 million | $84.1 million | $97.5 million | $204.6 million |
| Cash flow from operations | Not separately provided | Not separately provided | $111.1 million | $97.3 million |
Revenue declined 18% in the quarter and 7% year to date. The filing does not provide a single consolidated GAAP operating margin; based on reported figures, operating margins were approximately negative 31.9% for the quarter and negative 11.3% year to date. Adjusted operating income declined 86% for the quarter and 52% year to date.
- Cash, cash equivalents and restricted cash were $1.045 billion at March 31, 2020, including $1.006 billion of cash and cash equivalents and $38.8 million of restricted cash.
- Short-term investments were $331.0 million at March 31, 2020.
- Total debt, including current debt and deferred financing costs, was approximately $385.3 million, compared with $55.0 million at June 30, 2019.
- Operating lease liabilities totaled $247.4 million following adoption of the new lease standard.
- Total assets were $4.310 billion and total equity was $2.576 billion at March 31, 2020.
- Capital expenditures were $342.2 million in the first nine months, primarily related to the planned MSG Sphere projects in Las Vegas and London.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue decreased $93.2 million, primarily because COVID-19 caused venue closures and suspended NBA and NHL seasons. MSG Entertainment revenue decreased 18% to $136.4 million, while MSG Sports revenue decreased 18% to $288.4 million.
- Nine-month revenue decreased $100.0 million. MSG Entertainment revenue declined 6% to $608.1 million, and MSG Sports revenue declined 9% to $660.9 million.
- The Company recorded a $102.2 million non-cash impairment charge related to Tao Group Hospitality, consisting primarily of an $80.7 million goodwill impairment, plus impairments of right-of-use assets, property and equipment, and a tradename.
- Selling, general and administrative expense increased 11% in the quarter and 14% year to date, including higher MSG Sphere-related costs, professional fees related to the separation, and MSG Sports compensation and severance costs.
- Adjusted operating income fell to $11.6 million in the quarter from $84.1 million and to $97.5 million year to date from $204.6 million.
- Operating cash flow increased to $111.1 million from $97.3 million, but investing cash use increased to $494.6 million from $159.8 million, driven by higher capital expenditures and purchases of short-term investments.
- Financing activities provided $306.8 million, principally from $350.0 million of draws under the Knicks and Rangers revolving facilities, partially offset by repayments.
- The Company acquired an additional 15% interest in Tao Group Hospitality for 102 shares of Class A common stock, increasing ownership to 77.5%.
- The Forum was classified as held for sale at March 31, 2020 under an agreement for a $400.0 million cash sale and litigation settlement. The transaction closed on May 1, 2020.
Outlook, Management Commentary, Risks and Unusual Items
Management stated that virtually all operations were suspended as of the filing date. The NBA and NHL seasons had been suspended, venues were closed, and nearly all Tao Group Hospitality locations were closed or restricted to take-out and delivery. The filing states that the timing and extent of reopening, whether sports seasons would resume, and the resulting revenue impact could not be reasonably estimated.
Management expects COVID-19-related disruption to reduce revenue and cash flow substantially. Expense reductions, including lower game-day costs and waived arena license fees while The Garden is unavailable, will not fully offset lost revenue. Deferred sports revenue was approximately $85 million at March 31, 2020, with roughly half relating to the 2019-20 NBA and NHL seasons and potentially subject to refunds, credits or make-goods.
Following the distribution, management identified approximately $100 million of unrestricted cash and cash equivalents, $15 million of remaining capacity under the Knicks unsecured facility, and up to $200 million under new delayed-draw term loan facilities. Management believed these resources, together with operating cash flow, were sufficient for the next 12 months; this assessment is highly dependent on the duration of the pandemic and the timing of business resumption.
- On April 17, 2020, the Company entered into $110 million Knicks and $90 million Rangers delayed-draw term loan facilities, maturing October 17, 2021, subject to liquidity and other borrowing conditions.
- The Knicks and Rangers revolving facilities were fully drawn at March 31, 2020, with $200 million and $150 million outstanding, respectively. Both subsidiaries were in compliance with their debt service covenants.
- The Arena License Agreements require future annual fees of approximately $22.5 million for the Knicks and $16.7 million for the Rangers beginning in fiscal 2021, subject to force majeure provisions.
- The filing warns that additional impairment charges may result as COVID-19 assumptions evolve. Tao Group Hospitality’s reporting-unit carrying value equaled estimated fair value after the impairment charge, leaving heightened sensitivity to future assumptions.
- Other risks include sports-team performance and compensation, league rules and work stoppages, consumer demand, venue concentration in New York, interest-rate exposure, litigation, related-party arrangements, and obligations of Madison Square Garden Entertainment Corp. under separation and ongoing commercial agreements.
- The filing identifies a derivative compensation-related lawsuit that remained stayed while a Special Litigation Committee investigated; management did not expect the matter or other lawsuits to have a material adverse effect.
Most Important Facts for Investors to Verify
- Reconcile post-distribution liquidity, debt ownership, cash contributions and the availability conditions for the $200 million delayed-draw facilities.
- Assess the extent to which postponed or canceled NBA, NHL and venue events create refunds, credits, make-goods or deferred-revenue obligations.
- Monitor reopening dates, sports-season resumption, attendance restrictions and the effect on media rights, sponsorship, ticketing and arena revenue.
- Evaluate sensitivity to further impairments of Tao Group Hospitality and other assets under prolonged COVID-19 disruption.
- Review future filings for discontinued-operations presentation and comparable historical results after the Entertainment Distribution.
- Verify MSG Sphere construction commitments, delays, transferred obligations and the effect of the Forum sale.
- Confirm compliance with debt covenants, floating-rate exposure and scheduled maturities, including the estimated $3.85 million annual interest impact of a 100-basis-point rate increase.