Business Context and Reporting Period
The filing is The Madison Square Garden Company’s unaudited Form 10-Q for the fiscal quarter and nine months ended March 31, 2019. The company operates two reportable segments: MSG Entertainment, including venues, live events, TAO Group, Boston Calling and the Christmas Spectacular; and MSG Sports, including the Knicks, Rangers, other sports teams, sports events and esports businesses.
The filing text identifies the registrant as The Madison Square Garden Company, rather than Madison Square Garden Sports Corp. Results include the New York Liberty through its January 2019 sale. TAO Group results are reported on a three-month lag.
Key Financial Metrics
| Metric | Three months ended March 31, 2019 | Year-over-year change | Nine months ended March 31, 2019 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $517.2 million | 13% | $1.368 billion | 10% |
| Operating income | $38.5 million | Up $30.2 million | $66.0 million | Down $1.2 million |
| Net income | $34.2 million | Up $26.3 million | $76.1 million | Down $108.9 million |
| Net income attributable to shareholders | $35.3 million | Up $26.1 million | $84.7 million | Down $103.0 million |
| Diluted EPS | $1.48 | Compared with $0.38 | $3.55 | Compared with $7.87 |
| Adjusted operating income | $84.1 million | Up 68% | $204.6 million | Up 3% |
| Net cash from operating activities | Not separately reported for the quarter | — | $97.3 million | Down $67.7 million |
Approximate margins were 7.4% operating and 6.8% shareholder net income for the quarter, and 4.8% operating and 6.2% shareholder net income for the nine-month period. Adjusted operating income margins were approximately 16.3% and 15.0%, respectively.
- Third-quarter revenue was $166.5 million in MSG Entertainment and $351.6 million in MSG Sports. Segment adjusted operating income was $7.2 million and $103.1 million, respectively.
- Nine-month revenue was $645.9 million in MSG Entertainment and $722.8 million in MSG Sports. Segment adjusted operating income was $117.3 million and $152.4 million, respectively.
- Cash, cash equivalents and restricted cash totaled $1.182 billion at March 31, 2019, including $1.153 billion of unrestricted cash and cash equivalents. Short-term investments were $110.9 million.
- Total debt, including current maturities and before considering cash, was approximately $105.4 million; the debt primarily relates to the TAO term loan. The Knicks, Rangers and TAO revolving facilities were undrawn at March 31, 2019.
- Total assets were $3.918 billion and total equity was $2.709 billion at March 31, 2019.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased $57.6 million, driven primarily by higher MSG Sports local media rights, more Knicks and Rangers games at The Garden, higher suite revenue and ticketing-agreement-related revenue, partly offset by weaker other live sporting events.
- Third-quarter MSG Sports operating income rose 80% to $96.5 million and adjusted operating income rose 74% to $103.1 million. MSG Entertainment adjusted operating income declined 26% to $7.2 million.
- Nine-month operating income declined modestly despite revenue growth because direct operating expenses increased 12% and selling, general and administrative expenses increased 13%.
- Nine-month shareholder net income fell sharply because the prior-year period included a $115.4 million income tax benefit associated primarily with the Tax Cuts and Jobs Act. The current-year period recorded $12.6 million of income tax expense.
- Team personnel transaction provisions increased to $57.1 million for the nine months from $10.0 million, mainly reflecting player waivers and contract terminations.
- Operating cash flow declined to $97.3 million from $165.0 million, primarily because of higher receivables, lower deferred revenue and reduced tax-related benefits.
- Investing cash outflows were $159.8 million, including $117.2 million of capital expenditures, $112.7 million invested in short-term investments, and $51.8 million of investments and loans to affiliates. These uses were partly offset by $125.0 million of proceeds from the sale of the company’s 50% interest in AMSGE.
Guidance, Outlook, Risks and Unusual Items
- The company did not provide formal quantitative revenue or earnings guidance in the filing.
- Management expected to continue pursuing the proposed Sports Distribution, potentially in the second half of calendar 2019. The contemplated transaction would distribute approximately two-thirds of the sports company’s economic interest to existing stockholders, with the company retaining approximately one-third. Completion remained subject to league approvals, an IRS private letter ruling, a tax opinion and final board approval.
- The company was developing MSG Sphere venues in Las Vegas and London. Las Vegas foundation work began in February 2019, with an opening target in calendar 2021. London planning applications were submitted in March 2019. Construction cost estimates had not been finalized, and management stated that additional capital would be required.
- ASC Topic 606 was adopted prospectively using the modified retrospective method. The adoption increased reported nine-month revenue by $39.6 million and reduced direct operating expenses by $2.2 million versus amounts that would have been reported under the prior standard. Prior-year results were not recast, limiting comparability.
- A renewed ticketing agreement resulted in $8.3 million of third-quarter revenue and $4.7 million of nine-month revenue relating to events from prior periods.
- The company sold its AMSGE interest for $125.0 million and recognized a $3.2 million gain. The related $63.5 million revolving loan was converted into a subordinated term loan; a $4.8 million principal repayment was received during the quarter.
- The company recognized a $5.3 million third-quarter unrealized gain and a $2.4 million nine-month unrealized loss on its Townsquare investment following adoption of new financial-instrument accounting guidance.
- Key risks include team performance and popularity, player compensation and injuries, league revenue sharing and luxury tax estimates, seasonality, competition, economic conditions, venue construction delays and cost overruns, funding availability, potential NBA or NHL work stoppages, acquisition and investment performance, litigation, related-party transactions and the uncertainty of the Sports Distribution.
- A derivative lawsuit filed in Delaware alleges fiduciary-duty breaches related to executive compensation. Management does not believe the company’s lawsuits will have a material adverse effect, but the outcome cannot be predicted.
- On May 6, 2019, after quarter-end, the company entered into related-party aircraft dry-lease and flight-crew arrangements involving entities controlled by members of the Dolan family. The filing does not provide expected aggregate costs.
Important Facts for Investors to Verify
- Confirm that the issuer and reporting entity correspond to the intended investment: this filing is for The Madison Square Garden Company, not a separately reported Madison Square Garden Sports Corp.
- Reconcile reported year-over-year results for the effects of ASC Topic 606, the ticketing-agreement renewal, the AMSGE disposition, the Liberty sale and the prior-year tax benefit.
- Assess whether the company’s substantial cash balance and undrawn revolving facilities are sufficient for MSG Sphere construction, expected capital spending and other strategic investments.
- Monitor team personnel transaction costs, league revenue-sharing and luxury-tax estimates, which materially affected sports-segment expenses.
- Review the conditions, tax consequences, financing implications and timing of any Sports Distribution.
- Evaluate related-party transactions, including MSG Networks arrangements, aircraft agreements and the post-quarter-end Dolan-family aircraft transactions.
- Review the company’s liquidity, TAO term-loan covenants, planned venue spending, construction cost estimates and potential need for additional capital.