Business Context and Reporting Period
The filing is The Madison Square Garden Company’s unaudited Form 10-Q for the three months ended September 30, 2016, the first quarter of fiscal 2017. The business comprised MSG Entertainment and MSG Sports, including the Knicks, Rangers, Liberty, other sports properties, entertainment venues, live productions, and Boston Calling Events. The company became a standalone public company on September 30, 2015; therefore, the prior-year period contains carve-out allocations from the former parent and is not fully comparable.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $181.7 million | $150.4 million | 21% increase |
| Operating loss | $(32.8) million | $(4.6) million | $(28.3) million |
| Net loss | $(28.9) million | $(1.6) million | $(27.3) million |
| Net loss attributable to shareholders | $(28.6) million | $(1.6) million | $(27.0) million |
| Diluted loss per share | $(1.19) | $(0.06) | $(1.13) |
| Adjusted operating income | $1.6 million | $23.8 million | 93% decrease |
| Net cash used in operating activities | $(21.7) million | $(1.7) million | $(19.9) million |
Revenue increased to $181.7 million, but direct operating expenses rose 56% to $111.4 million and selling, general and administrative expenses rose 32% to $77.0 million. Operating margin declined to approximately negative 18.1% from negative 3.0%; net margin declined to approximately negative 15.9% from negative 1.1%. Adjusted operating margin was approximately 0.9%, compared with 15.8% in the prior-year period.
- MSG Entertainment: Revenue increased 44% to $110.7 million, while adjusted operating income declined to a $1.1 million loss from income of $3.1 million. The segment benefited from 56 performances of New York Spectacular, higher activity at The Garden and the Forum, and the Boston Calling acquisition, but associated production and event costs increased substantially.
- MSG Sports: Revenue decreased 3% to $71.0 million. Adjusted operating income declined 37% to $15.4 million, primarily due to higher team operating costs, revenue-sharing provisions, selling and administrative expenses, and a $5.0 million provision related to a player trade.
- Liquidity: Cash and cash equivalents were $1.294 billion at September 30, 2016, compared with $1.444 billion at June 30, 2016. Restricted cash was $14.7 million. Total liabilities were $957.7 million and total equity was $2.502 billion.
- Debt and credit availability: The company had no debt outstanding. The Knicks entered into a $200 million, five-year secured revolving facility and a $15 million, one-year unsecured facility; both were undrawn at quarter-end. The company also had $347.0 million remaining under its $525 million stock-repurchase authorization.
- Investing and financing cash flows: Investing cash use was $48.5 million, including $23.1 million for Townsquare Media securities and $13.5 million for the Boston Calling acquisition. Financing cash use was $80.0 million, including $72.3 million of share repurchases.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by MSG Entertainment, including the shifted summer schedule for New York Spectacular, additional events at The Garden and the Forum, and the acquisition of Boston Calling Events.
- Cost growth exceeded revenue growth, substantially reducing adjusted operating income and increasing the GAAP operating loss.
- The company incurred higher standalone-company costs, including employee compensation, professional fees, New York State and City capital taxes, and corporate overhead. The prior-year carve-out results did not include all costs that would have been incurred as a standalone public company.
- Share-based compensation increased to $8.4 million from $3.1 million.
- Equity-method results changed from $2.7 million of earnings to a $1.0 million loss, partly because the prior-year period included nonrecurring joint-venture gains.
- The company acquired a controlling interest in Boston Calling Events on July 1, 2016. The preliminary purchase price allocation included $11.8 million of amortizable intangible assets, $12.5 million of goodwill, and $11.4 million of noncontrolling interest. The acquisition’s quarterly revenue and earnings contribution was not material.
- The company acquired approximately 12% of Townsquare Media for $23.1 million. The investment generated a $6.7 million pretax unrealized gain recorded in other comprehensive income.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that fiscal 2017 MSG Sports results would reflect higher revenue from the new NBA national media-rights agreement, together with higher team personnel compensation resulting from the increased NBA salary cap.
- Management said it expected sufficient liquidity over the next twelve months from cash, operating cash flow, and available revolver capacity to fund operations, investments, acquisitions, the planned Las Vegas venue development, and share repurchases.
- The company expects seasonality: MSG Sports generally generates a disproportionate share of revenue in the second and third fiscal quarters, while MSG Entertainment generally benefits disproportionately from the Christmas Spectacular in the second quarter.
- Key risks include team popularity and competitiveness, player injuries and contracts, league rules and work stoppages, luxury-tax and revenue-sharing changes, event demand, competition, economic conditions, capital spending, acquisitions, litigation, regulatory changes, tax matters, and the performance of unconsolidated investments.
- The company recorded a $5.0 million provision related to a player trade and $2.0 million of increased net NBA and NHL revenue-sharing provisions.
- Goodwill and indefinite-lived intangible-asset impairment tests identified no impairments, although the valuations depend on assumptions concerning attendance, event performance, discount rates, growth, and future cash flows.
- Various lawsuits remain outstanding, but management does not believe their resolution will have a material adverse effect. The filing does not provide a clear aggregate value for litigation contingencies.
- The company had $7.1 million of letters of credit outstanding. It also had affiliate credit facilities with $97.5 million drawn by Azoff MSG Entertainment and $13.1 million outstanding for Tribeca Enterprises.
- Management stated that disclosure controls were effective as of September 30, 2016, with no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm comparability of the prior-year carve-out results, particularly corporate overhead, employee compensation, taxes, and other standalone-company costs.
- Assess whether the sharp increase in entertainment revenue and costs from New York Spectacular and other events is seasonal, recurring, or nonrecurring.
- Monitor the impact of the NBA media-rights agreement against higher player compensation, salary-cap effects, revenue sharing, and luxury-tax exposure.
- Review the final purchase price allocation and operating performance of Boston Calling Events, including any contingent consideration.
- Evaluate cash burn, planned Las Vegas venue investment, acquisitions, affiliate loans, and the pace of the stock-repurchase program.
- Verify the company’s substantial cash balance against deferred revenue, contractual sports personnel obligations, venue leases, pension obligations, and other commitments.
- Review the tax valuation allowances and the sustainability of future tax benefits, since the reported 9.2% effective tax rate was materially affected by valuation allowances.