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, 2015, the first quarter of fiscal 2016. The company operates through MSG Entertainment and MSG Sports, including live-event venues, the New York Knicks, New York Rangers and other sports franchises.
The company became a standalone public company on September 30, 2015, following the distribution of its stock by MSG Networks. Prior-period financial statements are carve-out combined statements derived from MSG Networks’ records and include allocated corporate costs; therefore, historical comparisons may not reflect the costs of operating as a standalone public company.
Financial Highlights
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $150.4 million | $118.9 million | Up 26% |
| Operating loss | $4.6 million | $35.1 million | Improved $30.5 million |
| Loss before taxes | $1.5 million | $37.5 million | Improved $36.0 million |
| Net loss | $1.6 million | $37.7 million | Improved $36.1 million |
| Basic and diluted loss per share | $0.06 | $1.51 | Improved $1.45 |
| Adjusted operating cash flow | $23.8 million | $1.8 million | Up $22.0 million |
| Cash used in operating activities | $3.7 million | $40.3 million | Improved $36.6 million |
| Capital expenditures | $52.3 million | $7.0 million | Up $45.3 million |
Revenue increased to $150.4 million, producing an approximate operating margin of negative 3.0%, compared with negative 29.5% in the prior-year quarter. Net loss margin improved to approximately negative 1.1% from negative 31.7%.
- MSG Entertainment revenue increased 18% to $77.0 million, and segment AOCF improved to $3.1 million from negative $0.9 million.
- MSG Sports revenue increased 37% to $73.1 million, and segment operating income increased to $20.0 million from an operating loss of $6.3 million. Sports AOCF increased to $24.4 million from $7.8 million.
- Revenue growth reflected additional events, higher sponsorship and suite revenue, increased ticket-related revenue, and $12.7 million of additional broadcast rights fees under new Knicks and Rangers media-rights agreements with MSG Networks.
- Depreciation and amortization declined 27% to $25.2 million, primarily because the prior-year period included approximately $8.4 million of accelerated depreciation on the teams’ former aircraft.
Liquidity, Cash Flow, Debt and Investments
- Cash and cash equivalents were $1.467 billion at September 30, 2015, compared with $14.2 million at June 30, 2015. The increase primarily reflected a $1.467 billion cash contribution received from MSG Networks in connection with the distribution.
- Total assets were $3.745 billion and total stockholders’ equity was $2.753 billion at September 30, 2015.
- The company reported no debt outstanding and stated that it had no interest-rate market-risk exposure from debt.
- Operating cash flow was slightly negative because of working-capital movements, including increases in related-party receivables and prepaid and other assets.
- Investing cash outflows included $52.3 million of capital expenditures, principally the $38.0 million purchase of a new aircraft and investments in The Garden, plus $16.3 million of investments and loans to nonconsolidated affiliates.
- The company had $84.0 million drawn under a $100.0 million revolving facility for Azoff MSG Entertainment and $4.1 million drawn under a $6.0 million facility for Tribeca Enterprises.
- Letters of credit totaling $7.0 million were outstanding. Management stated that available liquidity and expected operating cash flows were sufficient to fund operations, investments and other requirements over the following 12 months.
Material Changes Versus the Prior Comparable Period
- Results improved substantially, primarily due to higher event and sports-related revenue, new media-rights agreements, lower depreciation, improved equity-method investment results and lower sports operating expenses.
- Corporate and standalone-public-company costs increased. Management estimated that standalone costs for the quarter would have been approximately $10 million higher than the reported allocated costs.
- SG&A increased 14% to $58.4 million, including higher corporate, marketing, compensation and related costs.
- The company authorized repurchases of up to $525.0 million of Class A common stock beginning October 1, 2015; the full authorization remained available at September 30, 2015.
- Investments and loans to nonconsolidated affiliates increased to $268.5 million from $249.4 million at June 30, 2015.
Outlook, Risks, Contingencies and Unusual Items
The filing does not provide quantitative earnings or revenue guidance. Management emphasized that results are seasonal: MSG Sports generally earns a disproportionate share of revenue in the second and third fiscal quarters, while MSG Entertainment benefits disproportionately from the Radio City Christmas Spectacular in the second quarter.
- Key risks include team performance and popularity, player compensation and injuries, NBA and NHL rules and work stoppages, event attendance, sponsorship demand, competition, economic conditions in the New York metropolitan area, capital spending, litigation, regulation and higher costs as a standalone public company.
- The annual impairment tests performed during the quarter identified no impairment of goodwill or indefinite-lived intangible assets.
- A proposed settlement of NHL antitrust litigation became effective on September 16, 2015. The settlement did not change the distribution of NHL games on MSG Networks or create payment obligations for the company. Management did not expect other pending lawsuits to have a material adverse effect.
- The company assumed or retained certain pension and postretirement obligations in connection with the distribution. Cash Balance Plans were scheduled to freeze participation and future pay credits after December 31, 2015.
- The company was evaluating new accounting standards on revenue recognition, consolidation and cloud-computing arrangements; the filing did not quantify their expected financial impact.
Investor Verification Points
- Verify the effect of the MSG Networks distribution and the $1.467 billion cash contribution on ongoing liquidity, capitalization and future comparability.
- Assess recurring standalone corporate costs, including management’s estimate of approximately $10 million in additional quarterly expense.
- Determine the sustainability of sports revenue growth, particularly the new media-rights revenue and team-related performance.
- Review capital-allocation decisions, including the $525 million share-repurchase authorization, aircraft purchase and affiliate lending commitments.
- Monitor seasonality and the timing of the Radio City Christmas Spectacular, Knicks and Rangers seasons, and other major events.
- Review pension, postretirement, legal and other contractual obligations, including the affiliate credit facilities and letters of credit.