Business Context and Reporting Period
Madison Square Garden Sports Corp. owns and operates the New York Knicks and New York Rangers, their development-league teams, and the Madison Square Garden Training Center. The company reports one operating segment. This unaudited Form 10-Q covers the fiscal third quarter and nine months ended March 31, 2023, compared with the periods ended March 31, 2022. Results are seasonal, with a disproportionate share of revenue generated in the second and third fiscal quarters when most games are played.
Financial Results and Key Metrics
| Metric | Three months ended March 31, 2023 | Year-over-year change | Nine months ended March 31, 2023 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $382.7 million | Up 13% | $760.5 million | Up 18% |
| Operating income | $81.8 million | Up 33% | $97.4 million | Up 56% |
| Net income attributable to MSG Sports | $52.4 million | Up $27.9 million | $57.1 million | Up $33.1 million |
| Diluted EPS | $2.18 | From $1.00 | $2.27 | From $0.98 |
| Net cash provided by operating activities | Not separately provided for the quarter | — | $114.8 million | From $64.2 million |
Three-month operating margin was approximately 21.4%, compared with 18.2% in the prior-year period. Nine-month operating margin was approximately 12.8%, compared with 9.7%. Three-month net income attributable to MSG Sports represented approximately 13.7% of revenue, compared with 7.3% previously; the nine-month margin was approximately 7.5%, compared with 3.7%.
- Three-month revenue increases were led by ticket-related revenue of $21.9 million, suite revenue of $8.9 million, local media rights of $6.9 million, sponsorship and signage of $4.8 million, and food, beverage and merchandise sales of $3.2 million.
- Revenue growth reflected higher average per-game revenue, additional Knicks and Rangers home games, contractual media-rights increases, and stronger suite and sponsorship sales.
- Direct operating expenses increased 16% for the quarter and 15% for the nine-month period, primarily from higher team personnel compensation and other team operating costs. These increases were partly offset by lower league revenue-sharing and NBA luxury-tax provisions.
- Selling, general and administrative expense decreased 11% in the quarter because of lower employee compensation and executive-transition costs, but increased 11% for the nine months because of staffing, marketing, sponsorship-service, and professional-fee costs.
- Adjusted operating income, a non-GAAP measure, increased 20% to $98.1 million for the quarter and 35% to $147.5 million for the nine months.
- Miscellaneous income included significant unrealized gains, primarily on Xtract One common stock, warrants, and a forward contract. Miscellaneous income was $19.3 million for the quarter and $19.5 million for the nine months, compared with losses in the prior-year periods.
- Effective income tax rates declined to 45% for the quarter and 46% for the nine months, compared with 59% and 58%, respectively, in the prior-year periods.
Liquidity, Debt, and Capital Allocation
- Cash and cash equivalents were $65.2 million at March 31, 2023, compared with $91.0 million at June 30, 2022. Including restricted cash, cash available for cash-flow reporting was $65.8 million.
- Total debt was $380.0 million, consisting of $350.0 million under the Knicks and Rangers revolving facilities and a $30.0 million Rangers NHL advance. Total debt was $250.0 million at June 30, 2022.
- The Knicks facility had $260.0 million outstanding at a 6.11% interest rate; the Rangers facility had $90.0 million outstanding at a 6.66% rate. Both facilities mature in December 2026 and require a minimum 1.5:1.0 debt-service ratio; the company reported compliance at March 31, 2023.
- Management stated that the company had approximately $175.0 million of additional borrowing capacity and sufficient liquidity to fund operations and obligations for the foreseeable future.
- Operating cash flow of $114.8 million was more than offset by $129.6 million of financing cash outflows, including the $170.8 million special dividend, the $75.1 million accelerated share repurchase, debt repayments, and taxes related to equity compensation.
- The $75.0 million accelerated share repurchase was completed in January 2023 at an average price of $164.31 per share. Approximately $184.6 million remained available under the repurchase authorization at March 31, 2023.
- Lease liabilities totaled $759.1 million, primarily related to long-term use of Madison Square Garden and other facilities. The company reported future operating lease payments of $2.26 billion before $1.50 billion of imputed interest.
Material Changes, Outlook, and Risks
- The principal improvement versus the prior year was a broad-based recovery in attendance, per-game revenue, media rights, suites, sponsorship, and in-venue sales, together with lower league revenue-sharing and luxury-tax provisions.
- Higher floating interest rates increased net interest expense by 64% for the nine months. Management estimated that a 100-basis-point increase in floating rates sustained for a full year would increase annual interest expense by approximately $3.5 million.
- On April 6, 2023, the company sold its controlling interest in Counter Logic Gaming to NRG in exchange for a noncontrolling equity interest. CLG will be deconsolidated in the fourth quarter of fiscal 2023; management did not expect a material impact on ongoing operations, financial position, or cash flows.
- On April 20, 2023, Sphere Entertainment distributed approximately 67% of MSG Entertainment to its stockholders. Certain agreements previously with Sphere Entertainment, including arena-license, services, sponsorship, and sublease arrangements, became agreements with MSG Entertainment.
- On April 28, 2023, the company repaid an additional $30.0 million under the Rangers revolving facility.
- The filing provides no formal revenue, earnings, or cash-flow guidance. Management expressed confidence in available liquidity but cautioned that results depend on team popularity and competitiveness, attendance, sponsorship demand, player compensation and injuries, league rules and collective bargaining agreements, economic conditions, interest rates, litigation, security incidents, work stoppages, and potential renewed COVID-19 restrictions.
- Goodwill and indefinite-lived intangible assets were tested during the first quarter of fiscal 2023, with no impairment identified. Various lawsuits remain outstanding, but management does not expect their resolution to have a material adverse effect.
Investor Verification Checklist
- Verify the sustainability of attendance, ticket pricing, suite sales, sponsorship revenue, and in-venue spending after the unusually strong year-over-year recovery.
- Assess the effect of higher interest rates and the company’s increased debt balance on future earnings and liquidity.
- Review the terms and financial implications of the transition from Sphere Entertainment to MSG Entertainment for arena, services, sponsorship, lease, and other related-party agreements.
- Monitor league revenue-sharing, luxury-tax recoveries, player compensation, roster changes, injuries, and potential work stoppages, all of which can materially affect margins.
- Evaluate the volatility and noncash nature of gains on Xtract One investments, warrants, and the forward contract.
- Confirm the financial and reporting consequences of deconsolidating CLG and accounting for the retained NRG/CLG interest.
- Consider the substantial long-term lease obligations, special dividend, share repurchases, and negative total equity position when assessing financial flexibility.