Business Context and Reporting Period
The Madison Square Garden Company filed an unaudited Form 10-Q for the quarter and six months ended December 31, 2016, its fiscal 2017 second quarter. The business comprised MSG Entertainment, including venues, concerts, productions and Boston Calling Events, and MSG Sports, including the Knicks, Rangers and other sports properties. The company became a standalone public company on September 30, 2015; certain prior-year six-month results include carve-out allocations from the former parent and are not fully comparable to standalone results.
The business is seasonal: MSG Sports generally generates a disproportionate share of revenue in the second and third fiscal quarters, while MSG Entertainment benefits disproportionately from the Christmas Spectacular in the second quarter.
Key Financial Metrics
| Metric | Three months ended December 31, 2016 | Year-over-year change | Six months ended December 31, 2016 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $445.2 million | +8% | $626.8 million | +12% |
| Operating income | $58.3 million | +19% | $25.4 million | -43% |
| Net income | $57.4 million | +32% | $28.5 million | -32% |
| Net income attributable to shareholders | $57.7 million | +33% | $29.1 million | -31% |
| Diluted EPS | $2.39 | +$0.65 | $1.20 | -$0.47 |
| Adjusted operating income | $96.0 million | +17% | $97.6 million | -8% |
| Cash flow from operations | Not separately disclosed for the quarter | — | $109.9 million | -$4.4 million |
All dollar amounts are presented in thousands in the filing unless otherwise noted. Adjusted operating income is a non-GAAP measure that excludes depreciation and amortization and share-based compensation.
- Quarterly operating margin was approximately 13.1%; six-month operating margin was approximately 4.1%.
- Quarterly adjusted operating margin was approximately 21.6%; six-month adjusted operating margin was approximately 15.6%.
- Cash and cash equivalents were $1.410 billion at December 31, 2016, compared with $1.444 billion at June 30, 2016. Restricted cash was $19.7 million.
- Total assets were $3.553 billion and total liabilities were $974.8 million at December 31, 2016.
- The balance sheet does not show material corporate borrowings. The $200 million Knicks secured revolving facility and $15 million Knicks unsecured facility were undrawn at December 31, 2016. A $150 million Rangers facility was entered into after quarter-end and was undrawn at closing.
- Capital expenditures were $21.8 million for the six-month period. Investing cash uses also included $23.2 million for available-for-sale securities, $13.5 million for the BCE acquisition and $3.2 million of investments and loans to nonconsolidated affiliates.
- The company repurchased 406 thousand Class A shares for $72.3 million during the six months, leaving $347.0 million of authorization available at December 31, 2016.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue growth reflected higher MSG Entertainment revenue, including the Christmas Spectacular, Forum events and sponsorships, and higher MSG Sports revenue from NBA national media-rights distributions, ticketing and other sporting events.
- MSG Entertainment second-quarter revenue rose 6% to $192.5 million, operating income rose 28% to $56.7 million and adjusted operating income rose 30% to $63.7 million.
- MSG Sports second-quarter revenue rose 10% to $252.7 million, but operating income declined 1% to $40.2 million. Higher player compensation, league revenue-sharing and luxury-tax provisions, venue costs and personnel transaction costs largely offset revenue growth.
- For the six-month period, MSG Entertainment operating income increased 13% to $49.5 million, while MSG Sports operating income declined 18% to $49.5 million. Corporate and other operating losses increased by $13.6 million.
- Six-month adjusted operating income declined 8% to $97.6 million, primarily because of lower MSG Sports adjusted operating income and higher corporate costs, partially offset by improved MSG Entertainment results.
- Share-based compensation increased to $20.1 million for the six months from $10.3 million in the prior-year period.
- Operating cash flow declined modestly despite higher noncash compensation, principally because net income decreased and working-capital movements differed from the prior year.
- Goodwill increased to $289.7 million from $277.2 million, principally from the Boston Calling acquisition. The company reported no goodwill or indefinite-lived intangible-asset impairments.
Guidance, Outlook, Risks and Unusual Items
- The filing provides no formal numerical revenue, earnings or cash-flow guidance. Management stated that available liquidity, operating cash flow and borrowing capacity were sufficient for operations, investments, acquisitions and planned share repurchases over the following twelve months.
- Management cited the NBA’s new national media-rights agreement as a source of higher distributions and revenue, but also expects related increases in team compensation and league-related costs.
- The company is reviewing the content, operating model and timing of the New York Spectacular after shifting its production run to the summer. The 2016 period included 56 performances compared with none in the prior-year period.
- On July 1, 2016, the company acquired a controlling interest in Boston Calling Events. Its revenue and earnings contribution through December 31 were not material.
- After quarter-end, on January 31, 2017, the company agreed to acquire a controlling interest in TAO Group for approximately $181 million plus $8.7 million of preferred equity and a potential earn-out of up to $25.5 million. TAO-related facilities included a $110 million term loan and $12 million revolving facility without recourse to MSG except through the acquired entities. The purchase price allocation was incomplete at filing.
- A payment-card security incident affected merchandise and food-and-beverage locations at several New York and Chicago venues. The company recorded an estimable contingent liability and an equal insurance receivable, but could not estimate the remaining potential payments. Insurance is expected to offset most, if not all, related costs, but future results could be materially affected.
- Global Music Rights, an indirect investment, is involved in antitrust litigation with the Radio Music Licensing Committee. The parties entered into an interim licensing arrangement through September 30, 2017; the ultimate outcome and financial impact remain uncertain.
- The company faces risks from team performance and player injuries, salary and luxury-tax changes, NBA or NHL work stoppages, event popularity, economic conditions, venue competition, seasonality, acquisitions, litigation, payment-card claims and interest-rate movements.
- The six-month effective tax rate was unusually low at 1.1%, primarily because of reductions in federal and state valuation allowances. The prior-year period also benefited from a significant valuation-allowance reduction, limiting comparability.
- The company changed its pension-cost measurement approach beginning July 1, 2016, reducing pension and postretirement expense by approximately $0.3 million in the quarter and $0.6 million in the six months.
Most Important Facts for Investors to Verify
- Whether MSG Sports revenue growth from media-rights distributions can offset rising player compensation, revenue-sharing obligations and personnel transaction costs.
- The sustainability of MSG Entertainment performance, particularly Christmas Spectacular attendance and pricing and the future economics of New York Spectacular.
- The final purchase accounting, operating contribution, earn-out exposure and integration results for the TAO Group acquisition.
- The ultimate cost, insurance recovery and legal exposure associated with the payment-card incident.
- The outcome and potential financial effect of the Global Music Rights/RMLC antitrust proceedings.
- The comparability of year-to-date results because the prior-year first quarter included carve-out allocations and a large former-parent cash transfer.
- Cash deployment, including the remaining $347.0 million share-repurchase authorization, planned Las Vegas venue investment and future acquisitions.