Business Context and Reporting Period
Madison Square Garden Sports Corp. owns and operates the New York Knicks, New York Rangers, Westchester Knicks, Hartford Wolf Pack and other sports assets. The Knicks and Rangers play at Madison Square Garden under long-term arena license agreements with MSG Entertainment. The filing is a Form 10-K for the fiscal year ended June 30, 2023, not a 2022 fourth-quarter filing. The Company reports one operating segment.
In April 2023, the Company sold its controlling interest in Counter Logic Gaming to NRG in exchange for an approximately 25% noncontrolling equity interest in the combined company.
Key Financial Metrics
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Revenue | $887.4 million | $821.4 million | Up 8% |
| Operating income | $85.2 million | $86.1 million | Down 1% |
| Adjusted operating income | $115.0 million | $114.9 million | Approximately flat |
| Net income | $45.6 million | $48.9 million | Down 7% |
| Net income attributable to MSG Sports stockholders | $47.8 million | $51.1 million | Down 7% |
| Diluted EPS | $1.89 | $2.10 | Down 10% |
| Net cash from operating activities | $152.5 million | $178.1 million | Down 14% |
Revenue growth was led by higher pre-season and regular-season ticket revenue, suite revenue, sponsorship and signage revenue, local media rights fees, and food, beverage and merchandise sales. Event-related revenue was $362.5 million, media rights revenue was $289.0 million, sponsorship, signage and suite revenue was $196.5 million, and league distributions and other revenue was $39.5 million.
Operating margin was approximately 9.6% in FY2023 versus 10.5% in FY2022. Net margin was approximately 5.1% versus 6.0%. Adjusted operating margin was approximately 13.0% in both periods. Higher player and team personnel compensation, SG&A, interest expense and taxes offset the revenue increase.
Interest expense, net increased to $20.5 million from $11.4 million, primarily because of higher floating interest rates. Miscellaneous income, net was $25.2 million, compared with a $0.7 million expense in FY2022, mainly reflecting unrealized gains on Xtract One investments and warrants.
Debt, Liquidity and Balance Sheet
- Cash and cash equivalents were $40.4 million at June 30, 2023, compared with $91.0 million at June 30, 2022.
- Total borrowings were $325.0 million, consisting of $235.0 million under the Knicks revolving facility, $60.0 million under the Rangers revolving facility and a $30.0 million NHL advance payable on demand.
- The Knicks and Rangers revolving facilities mature in December 2026. Their interest rates were 6.43% and 6.95%, respectively, at June 30, 2023.
- Management reported approximately $230.0 million of additional borrowing capacity and believes liquidity is sufficient for foreseeable operating needs. The Company borrowed an additional $25.0 million under the Knicks facility on July 10, 2023.
- Operating lease liabilities totaled $796.2 million, primarily reflecting the long-term Arena License Agreements. Total future lease payments were $2.306 billion, including $2.042 billion after five years.
- Stockholders’ equity was negative $337.2 million at year-end, compared with negative $147.1 million in the prior year, primarily due to the special dividend, accelerated share repurchase and treasury stock activity.
A hypothetical 100-basis-point increase in floating interest rates was estimated to increase annual interest expense by approximately $3.0 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 8%, but operating income declined slightly because direct operating expenses rose 10% and SG&A increased 9%.
- Direct operating expenses increased by $48.2 million, including a $56.0 million increase in team personnel compensation. The increase was partially offset by a $21.3 million reduction in net league revenue-sharing expense and NBA luxury tax.
- SG&A increased by $20.2 million, including higher employee compensation, sales and marketing costs, professional fees and sponsorship representation fees.
- Playoff revenue declined by $8.6 million. The Rangers played three home playoff games in FY2023 versus ten in FY2022, partly offset by five Knicks home playoff games in FY2023 after the Knicks did not qualify in FY2022.
- Operating cash flow declined $25.6 million, while financing cash outflows increased to $185.3 million due primarily to the $170.9 million special dividend and $75.1 million accelerated share repurchase.
- The Company paid a one-time cash dividend of $7.00 per share and completed a $75.0 million accelerated share repurchase at an average price of $164.31 per share. Approximately $184.6 million remained available under the broader repurchase authorization.
- The NBA and NBPA ratified a new seven-year collective bargaining agreement in April 2023, expiring after the 2029-30 season, subject to termination rights. The NHL CBA expires after the 2025-26 season, with a possible one-year extension.
Outlook, Commentary, Risks and Unusual Items
Management did not provide specific financial guidance in the filing. Results are expected to remain seasonal, with revenue concentrated in the second and third fiscal quarters because of the NBA and NHL schedules. Performance remains highly dependent on the popularity and competitive success of the Knicks and Rangers, attendance, ticket pricing, sponsorship demand, media rights and discretionary consumer and corporate spending.
- League revenue-sharing estimates are subject to significant variation based on final league and team operating results. FY2023 net provisions were approximately $21.5 million for the NBA and $41.1 million for the NHL.
- Key risks include player injuries, roster and salary decisions, league rules and revenue-sharing arrangements, future labor disputes, work stoppages and rising player compensation.
- The Company does not own Madison Square Garden. The Arena License Agreements expire in 2055, and the Company depends on MSG Entertainment to operate the arena and maintain required permits and licenses.
- The Garden’s New York City zoning special-permit renewal remained pending. Proposed Penn Station redevelopment and potential changes to the Garden’s real estate tax exemption could adversely affect costs and operations. The fiscal 2023 tax exemption was $42.4 million.
- The Company depends on affiliated entities, including MSG Entertainment and MSG Networks. MSG Networks accounted for $172.3 million, or 19%, of FY2023 revenue; financial difficulties or nonperformance by affiliates could affect media rights revenue and operations.
- The Company recorded $25.2 million of share-based compensation and $4.4 million of team personnel transaction charges in FY2023.
- The $25.2 million miscellaneous income benefit included significant unrealized investment gains, including a $15.6 million gain on Xtract One common stock and $9.8 million of unrealized gains on Xtract One warrants. These gains are market-sensitive and non-operating.
- Management identified no goodwill or indefinite-lived intangible asset impairment in the FY2023 annual tests. Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.
- Potential tax exposure remains from the prior Sphere Distribution and related tax disaffiliation arrangements if the distribution does not receive tax-free treatment or specified indemnification obligations are triggered.
Important Facts for Investors to Verify
- Reconcile FY2023 revenue growth with the decline in operating income, operating margin and operating cash flow.
- Assess the sustainability of reported earnings excluding the $25.2 million of miscellaneous investment gains and other non-operating items.
- Review debt covenant compliance, floating-rate exposure, available borrowing capacity and the NHL advance payable on demand.
- Evaluate the Company’s negative equity position, substantial arena lease commitments and planned capital allocation through dividends and share repurchases.
- Monitor Knicks and Rangers attendance, playoff participation, ticket pricing, player payroll, revenue-sharing settlements and potential luxury tax exposure.
- Review the status of Madison Square Garden’s zoning permit, Penn Station redevelopment proposals and the $42.4 million real estate tax exemption.
- Examine related-party agreements with MSG Entertainment, Sphere Entertainment and MSG Networks, including the $190.0 million of related-party revenue and $162.6 million of related-party operating expenses in FY2023.
- Confirm the final impact of the CLG sale, including the valuation and future performance of the approximately 25% NRG equity interest.