Madison Square Garden Sports Corp. Form 10-Q Summary
Business Context and Reporting Period
Report for the quarter ended September 30, 2020, the first quarter of fiscal 2021. MSG Sports owns the New York Knicks, New York Rangers, development-league and esports teams, and operates team performance centers. The company reports one operating segment.
The April 17, 2020 distribution of MSG Entertainment materially changed the company’s structure. Prior-period MSG Entertainment results are presented as discontinued operations, limiting comparability with the current standalone sports business.
Key Financial Metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $57.0 million | $49.9 million | 14% increase |
| Operating loss | $27.4 million | $59.3 million | 54% improvement |
| Loss from continuing operations | $29.0 million | $40.2 million | 28% improvement |
| Net loss attributable to MSG Sports stockholders | $28.4 million | $80.0 million | 64% improvement |
| Basic and diluted loss per share | $1.18 | $3.36 | Improved |
| Adjusted operating loss | $17.8 million | $40.6 million | 56% improvement |
| Net cash used in operating activities | $57.5 million | $34.2 million | $23.3 million higher use |
Revenue increased primarily because postponed 2019-20 NBA and NHL national media rights revenue was recognized in the quarter. Media rights revenue was $50.2 million versus $6.2 million, while event-related revenue was zero versus $7.4 million. Sponsorship, signage and suite-license revenue declined to $3.0 million from $20.1 million.
Operating margin was approximately negative 48.1%, compared with negative 119.0% in the prior-year period. Net margin attributable to MSG Sports stockholders was approximately negative 49.8%, compared with negative 160.5% in the prior-year period; the comparison is affected by discontinued operations and the MSG Entertainment separation.
Direct operating expenses increased 116% to $39.8 million, driven by team personnel compensation, league revenue sharing and NBA luxury tax provisions, and other team operating expenses. Selling, general and administrative expense decreased 50% to $43.0 million, primarily because certain pre-separation corporate costs were no longer incurred. Restructuring charges were $1.6 million.
At September 30, 2020, cash and cash equivalents were $23.5 million, restricted cash was $2.7 million, and total assets were $1.22 billion. Total liabilities were $1.46 billion, including $350.0 million of long-term debt and $720.9 million of operating lease liabilities. Total equity was negative $239.9 million.
Material Changes Versus the Prior Comparable Period
- Revenue rose $7.2 million, but the mix shifted sharply toward media rights because of the delayed completion of the prior NBA and NHL seasons.
- No events were permitted at Madison Square Garden because of COVID-19 restrictions; ticket, suite, sponsorship, signage, food, beverage and merchandise revenue were substantially reduced or absent.
- Operating loss improved primarily due to lower standalone corporate overhead, higher revenue and lower depreciation and amortization, partly offset by higher team-related expenses.
- Prior-year results included a $40.5 million net loss from discontinued operations; no discontinued-operations loss was reported in the current period.
- Cash used in operations increased despite the lower net loss, primarily because of working-capital changes and compensation-related payments.
- Capital spending was only $0.1 million, compared with $93.0 million in the prior-year period, which included discontinued operations.
- Share-based compensation expense declined to $6.3 million from $13.8 million. The company did not repurchase shares during the quarter.
Liquidity, Debt and Financing
The company had $350.0 million outstanding under the Knicks and Rangers revolving facilities at September 30, 2020. Both subsidiaries were in compliance with their 1.5-to-1.0 debt-service covenants. A hypothetical 100-basis-point increase in floating interest rates would have increased annual interest expense by approximately $3.5 million.
Management stated that available liquidity, including approximately $23.5 million of unrestricted cash and available borrowing capacity, was sufficient to fund operations, address deferred-revenue obligations and repay debt due within the next 12 months. Deferred revenue was approximately $138.0 million, largely related to tickets, local media rights, suites and sponsorships; some amounts could require credits, make-goods or refunds if seasons did not proceed.
On November 6, 2020, subsequent to quarter-end, the company refinanced and expanded its facilities. New Knicks and Rangers facilities had outstanding balances of $220.0 million and $160.0 million, respectively, as of November 9, 2020, while a new $75.0 million Knicks Holdings facility was undrawn. The delayed-draw term loan facilities and Knicks unsecured facility were terminated.
Outlook, Management Commentary and Risks
- Management provided no formal financial guidance in the filing.
- The timing, duration and capacity of the 2020-21 NBA and NHL seasons remained uncertain. The Garden could remain closed or operate with capacity limitations.
- Revenue would remain pressured until the Knicks and Rangers resumed home games at The Garden with fans. Arena license fees were generally suspended while the venue remained closed and could be reduced by up to 80% under capacity constraints.
- Management implemented workforce reductions, limits on third-party vendors and additional discretionary-spending cuts in August 2020, but expected cost reductions to be insufficient to offset revenue losses fully.
- Revenue is seasonal, with a disproportionate amount generally earned in the second and third fiscal quarters. COVID-19 postponements shifted some revenue and related expenses between fiscal periods.
- Key risks include COVID-19 disruption, reduced discretionary spending, team performance and popularity, player compensation and luxury-tax obligations, league rules and work stoppages, interest-rate exposure, reliance on related parties, litigation, and potential defaults under credit facilities.
- The annual impairment tests identified no impairment of goodwill or indefinite-lived intangible assets as of the first quarter of fiscal 2021.
Important Facts for Investors to Verify
- Whether the NBA and NHL seasons proceed as planned and whether games at The Garden are permitted with paying audiences.
- The treatment, timing and potential refund or credit exposure associated with approximately $138.0 million of deferred revenue.
- Post-quarter-end debt balances, borrowing capacity, interest rates, covenant compliance and refinancing terms under the new facilities.
- The sustainability of media-rights revenue after the one-time timing benefit from completion of the postponed 2019-20 seasons.
- The impact of the MSG Entertainment separation and related-party agreements on future revenue, expenses, arena rent and corporate costs.
- The expected second-quarter reversal of approximately $18.5 million of share-based compensation related to canceled equity awards under the October 2020 settlement.