Madison Square Garden Company Form 10-Q Summary
Reporting period: Three months ended September 30, 2018, the first quarter of fiscal 2019. The filing is by The Madison Square Garden Company, encompassing MSG Entertainment and MSG Sports. Results are unaudited and seasonal; Entertainment typically generates a disproportionate share of annual results in the second fiscal quarter, while Sports is concentrated in the second and third quarters.
Financial performance and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Revenue | $218.1 million | $245.2 million | Down 11% |
| Operating loss | $50.8 million | $14.5 million | Higher loss |
| Net loss | $34.0 million | $10.9 million | Higher loss |
| Net loss attributable to MSG stockholders | $32.2 million | $11.1 million | Higher loss |
| Basic and diluted loss per share | $1.36 | $0.47 | Higher loss per share |
| Adjusted operating income (loss) | $(9.9) million | $30.1 million | Down $40.0 million |
| Cash flow from operations | $(44.7) million | $(32.1) million | Higher use of cash |
| Capital expenditures | $42.0 million | $19.5 million | Higher spending |
Reported operating margin was approximately negative 23%, compared with approximately negative 6% in the prior-year quarter. Adjusted operating margin was approximately negative 5%, compared with approximately 12% previously. These comparisons are materially affected by the adoption of ASC Topic 606, and prior-year results were not recast.
- Segment revenue: MSG Entertainment generated $163.0 million, down 1%; MSG Sports generated $55.4 million, down 32%.
- Segment adjusted operating income: Entertainment was $9.0 million versus $18.2 million; Sports was $0.6 million versus $26.5 million.
- Cash and liquidity: Cash and cash equivalents were $1.069 billion, with total cash, cash equivalents and restricted cash of $1.101 billion at September 30, 2018. Management stated that liquidity was sufficient for operations, planned venue development and other investments over the next 12 months.
- Debt: Debt, net of deferred financing costs, totaled approximately $103.1 million, principally the TAO term loan. The Knicks and Rangers revolving facilities and the TAO revolving facility were undrawn. Total revolving credit capacity was approximately $377 million.
- Balance sheet: Total assets were $3.728 billion and total equity was $2.550 billion. Investments and loans to nonconsolidated affiliates were $265.5 million.
Material changes versus the prior comparable period
- Revenue declined $27.1 million, primarily because of lower MSG Sports revenue, including local media rights, suite licenses and team ticket-related revenue.
- MSG Entertainment revenue was broadly stable, but operating income declined due to higher selling, general and administrative expenses, higher venue and hospitality costs, and fewer events at certain venues. Obscura contributed $4.7 million of revenue after its November 2017 acquisition.
- MSG Sports revenue declined $25.6 million. The decrease was primarily attributable to the timing effects of ASC Topic 606 on local media rights and suite license revenue, as well as lower team ticket-related revenue, partly offset by higher league distributions.
- Corporate selling, general and administrative expenses increased 25% to $24.1 million, primarily due to professional fees related to the proposed Sports Distribution.
- Net cash used in investing activities rose to $94.5 million, reflecting the $47.2 million SACO investment and increased capital spending for the planned Las Vegas and London venues.
- The Company adopted ASC Topic 606 using the modified retrospective method. Without the new standard, management presented estimated first-quarter revenue of $258.4 million and operating loss of $15.3 million, compared with reported revenue of $218.1 million and operating loss of $50.8 million.
- The Company also adopted financial-instrument guidance, recognizing a $4.4 million unrealized gain on its Townsquare investment in earnings and reclassifying a $5.6 million after-tax amount from accumulated other comprehensive loss to accumulated deficit.
Outlook, commentary, risks and unusual items
- Management expects suite license revenue and local media rights revenue to increase in the December 2018 quarter and for the full fiscal year as revenue recognition shifts toward periods with more events and regular-season games.
- MSG Sphere Las Vegas site preparation began in September 2018, with a targeted fiscal 2021 opening. The Company expected to submit the London planning application by the end of calendar 2018. Construction cost estimates had not been finalized, and management expects these projects to require substantial capital.
- Management stated that additional capital may be needed for the Spheres and other major venues, and there is no assurance that such funding will be available on acceptable terms.
- On October 8, 2018, Azoff Music agreed to acquire the Company’s 50% interest in Azoff MSG Entertainment for $125 million, subject to closing conditions and financing. The Company’s $63.5 million loan to the affiliate would convert to a term loan upon closing.
- In October 2018, the Company recorded an approximately $36.2 million pre-tax charge related to a player waiver, to be recognized in the quarter ending December 31, 2018.
- Key risks include sports-team performance and player costs, seasonal volatility, venue construction delays and cost overruns, competition, economic conditions, execution of acquisitions and new venues, leverage and subsidiary covenant compliance, investee repayment risk, litigation, regulatory changes and the proposed Sports Distribution.
- The Company’s 50%-owned Azoff MSG Entertainment affiliate remains involved in litigation with the Radio Music Licensing Committee concerning music-performance licensing and antitrust claims. Management did not believe other pending lawsuits would have a material adverse effect.
- Annual impairment testing identified no goodwill or indefinite-lived intangible asset impairments. The Company was also notified of an IRS examination of its fiscal 2016 federal tax returns and did not expect material changes.
Most important facts to verify
- Separate the economic change in operations from the significant timing and presentation effects of ASC Topic 606.
- Track cash consumption, capital expenditures and funding requirements for MSG Sphere Las Vegas and London.
- Confirm the closing and proceeds of the proposed $125 million sale of the Azoff MSG Entertainment investment and the treatment of the related affiliate loan.
- Assess the impact and timing of the approximately $36.2 million player-waiver charge in the December 2018 quarter.
- Monitor MSG Sports revenue recovery as regular seasons progress, including local media rights and suite license recognition.
- Review covenant compliance, TAO term-loan amortization and the availability of revolving credit facilities.
- Evaluate the proposed Sports Distribution, related professional fees and potential financing implications.