Madison Square Garden Sports Corp. — Fiscal 2022 Second-Quarter Form 10-Q
Business Context and Reporting Period
Madison Square Garden Sports Corp. owns and operates the New York Knicks, New York Rangers, development-league and esports teams, including a controlling interest in Counter Logic Gaming. The company reports one operating segment.
The filing covers the three and six months ended December 31, 2021, compared with the corresponding periods ended December 31, 2020. Results for the prior-year periods were materially affected by COVID-19-related game delays, shortened schedules and restrictions on attendance at Madison Square Garden.
Key Financial Metrics
| Metric | Three months ended Dec. 31, 2021 | Six months ended Dec. 31, 2021 |
|---|---|---|
| Revenue | $289.6 million | $308.4 million |
| Operating income | $35.9 million | $1.0 million |
| Operating margin | 12.4% | 0.3% |
| Net income attributable to MSG Sports stockholders | $15.8 million | $(0.6) million |
| Basic and diluted EPS | $0.65 | $(0.02) |
| Adjusted operating income | $55.7 million | $27.5 million |
| Net cash provided by operating activities | Not separately provided | $24.0 million |
Quarterly net margin was approximately 5.5%; the six-month net margin was approximately negative 0.5%. Adjusted operating income is a non-GAAP measure that excludes deferred rent, depreciation and amortization, share-based compensation and certain other items.
Revenue by category for the quarter was $109.1 million of event-related revenue, $112.3 million of media rights, $58.5 million of sponsorship, signage and suite licenses, and $9.7 million of league distributions and other revenue.
Liquidity, Debt and Cash Flow
- Cash and cash equivalents were $54.8 million at December 31, 2021; cash, cash equivalents and restricted cash totaled $55.6 million.
- Total debt was $360.0 million, consisting of $330.0 million under the Knicks and Rangers revolving credit facilities and a $30.0 million NHL advance.
- The amended Knicks facility provides capacity of up to $275.0 million and matures December 14, 2026; the Rangers facility provides capacity of up to $250.0 million and also matures December 14, 2026.
- Management reported approximately $195.0 million of additional borrowing capacity and stated that available liquidity was sufficient to fund operations and obligations for the foreseeable future.
- Operating cash flow was $24.0 million, versus cash used in operations of $21.6 million in the prior-year period.
- Investing cash outflow was $0.6 million. Financing cash outflow was $39.9 million, including a $25.0 million Rangers facility repayment and $12.1 million of taxes paid in lieu of shares issued for equity compensation.
- On February 2, 2022, the company made an additional $25.0 million repayment on the Rangers facility.
- Operating lease liabilities totaled $735.6 million, with undiscounted future lease payments of $2.3 billion, primarily related to long-term arrangements with MSG Entertainment and The Garden.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased $260.8 million to $289.6 million, and six-month revenue increased $222.6 million to $308.4 million. The comparisons are not fully representative because the prior-year periods were heavily disrupted by COVID-19.
- The quarterly improvement was led by higher ticket-related revenue of $100.8 million, local media rights fees of $50.9 million, league distributions of $44.8 million, suite license revenue of $34.3 million, sponsorship and signage revenue of $20.2 million, and food, beverage and merchandise sales of $8.5 million.
- Quarterly operating income improved from a $38.4 million loss to $35.9 million of income. Six-month operating income improved from a $65.8 million loss to $1.0 million of income.
- Direct operating expenses rose $176.2 million in the quarter and $145.0 million for six months, primarily because games were played with fans and the company incurred higher team personnel, arena lease, league revenue-sharing and other operating costs.
- Quarterly selling, general and administrative expense increased 22% to $59.6 million; six-month expense increased 12% to $103.3 million, driven principally by marketing, sponsorship-related fees and transition-service costs.
- Net interest expense increased 42% for the quarter and 47% for six months, primarily because of borrowings under the Knicks and Rangers facilities and amortization or acceleration of financing costs.
- Share-based compensation declined to $12.2 million for six months from $22.3 million, partly because the prior-year period included approximately $7.4 million of accelerated expense related to cancellation of a one-time equity award.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific revenue, earnings or cash-flow guidance. Management expects results to remain seasonal, with a disproportionate share of revenue generally generated in the second and third fiscal quarters.
- COVID-19, including Delta and Omicron variants, could reduce attendance, cause game cancellations or restrictions, affect tourism and discretionary spending, and increase uncertainty around future operating results.
- Results depend on team popularity and competitiveness, player compensation and injuries, league revenue sharing, NBA luxury tax exposure, media rights, sponsorship demand and attendance at The Garden.
- The company is exposed to floating-rate debt. A hypothetical 100-basis-point increase in rates, sustained for a full year, would increase interest expense by approximately $3.3 million based on December 31, 2021 borrowings.
- The Knicks and Rangers were in compliance with their respective 1.5:1.0 trailing-four-quarter debt-service covenants at December 31, 2021.
- Goodwill of $227.0 million and indefinite-lived intangible assets of $112.1 million passed the company’s annual qualitative impairment assessments; no impairment was identified.
- The company has various lawsuits outstanding, but management does not believe their resolution will have a material adverse effect.
- Related-party transactions are significant. The quarter included $70.1 million of related-party revenue and $63.0 million of related-party operating expenses, primarily involving MSG Entertainment and MSG Networks.
- The company had $208.1 million of deferred revenue, including current and noncurrent amounts, at December 31, 2021. Remaining performance obligations were estimated at $423.4 million.
Most Important Facts for Investors to Verify
- Whether attendance, event schedules and media-rights revenue normalize sustainably after COVID-19-related disruptions.
- The availability and conditions of the reported $195.0 million of unused borrowing capacity, including debt-service covenants and collateral requirements.
- The effect of full contractual Arena License Agreement payments on future margins and cash flow.
- The sustainability of quarterly profitability after accounting for team personnel costs, league revenue sharing, luxury taxes and related-party charges.
- The magnitude and timing of deferred-revenue recognition and any potential ticket, suite or media-rights refund obligations.
- Future floating-rate exposure and additional debt repayments, including the February 2, 2022 Rangers repayment.
- The assumptions supporting the company’s goodwill and sports-franchise intangible-asset impairment conclusions.