Business Context and Reporting Period
The filing is Madison Square Garden Company’s Form 10-K for the fiscal year ended June 30, 2016. The company operates two segments: MSG Sports, including the Knicks, Rangers, Liberty and other sports businesses, and MSG Entertainment, including concerts, venues and the Christmas Spectacular and New York Spectacular productions. The company became a standalone public company following its distribution from MSG Networks on September 30, 2015; therefore, prior-period results are presented on a carve-out and combined basis and are not fully comparable to standalone results.
The request references 2015 Q4, but the filing reports fiscal 2016 full-year results and includes unaudited fourth-quarter results for the three months ended June 30, 2016.
Key Financial Metrics
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $1,115.3 million | $1,071.6 million | +4% |
| Operating income (loss) | $(58.6) million | $(0.4) million | Declined $58.2 million |
| Net income (loss) | $(77.3) million | $(40.7) million | Declined $36.6 million |
| Adjusted operating cash flow | $68.3 million | $118.7 million | $(50.3) million, or -42% |
| Cash flow from operations | $125.8 million | $69.4 million | +$56.4 million |
| Capital expenditures | $71.7 million | $64.1 million | +$7.6 million |
| Cash and cash equivalents | $1,444.3 million | $14.2 million | +$1,430.1 million |
| Debt | No debt outstanding | No debt outstanding | No material change reported |
FY2016 operating margin was approximately negative 5.3%, net margin was approximately negative 6.9%, and AOCF margin was approximately 6.1%. The filing identifies AOCF as a non-GAAP performance measure and reconciles it to operating loss.
Segment Results
| Segment | FY2016 Revenue | FY2016 Operating Income (Loss) | FY2016 AOCF | Change in AOCF |
|---|---|---|---|---|
| MSG Sports | $699.1 million | $109.8 million | $131.0 million | +$33.0 million |
| MSG Entertainment | $415.4 million | $(32.3) million | $(14.6) million | $(55.8) million |
MSG Sports represented approximately 63% of consolidated revenue and benefited from higher local media rights fees, sponsorship and advertising commissions, ticket-related revenue and lower team personnel transaction costs. MSG Entertainment revenue was essentially flat, but profitability deteriorated because of higher expenses and a $41.8 million write-off of deferred production costs related to the New York Spectacular.
Fourth-Quarter Results
| Three months ended June 30 | 2016 | 2015 |
|---|---|---|
| Revenue | $217.8 million | $255.0 million |
| Operating income (loss) | $(46.2) million | $4.3 million |
| Net income (loss) | $(58.4) million | $(1.1) million |
| Basic loss per share | $(2.39) | $(0.04) |
Material Changes Versus the Prior Comparable Period
- Revenue increased $43.8 million, led by a $49.6 million increase in local media rights fees under new Knicks and Rangers agreements with MSG Networks and higher advertising commission and sponsorship revenue.
- Sports playoff revenue declined $40.5 million because the Rangers played nine fewer home playoff games than in the prior year, when the team advanced to the Eastern Conference Finals.
- MSG Entertainment revenue was nearly unchanged. Higher venue and event revenue was offset by lower New York Spectacular revenue and the absence of certain Christmas Spectacular productions outside New York.
- SG&A increased $95.3 million, or 40%, reflecting higher employee compensation, approximately $6.9 million of reorganization costs, higher professional fees and costs associated with operating as a standalone public company.
- Adjusted operating cash flow decreased 42%, primarily because MSG Entertainment AOCF fell $55.8 million and corporate costs increased, partly offset by a $33.0 million improvement in MSG Sports AOCF.
- Cash increased primarily because the company received a $1,467.1 million cash contribution from MSG Networks in connection with the Distribution. Financing cash flow was $1,420.0 million, including $105.7 million of share repurchases.
Outlook, Commentary, Risks and Unusual Items
- Management expected MSG Sports results in fiscal 2017 to benefit from the new NBA national media rights agreement, but also expected higher team personnel compensation due to the increased NBA salary cap.
- The company announced plans for a new approximately 400,000-square-foot, 17,500-seat music and entertainment venue in Las Vegas. The filing does not provide a final project cost or financing plan.
- The New York Spectacular was shifted from spring to summer. Only 21 performances occurred in fiscal 2016, with 56 performances scheduled in the first quarter of fiscal 2017. Remaining deferred production costs were approximately $37.0 million at June 30, 2016, creating risk of additional losses or write-offs.
- Other unusual items included a $7.3 million impairment of an investment in the Broadway production Finding Neverland and a $4.1 million impairment of a cost-method investment.
- The company had approximately $1.444 billion of unrestricted cash and believed liquidity was sufficient for operations, investments, capital spending and share repurchases. It had $419.3 million remaining under its $525 million repurchase authorization.
- Total contractual obligations were $764.1 million, including $287.1 million of operating leases, $389.6 million of off-balance-sheet contractual obligations, $7.1 million of letters of credit and $80.4 million of obligations recorded on the balance sheet.
- Key risks include dependence on the popularity and performance of the Knicks and Rangers, competition for entertainment spending and venue bookings, labor disputes, league decisions and revenue sharing, economic weakness, event cancellations, venue leases and permits, investment losses, litigation, cybersecurity and the company’s tax indemnification obligations to MSG Networks.
- The Dolan family controlled approximately 70% of total voting power and could prevent a change in control. The company also elected controlled-company exemptions from certain NYSE governance requirements.
Investor Verification Checklist
- Verify the effect of the MSG Networks Distribution and the comparability of carve-out FY2015 results with standalone FY2016 results.
- Assess whether MSG Sports’ improved AOCF can offset higher player compensation and league revenue-sharing costs.
- Review the New York Spectacular’s attendance, profitability and remaining deferred production costs for potential additional impairment.
- Confirm the economics, financing requirements and construction commitments for the planned Las Vegas venue.
- Evaluate the concentration of revenue from MSG Networks, which represented approximately 13% of FY2016 consolidated revenue, and the terms of the related media rights agreements.
- Review liquidity after share repurchases, investments and loans to affiliates, including $97.5 million drawn by AMSGE and approximately $10.4 million drawn by Tribeca Enterprises.
- Consider the company’s seasonal earnings pattern, with MSG Entertainment strongest in the second fiscal quarter and sports revenue concentrated in the second and third quarters.