Business Context and Reporting Period
The filing is The Madison Square Garden Company’s unaudited Form 10-Q for the quarter and six months ended December 31, 2015, corresponding to fiscal 2015 Q2. The filing entity differs from the requested “Madison Square Garden Sports Corp.” The Company became a standalone public company on September 30, 2015, following the distribution of its sports and entertainment businesses by MSG Networks.
The Company operates two reportable segments: MSG Entertainment, which presents live entertainment and productions, and MSG Sports, which owns and operates the Knicks, Rangers, Liberty, Hartford Wolf Pack and Westchester Knicks, and promotes other sporting events. Historical comparative results are carve-out and combined results and may not be fully comparable with post-distribution results.
Financial Results and Key Metrics
| Metric | Three Months Ended Dec. 31, 2015 | Prior Year | Change |
|---|---|---|---|
| Revenue | $410.8 million | $396.8 million | +4% |
| Operating income | $49.0 million | $39.9 million | +23% |
| Net income | $43.5 million | $9.6 million | +$33.9 million |
| Operating margin | 11.9% | 10.1% | +180 basis points |
| AOCF | $82.1 million | $69.7 million | +18% |
| Diluted EPS | $1.74 | $0.39 | +$1.35 |
| Metric | Six Months Ended Dec. 31, 2015 | Prior Year | Change |
|---|---|---|---|
| Revenue | $561.2 million | $515.7 million | +9% |
| Operating income | $44.5 million | $4.9 million | +$39.6 million |
| Net income (loss) | $41.9 million | $(28.1) million | +$70.0 million |
| Operating margin | 7.9% | 0.9% | +700 basis points |
| AOCF | $105.9 million | $71.5 million | +48% |
| Diluted EPS | $1.67 | $(1.13) | +$2.80 |
AOCF, or adjusted operating cash flow, is a non-GAAP measure defined by the Company as operating income before depreciation, amortization, impairments, share-based compensation, restructuring charges and gains or losses on dispositions.
- Six-month operating cash flow was $112.3 million, compared with $35.0 million in the prior year.
- Six-month capital expenditures were $59.7 million, including $38.1 million for a new aircraft.
- Cash and cash equivalents were $1.559 billion at December 31, 2015, including approximately $1.559 billion of unrestricted cash cited by management. Restricted cash was $20.7 million.
- Total assets were $3.746 billion and total liabilities were $957.6 million.
- The Company reported no debt outstanding and stated that it had no interest-rate market risk exposure from debt.
- Investments and loans to nonconsolidated affiliates totaled $265.1 million, including $94.3 million of loans.
Material Changes Versus the Prior Comparable Period
- MSG Sports drove growth: second-quarter revenue increased 12% to $226.8 million and six-month revenue increased 17% to $299.9 million. Growth primarily reflected new long-term Knicks and Rangers media-rights agreements, higher sponsorship and advertising commissions, and higher other live-sports revenue.
- MSG Sports second-quarter AOCF rose 156% to $44.5 million; six-month AOCF rose 174% to $68.9 million. Lower NBA luxury-tax provisions, lower team personnel costs and the absence of prior-year team personnel transaction charges were significant contributors.
- MSG Entertainment second-quarter revenue declined 5% to $183.8 million and AOCF declined 13% to $50.1 million. The decline reflected the end of theatrical productions outside New York after the 2014 holiday season, fewer events at certain venues and higher standalone-company costs.
- Six-month MSG Entertainment revenue was essentially flat at $260.9 million, while AOCF declined 6% to $53.3 million because higher corporate and advertising-related costs more than offset lower direct operating expenses.
- Selling, general and administrative expense increased 37% in the second quarter and 26% for the six months, primarily because the Company was operating as a standalone public company and the prior-year carve-out results did not include all comparable corporate costs.
- Equity in earnings of investments improved substantially from a prior-year loss, primarily because the prior year included a $23.6 million non-cash impairment of the Company’s equity investment in Brooklyn Bowl Las Vegas.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management stated that available cash and operating cash flow should be sufficient to fund operations, investments, potential new business opportunities and share repurchases over the next twelve months.
- The Company received $1.467 billion of cash from MSG Networks in connection with the distribution. Net financing cash inflows for the six months were $1.510 billion, largely reflecting transfers from the former parent.
- The Board authorized up to $525.0 million of Class A stock repurchases. Through December 31, 2015, the Company repurchased 98 thousand shares for $15.7 million, leaving $509.3 million available.
- The Company recorded a $4.1 million pre-tax, non-cash impairment charge on a cost-method investment because of legal and regulatory actions affecting that investment.
- The Company’s effective tax rate was unusually low: negative 0.2% for the quarter and 0.1% for the six months. This primarily reflected a reduction of approximately $20.8 million in a valuation allowance established at the distribution and other deferred-tax items.
- MSG Networks is responsible for taxes on approximately $348 million of deferred revenue related to advance ticket, sponsorship and suite receipts. Management stated that the Company therefore will avoid approximately $152 million of cash tax payments that otherwise would have been due.
- The Company’s business is seasonal: MSG Sports generally generates a disproportionate share of revenue in the second and third fiscal quarters, while MSG Entertainment is concentrated in the second quarter because of the Radio City Christmas Spectacular.
- Key risks include team performance and popularity, player injuries and compensation, NBA luxury taxes and league revenue sharing, work stoppages, event attendance, sponsorship and advertising demand, competition, economic conditions, venue and production execution, investment performance, litigation, regulation and higher costs associated with being a standalone public company.
- Revolving credit facilities to nonconsolidated affiliates were substantially drawn: $84.0 million by Azoff-MSG under a $100.0 million facility and $6.0 million by Tribeca Enterprises. A $2.5 million letter of credit was outstanding.
- Annual impairment testing identified no impairment of goodwill or indefinite-lived intangible assets as of the first quarter of fiscal 2016.
Most Important Facts for Investors to Verify
- Confirm the correct issuer: the filing is for The Madison Square Garden Company, not Madison Square Garden Sports Corp.
- Assess comparability of year-over-year results because prior periods were carve-out financial statements with allocated corporate costs, while current results reflect standalone-company expenses.
- Separate recurring operating improvement from one-time or unusual effects, including the former parent’s cash contribution, tax valuation allowance release, prior-year Brooklyn Bowl impairment, current-year investment impairment and lower luxury-tax provisions.
- Evaluate the sustainability and concentration of revenue from MSG Networks media-rights agreements and related-party transactions, which generated $74.9 million of revenue during the six months.
- Review liquidity needs associated with capital expenditures, affiliate loans, sports-team commitments, venue leases, pension obligations and the remaining $509.3 million stock-repurchase authorization.
- Monitor future NBA and NHL luxury-tax and revenue-sharing settlements, which may differ materially from recorded estimates.