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, and related performance centers. The company reports one operating segment. This unaudited Form 10-Q covers the fiscal second quarter and six months ended December 31, 2022, compared with the corresponding periods in 2021.
Financial Performance and Position
| Metric | Three Months Ended Dec. 31, 2022 | Year-over-Year Change | Six Months Ended Dec. 31, 2022 | Year-over-Year Change |
|---|---|---|---|---|
| Revenue | $353.7 million | 22% | $377.8 million | 23% |
| Operating income | $51.5 million | 43% | $15.6 million | NM |
| Net income | $21.8 million | 44% | $3.3 million | NM |
| Net income attributable to MSG Sports stockholders | $22.5 million | 42% | $4.7 million | From a $0.6 million loss |
| Diluted EPS | $0.84 | Up from $0.65 | $0.11 | Up from $(0.02) |
| Net cash provided by operating activities | Not separately provided | — | $31.6 million | Up from $24.0 million |
Second-quarter operating margin was approximately 14.6%, compared with 12.4% in the prior-year quarter. Six-month operating margin was approximately 4.1%, compared with 0.3% in the prior-year period. Six-month net margin was approximately 0.9%, compared with negative 0.5% in the prior-year period.
- Revenue categories for the second quarter were event-related revenue of $142.3 million, media rights of $118.2 million, sponsorship, signage and suite licenses of $81.0 million, and league distributions and other revenue of $12.2 million.
- Adjusted operating income, a non-GAAP measure, was $76.6 million for the quarter and $49.4 million for the six months, increasing 38% and 79%, respectively. The measure excludes items including deferred rent, depreciation and amortization, share-based compensation, and certain deferred-compensation remeasurement effects.
- As of December 31, 2022, cash and cash equivalents were $43.9 million, and cash, cash equivalents and restricted cash totaled $45.2 million, down from $91.0 million at June 30, 2022.
- Total debt was $435.0 million, consisting of $405.0 million of long-term debt and $30.0 million of current debt. The long-term debt comprised $260.0 million outstanding under the Knicks revolving facility and $145.0 million under the Rangers revolving facility.
- The company reported approximately $120.0 million of additional borrowing capacity under its existing credit facilities and stated that it believed available liquidity was sufficient to fund operations and obligations for the foreseeable future.
- Total assets were $1.30 billion, while total liabilities were $1.69 billion and total equity was negative $386.4 million at December 31, 2022.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily because of higher ticket-related revenue, additional Rangers home games, increased suite license and sponsorship revenue, higher food, beverage and merchandise sales, contractual increases in local media rights fees, and higher league distributions.
- Direct operating expenses increased 17% for the quarter and 14% for the six months, driven principally by higher team personnel compensation, other team operating costs, Garden lease costs, and merchandise-related expenses.
- Selling, general and administrative expenses increased 27% for both the quarter and six-month period, reflecting higher employee compensation and benefits, executive management transition costs, staffing increases, and higher marketing costs.
- Net interest expense increased 56% for the quarter and 28% for the six months, primarily because of higher interest rates on the revolving credit facilities.
- Cash flow benefited from improved operating results but was reduced by $170.7 million of special dividends, a $75.0 million accelerated share repurchase, $15.4 million of taxes paid in lieu of shares issued for equity compensation, and net debt repayments.
- The company borrowed $215.0 million under its revolving credit facilities and repaid $30.0 million during the six months. It also repaid an additional $15.0 million under the Rangers facility on February 3, 2023.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- The filing does not provide formal revenue or earnings guidance.
- Management emphasizes significant seasonality: revenues are generally concentrated in the second and third fiscal quarters when most Knicks and Rangers games are played.
- COVID-19 remains a risk because renewed variants, governmental actions or league restrictions could affect attendance, games, tourism and operations, although the filing does not quantify a current impact.
- Other key risks include team performance and popularity, player injuries and compensation, NBA and NHL rules and collective bargaining agreements, luxury taxes and revenue sharing, economic conditions, sponsorship demand, work stoppages, cybersecurity, litigation, esports performance, and potential defaults under credit facilities.
- The Knicks and Rangers revolving facilities bear floating interest rates. A hypothetical 100-basis-point increase in prevailing rates for a full year would increase annual interest expense by approximately $4.1 million based on the $405.0 million of floating-rate borrowings outstanding at December 31, 2022.
- Both the Knicks and Rangers were in compliance with their required 1.5:1.0 trailing-four-quarter debt service ratio at December 31, 2022.
- The company completed its annual impairment tests during the first quarter of fiscal 2023 and identified no impairment of goodwill or indefinite-lived intangible assets.
- The company authorized and completed a $75.0 million accelerated share repurchase. It received 388,777 shares during the quarter and an additional 67,681 shares upon final settlement in February 2023; the reported average purchase price was $164.31 per share.
- Management states that various lawsuits are not expected to have a material adverse effect, although outcomes cannot be predicted with certainty. New York City tax audits covering fiscal years 2016 through 2019 were also not expected to result in material changes.
Investor Verification Items
- Verify the sustainability of revenue growth driven by additional Rangers games, ticket pricing, suite sales and sponsorship inventory.
- Monitor cash balances, deferred revenue obligations, negative total equity and reliance on approximately $120.0 million of remaining borrowing capacity.
- Assess exposure to higher floating interest rates and compliance with the Knicks and Rangers debt covenants.
- Evaluate the cash impact of the special dividend, accelerated share repurchase and any future capital allocation decisions.
- Review the effect of seasonality, team performance, player personnel costs, luxury tax and league revenue-sharing adjustments on full-year results.
- Track potential renewed COVID-19 restrictions, attendance changes, labor disruptions, litigation and other risks identified in the filing.
- Reconcile non-GAAP adjusted operating income with GAAP operating income and consider the recurring or cash nature of excluded items, particularly deferred rent and share-based compensation.