Madison Square Garden Sports Corp. — Fiscal 2023 First-Quarter 10-Q
Business Context and Reporting Period
Madison Square Garden Sports Corp. owns and operates the New York Knicks, New York Rangers, development-league teams, and esports interests including Knicks Gaming and Counter Logic Gaming. The company reports one operating segment. This unaudited Form 10-Q covers the three months ended September 30, 2022, compared with the three months ended September 30, 2021. Results are seasonal, with a disproportionate share of revenue generally earned in the second and third fiscal quarters.
Key Financial Metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $24.1 million | $18.8 million | +28% |
| Operating loss | $35.9 million | $34.9 million | Loss widened $1.0 million |
| Net loss | $18.5 million | $16.9 million | Loss widened $1.6 million |
| Net loss attributable to MSG Sports stockholders | $17.8 million | $16.4 million | Loss widened $1.4 million |
| Basic and diluted loss per share | $0.73 | $0.68 | Loss per share increased $0.05 |
| Net cash from operating activities | $1.3 million | $(19.3) million | Improved $20.6 million |
Revenue grew across all disclosed categories: event-related revenue increased to $5.3 million, media rights to $7.0 million, sponsorship, signage and suite licenses to $4.8 million, and league distributions and other revenue to $6.9 million. Revenue included $8.2 million from related parties, compared with $7.2 million in the prior-year period.
Operating margin was approximately negative 149% of revenue, compared with approximately negative 186% in the prior-year period. Net margin was approximately negative 77%, compared with approximately negative 90% previously. The company reported an income tax benefit of $20.5 million, representing a 52.5% effective tax rate.
Adjusted operating loss, a non-GAAP measure, was $27.3 million compared with $28.1 million, an improvement of $0.9 million. The adjustment included $7.2 million of share-based compensation, $1.0 million of depreciation and amortization, $0.5 million of deferred rent, and a $0.1 million deferred-compensation-plan remeasurement credit.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $81.0 million at September 30, 2022, down from $91.0 million at June 30, 2022.
- Net cash provided by operating activities was $1.3 million, while investing activities used $0.3 million and financing activities used $11.0 million, primarily for taxes withheld on equity compensation.
- Debt totaled $250.0 million: $220.0 million outstanding under the Knicks revolving credit facility and a $30.0 million NHL advance payable upon demand. The Knicks facility had a 4.37% interest rate at quarter-end and matures in December 2026.
- The Rangers revolving facility had no borrowings at September 30, 2022. The company reported approximately $305.0 million of additional borrowing capacity at quarter-end.
- Total operating lease liabilities were $733.1 million, including $689.3 million noncurrent. The company’s equity was negative $171.9 million.
- Deferred revenue, including the noncurrent portion, was $298.2 million, primarily reflecting customer consideration received before delivery of tickets, suites and media rights.
- Management stated that available cash, borrowing capacity and expected operating cash flow were sufficient to fund operations and planned obligations for the foreseeable future.
Material Changes Versus the Prior Comparable Period
- Revenue increased $5.3 million, primarily from higher suite license fees, higher preseason and regular-season ticket revenue, increased league distributions and other net increases.
- Direct operating expenses decreased $4.9 million, mainly because of lower league revenue-sharing and NBA luxury-tax provisions and lower team-personnel transaction costs.
- Selling, general and administrative expense increased $11.6 million, driven by higher employee compensation and benefits, increased staffing as operations returned toward normal, executive management transition costs and higher general and administrative expenses.
- Net interest expense declined modestly to $3.0 million, reflecting the absence of Rangers facility borrowings and higher interest income, partly offset by higher Knicks facility interest expense.
- Operating cash flow improved substantially because of working-capital changes, particularly a $134.7 million increase in deferred revenue, partially offset by increases in prepaid expenses and other assets and decreases in accrued liabilities.
- Share-based compensation increased to $7.2 million from $4.9 million.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal quantitative revenue or earnings guidance. Management emphasized the company’s dependence on the performance and popularity of the Knicks and Rangers, seasonal revenue patterns, team personnel costs, sponsorship demand, media rights, league rules, salary caps, luxury taxes, revenue sharing and general economic conditions.
COVID-19 remained a material uncertainty. The company stated that renewed variants, attendance restrictions, reduced tourism, league decisions, game cancellations or public reluctance to attend events could adversely affect operations and results, although the filing does not provide a specific forecast of future COVID-19 effects.
On October 6, 2022, the board declared a special cash dividend of $7.00 per share, expected to total approximately $172.7 million, and authorized a $75.0 million accelerated share repurchase. On October 27, 2022, the company borrowed an additional $55.0 million under the Knicks facility and $160.0 million under the Rangers facility in connection with these actions. Following those borrowings, available borrowing capacity was approximately $90.0 million.
The company completed annual impairment testing during the first quarter and identified no goodwill or indefinite-lived intangible-asset impairment. It also stated that it was in compliance with the 1.5-to-1.0 debt-service-ratio covenants for both team facilities. Various lawsuits remain pending, but management does not believe their resolution will have a material adverse effect.
Important Facts for Investors to Verify
- Verify the effect of the October 2022 special dividend, accelerated share repurchase and related $215.0 million of additional borrowings on leverage, interest expense and liquidity.
- Assess whether the improved operating cash flow is sustainable or primarily reflects advance billings and deferred revenue.
- Monitor the company’s negative equity position, $733.1 million of operating lease liabilities and the $30.0 million NHL advance payable upon demand.
- Review the sensitivity of results to Knicks and Rangers attendance, team performance, media rights, sponsorship demand, revenue sharing and player-related costs.
- Evaluate exposure to floating interest rates; management estimated that a 100-basis-point increase sustained for one year would increase annual interest expense by approximately $2.2 million on borrowings outstanding at September 30, 2022.
- Review the extensive related-party arrangements with MSG Entertainment, including arena licenses, media rights, sponsorship services, corporate services and lease obligations.