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 three months ended September 30, 2021, the first quarter of fiscal 2022, compared with the three months ended September 30, 2020.
Comparisons are significantly affected by COVID-19-related schedule disruptions. The prior-year period included revenue and expenses associated with completion of the delayed 2019-20 NBA and NHL seasons.
Key Financial Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $18.8 million | $57.0 million | Down 67% |
| Operating loss | $(34.9) million | $(27.4) million | Loss increased $7.5 million |
| Adjusted operating loss | $(28.1) million | $(17.8) million | Loss increased $10.4 million |
| Net loss | $(16.9) million | $(29.0) million | Improved $12.1 million |
| Net loss attributable to MSG Sports stockholders | $(16.4) million | $(28.4) million | Improved $12.0 million |
| Basic and diluted loss per share | $(0.68) | $(1.18) | Improved $0.50 |
| Net cash used in operating activities | $(19.3) million | $(57.5) million | Improved $38.2 million |
Revenue consisted of $3.9 million of event-related revenue, $6.6 million of media rights, $3.2 million of sponsorship, signage and suite licenses, and $5.2 million of league distributions and other revenue. The operating loss margin was approximately negative 186%, compared with negative 48% in the prior-year period. The net loss attributable to stockholders represented approximately negative 87% of revenue.
Cash and cash equivalents were $33.6 million at September 30, 2021, or $40.3 million including restricted cash. Total debt was $385.0 million, consisting of $220.0 million under the Knicks revolving facility, $135.0 million under the Rangers revolving facility, and a $30.0 million NHL advance. The company reported approximately $245.0 million of additional borrowing capacity and stated that it believed available liquidity was sufficient for operations and obligations over the following 12 months.
Total assets were $1.33 billion and total liabilities were $1.56 billion at September 30, 2021. Total equity was negative $232.2 million. Deferred revenue was $251.2 million, including current and noncurrent amounts.
Material Changes Versus the Prior Comparable Period
- Revenue declined $38.2 million, primarily because the prior-year quarter included deferred recognition of national media rights and other league-related revenue from the completed 2019-20 seasons.
- Event-related revenue increased $3.9 million because two Rangers preseason home games were played in the current period, compared with no comparable games in the prior-year period.
- Direct operating expenses fell $31.2 million, driven by lower team personnel compensation, lower team transaction costs, and lower league revenue sharing and NBA luxury tax provisions. These savings only partially offset the revenue decline.
- Selling, general and administrative expenses increased 2% to $43.7 million, while share-based compensation declined to $4.9 million from $6.3 million.
- Operating lease costs increased as games resumed at Madison Square Garden; the company began paying full contractual arena license fees effective July 1, 2021.
- Interest expense, net increased 53% to $3.1 million, primarily due to borrowings under the Knicks and Rangers revolving credit facilities and amortization of financing costs.
- The net loss improved despite the higher operating loss because the company recorded a $21.2 million income tax benefit, compared with a $0.5 million benefit in the prior-year period. The current-period effective tax rate was 56%.
- Cash used in operations improved substantially, principally because prior-year working capital was adversely affected by COVID-19 disruptions. Cash used in financing activities increased to $12.1 million, mainly due to taxes paid in lieu of shares issued for equity compensation.
Outlook, Commentary, Risks and Unusual Items
The filing does not provide quantitative revenue, earnings or cash-flow guidance. Management stated that full-capacity attendance at The Garden was permitted beginning August 17, 2021, subject to vaccination, masking and other restrictions.
Management remained unable to predict the longer-term effects of COVID-19. Risks include renewed outbreaks, attendance restrictions, reduced tourism, consumer hesitation, lower discretionary spending, game cancellations or work stoppages, and changes in NBA or NHL rules, collective bargaining agreements, revenue sharing, salary caps and luxury-tax requirements.
The company’s business is seasonal, with a disproportionate share of revenue generally earned in the second and third fiscal quarters. Operating results may therefore not be indicative of full-year performance.
The company completed annual qualitative impairment assessments during the quarter and identified no goodwill or indefinite-lived intangible-asset impairments. It also remained in compliance with the applicable debt-service covenants. A hypothetical 100-basis-point increase in floating interest rates would increase annual interest expense by approximately $3.6 million based on outstanding borrowings at September 30, 2021.
Related-party arrangements with MSG Entertainment and MSG Networks are significant. Related-party revenue was $7.2 million, and related-party operating charges included arena, sponsorship, corporate and other services. The Dolan Family Group controlled approximately 70.6% of aggregate voting power.
The company disclosed various lawsuits but stated that their resolution was not expected to have a material adverse effect. No material changes to contractual obligations were reported other than ordinary-course activity.
Facts an Investor Should Verify
- Whether attendance, ticket pricing, sponsorship demand and media-rights revenue normalize during the 2021-22 NBA and NHL seasons.
- The sustainability of liquidity given $385.0 million of debt, negative equity, significant deferred revenue obligations and continuing operating cash outflows.
- The terms, maturity dates, interest-rate exposure and covenant compliance of the Knicks and Rangers credit facilities and the $30.0 million NHL advance.
- The effect of full contractual arena license fees beginning July 1, 2021 on future margins and cash flow.
- The basis for the unusually large $21.2 million income tax benefit and whether comparable benefits are expected in future periods.
- The extent and economics of ongoing related-party transactions with MSG Entertainment and MSG Networks.
- Potential effects of COVID-19 developments, New York City requirements, league restrictions, reduced tourism or future game disruptions.
- Execution of the $525 million share-repurchase authorization, under which approximately $259.6 million remained available and no repurchases occurred during the quarter.