Business context and reporting period
Madison Square Garden Sports Corp. filed its Form 10-K for the fiscal year ended June 30, 2020. The company owns the New York Knicks, New York Rangers, Hartford Wolf Pack, Westchester Knicks, Knicks Gaming and a controlling interest in Counter Logic Gaming. The requested “2019 Q4” metadata does not match the filing period; the filing covers fiscal 2020, including the quarter ended June 30, 2020.
On April 17, 2020, the company distributed Madison Square Garden Entertainment Corp. to shareholders. Historical MSG Entertainment results are presented as discontinued operations, and MSG Sports thereafter reports one continuing operating segment.
Key financial metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $603.3 million | $729.4 million | Down 17% |
| Operating loss | $(93.9) million | $(58.2) million | Loss increased $35.7 million |
| Adjusted operating income (loss) | $(27.5) million | $11.2 million | Down $38.7 million |
| Loss from continuing operations | $(118.6) million | $(48.0) million | Loss increased $70.6 million |
| Net loss attributable to MSG Sports shareholders | $(182.4) million | $11.4 million | Declined $193.8 million |
| Diluted loss per share | $(7.62) | $0.48 | Declined $8.10 |
| Net cash provided by operating activities | $3.6 million | $161.3 million | Down $157.7 million |
| Cash used in investing activities | $(514.9) million | $(232.9) million | Outflow increased $282.0 million |
| Cash used in financing activities | $(520.6) million | $(71.7) million | Outflow increased $448.8 million |
Revenue declined primarily because COVID-19 reduced home games, ticket sales, league distributions, suite revenue, sponsorship and signage, local media rights fees, and food, beverage and merchandise sales. Approximate operating margin was negative 15.6% in FY2020 versus negative 8.0% in FY2019. Adjusted operating margin was negative 4.6% versus positive 1.5%.
At June 30, 2020, cash and cash equivalents were $77.9 million and restricted cash was $12.8 million. Deferred revenue was $126.3 million, including approximately $61 million related to the 2019-20 NBA and NHL seasons. Total assets were $1.23 billion, total liabilities were $1.44 billion, and total MSG Sports shareholders’ equity was negative $207.0 million, substantially reflecting the MSGE Distribution.
Long-term debt was $350 million, consisting of fully drawn revolving facilities of $200 million for the Knicks and $150 million for the Rangers. Both facilities were in compliance with their 1.5:1.0 debt service ratio covenants at June 30, 2020. The company also had undrawn delayed-draw term loan facilities totaling $200 million from MSG Entertainment, subject to borrowing conditions and MSG Entertainment’s liquidity.
Material changes versus the prior comparable period
- Revenue decreased $126.1 million, or 17%, primarily because the NBA and NHL suspended their seasons in March 2020. The Knicks played 36 home games and the Rangers 39, compared with 44 home games for each team in the prior season.
- Operating loss increased from $58.2 million to $93.9 million, despite an $80.1 million reduction in direct operating expenses and a $7.8 million reduction in selling, general and administrative expenses.
- League revenue-sharing and NBA luxury-tax provisions fell to $6.4 million from $56.2 million, while team personnel transaction costs declined to $33.7 million from $53.1 million.
- Operating cash flow fell to $3.6 million from $161.3 million. The company borrowed $350 million under the Knicks and Rangers revolving facilities and distributed $827.1 million of cash to MSG Entertainment in connection with the MSGE Distribution.
- Net loss from discontinued operations was $90.2 million, compared with income of $44.9 million in FY2019. Discontinued operations included a $102.2 million impairment charge associated with MSG Entertainment assets.
- Share repurchases were suspended during FY2020; approximately $259.6 million remained available under the $525 million authorization at year-end. No cash dividends were paid.
Guidance, outlook, commentary and risks
The filing provides no formal quantitative revenue or earnings guidance. Management stated that it could not reasonably estimate the future impact of COVID-19 on revenue, results, cash flows or financial condition. No events were permitted at Madison Square Garden when the filing was issued, and management could not assure that 2020-21 games would be played at The Garden or with full-capacity audiences.
- The NBA and NHL suspensions materially reduced fiscal 2020 revenue. Approximately $42 million of national media rights revenue remained deferred pending completion of the seasons, and additional credits, make-goods or refunds could be required for suites and sponsorships.
- Management implemented workforce reductions, limits on third-party vendors and cuts to discretionary spending. Full-time employees declined from approximately 450 at June 30, 2020 to approximately 420 by August 21, 2020.
- Management believed available liquidity was sufficient for operations and debt due over the following 12 months, based on $77.9 million of unrestricted cash, $15 million of available Knicks unsecured capacity and $200 million of undrawn delayed-draw facilities. This assessment depends on continued access to financing and the liquidity of MSG Entertainment.
- The Knicks revolving facility matures in September 2021 and the Rangers facility in January 2022. Management expected to refinance them; failure to do so would make $350 million of debt, plus any DDTL borrowings, due during fiscal 2022.
- Future performance remains highly dependent on attendance, team popularity and competitiveness, media rights, sponsorship demand, league decisions, player compensation, collective bargaining, and the ability to operate The Garden.
- Related-party dependence is significant: MSG Networks accounted for approximately 23% of FY2020 revenue, and MSG Entertainment provides arena access, sponsorship, administrative and other services. The Dolan family controlled approximately 70.9% of voting power.
- COVID-19-related uncertainty also increased the risk of future goodwill and intangible-asset impairments, although management concluded no such impairment existed at June 30, 2020.
Most important facts for investors to verify
- Whether games can resume at The Garden, the permitted arena capacity, and the resulting impact on ticket, suite, sponsorship, concession and merchandise revenue.
- The final treatment of deferred national media rights revenue, including the approximately $42 million not recognized at June 30, 2020, and any required credits or refunds.
- Liquidity after the $350 million revolving-facility draw, including availability and conditions under the $200 million DDTL facilities.
- The company’s ability to refinance the Knicks and Rangers facilities before their September 2021 and January 2022 maturities.
- The allocation of assets, liabilities, cash flows and tax obligations resulting from the MSGE Distribution, including the company’s negative equity balance at June 30, 2020.
- Potential future impairment charges, tax valuation allowance changes, and obligations under related-party agreements with MSG Entertainment and MSG Networks.