Business Context and Reporting Period
The filing is Madison Square Garden Company’s unaudited Form 10-Q for the quarter ended December 31, 2018, covering the three and six months ended December 31, 2018. The company operated two reportable segments: MSG Entertainment, including venues, Christmas Spectacular, TAO Group, Boston Calling and Obscura; and MSG Sports, including the Knicks, Rangers, other sports properties and esports. The filing predates the later separation of the sports business and is not a standalone MSG Sports filing.
Results are highly seasonal: MSG Entertainment generally earns a disproportionate share of annual revenue in the fiscal second quarter due to the Christmas Spectacular, while MSG Sports is concentrated in the second and third quarters because of NBA and NHL operations.
Key Financial Metrics
| Metric | Three months ended Dec. 31, 2018 | Year-over-year change | Six months ended Dec. 31, 2018 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $632.2 million | Up 18% | $850.3 million | Up 9% |
| Operating income | $78.3 million | Up 7% | $27.5 million | Down 53% |
| Operating margin | 12.4% | Down from 13.7% | 3.2% | Down from 7.5% |
| Net income attributable to shareholders | $81.6 million | Down 57% | $49.4 million | Down 72% |
| Diluted EPS | $3.42 | Down from $7.96 | $2.07 | Down from $7.48 |
| Adjusted operating income | $130.4 million | Up 10% | $120.5 million | Down 19% |
| Net cash from operating activities | Not separately provided | — | $28.5 million | Down from $52.6 million |
Adjusted operating income, a non-GAAP measure, excludes depreciation and amortization, share-based compensation and certain purchase accounting adjustments. Adjusted operating margins were approximately 20.6% for the quarter and 14.2% for the six-month period.
Segment Performance
- MSG Entertainment: Second-quarter revenue increased 17% to $316.5 million, operating income increased 25% to $93.3 million and adjusted operating income increased 23% to $101.0 million. Six-month revenue increased 10% to $479.5 million and adjusted operating income increased 10% to $110.0 million. Growth reflected stronger Christmas Spectacular ticket revenue, more events at The Garden and other venues, sponsorship growth and the inclusion of a larger period of Obscura operations.
- MSG Sports: Second-quarter revenue increased 19% to $315.8 million, but operating income declined 16% to $41.8 million and adjusted operating income declined 13% to $48.6 million. Six-month revenue increased 7% to $371.2 million, while operating income fell 46% to $37.7 million and adjusted operating income fell 40% to $49.2 million.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $1.228 billion at December 31, 2018; cash, cash equivalents and restricted cash totaled $1.252 billion, compared with $1.257 billion at June 30, 2018.
- Six-month operating cash flow was $28.5 million. Investing cash outflow was $15.9 million and financing cash outflow was $18.1 million, producing a $5.0 million decrease in cash and restricted cash.
- Capital expenditures were $81.1 million, primarily related to MSG Sphere development and other venue projects. The company also invested $52.1 million in nonconsolidated affiliates and received $125.0 million from the sale of its interest in AMSG Entertainment.
- Debt, net of deferred financing costs, totaled $102.8 million, including $2.4 million current and $100.4 million long-term. The company had approximately $377 million of revolving credit capacity, and the Knicks, Rangers and TAO revolving facilities were undrawn at December 31, 2018.
- Management stated that available cash, operating cash flow and borrowing capacity were sufficient for at least the next 12 months, including operations, debt service, venue development and potential share repurchases.
Material Changes Versus the Prior Comparable Period
- ASC Topic 606 was adopted in the first quarter of fiscal 2019 using the modified retrospective method. Prior periods were not recast, making direct comparisons less meaningful.
- For the quarter, ASC 606 increased reported revenue by $38.6 million and direct operating expenses by $7.1 million versus amounts that would have been reported under the prior standard, reducing operating income by $31.5 million. For six months, revenue was $1.8 million lower and direct operating expenses were $2.3 million higher, reducing operating income by $4.1 million.
- Revenue timing changed materially for suite licenses, sponsorships, local media rights, league distributions and related fulfillment costs. Management expected local media rights revenue to increase in the quarter ending March 31, 2019 and for fiscal 2019 as a whole.
- MSG Sports direct operating expenses rose substantially, driven by $40.8 million of team personnel transaction provisions in the quarter, including $39.2 million for player waivers or contract terminations. The comparable 2017 quarter included $2.8 million of such provisions.
- Six-month earnings benefited from $20.0 million of earnings in equity method investments, including a gain on the sale of the AMSG Entertainment interest. Conversely, a $12.0 million quarterly and $7.7 million six-month unrealized loss on the Townsquare investment increased miscellaneous expense under newly adopted financial-instrument accounting guidance.
- The prior-year period included a substantial $116.8 million income tax benefit related principally to the Tax Cuts and Jobs Act. The current-year periods recorded tax expense of $0.7 million for the quarter and $1.4 million for six months, materially depressing year-over-year net income comparisons.
Guidance, Outlook, Risks and Unusual Items
- Management expected to begin foundation work for MSG Sphere Las Vegas in February 2019, targeting an opening in calendar 2021. The London project was in planning and was expected to open approximately one year after Las Vegas, subject to approvals and construction timing.
- Cost estimates for the Las Vegas and London MSG Sphere projects had not been finalized. Management expected the projects to require capital beyond current cash, operating cash flow and revolving facilities and noted that additional financing might be necessary.
- The board authorized exploration of a tax-free Sports Distribution. Management was working toward a possible transaction in the second half of calendar 2019, subject to league approvals, an IRS private letter ruling, a tax opinion and final board approval. There was no assurance that the transaction would occur.
- The New York Liberty was sold on January 30, 2019; management stated the sale would not materially affect ongoing operations.
- Principal risks include sports-team performance and popularity, player injuries and personnel costs, league revenue sharing and luxury tax outcomes, event and sponsorship demand, seasonality, venue construction delays and cost overruns, economic conditions, competition, acquisition and investment performance, litigation, cybersecurity, regulatory changes, credit-facility defaults and the ability of investees to repay loans.
- The company reported no goodwill or indefinite-lived intangible asset impairments in its fiscal 2019 annual testing. Management stated that existing lawsuits were not expected to have a material adverse effect, although outcomes could not be predicted with certainty.
- Disclosure controls and procedures were deemed effective as of December 31, 2018, with no material changes to internal control over financial reporting.
Most Important Facts to Verify
- Reconcile reported year-over-year results for the impact of ASC 606, particularly revenue timing for local media rights, suite licenses and league distributions.
- Assess whether elevated team personnel transaction costs and sports-segment margin pressure are recurring or principally one-time items.
- Monitor final cost estimates, financing requirements, approvals, delays and opening dates for the Las Vegas and London MSG Sphere projects.
- Verify the status, structure, tax treatment and league approvals for the proposed Sports Distribution.
- Evaluate liquidity after planned venue capital spending, investments, debt amortization and any future share repurchases.
- Review the volatility and valuation implications of the Townsquare investment, equity-method investments and loans to nonconsolidated affiliates.
- Consider the effect of the prior-year Tax Cuts and Jobs Act benefit when comparing reported net income and EPS.