Business Context and Reporting Period
The filing is The Madison Square Garden Company’s unaudited Form 10-Q for the three and six months ended December 31, 2019, the second quarter of fiscal 2020. The company operated through MSG Entertainment and MSG Sports, including the Knicks, Rangers, other sports teams, esports businesses, venues, Tao Group Hospitality, Boston Calling Events, and the Christmas Spectacular. The filing predates the later separation of the sports and entertainment businesses.
Results are highly seasonal: MSG Entertainment generally earns a disproportionate share of annual revenue and operating income in the second quarter because of the Christmas Spectacular, while MSG Sports is concentrated in the second and third fiscal quarters. Tao Group Hospitality results are reported on a three-month lag.
Key Financial Metrics
| Metric | Three months ended Dec. 31, 2019 | Year-over-year change | Six months ended Dec. 31, 2019 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $628.8 million | Down 1% | $843.6 million | Down 1% |
| Operating income (loss) | $80.8 million | Up 3% | $(8.5) million | Down from $27.5 million |
| Net income | $92.3 million | Up 22% | $11.7 million | Down 72% |
| Net income attributable to company stockholders | $94.1 million | Up 15% | $14.2 million | Down 71% |
| Diluted EPS | $3.93 | Up from $3.42 | $0.59 | Down from $2.07 |
| Adjusted operating income | $126.9 million | Down 3% | $85.8 million | Down 29% |
| Cash flow from operations | Not separately provided | Not applicable | $111.2 million | Up from $28.5 million |
Approximate consolidated operating margin was 12.9% for the quarter and negative 1.0% for the six-month period. Approximate net margin was 14.7% for the quarter and 1.4% for the six-month period. The filing does not present a consolidated EBITDA measure.
- MSG Entertainment revenue was $312.7 million for the quarter, down 1%, and $471.7 million for six months, down 2%. Six-month adjusted operating income was $109.8 million, essentially flat versus the prior year.
- MSG Sports revenue was $316.5 million for the quarter, essentially flat, and $372.5 million for six months, up less than 1%. Six-month adjusted operating income declined 15% to $41.6 million.
- Cash, cash equivalents and restricted cash totaled $1.043 billion at December 31, 2019, including $1.000 billion of cash and cash equivalents and $113.0 million of short-term investments.
- Net cash used in investing activities was $143.9 million, including $221.3 million of capital expenditures, substantially related to the MSG Sphere projects. Net cash used in financing activities was $43.7 million.
- Long-term debt, including the current portion and net of deferred financing costs, was $35.3 million. The company also had $390 million of revolving credit facilities, none of which was drawn by the Knicks or Rangers and none of which was drawn under Tao’s revolving facility at December 31, 2019.
- Operating lease liabilities totaled $241.2 million following adoption of the new lease accounting standard on July 1, 2019.
Material Changes Versus the Prior Comparable Period
- Quarterly profitability improved despite slightly lower revenue. Direct operating expenses declined $15.5 million, while selling, general and administrative expenses increased $11.5 million.
- Six-month operating income turned into an $8.5 million loss, primarily because corporate expenses increased $27.9 million, including higher MSG Sphere investment and professional fees related to the proposed separation.
- Six-month net income and attributable earnings declined substantially because the prior-year period included equity earnings from investments later sold, including Azoff MSG Entertainment and Tribeca Enterprises. Equity-method results changed from $20.0 million of earnings to a $2.6 million loss.
- Miscellaneous income improved by $23.5 million for six months, primarily because the company recorded a $14.7 million unrealized gain on its Townsquare investment versus a $7.7 million unrealized loss in the prior year.
- MSG Sports benefited from lower team personnel transaction costs, which declined to $27.9 million for six months from $40.1 million. This benefit was more than offset by higher employee compensation and corporate costs.
- MSG Entertainment revenue was pressured by fewer or lower-revenue concerts, the wind-down of Obscura’s third-party production business, and the expiration of the Wang Theatre booking agreement. These effects were partly offset by Christmas Spectacular and entertainment dining and nightlife revenue.
- Capital expenditures increased to $221.3 million from $81.1 million, reflecting substantially higher spending on MSG Sphere development.
Guidance, Outlook, Risks and Unusual Items
- Management estimated the total cost of MSG Sphere at The Venetian in Las Vegas at approximately $1.66 billion, net of a $75 million contribution from Las Vegas Sands and excluding certain content, internal labor, furniture and equipment costs. Approximately $248 million had been incurred through December 31, 2019, net of $37.5 million received from Las Vegas Sands. The target opening was calendar year 2021.
- London Sphere cost estimates and an opening date were not available. The planning process was expected to continue through calendar 2020.
- Management expected higher MSG Sphere personnel, content and technology expenses during the remaining periods of fiscal 2020 and planned to finance the Las Vegas project primarily with cash, operating cash flow, revolver borrowings and additional debt financing. There was no assurance that additional financing would be available.
- The company pursued a potential tax-free pro-rata distribution of 100% of an entertainment subsidiary to stockholders, leaving the existing company with the sports businesses. Completion depended on board approval, NBA and NHL approvals, a tax opinion and SEC registration effectiveness; there was no assurance the transaction would occur.
- On January 22, 2020, the company acquired an additional 15% of Tao Group Hospitality through issuance of Class A shares, increasing its ownership to 77.5%.
- The company adopted ASC Topic 842 leases, recognizing $261.1 million of operating lease right-of-use assets at adoption and $241.2 million of lease liabilities at December 31, 2019. No retained earnings adjustment was recorded.
- Management identified no goodwill or indefinite-lived intangible asset impairments in its fiscal 2020 annual tests.
- Key risks include venue construction delays and cost overruns, sports-team performance and player costs, luxury tax and league revenue-sharing changes, seasonality, economic conditions, competition, labor or league work stoppages, security incidents, litigation, Tao venue performance, and the proposed separation.
- A derivative stockholder lawsuit concerning executive compensation was stayed while a special litigation committee investigated. Management stated that other litigation was not expected to have a material adverse effect, although outcomes were not certain.
Most Important Facts for Investors to Verify
- Verify the identity and scope of the issuer: this filing is for The Madison Square Garden Company, not a post-separation standalone Madison Square Garden Sports entity.
- Assess the sustainability of earnings excluding the $14.7 million Townsquare unrealized gain and other non-operating items.
- Track MSG Sphere construction spending, total project cost, financing plans, construction progress and the targeted 2021 opening.
- Reconcile the sharp six-month decline in adjusted operating income and attributable earnings with the relatively stable revenue base.
- Monitor the proposed Entertainment Distribution, including regulatory, league, tax and board approvals and the allocation of assets and liabilities.
- Review seasonality and the three-month reporting lag for Tao Group Hospitality when extrapolating quarterly results.
- Evaluate lease obligations, sports-team commitments, contingent consideration, credit-facility covenants and remaining liquidity after planned capital expenditures.
- Review related-party transactions, particularly media rights and services involving MSG Networks and aircraft and other arrangements involving the Dolan family group.