Business Context and Reporting Period
This filing is The Madison Square Garden Company’s Form 10-K for the fiscal year ended June 30, 2019, filed August 20, 2019. The request references “2018 Q4,” but the supplied filing is an annual report for fiscal 2019, not a fiscal 2018 quarterly filing. The filing describes two operating segments: MSG Entertainment and MSG Sports. The company operates iconic venues, the Knicks and Rangers, esports assets, the Christmas Spectacular, TAO Group and Boston Calling.
The filing is not titled Madison Square Garden Sports Corp.; it identifies the registrant as The Madison Square Garden Company. The company was evaluating a potential tax-free distribution of its sports businesses into a separately traded entity, with completion targeted for the first quarter of calendar 2020, subject to approvals and other conditions.
Financial Performance and Liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $1,631.1 million | $1,559.1 million | 5% |
| Operating income (loss) | $(13.9) million | $23.1 million | $(36.9) million |
| Net income (loss) | $(3.1) million | $134.4 million | $(137.6) million |
| Net income attributable to stockholders | $11.4 million | $141.6 million | $(130.2) million |
| Basic diluted EPS | $0.48 | $5.99 / $5.94 | Down materially |
| Adjusted operating income | $169.8 million | $198.0 million | Down 14% |
| Cash flow from operations | $161.3 million | $217.6 million | Down $56.4 million |
| Capital expenditures | $188.8 million | $191.9 million | Down $3.1 million |
Revenue increased in both segments. MSG Entertainment revenue rose 5% to $819.9 million, while MSG Sports revenue rose 4% to $812.7 million. Entertainment operating income declined 1% to $86.1 million and adjusted operating income was essentially flat at $118.3 million. Sports operating income declined 5% to $122.5 million and adjusted operating income declined 4% to $146.7 million.
Consolidated operating margin was approximately negative 0.9%, compared with approximately 1.5% in FY2018. Adjusted operating margin was approximately 10.4%, compared with approximately 12.7% in FY2018. The filing does not present a formal companywide EBITDA measure.
Cash, cash equivalents and restricted cash totaled $1.118 billion at June 30, 2019, including $1.086 billion of unrestricted cash and cash equivalents. Short-term investments were $108.4 million. The company reported $390 million of revolving credit capacity at the corporate and segment level, with the Knicks and Rangers facilities undrawn.
Reported debt, net of deferred financing costs, was $54.6 million, compared with $105.7 million in FY2018. TAO Group had $40.0 million outstanding under a term loan and $15.0 million drawn under its revolving facility at June 30, 2019. Total equity was $2.639 billion and total assets were $3.764 billion.
The company did not repurchase shares during FY2019 and had approximately $259.6 million remaining under its $525 million repurchase authorization. No cash dividend was paid and none was planned for the foreseeable future.
Material Changes Versus the Prior Comparable Period
- Revenue grew 5%, but operating results weakened because direct operating expenses increased 6% and selling, general and administrative expenses increased 13%.
- Corporate and Other operating loss increased by approximately $29.3 million to $199.6 million, primarily because of higher compensation, professional fees, potential Sports Distribution costs and MSG Sphere development expenses.
- MSG Sports incurred $53.1 million of net team personnel transaction costs, compared with $27.5 million in FY2018, principally from waivers and contract terminations.
- MSG Entertainment benefited from additional concerts, higher Christmas Spectacular revenue and TAO Group growth. The Christmas Spectacular had 210 performances, compared with 200, and sold more than one million tickets.
- Revenue recognition changed under ASC Topic 606. FY2019 revenue was $23.0 million lower and direct operating expenses were $26.2 million lower than they would have been without adoption. Prior-year results were not recast, limiting comparability.
- The company acquired a 30% interest in SACO for approximately $47.2 million and began using it as a preferred display technology provider for MSG Sphere venues.
- The New York Liberty was sold in January 2019. The company also sold its interest in Azoff MSG Entertainment in December 2018 and agreed to sell its Tribeca Enterprises interest after year-end.
- The company replaced TAO Group’s prior credit agreement with a new $40 million term loan and $25 million revolving facility, and extended a $49 million subordinated loan to TAO Group. The refinancing generated a $4.0 million loss on debt extinguishment.
- FY2018 net income included a $116.9 million tax benefit, principally related to the Tax Cuts and Jobs Act. FY2019 included $1.3 million of tax expense, making the year-over-year earnings comparison unusually distorted.
Outlook, Risks, Contingencies and Unusual Items
Management expects continued investment in MSG Sphere personnel, technology and content, with higher Corporate and Other expenses anticipated in FY2020. The Las Vegas MSG Sphere had incurred approximately $109 million of construction costs through June 30, 2019. A preliminary company estimate was $1.2 billion, while the general contractor’s initial estimate, including technology and soft costs, was approximately $1.7 billion. Management stated that it was reviewing and value-engineering the estimate; the filing provides no final construction budget.
The Las Vegas venue is targeted to open in calendar 2021. The company disclosed approximately $1.050 billion of additional MSG Sphere-related commitments not reflected on the balance sheet, although the timing of payments may change. Management stated that additional capital beyond cash, operating cash flow and revolving facilities would be required and that the potential Sports Distribution could provide additional liquidity.
The principal operating risks include dependence on the popularity and competitive success of the Knicks and Rangers; event attendance and consumer discretionary spending; competition from other teams, venues and entertainment options; labor disputes or work stoppages; league control over media rights, financing, player compensation and franchise matters; and the seasonal and volatile nature of results.
Other material risks include cost overruns or delays at MSG Sphere, the ability to secure approvals for a London Sphere, TAO Group execution and leverage, lease renewals, cybersecurity and data privacy matters, the potential loss or modification of New York City’s real estate tax exemption, and reliance on related-party arrangements with MSG Networks and entities controlled by the Dolan family.
The company is defending a derivative Delaware lawsuit alleging fiduciary-duty breaches related to compensation paid to James L. Dolan. A Special Litigation Committee was formed in June 2019 and the litigation was stayed through December 19, 2019. Management did not believe the company’s other lawsuits would have a material adverse effect.
Subsequent to year-end, the company recorded an approximately $10.2 million pre-tax charge related to a player waiver. The company also completed the sale of its Tribeca Enterprises interest for $18 million on August 5, 2019.
Most Important Facts for Investors to Verify
- Confirm the status, structure, tax treatment and league approvals for the proposed Sports Distribution.
- Reconcile the final MSG Sphere construction budget, remaining commitments, financing plan and expected opening date.
- Assess recurring operating performance excluding the FY2018 tax benefit, ASC Topic 606 transition effects, team personnel charges and other unusual items.
- Review cash flow conversion and the effect of capital expenditures on liquidity, particularly as MSG Sphere spending increases.
- Evaluate TAO Group’s debt, covenant compliance, subordinated loan exposure and future put/call obligations.
- Monitor team performance, player transactions, revenue-sharing estimates, collective bargaining agreements and potential work stoppages.
- Review related-party revenue, media rights, shared services, aircraft arrangements and Dolan family control of approximately 71.1% of voting power.
- Verify lease renewals, venue competition near the Forum, the New York City real estate tax exemption and the pending compensation-related litigation.