Business Context and Reporting Period
The filing is The Madison Square Garden Company’s unaudited Form 10-Q for the quarter ended March 31, 2016, representing fiscal 2016 third-quarter results. The request metadata identifies “Madison Square Garden Sports Corp.” and “2015 Q3,” but the filing itself identifies The Madison Square Garden Company and fiscal 2016.
The company operates two reportable segments: MSG Entertainment, which presents live entertainment and operates venues and productions, and MSG Sports, which owns the Knicks, Rangers, Liberty, Hartford Wolf Pack and Westchester Knicks and promotes other sporting events. The company became a standalone public company following the September 30, 2015 distribution from MSG Networks; prior-period results are carve-out and combined results and may not be fully comparable.
Financial Metrics
| Metric | Three months ended March 31, 2016 | Three months ended March 31, 2015 | Nine months ended March 31, 2016 | Nine months ended March 31, 2015 |
|---|---|---|---|---|
| Revenue | $336.3 million | $300.9 million | $897.5 million | $816.6 million |
| Operating income (loss) | $(56.9) million | $(9.6) million | $(12.5) million | $(4.7) million |
| Net income (loss) | $(60.8) million | $(11.5) million | $(18.9) million | $(39.6) million |
| Basic and diluted EPS | $(2.47) | $(0.46) | $(0.76) | $(1.59) |
| Adjusted operating cash flow | $(23.8) million | $16.8 million | $82.1 million | $88.3 million |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $84.0 million | $22.5 million |
Revenue increased 12% in the quarter and 10% year to date. Quarterly operating margin was approximately negative 16.9%, compared with negative 3.2% in the prior-year period; nine-month operating margin was approximately negative 1.4%, compared with negative 0.6%. Quarterly net margin was approximately negative 18.1%, compared with negative 3.8%; nine-month net margin improved to approximately negative 2.1% from negative 4.8%.
MSG Sports generated quarterly revenue of $262.9 million and adjusted operating cash flow of $42.5 million, compared with $239.1 million and $31.0 million, respectively. MSG Entertainment generated quarterly revenue of $73.2 million and adjusted operating cash flow of negative $53.4 million, compared with $61.6 million and negative $11.2 million, respectively.
At March 31, 2016, cash and cash equivalents were $1.452 billion, including $1.452 billion of unrestricted cash and cash equivalents as discussed in MD&A. Total assets were $3.610 billion and total liabilities were $936.8 million. The company reported no debt outstanding and therefore no interest-rate exposure from debt. Restricted cash was $28.1 million.
For the nine months, investing cash outflows were $94.5 million, including $64.0 million of capital expenditures and $32.0 million of investments and loans to nonconsolidated affiliates. Financing cash inflows were $1.448 billion, primarily reflecting $1.467 billion received from MSG Networks in connection with the distribution, partly offset by $78.0 million of share repurchases.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased $35.5 million, led by a $23.8 million increase in MSG Sports and an $11.7 million increase in MSG Entertainment.
- Nine-month revenue increased $81.0 million, including a $70.4 million increase in MSG Sports and a $10.4 million increase in MSG Entertainment.
- Quarterly operating loss increased by $47.4 million. Direct operating expenses rose 19% and selling, general and administrative expenses rose 72%.
- Nine-month operating loss increased by $7.7 million despite higher revenue, primarily because selling, general and administrative expenses increased 41% and MSG Entertainment incurred a significant production write-off.
- MSG Sports benefited from new long-term media rights agreements with MSG Networks effective July 1, 2015 and a new advertising sales representation agreement effective September 28, 2015. Nine-month MSG Sports adjusted operating cash flow increased 101% to $112.7 million.
- MSG Entertainment’s nine-month adjusted operating cash flow declined to a loss of $1.4 million from income of $45.8 million, primarily because of the production write-off and the timing and performance of entertainment productions.
- Share-based compensation increased to $7.4 million in the quarter and $17.6 million for the nine months, from $0.8 million and $7.9 million, respectively.
- Losses from equity-method investments improved to $5.0 million for the nine months from $35.0 million, primarily because the prior-year period included a $23.6 million impairment of the Brooklyn Bowl Las Vegas investment.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management stated that available liquidity should be sufficient to fund operations, capital requirements, potential investments and share repurchases. The company intends to continue expanding its live sports and entertainment business, including through venue, content and adjacent-business opportunities.
- A $41.8 million non-cash write-off of deferred production costs was recorded in the third quarter because the company decided not to include certain prior scenes in the production now called New York Spectacular Starring The Radio City Rockettes. Approximately $30.0 million of related deferred production costs remained at March 31, 2016.
- The company recorded a $4.1 million non-cash impairment of a cost-method investment during the nine months.
- After quarter-end, an equity-method affiliate announced the planned August 2016 closure of the Broadway production Finding Neverland. The company was evaluating potential impairment of its $7.3 million investment, which could result in a future non-cash charge.
- The company’s new standalone public-company cost structure increased corporate expenses, making prior-year carve-out comparisons less representative.
- Results are seasonal: MSG Sports generally generates a disproportionate share of revenue in the second and third fiscal quarters, while MSG Entertainment is heavily influenced by the Radio City Christmas Spectacular in the second quarter.
- Key risks include team performance and popularity, player compensation and injuries, NBA and NHL revenue sharing and luxury tax obligations, economic conditions, event attendance, sponsorship and advertising demand, competition, work stoppages, production execution, acquisitions and investments, litigation, regulation and the company’s increased standalone overhead.
- The company had $447.0 million remaining under its $525.0 million share repurchase authorization after repurchasing 516 thousand shares for $78.0 million through March 31, 2016.
- The company provided revolving credit facilities to nonconsolidated affiliates, including $97.5 million drawn by Azoff MSG Entertainment and $6.0 million drawn by Tribeca Enterprises at March 31, 2016.
Most Important Facts to Verify
- Confirm the correct issuer and period: the filing is for The Madison Square Garden Company, quarter ended March 31, 2016.
- Assess the sustainability of MSG Sports’ media-rights and advertising-related revenue increases and the effect of future NBA and NHL revenue-sharing, luxury-tax and player-cost adjustments.
- Evaluate whether MSG Entertainment can recover from the production write-off and return to positive adjusted operating cash flow.
- Review the comparability of prior-year results, including allocated corporate costs and other carve-out adjustments associated with the separation from MSG Networks.
- Monitor the potential impairment of the $7.3 million Finding Neverland investment and other nonconsolidated affiliate investments and loans.
- Reconcile the unusually large cash balance to the $1.467 billion distribution-related cash contribution and distinguish recurring operating liquidity from one-time financing inflows.
- Review the company’s commitments for sports personnel, venue leases, affiliate credit facilities, letters of credit and pension obligations.