Filing scope and business context
This is The Madison Square Garden Company’s Form 10-K for the fiscal year ended June 30, 2018, filed August 16, 2018. The requested period is identified as “2017 Q4,” but the filing covers fiscal 2018 and includes unaudited fourth-quarter results for the three months ended June 30, 2018. The Company operates two segments: MSG Sports, including the Knicks, Rangers, Liberty, minor-league teams, esports and other sporting events; and MSG Entertainment, including venues, concerts, the Christmas Spectacular, Boston Calling, TAO Group and Obscura.
Financial performance and liquidity
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Revenue | $1,559.1 million | $1,318.5 million | +18% |
| Operating income (loss) | $18.9 million | $(60.4) million | Improved $79.2 million |
| Net income (loss) | $134.4 million | $(76.8) million | Improved $211.2 million |
| Net income attributable to stockholders | $141.6 million | $(72.7) million | Improved $214.3 million |
| Diluted EPS | $5.94 | $(3.05) | Improved $8.99 |
| Adjusted operating income | $193.8 million | $97.6 million | +98% |
| Operating margin | 1.2% | (4.6%) | Improved |
MSG Entertainment revenue increased 54% to $780.7 million and operating income improved to $86.0 million from a $3.7 million loss, principally reflecting a substantially larger contribution from TAO Group, stronger venue activity and higher Christmas Spectacular revenue. MSG Sports revenue declined 4% to $778.7 million, primarily because the Rangers did not qualify for the playoffs and fiscal 2017 included nonrecurring league distributions; operating income nevertheless increased 6% to $126.6 million because of lower selling, general and administrative and direct operating expenses.
Net income benefited materially from a $116.9 million income-tax benefit, including a $113.5 million deferred-tax benefit associated primarily with the Tax Cuts and Jobs Act and related valuation allowance changes. The tax benefit is therefore an unusual and largely non-operating contributor to reported earnings.
Cash and cash equivalents were $1,225.6 million at June 30, 2018, compared with $1,238.1 million at June 30, 2017. Net cash provided by operating activities was $220.6 million, compared with $216.6 million. Investing cash outflow was $182.4 million, including $191.9 million of capital expenditures, principally for London land and development of the planned MSG Sphere venues. Financing cash outflow was $51.1 million, including share repurchases, equity-compensation tax withholding, distributions to noncontrolling interests and debt repayment.
Reported debt was $105.7 million net of deferred financing costs, consisting principally of the TAO Group term loan. Gross TAO term-loan debt was $109.3 million at June 30, 2018. The Knicks and Rangers revolving facilities, with combined capacity of $350 million, were undrawn, as was the TAO $12 million revolving facility. Total available revolving capacity was approximately $377 million. Management stated that available cash, operating cash flow and borrowing capacity were sufficient for expected operations and planned investments over the following 12 months.
Material changes versus the prior comparable period
- TAO Group was consolidated for a much larger portion of fiscal 2018, materially increasing MSG Entertainment revenue and expenses. TAO results are reported on a three-month lag, limiting period comparability.
- The Company acquired a 65% controlling interest in Counter Logic Gaming in July 2017 and Obscura Digital in November 2017; reported contributions were not material.
- MSG Sports lost the benefit of six Rangers home playoff games recorded in fiscal 2017 and fiscal 2017’s approximately $15.5 million NHL expansion fee and approximately $15 million of other nonrecurring league distributions.
- Fiscal 2018 included $27.5 million of team personnel transaction provisions, compared with $42.3 million in fiscal 2017, including waivers, contract terminations, trades and season-ending injuries.
- Fiscal 2017 included a $33.6 million write-off of remaining New York Spectacular deferred production costs; no comparable write-off occurred in fiscal 2018.
- Adjusted operating income rose to $193.8 million, but this measure excludes $122.5 million of depreciation and amortization, $47.6 million of share-based compensation and $4.9 million of other purchase-accounting adjustments.
Fourth-quarter information
For the quarter ended June 30, 2018, revenue was $317.96 million, operating loss was $45.39 million, net loss was $50.49 million and net loss attributable to stockholders was $46.05 million, or $(1.94) diluted EPS. The comparable fiscal 2017 fourth quarter reported revenue of $305.57 million, operating loss of $92.47 million and stockholder net loss of $84.28 million, or $(3.58) diluted EPS. The filing cautions that quarterly comparisons are affected by seasonality and the timing of TAO Group’s consolidation.
Guidance, outlook, risks and unusual items
- The Company did not provide numerical revenue or earnings guidance. Management’s outlook emphasizes continued development of the Knicks and Rangers, venue utilization, TAO Group expansion and construction of MSG Sphere venues.
- The first Las Vegas MSG Sphere was targeted to begin site preparation in September 2018 and open in fiscal 2021. The London venue was targeted to open approximately one year later, subject to planning and governmental approvals. Cost estimates had not been finalized, and management expected to require additional capital beyond cash flow and existing facilities.
- A possible tax-free Sports Distribution was announced for exploration in June 2018. The contemplated transaction would distribute an approximately two-thirds economic interest in a separately traded sports company, subject to league approvals, an IRS private letter ruling, a tax opinion and final Board approval. No timetable or assurance of completion was provided.
- Key risks include dependence on the popularity and competitive performance of the Knicks and Rangers, playoff volatility, league rules and collective bargaining, labor actions, intense competition, consumer discretionary spending, venue leases, TAO Group execution and labor costs, MSG Sphere construction costs and financing, regulatory and permitting requirements, cybersecurity, litigation and concentrated exposure to New York, Los Angeles and Las Vegas.
- The Company had $390.7 million of operating lease obligations, $390.8 million of other off-balance-sheet contractual obligations and $4.1 million of letters of credit. Total contractual obligations, including amounts reflected on the balance sheet, were $874.0 million.
- MSG Networks generated approximately $154.9 million of revenue for the Company, equal to 10% of consolidated revenue, principally through local media rights and related arrangements.
Important facts for investors to verify
- Separate recurring operating performance from the $116.9 million tax benefit and other nonrecurring items.
- Normalize fiscal comparisons for TAO Group’s three-month reporting lag, acquisitions, playoff participation and nonrecurring league distributions.
- Review the funding requirements, final cost estimates and financing plan for MSG Sphere Las Vegas and London.
- Assess TAO Group’s profitability, leverage, high floating interest rate and planned venue openings, including the minority owners’ put rights.
- Monitor the proposed Sports Distribution, required league and tax approvals, allocation of assets and liabilities, and the impact on the remaining Company.
- Review debt maturities, including approximately $90.9 million of TAO term-loan maturities shown for fiscal 2022, and the Company’s large contractual and lease commitments.
- Consider governance and related-party risks: the Dolan Family Group held approximately 71.1% of total voting power and the Company elected controlled-company exemptions under NYSE rules.