Business Context and Reporting Period
The filing is a Form 10-K for The Madison Square Garden Company, not Madison Square Garden Sports Corp. It covers the fiscal year ended June 30, 2017; the supplied metadata reference to “2016 Q4” does not match the filing period. The company operates two segments: MSG Sports, comprising the Knicks, Rangers, Liberty, minor-league teams and other sporting events; and MSG Entertainment, comprising venues, concerts, productions, Boston Calling Events and TAO Group.
Fiscal 2017 results include the July 2016 acquisition of Boston Calling Events and the January 2017 acquisition of a controlling interest in TAO Group. TAO Group operating results were consolidated on a three-month lag. The company became a standalone public company following its September 30, 2015 distribution from MSG Networks, so earlier periods include carve-out and allocated expenses.
Key Financial Metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $1.318 billion | $1.115 billion | 18% |
| Operating loss | $(60.4) million | $(58.6) million | 3% unfavorable |
| Net loss | $(76.8) million | $(77.3) million | 1% improvement |
| Net loss attributable to shareholders | $(72.7) million | $(77.3) million | 6% improvement |
| Loss per share | $(3.05) | $(3.12) | Improved |
| Adjusted operating income | $97.6 million | $68.3 million | 43% |
| Cash flow from operations | $216.6 million | $125.8 million | 72% increase |
| Cash and cash equivalents | $1.238 billion | $1.444 billion | Down $206.2 million |
| Long-term debt, net | $105.4 million | None reported | New debt primarily related to TAO |
Reported operating margin was approximately (4.6%), net margin was approximately (5.8%), and adjusted operating margin was approximately 7.4%. Adjusted operating income is a non-GAAP measure that excludes depreciation and amortization, share-based compensation and purchase accounting adjustments.
- MSG Sports revenue increased 16% to $812.0 million, and operating income increased 9% to $119.1 million. Adjusted operating income increased 9% to $143.0 million.
- MSG Entertainment revenue increased 22% to $506.5 million. Operating loss improved to $3.7 million from $32.3 million, while adjusted operating income improved to $22.0 million from an adjusted operating loss of $14.6 million.
- Sports revenue benefited from the NBA national media-rights agreements, six Rangers home playoff games, higher ticket yields and approximately $15.5 million of NHL expansion-related distributions. The filing also identifies approximately $15.0 million of other non-recurring NBA and NHL distributions.
- Direct operating expenses increased 17% to $861.4 million and selling, general and administrative expenses increased 23% to $410.0 million. Depreciation and amortization increased 5% to $107.4 million.
- Operating cash flow benefited from higher deferred revenue, lower deferred production spending, luxury-tax receipts and non-cash charges. Investing cash outflow increased to $264.3 million, including $192.1 million for business acquisitions.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven substantially by the BCE and TAO Group acquisitions, stronger Forum and venue activity, higher Christmas Spectacular ticket pricing, additional New York Spectacular performances and improved sports revenue.
- TAO Group contributed $34.3 million of revenue and $58,000 of net income for the included period. Its acquisition added $110.0 million of senior secured term debt and $85.0 million of redeemable noncontrolling interests.
- MSG Sports incurred $42.3 million of team personnel transaction costs, compared with $7.5 million in fiscal 2016. Net NBA and NHL revenue-sharing and luxury-tax provisions increased to $59.0 million from $42.3 million.
- The company wrote off $33.6 million of remaining deferred production costs for the New York Spectacular in the fourth quarter and suspended the planned 2017 presentation. This followed a $41.8 million write-off in fiscal 2016.
- The company recorded a $20.6 million non-cash impairment of its Fuse Media investment. This was partly offset by the absence of the $7.3 million Finding Neverland impairment recorded in fiscal 2016.
- The company repurchased 827,000 Class A shares for $148.0 million during fiscal 2017. Approximately $271.3 million remained available under the $525 million authorization at June 30, 2017.
Liquidity, Debt and Outlook
Management stated that unrestricted cash and cash equivalents, available borrowing capacity and operating cash flows were sufficient to fund operations, acquisitions, capital spending and share repurchases over the following 12 months. Total available revolving credit facilities were described as approximately $377 million, including $200 million for the Knicks, $150 million for the Rangers, $15 million of unsecured Knicks capacity and $12 million for TAO Group. The Knicks and Rangers facilities were undrawn at June 30, 2017; the TAO revolving facility was also undrawn at its latest compliance date.
TAO Group had $110 million of term debt outstanding, with stated interest margins of 7.50% to 8.00% over LIBOR or 6.50% to 7.00% over the applicable base rate. Scheduled TAO term-loan maturities total $2.75 million in each of fiscal 2019 and 2020, $11.0 million in fiscal 2021 and $93.5 million in fiscal 2022. The company also had substantial contractual and lease obligations, totaling $846.7 million, including $391.8 million of contractual obligations, $357.0 million of operating leases and $94.5 million of obligations reflected on the balance sheet.
No formal quantitative financial guidance was provided. Management’s outlook emphasizes continued investment in sports teams, venues, live productions, TAO Group expansion, the planned Las Vegas music venue and other strategic opportunities. Results are expected to remain seasonal and volatile, with Christmas Spectacular activity concentrated in the second fiscal quarter and sports revenue concentrated in the second and third quarters.
Risks, Contingencies and Unusual Items
- Results depend on the popularity and competitive performance of the Knicks and Rangers, playoff participation, player compensation, injuries, league revenue sharing, collective bargaining agreements and potential work stoppages.
- The Christmas Spectacular represented 21% of MSG Entertainment revenue and 8% of consolidated revenue in fiscal 2017, creating concentration and production risk.
- TAO Group carries significant subsidiary-level debt, high interest costs, lease obligations, geographic concentration and exposure to labor, reputational, food-safety and venue-location risks. Minority holders have put rights that may require the company to purchase their interests.
- The company’s equity-method investments generated a $30.0 million loss in fiscal 2017 and may require additional funding. Loans outstanding to affiliates included approximately $97.6 million to AMSGE and $14.4 million to Tribeca Enterprises, including PIK interest.
- GMR, an investment of Azoff MSG Entertainment, was involved in antitrust litigation with the Radio Music Licensing Committee. An interim licensing arrangement extended through September 30, 2017, and the ultimate outcome was uncertain.
- The company disclosed a payment-card security incident affecting several venues and expects related expenses. It also faces risks involving data security, governmental permits, liquor licenses, labor relations, leases, litigation and the renewal of The Garden’s zoning permit.
- Management concluded that internal controls were effective, but excluded TAO Group from its fiscal 2017 internal-control assessment. TAO Group represented $435.2 million of assets and $34.3 million of reported revenue.
- The Dolan Family Group controlled approximately 71.3% of total voting power and could substantially influence or block changes in control and other shareholder actions.
Investor Verification Priorities
- Verify the correct issuer and reporting period: the filing is for The Madison Square Garden Company for the year ended June 30, 2017.
- Reconcile reported earnings with adjusted operating income and isolate the effects of the New York Spectacular write-off, Fuse Media impairment, acquisition accounting and non-recurring league distributions.
- Review TAO Group’s full-year revenue, profitability, leverage, covenant compliance, earn-out exposure and minority-interest put rights, noting the three-month reporting lag.
- Assess the sustainability of operating cash flow after acquisitions, share repurchases, capital expenditures, affiliate loans and required debt amortization.
- Evaluate reliance on MSG Networks media-rights revenue, Christmas Spectacular performance, playoff activity and the contractual terms of related-party arrangements.
- Review the GMR litigation, payment-card incident, lease and zoning matters, labor agreement expirations and the company’s tax valuation allowance.