Madison Square Garden Sports Corp. quarterly report, Q3 FY2021

Madison Square Garden Sports Corp. — Form 10-Q Summary

Reporting period: Fiscal third quarter and nine months ended March 31, 2021. The filing reflects MSG Sports after the April 17, 2020 distribution of MSG Entertainment; prior-year MSG Entertainment results are presented as discontinued operations. The company owns the Knicks, Rangers, development-league and esports teams, and operates as one reporting segment.

Financial Results and Key Metrics

Metric	Q3 FY2021	Q3 FY2020	9M FY2021	9M FY2020
Revenue	$183.0 million	$267.6 million	$268.8 million	$610.3 million
Operating income (loss)	$8.1 million	$10.6 million	$(57.7) million	$(48.9) million
Net income (loss)	$5.1 million	$(141.1) million	$(65.1) million	$(129.4) million
Net income (loss) attributable to MSGS stockholders	$5.5 million	$(118.0) million	$(63.6) million	$(103.9) million
Diluted EPS	$0.22	$(4.92)	$(2.64)	$(4.34)
Cash flow from operations	Not provided for quarter	Not provided for quarter	$(54.4) million	$111.1 million

Margins: Q3 operating margin was approximately 4.4%, compared with approximately 4.0% in the prior-year quarter. Nine-month operating margin was approximately negative 21.5%, compared with approximately negative 8.0%. Q3 net margin was approximately 2.8%; the prior-year comparison was distorted by a $145.2 million loss from discontinued operations.

Q3 revenue declined 32%, while nine-month revenue declined 56%.
Q3 direct operating expenses decreased 22% to $126.5 million; nine-month expenses decreased 52% to $183.0 million.
Q3 selling, general and administrative expense decreased 48% to $46.8 million; nine-month expense decreased 48% to $138.7 million.
Adjusted operating income, a non-GAAP measure, was $30.0 million in Q3 versus $27.8 million, but was a $6.7 million loss for the nine months versus $6.1 million of adjusted operating income.
Revenue mix for Q3 included $140.0 million of media rights, $25.4 million of sponsorship, signage and suite licenses, $13.1 million of league distributions and other revenue, and $4.6 million of event-related revenue.

Material Changes Versus the Prior Comparable Period

COVID-19 restrictions materially reduced ticket sales, suite licenses, sponsorship, signage, food, beverage and merchandise revenue. The Garden games were played without fans until late February 2021 and thereafter at approximately 10% capacity.
The 2020-21 seasons were shortened to 72 NBA games and 56 NHL games versus traditional 82-game seasons, and season timing shifted revenue recognition between fiscal periods.
Media rights and league distributions partly offset weaker event-related revenue because the delayed and compressed seasons shifted certain prior-season amounts into the current fiscal year.
Cost reductions, including lower league revenue-sharing expense, lower game-day costs, workforce reductions and reduced discretionary spending, partly offset revenue declines but did not fully mitigate them.
Prior-year results included substantial discontinued-operation losses and impairment charges associated with MSG Entertainment, limiting comparability with current continuing operations.
Interest expense increased to $2.9 million in Q3 and $7.4 million for nine months, primarily due to borrowings under the Knicks and Rangers revolving credit facilities.

Debt, Liquidity and Cash Flow

Cash and cash equivalents were $69.1 million at March 31, 2021; cash, cash equivalents and restricted cash totaled $78.0 million.
Total debt was $410.0 million, consisting of $220.0 million outstanding under the Knicks revolving facility, $160.0 million under the Rangers revolving facility and a $30.0 million current NHL advance.
The Knicks facility has $275.0 million of capacity and matures November 6, 2023; the Rangers facility has $250.0 million of capacity and also matures November 6, 2023. A separate Knicks Holdings facility provides $75.0 million of capacity and was undrawn.
Management reported approximately $220.0 million of additional borrowing capacity and believes liquidity is sufficient for operations and deferred-revenue obligations over the next 12 months.
The $30.0 million NHL advance bears interest at 3.0%, is payable on demand and is expected to be offset against future NHL distributions.
Deferred revenue, including the noncurrent portion, was $161.4 million. Management indicated approximately $133.2 million of deferred revenue obligations, net of billed but uncollected amounts, primarily related to tickets, suites and media rights.
Operating lease liabilities totaled $726.6 million, including long-term obligations related primarily to The Garden and the company’s office arrangements.
Net cash used in operating activities was $54.4 million for the nine months, compared with $111.1 million provided in the prior-year period. Capital expenditures were only $0.4 million.

Guidance, Outlook, Risks and Unusual Items

Management did not provide formal numerical earnings guidance in the filing. It expected fiscal 2021 local media rights revenue to be affected by shortened seasons but anticipated higher fourth-quarter media rights revenue due to season timing and prior-year disruptions.
Suite license revenue was not expected to be material for fiscal 2021. Revenue recovery remained dependent on permitted attendance levels at The Garden and the continued operation of NBA and NHL seasons.
Management could not predict when normal operations would resume or whether COVID-19 would have longer-term effects. Risks include renewed restrictions, league schedule changes, reduced consumer and discretionary spending, work stoppages, team performance, player costs, luxury taxes, sponsorship demand, litigation, related-party performance and debt covenant compliance.
The company expected an approximately $21.0 million pretax charge in Q4 FY2021 related to team personnel contract terminations disclosed after March 31, 2021.
The cancellation of an executive equity award resulted in approximately $7.4 million of previously unrecognized share-based compensation expense during the nine months.
Annual impairment tests identified no impairment of goodwill or indefinite-lived intangible assets. Goodwill was $227.0 million and indefinite-lived intangible assets were $112.1 million.
A hypothetical 100-basis-point increase in floating interest rates would increase annual interest expense by approximately $3.8 million.
The company had $259.6 million remaining under its $525.0 million share-repurchase authorization but made no repurchases during the quarter.

Investor Verification Checklist

Verify the pace and sustainability of attendance increases at The Garden, including postseason attendance and related ticket, suite, sponsorship and concession recovery.
Assess whether operating cash flow can recover before cash reserves and borrowing capacity are materially reduced.
Review the terms, priority and repayment mechanics of the $30.0 million NHL advance and the covenants and collateral securing revolving debt.
Reconcile deferred revenue obligations with potential credits, make-goods or refunds for tickets, suites and sponsorships.
Evaluate the approximately $21.0 million expected team personnel charge and other roster-related commitments in future periods.
Consider the comparability effects of the MSG Entertainment distribution and discontinued operations when analyzing trends.
Monitor related-party arrangements with MSG Entertainment and MSG Networks, including arena license fees, media rights, sponsorship services and corporate support charges.