Business Context and Reporting Period
The filing is The Madison Square Garden Company’s unaudited Form 10-Q for the three and nine months ended March 31, 2018, its fiscal third quarter. The company operated through MSG Entertainment and MSG Sports. MSG Entertainment included venues, live events, TAO Group, Boston Calling Events, the Christmas Spectacular and, beginning November 2017, Obscura Digital. MSG Sports included the Knicks, Rangers, Liberty, Hartford Wolf Pack, Westchester Knicks and, beginning July 2017, esports organization Counter Logic Gaming.
Results include TAO Group on a three-month lag and include CLG and Obscura from their respective acquisition dates, limiting direct comparability with the prior-year periods. All dollar amounts below are in thousands unless otherwise noted.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2018 | Three Months Ended March 31, 2017 | Nine Months Ended March 31, 2018 | Nine Months Ended March 31, 2017 |
|---|---|---|---|---|
| Revenue | $459,621 | $386,033 | $1,241,138 | $1,012,878 |
| Operating income | $7,332 | $6,706 | $64,264 | $32,114 |
| Operating margin | 1.6% | 1.7% | 5.2% | 3.2% |
| Net income attributable to company stockholders | $9,141 | $(17,545) | $187,647 | $11,555 |
| Diluted EPS | $0.38 | $(0.74) | $7.87 | $0.48 |
| Adjusted operating income | $49,149 | $43,608 | $196,311 | $141,190 |
| Net cash provided by operating activities | Not provided for the quarter | Not provided for the quarter | $171,180 | $107,558 |
Nine-month adjusted operating income increased 39%, including $109,298 from MSG Entertainment and $139,467 from MSG Sports. Adjusted operating income is a non-GAAP measure that excludes depreciation and amortization, share-based compensation and certain purchase-accounting adjustments.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $1,176,554 at March 31, 2018, down from $1,238,114 at June 30, 2017. Restricted cash was $27,837.
- Long-term debt, including current maturities and net of deferred financing costs, was $106,153. The debt primarily comprised the $110,000 TAO Group term loan.
- Operating cash flow of $171,180 was offset by $183,433 of investing cash use and $50,231 of financing cash use, producing a $61,560 decrease in cash during the nine-month period.
- Capital expenditures were $159,113, primarily related to the London land purchase and development of planned venues in Las Vegas and London.
- The company had $377,000 of revolving credit capacity across its facilities; Knicks, Rangers, Knicks unsecured and TAO revolving facilities were undrawn at the applicable reporting dates.
- The company repurchased $11,830 of common stock during the nine months and had $259,639 remaining under its $525,000 authorization. No repurchases occurred during the quarter.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 19%, while nine-month revenue increased 23%. The increase primarily reflected the inclusion of TAO Group and higher MSG Entertainment activity.
- MSG Entertainment third-quarter revenue rose 106% to $159,586 and shifted from a $7,475 operating loss to $2,078 of operating income. Nine-month revenue increased 56% to $595,083 and operating income increased 104% to $86,456.
- MSG Sports third-quarter revenue declined 3% to $300,148 and operating income declined 11% to $53,033. The decline reflected lower league distributions, including the absence of a prior-year $15,500 NHL expansion fee, fewer Knicks and Rangers home games, and lower other live-sports revenue.
- Nine-month MSG Sports revenue increased 2% to $646,168 and operating income increased 12% to $122,049, supported by sponsorship, ticket-related, media-rights and suite revenue.
- The prior-year quarter and nine-month period included a $20,613 pretax non-cash impairment charge related to the Fuse Media equity investment. The absence of that charge materially improved other income in 2018.
- The nine-month 2018 results included a $115,418 income tax benefit, including a $113,494 deferred-tax benefit from the Tax Cuts and Jobs Act. This benefit materially increased reported net income and is not indicative of recurring operating profitability.
- Team personnel transaction costs increased to $7,119 in the quarter and $9,977 for the nine months, including injury, trade and waiver or contract-termination costs.
Guidance, Outlook, Risks and Unusual Items
- Management stated that the company’s sports teams were not expected to participate in their respective league playoffs in the fourth quarter of fiscal 2018. Fourth-quarter results were also expected to reflect contract terminations of certain team personnel.
- The company planned to begin site preparation for the more than 18,000-seat Las Vegas MSG Sphere during summer 2018, with a targeted opening by the end of calendar 2020. It expected to submit a planning application for the London venue by the end of calendar 2018, with a target opening approximately one year after Las Vegas, subject to approvals.
- Management believed available liquidity, operating cash flow and borrowing capacity were sufficient over the next 12 months to fund operations, venue development, new opportunities and potential share repurchases. Management also noted that additional capital would be required for major venue development and might not be available on acceptable terms.
- Key risks include event and team popularity, playoff participation, player injuries and contract costs, league rules and revenue sharing, seasonality, competition, venue construction delays and cost overruns, acquisition integration, TAO Group and esports performance, litigation, cybersecurity, tax-law changes and subsidiary credit-facility defaults.
- GMR, an investee of the company’s 50%-owned Azoff MSG Entertainment, remained involved in antitrust litigation with the Radio Music Licensing Committee. Interim licensing arrangements had been extended through September 30, 2018; management did not believe other disclosed litigation would have a material adverse effect.
- The company had $97,500 drawn under a $100,000 revolving facility provided to Azoff MSG Entertainment and $17,500 drawn under a Tribeca Enterprises facility. Azoff MSG Entertainment repaid $34,000 after quarter-end on April 20, 2018, with the amount remaining available to redraw.
- Goodwill of $392,378 and indefinite-lived intangible assets of $174,850 passed the company’s annual impairment tests with no impairment identified.
Most Important Facts for Investors to Verify
- Separate recurring operating performance from the $115,418 tax benefit and the prior-year Fuse Media impairment comparison.
- Assess the sustainability and comparability of growth after considering TAO Group’s three-month reporting lag and the acquisitions of CLG and Obscura.
- Monitor fourth-quarter exposure to missed NBA and NHL playoffs, player contract-termination costs and seasonality.
- Review funding requirements, construction timing, approvals and potential cost overruns for the Las Vegas and London venues.
- Confirm TAO Group’s ability to service its high-cost term loan and comply with liquidity, leverage and fixed-charge coverage covenants.
- Evaluate the concentration of liquidity in cash, investments and loans to affiliates, including repayment risk from nonconsolidated investees.
- Review related-party arrangements, including media-rights revenue from MSG Networks and transactions involving the Dolan family and affiliated entities.