Business Context and Reporting Period
Filing: Madison Square Garden Entertainment Corp. Form 10-K for the fiscal year ended June 30, 2020. The requested “2019 Q4” period does not match the filing period; the filing provides annual Fiscal Year 2020 results and quarterly data, including the quarter ended June 30, 2020.
The Company became an independent public company on April 17, 2020, following its distribution by Madison Square Garden Sports Corp. Historical results before that date are carve-out and combined results and may not represent the results of a standalone company. The business consists of the Entertainment segment and Tao Group Hospitality.
Key Financial Metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Revenue | $762.9 million | $1,048.9 million | Down 27% |
| Operating loss | $(59.8) million | $(45.6) million | Loss increased 31% |
| Net income (loss) | $(14.7) million | $(30.1) million | Improved $15.5 million |
| Net income (loss) attributable to shareholders | $17.2 million | $(17.9) million | Improved $35.1 million |
| Adjusted operating income (loss) | $(43.3) million | $103.9 million | Down $147.2 million |
| Net cash provided by operating activities | $96.0 million | $91.7 million | Up $4.3 million |
| Capital expenditures | $452.4 million | $184.0 million | Up $268.4 million |
| Cash, cash equivalents and restricted cash | $924.3 million | $1,092.1 million | Down $167.8 million |
| Long-term debt, including current portion | $33.6 million | $54.6 million | Down $21.0 million |
Fiscal 2020 operating margin was approximately (7.8%), compared with approximately (4.3%) in Fiscal 2019. The positive shareholder net income and $0.72 diluted EPS were substantially affected by the $240.8 million gain on the Forum sale and related litigation settlement, as well as investment gains.
At June 30, 2020, the Company had $906.6 million of cash and cash equivalents and $337.2 million of short-term investments. Management stated that it believed available liquidity was sufficient for the following 12 months, including operations, MSG Sports funding commitments and venue development.
Material Changes Versus the Prior Comparable Period
- Revenue declined 27% because COVID-19 restrictions closed the Company’s venues beginning in March 2020, suspended Knicks and Rangers events, reduced sponsorship and suite revenue, cancelled Boston Calling, and materially reduced Tao Group Hospitality operations.
- Entertainment revenue fell 27% to $585.2 million; adjusted operating income declined from $79.7 million to an adjusted operating loss of $44.3 million.
- Tao Group Hospitality revenue declined 29% to $180.2 million. Adjusted operating income declined 94% to $1.5 million, while reported operating loss was $102.6 million after $94.9 million of impairment charges.
- The Company recorded $105.8 million of non-cash impairment charges, including $88.6 million of Tao Group Hospitality goodwill impairment and charges related to long-lived assets and a tradename.
- The Company sold the Forum on May 1, 2020 for $400.0 million of cash consideration, recording a $240.8 million gain, including $140.5 million attributable to settlement of related litigation.
- Capital expenditures increased sharply, principally because of MSG Sphere development. Construction costs incurred for the Las Vegas Sphere were approximately $453.0 million through June 30, 2020, net of $65.0 million received from Las Vegas Sands.
- The Company increased its ownership of Tao Group Hospitality from 62.5% to 77.5% in January 2020.
- The Company adopted the new lease standard, recording $259.8 million of operating lease right-of-use assets and $257.4 million of operating lease liabilities at adoption.
Guidance, Outlook, Risks and Unusual Items
- There was no conventional revenue or earnings guidance. Management estimated an average operational cash burn of approximately $25 million per month for Fiscal 2021, compared with approximately $35 million per month in the fourth quarter of Fiscal 2020. This estimate excludes capital expenditures, severance, capitalized Sphere spending and working-capital changes.
- Management expected the Las Vegas MSG Sphere to open in calendar year 2023 after construction was suspended and rescheduled because of COVID-19-related supply-chain disruptions. The current estimated project cost was approximately $1.66 billion, excluding certain content, internal labor, furniture and equipment costs.
- The Company was pursuing up to $500 million of additional long-term debt financing to support Sphere construction and liquidity. It also had up to $200 million of delayed-draw commitments available to MSG Sports, which could reduce the Company’s cash balance if fully drawn.
- Tao Group Hospitality had a $40 million term loan facility and a $25 million revolving facility. No revolver borrowing was outstanding at June 30, 2020, although $0.75 million was used for letters of credit. An August 2020 amendment suspended certain financial covenants through December 31, 2021, increased liquidity requirements and caused the Company to guarantee Tao obligations and fund an approximately $9.8 million reserve account.
- COVID-19 created substantial uncertainty regarding venue reopening, attendance, capacity restrictions, cancellations, consumer demand, sponsorships, rent obligations and the timing of future cash inflows. Additional impairment charges were possible, particularly for Tao venues.
- Approximately $1.22 billion of MSG Sphere-related commitments were excluded from the contractual obligations table because they were not reflected on the balance sheet. Total reported lease, debt, other contractual and letter-of-credit commitments were $456.2 million, excluding those Sphere commitments.
- The Company had approximately $200.5 million of cash and cash equivalents associated with deferred revenue and collections due to promoters, potentially subject to refunds, credits, make-goods or rescheduled events.
- The Company authorized a $350 million Class A share repurchase program but had made no repurchases. No cash dividend was paid and no near-term dividend was planned.
- The Company is controlled by the Dolan Family Group, which held approximately 70.9% of total voting power as of July 31, 2020. Related-party arrangements with MSG Sports, MSG Networks and other Dolan-affiliated entities are material.
Most Important Facts for Investors to Verify
- Whether venue operations, concerts, sports events, Christmas Spectacular performances and Tao venues have resumed at levels sufficient to reduce the stated cash burn.
- Actual remaining cost, financing plan, construction schedule and opening date for MSG Sphere in Las Vegas, including the approximately $1.22 billion of excluded commitments.
- Liquidity after potential MSG Sports draws under the $200 million delayed-draw facilities and after funding Tao’s reserve and minimum-liquidity requirements.
- Compliance with Tao Group Hospitality’s amended debt covenants and the risk of further venue closures, impairments or debt acceleration.
- The portion of reported Fiscal 2020 earnings attributable to the nonrecurring Forum gain and DraftKings investment gains versus recurring operations.
- The effect of carve-out accounting, corporate allocations and the April 2020 distribution on comparability with Fiscal 2019 and future standalone results.
- Potential obligations related to deferred revenue, customer refunds, promoter collections, leases, pension liabilities, litigation, taxes and put rights held by Tao Group Hospitality minority owners.