Madison Square Garden Sports Corp. - Quarter Report: 2020 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
________________________
(Mark One)
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to
Commission File Number: 1-36900
MADISON SQUARE GARDEN SPORTS CORP.
(Exact name of registrant as specified in its charter)
Delaware | 47-3373056 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
Two Penn Plaza | New York | , | NY | 10121 | |
(Address of principal executive offices) | (Zip Code) | ||||
Registrant’s telephone number, including area code: (212) 465-1111
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common Stock | MSGS | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☑ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |
Emerging growth company | ☐ | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No
Number of shares of common stock outstanding as of April 30, 2020:
Class A Common Stock par value $0.01 per share | — | 19,461,991 | |
Class B Common Stock par value $0.01 per share | — | 4,529,517 | |
MADISON SQUARE GARDEN SPORTS CORP.
INDEX TO FORM 10-Q
Page | |
Item 1A. Risk Factors | |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
MADISON SQUARE GARDEN SPORTS CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
March 31, 2020 | June 30, 2019 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 1,006,293 | $ | 1,086,372 | ||||
Restricted cash | 38,844 | 31,529 | ||||||
Short-term investments | 331,019 | 108,416 | ||||||
Accounts receivable, net | 130,824 | 96,856 | ||||||
Net related party receivables | 2,298 | 1,483 | ||||||
Prepaid expenses | 66,515 | 45,150 | ||||||
Other current assets | 57,138 | 43,303 | ||||||
Assets held for sale | 109,155 | — | ||||||
Total current assets | 1,742,086 | 1,413,109 | ||||||
Investments and loans to nonconsolidated affiliates | 61,998 | 84,560 | ||||||
Property and equipment, net of accumulated depreciation and amortization | 1,581,602 | 1,380,392 | ||||||
Right-of-use lease assets | 235,781 | — | ||||||
Amortizable intangible assets, net | 158,968 | 220,706 | ||||||
Indefinite-lived intangible assets | 175,945 | 176,485 | ||||||
Goodwill | 308,951 | 392,513 | ||||||
Other assets | 44,255 | 95,786 | ||||||
Total assets | $ | 4,309,586 | $ | 3,763,551 | ||||
See accompanying notes to consolidated financial statements. | ||||||||
March 31, 2020 | June 30, 2019 | |||||||
(Unaudited) | ||||||||
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 19,696 | $ | 25,009 | ||||
Net related party payables, current | 31,813 | 19,048 | ||||||
Current portion of long-term debt, net of deferred financing costs | 4,792 | 6,042 | ||||||
Accrued liabilities: | ||||||||
Employee related costs | 147,597 | 137,660 | ||||||
Other accrued liabilities | 239,290 | 211,403 | ||||||
Operating lease liabilities, current | 54,875 | — | ||||||
Collections due to promoters | 49,421 | 67,212 | ||||||
Deferred revenue | 266,427 | 293,410 | ||||||
Liabilities held for sale | 72,811 | — | ||||||
Total current liabilities | 886,722 | 759,784 | ||||||
Related party payables, noncurrent | — | 172 | ||||||
Long-term debt, net of deferred financing costs | 379,962 | 48,556 | ||||||
Operating lease liabilities, noncurrent | 192,533 | — | ||||||
Defined benefit and other postretirement obligations | 32,359 | 41,318 | ||||||
Other employee related costs | 67,653 | 62,015 | ||||||
Deferred tax liabilities, net | 69,293 | 79,098 | ||||||
Other liabilities | 81,787 | 66,221 | ||||||
Total liabilities | 1,710,309 | 1,057,164 | ||||||
Commitments and contingencies (see Note 12) | ||||||||
Redeemable noncontrolling interests | 23,000 | 67,627 | ||||||
Madison Square Garden Sports Corp. Stockholders’ Equity: | ||||||||
Class A Common stock, par value $0.01, 120,000 shares authorized; 19,462 and 19,229 shares outstanding as of March 31, 2020 and June 30, 2019, respectively | 204 | 204 | ||||||
Class B Common stock, par value $0.01, 30,000 shares authorized; 4,530 shares outstanding as of March 31, 2020 and June 30, 2019 | 45 | 45 | ||||||
Preferred stock, par value $0.01, 15,000 shares authorized; none outstanding as of March 31, 2020 and June 30, 2019 | — | — | ||||||
Additional paid-in capital | 2,850,372 | 2,845,961 | ||||||
Treasury stock, at cost, 986 and 1,219 shares as of March 31, 2020 and June 30, 2019, respectively | (168,066 | ) | (207,790 | ) | ||||
Retained earnings (accumulated deficit) | (74,866 | ) | 29,003 | |||||
Accumulated other comprehensive loss | (52,607 | ) | (46,923 | ) | ||||
Total Madison Square Garden Sports Corp. stockholders’ equity | 2,555,082 | 2,620,500 | ||||||
Nonredeemable noncontrolling interests | 21,195 | 18,260 | ||||||
Total equity | 2,576,277 | 2,638,760 | ||||||
Total liabilities, redeemable noncontrolling interests and equity | $ | 4,309,586 | $ | 3,763,551 | ||||
See accompanying notes to consolidated financial statements.
1
MADISON SQUARE GARDEN SPORTS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenues (a) | $ | 423,962 | $ | 517,190 | $ | 1,267,549 | $ | 1,367,512 | ||||||||
Operating expenses: | ||||||||||||||||
Direct operating expenses (b) | 272,662 | 310,792 | 776,464 | 821,510 | ||||||||||||
Selling, general and administrative expenses (c) | 154,626 | 138,949 | 445,685 | 391,205 | ||||||||||||
Depreciation and amortization | 29,667 | 28,936 | 86,869 | 88,792 | ||||||||||||
Impairment of intangibles, long-lived assets and goodwill | 102,211 | — | 102,211 | — | ||||||||||||
Operating income (loss) | (135,204 | ) | 38,513 | (143,680 | ) | 66,005 | ||||||||||
Other income (expense): | ||||||||||||||||
Earnings (loss) in equity method investments | (1,096 | ) | (2,881 | ) | (3,739 | ) | 17,131 | |||||||||
Interest income (d) | 3,659 | 7,988 | 17,244 | 22,061 | ||||||||||||
Interest expense | (1,881 | ) | (4,405 | ) | (5,437 | ) | (13,614 | ) | ||||||||
Miscellaneous income (expense), net | (17,448 | ) | 6,201 | (3,071 | ) | (2,895 | ) | |||||||||
(16,766 | ) | 6,903 | 4,997 | 22,683 | ||||||||||||
Income (loss) from operations before income taxes | (151,970 | ) | 45,416 | (138,683 | ) | 88,688 | ||||||||||
Income tax benefit (expense) | 10,904 | (11,253 | ) | 9,300 | (12,605 | ) | ||||||||||
Net income (loss) | (141,066 | ) | 34,163 | (129,383 | ) | 76,083 | ||||||||||
Less: Net loss attributable to redeemable noncontrolling interests | (22,447 | ) | (7 | ) | (23,851 | ) | (3,662 | ) | ||||||||
Less: Net loss attributable to nonredeemable noncontrolling interests | (590 | ) | (1,101 | ) | (1,663 | ) | (4,913 | ) | ||||||||
Net income (loss) attributable to Madison Square Garden Sports Corp.’s stockholders | $ | (118,029 | ) | $ | 35,271 | $ | (103,869 | ) | $ | 84,658 | ||||||
Basic earnings (loss) per common share attributable to Madison Square Garden Sports Corp.’s stockholders | $ | (4.92 | ) | $ | 1.48 | $ | (4.34 | ) | $ | 3.56 | ||||||
Diluted earnings (loss) per common share attributable to Madison Square Garden Sports Corp.’s stockholders | $ | (4.92 | ) | $ | 1.48 | $ | (4.34 | ) | $ | 3.55 | ||||||
Weighted-average number of common shares outstanding: | ||||||||||||||||
Basic | 24,004 | 23,792 | 23,914 | 23,759 | ||||||||||||
Diluted | 24,004 | 23,881 | 23,914 | 23,868 | ||||||||||||
_________________
(a) | Includes revenues from related parties of $63,764 and $74,020 for the three months ended March 31, 2020 and 2019, respectively, and $138,328 and $145,766 for the nine months ended March 31, 2020 and 2019, respectively. |
(b) | Includes net charges from related parties of $372 and $325 for the three months ended March 31, 2020 and 2019, respectively, and $762 and $814 for the nine months ended March 31, 2020 and 2019, respectively. |
(c) | Includes net charges to related parties of $(2,679) and $(2,451) for the three months ended March 31, 2020 and 2019, respectively, and $(8,143) and $(5,892) for the nine months ended March 31, 2020 and 2019, respectively. |
(d) | Includes interest income from nonconsolidated affiliates of $380 and $2,714 for the three and nine months ended March 31, 2019, respectively. |
See accompanying notes to consolidated financial statements.
2
MADISON SQUARE GARDEN SPORTS CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
March 31, | March 31, | |||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||
Net income (loss) | $ | (141,066 | ) | $ | 34,163 | $ | (129,383 | ) | $ | 76,083 | ||||||||||||||||||||||
Other comprehensive income (loss), before income taxes: | ||||||||||||||||||||||||||||||||
Pension plans and postretirement plan: | ||||||||||||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss: | ||||||||||||||||||||||||||||||||
Amortization of actuarial loss included in net periodic benefit cost | $ | 342 | $ | 328 | $ | 1,027 | $ | 984 | ||||||||||||||||||||||||
Settlement loss recognized | 67 | — | 67 | — | ||||||||||||||||||||||||||||
Amortization of prior service credit included in net periodic benefit cost | — | 409 | (1 | ) | 327 | — | 1,094 | (4 | ) | 980 | ||||||||||||||||||||||
Cumulative translation adjustments | (19,946 | ) | 6,383 | (6,778 | ) | 3,181 | ||||||||||||||||||||||||||
Other comprehensive income (loss) | (19,537 | ) | 6,710 | (5,684 | ) | 4,161 | ||||||||||||||||||||||||||
Comprehensive income (loss) | (160,603 | ) | 40,873 | (135,067 | ) | 80,244 | ||||||||||||||||||||||||||
Less: Comprehensive loss attributable to redeemable noncontrolling interests | (22,447 | ) | (7 | ) | (23,851 | ) | (3,662 | ) | ||||||||||||||||||||||||
Less: Comprehensive loss attributable to nonredeemable noncontrolling interests | (590 | ) | (1,101 | ) | (1,663 | ) | (4,913 | ) | ||||||||||||||||||||||||
Comprehensive income (loss) attributable to Madison Square Garden Sports Corp.’s stockholders | $ | (137,566 | ) | $ | 41,981 | $ | (109,553 | ) | $ | 88,819 | ||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
3
MADISON SQUARE GARDEN SPORTS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (129,383 | ) | $ | 76,083 | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 86,869 | 88,792 | ||||||
Impairment of intangibles, long-lived assets and goodwill | 102,211 | — | ||||||
Provision (benefits) from deferred income taxes | (9,805 | ) | 12,112 | |||||
Share-based compensation expense | 47,440 | 45,984 | ||||||
Earnings (loss) in equity method investments, net of income distributions | 3,739 | (17,131 | ) | |||||
Purchase accounting adjustments associated with leases | 4,458 | 3,197 | ||||||
Unrealized loss on equity investment with readily determinable fair value | 2,471 | 2,405 | ||||||
Provision for doubtful accounts | 6,990 | 766 | ||||||
Other non-cash adjustments | 273 | 3,065 | ||||||
Change in assets and liabilities: | ||||||||
Accounts receivable, net | (41,249 | ) | (95,892 | ) | ||||
Net related party receivables | (815 | ) | (862 | ) | ||||
Prepaid expenses and other assets | (52,593 | ) | (58,665 | ) | ||||
Accounts payable | 3,222 | (4,163 | ) | |||||
Net related party payables | 12,593 | 18,692 | ||||||
Accrued and other liabilities | 71,870 | 48,013 | ||||||
Collections due to promoters | 15,924 | (16,953 | ) | |||||
Deferred revenue | (12,110 | ) | (8,099 | ) | ||||
Operating lease right-of-use assets and lease liabilities | (972 | ) | — | |||||
Net cash provided by operating activities | $ | 111,133 | $ | 97,344 | ||||
Cash flows from investing activities: | ||||||||
Capital expenditures | $ | (342,243 | ) | $ | (117,222 | ) | ||
Proceeds from insurance recoveries | 476 | — | ||||||
Payments for acquisition of assets | (1,000 | ) | — | |||||
Purchase of short-term investments | (405,935 | ) | (112,735 | ) | ||||
Proceeds from maturity of short-term investments | 176,661 | — | ||||||
Investments and loans to nonconsolidated affiliates | (75 | ) | (51,807 | ) | ||||
Proceeds from sale of nonconsolidated affiliates | 18,000 | 125,000 | ||||||
Loan repayment received from subordinated note | 58,735 | 4,765 | ||||||
Cash received (paid) for notes receivable | 750 | (7,761 | ) | |||||
Net cash used in investing activities | $ | (494,631 | ) | $ | (159,760 | ) | ||
See accompanying notes to consolidated financial statements. | ||||||||
4
MADISON SQUARE GARDEN SPORTS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
Nine Months Ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
Cash flows from financing activities: | ||||||||
Taxes paid in lieu of shares issued for equity-based compensation | $ | (26,447 | ) | $ | (19,525 | ) | ||
Noncontrolling interest holders’ capital contribution | 4,000 | 5,560 | ||||||
Distributions to noncontrolling interest holders | (535 | ) | (1,263 | ) | ||||
Loans from noncontrolling interest holders | — | 606 | ||||||
Proceeds from revolving credit facilities | 350,000 | — | ||||||
Repayment of revolving credit facility | (15,000 | ) | — | |||||
Principal repayment on long-term debt | (5,000 | ) | (3,929 | ) | ||||
Payment of contingent consideration | (200 | ) | — | |||||
Net cash provided by (used in) financing activities | $ | 306,818 | $ | (18,551 | ) | |||
Effect of exchange rates on cash, cash equivalents and restricted cash | 3,916 | 6,440 | ||||||
Net decrease in cash, cash equivalents and restricted cash | (72,764 | ) | (74,527 | ) | ||||
Cash, cash equivalents and restricted cash at beginning of period | 1,117,901 | 1,256,620 | ||||||
Cash, cash equivalents and restricted cash at end of period | $ | 1,045,137 | $ | 1,182,093 | ||||
Non-cash investing and financing activities: | ||||||||
Non-cash acquisition of additional redeemable noncontrolling interests | $ | 37,715 | $ | — | ||||
Capital expenditures incurred but not yet paid | $ | 75,846 | $ | 17,601 | ||||
Tenant improvement paid by landlord | $ | 195 | $ | 13,715 | ||||
Share-based compensation capitalized in property and equipment | $ | 3,790 | $ | 1,951 | ||||
See accompanying notes to consolidated financial statements.
5
MADISON SQUARE GARDEN SPORTS CORP.
CONSOLIDATED STATEMENTS OF EQUITY AND REDEEMABLE NONCONTROLLING INTERESTS
(Unaudited)
(in thousands)
Three Months Ended March 31, 2020 | ||||||||||||||||||||||||||||||||||||
Common Stock Issued | Additional Paid-In Capital | Treasury Stock | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Loss | Total Madison Square Garden Sports Corp. Stockholders’ Equity | Non - redeemable Noncontrolling Interests | Total Equity | Redeemable Noncontrolling Interests | ||||||||||||||||||||||||||||
Balance as of December 31, 2019 | $ | 249 | $ | 2,833,867 | $ | (185,893 | ) | $ | 43,163 | $ | (33,070 | ) | $ | 2,658,316 | $ | 20,361 | $ | 2,678,677 | $ | 66,223 | ||||||||||||||||
Net income (loss) | — | — | — | (118,029 | ) | — | (118,029 | ) | (590 | ) | (118,619 | ) | (22,447 | ) | ||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (19,537 | ) | (19,537 | ) | — | (19,537 | ) | — | ||||||||||||||||||||||||
Comprehensive income (loss) | — | — | — | — | — | (137,566 | ) | (590 | ) | (138,156 | ) | (22,447 | ) | |||||||||||||||||||||||
Share-based compensation | — | 15,163 | — | — | — | 15,163 | — | 15,163 | — | |||||||||||||||||||||||||||
Tax withholding associated with shares issued for equity-based compensation | — | (183 | ) | — | — | — | (183 | ) | — | (183 | ) | — | ||||||||||||||||||||||||
Common stock issued under stock incentive plans | — | (374 | ) | 374 | — | — | — | — | — | — | ||||||||||||||||||||||||||
Noncontrolling interest non-cash acquisition | — | 20,262 | 17,453 | — | — | 37,715 | — | 37,715 | (37,715 | ) | ||||||||||||||||||||||||||
Noncontrolling interest acquisition | — | (1,424 | ) | — | — | — | (1,424 | ) | 1,424 | — | — | |||||||||||||||||||||||||
Redeemable noncontrolling interest adjustment to redemption fair value | — | (16,939 | ) | — | — | — | (16,939 | ) | — | (16,939 | ) | 16,939 | ||||||||||||||||||||||||
Balance as of March 31, 2020 | $ | 249 | $ | 2,850,372 | $ | (168,066 | ) | $ | (74,866 | ) | $ | (52,607 | ) | $ | 2,555,082 | $ | 21,195 | $ | 2,576,277 | $ | 23,000 | |||||||||||||||
See accompanying notes to consolidated financial statements. | ||||||||||||||||||||||||||||||||||||
6
MADISON SQUARE GARDEN SPORTS CORP.
CONSOLIDATED STATEMENTS OF EQUITY AND REDEEMABLE NONCONTROLLING INTERESTS (Continued)
(Unaudited)
(in thousands)
Three Months Ended March 31, 2019 | ||||||||||||||||||||||||||||||||||||
Common Stock Issued | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total Madison Square Garden Sports Corp. Stockholders’ Equity | Non - redeemable Noncontrolling Interests | Total Equity | Redeemable Noncontrolling Interests | ||||||||||||||||||||||||||||
Balance as of December 31, 2018 | $ | 249 | $ | 2,812,880 | $ | (207,790 | ) | $ | 66,963 | $ | (43,897 | ) | $ | 2,628,405 | $ | 18,984 | $ | 2,647,389 | $ | 72,770 | ||||||||||||||||
Net income (loss) | — | — | — | 35,271 | — | 35,271 | (1,101 | ) | 34,170 | (7 | ) | |||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 6,710 | 6,710 | — | 6,710 | — | |||||||||||||||||||||||||||
Comprehensive income (loss) | — | — | — | — | — | 41,981 | (1,101 | ) | 40,880 | (7 | ) | |||||||||||||||||||||||||
Share-based compensation | — | 17,531 | — | — | — | 17,531 | — | 17,531 | — | |||||||||||||||||||||||||||
Contribution from noncontrolling interest holders | — | — | — | — | — | — | 3,156 | 3,156 | — | |||||||||||||||||||||||||||
Distributions to noncontrolling interest holders | — | — | — | — | — | — | — | — | (1,004 | ) | ||||||||||||||||||||||||||
Balance as of March 31, 2019 | $ | 249 | $ | 2,830,411 | $ | (207,790 | ) | $ | 102,234 | $ | (37,187 | ) | $ | 2,687,917 | $ | 21,039 | $ | 2,708,956 | $ | 71,759 | ||||||||||||||||
See accompanying notes to consolidated financial statements. | ||||||||||||||||||||||||||||||||||||
7
MADISON SQUARE GARDEN SPORTS CORP. | ||||||||||||||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF EQUITY AND REDEEMABLE NONCONTROLLING INTERESTS (Continued) | ||||||||||||||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Nine Months Ended March 31, 2020 | ||||||||||||||||||||||||||||||||||||
Common Stock Issued | Additional Paid-In Capital | Treasury Stock | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Loss | Total Madison Square Garden Sports Corp. Stockholders’ Equity | Non - redeemable Noncontrolling Interests | Total Equity | Redeemable Noncontrolling Interests | ||||||||||||||||||||||||||||
Balance as of June 30, 2019 | $ | 249 | $ | 2,845,961 | $ | (207,790 | ) | $ | 29,003 | $ | (46,923 | ) | $ | 2,620,500 | $ | 18,260 | $ | 2,638,760 | $ | 67,627 | ||||||||||||||||
Net loss | — | — | — | (103,869 | ) | — | (103,869 | ) | (1,663 | ) | (105,532 | ) | (23,851 | ) | ||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (5,684 | ) | (5,684 | ) | — | (5,684 | ) | — | ||||||||||||||||||||||||
Comprehensive loss | — | — | — | — | — | (109,553 | ) | (1,663 | ) | (111,216 | ) | (23,851 | ) | |||||||||||||||||||||||
Share-based compensation | — | 51,230 | — | — | — | 51,230 | — | 51,230 | — | |||||||||||||||||||||||||||
Tax withholding associated with shares issued for equity-based compensation | — | (26,447 | ) | — | — | — | (26,447 | ) | — | (26,447 | ) | — | ||||||||||||||||||||||||
Common stock issued under stock incentive plans | — | (22,271 | ) | 22,271 | — | — | — | — | — | — | ||||||||||||||||||||||||||
Contribution from noncontrolling interest holders | — | — | — | — | — | — | 3,709 | 3,709 | — | |||||||||||||||||||||||||||
Distributions to noncontrolling interest holders | — | — | — | — | — | — | (535 | ) | (535 | ) | — | |||||||||||||||||||||||||
Noncontrolling interest non-cash acquisition | — | 20,262 | 17,453 | — | — | 37,715 | — | 37,715 | (37,715 | ) | ||||||||||||||||||||||||||
Noncontrolling interest acquisition | — | (1,424 | ) | — | — | — | (1,424 | ) | 1,424 | — | — | |||||||||||||||||||||||||
Redeemable noncontrolling interest adjustment to redemption fair value | — | (16,939 | ) | — | — | — | (16,939 | ) | — | (16,939 | ) | 16,939 | ||||||||||||||||||||||||
Balance as of March 31, 2020 | $ | 249 | $ | 2,850,372 | $ | (168,066 | ) | $ | (74,866 | ) | $ | (52,607 | ) | $ | 2,555,082 | $ | 21,195 | $ | 2,576,277 | $ | 23,000 | |||||||||||||||
See accompanying notes to consolidated financial statements. | ||||||||||||||||||||||||||||||||||||
8
MADISON SQUARE GARDEN SPORTS CORP. | ||||||||||||||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF EQUITY AND REDEEMABLE NONCONTROLLING INTERESTS (Continued) | ||||||||||||||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Nine Months Ended March 31, 2019 | ||||||||||||||||||||||||||||||||||||
Common Stock Issued | Additional Paid-In Capital | Treasury Stock | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Loss | Total Madison Square Garden Sports Corp. Stockholders’ Equity | Non - redeemable Noncontrolling Interests | Total Equity | Redeemable Noncontrolling Interests | ||||||||||||||||||||||||||||
Balance as of June 30, 2018 | $ | 249 | $ | 2,817,873 | $ | (223,662 | ) | $ | (11,059 | ) | $ | (46,918 | ) | $ | 2,536,483 | $ | 17,552 | $ | 2,554,035 | $ | 76,684 | |||||||||||||||
Adoption of ASU No. 2016-01 | — | — | — | (5,570 | ) | 5,570 | — | — | — | — | ||||||||||||||||||||||||||
Adoption of ASC Topic 606 | — | — | — | 34,205 | — | 34,205 | — | 34,205 | — | |||||||||||||||||||||||||||
Net income (loss) | — | — | — | 84,658 | — | 84,658 | (4,913 | ) | 79,745 | (3,662 | ) | |||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 4,161 | 4,161 | — | 4,161 | — | |||||||||||||||||||||||||||
Comprehensive income (loss) | — | — | — | — | — | 88,819 | (4,913 | ) | 83,906 | (3,662 | ) | |||||||||||||||||||||||||
Share-based compensation | — | 47,935 | — | — | — | 47,935 | — | 47,935 | — | |||||||||||||||||||||||||||
Tax withholding associated with shares issued for equity-based compensation | — | (19,525 | ) | — | — | — | (19,525 | ) | — | (19,525 | ) | — | ||||||||||||||||||||||||
Common stock issued under stock incentive plans | — | (15,872 | ) | 15,872 | — | — | — | — | — | — | ||||||||||||||||||||||||||
Contribution from noncontrolling interest holders | — | — | — | — | — | — | 8,400 | 8,400 | ||||||||||||||||||||||||||||
Distributions to noncontrolling interest holders | — | — | — | — | — | — | — | — | (1,263 | ) | ||||||||||||||||||||||||||
Balance as of March 31, 2019 | $ | 249 | $ | 2,830,411 | $ | (207,790 | ) | $ | 102,234 | $ | (37,187 | ) | $ | 2,687,917 | $ | 21,039 | $ | 2,708,956 | $ | 71,759 | ||||||||||||||||
See accompanying notes to consolidated financial statements. | ||||||||||||||||||||||||||||||||||||
9
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
All amounts included in the following Notes to Consolidated Financial Statements are presented in thousands, except per share data or as otherwise noted.
Note 1. Description of Business and Basis of Presentation
Spin-off Transaction
On April 17, 2020 (the “Entertainment Distribution Date”), Madison Square Garden Sports Corp. (the “Company”) distributed all of the outstanding common stock of Madison Square Garden Entertainment Corp. (formerly MSG Entertainment Spinco, Inc.) to its stockholders (the “Entertainment Distribution”). Madison Square Garden Entertainment Corp. owns, directly or indirectly, the entertainment business previously owned and operated by the Company through its MSG Entertainment business segment and the sports booking business previously owned and operated by the Company through its MSG Sports business segment (collectively, the “Spinco Business”). In the Entertainment Distribution, (a) each holder of the Company’s Class A common stock, par value $0.01 per share, received one share of Madison Square Garden Entertainment Corp. Class A common stock, par value $0.01 per share, for every share of the Company’s Class A common stock held of record as of the close of business, New York City time, on April 13, 2020 (the “Record Date”), and (b) each holder of the Company’s Class B common stock, par value $0.01 per share, received one share of Madison Square Garden Entertainment Corp. Class B common stock, par value $0.01 per share, for every share of the Registrant’s Class B common stock held of record as of the close of business, New York City time, on the Record Date.
Following the Entertainment Distribution, the Company’s business consist of the Company’s professional sports franchises: the New York Knicks (the “Knicks”) of the National Basketball Association (the “NBA”), the New York Rangers (the “Rangers”) of the National Hockey League (the “NHL”), the Hartford Wolf Pack of the American Hockey League (the “AHL”) and the Westchester Knicks of the NBA G League (the “NBAGL”). In addition, the Company’s business includes esports teams through Counter Logic Gaming (“CLG”) and Knicks Gaming, the Company’s franchise that competes in the NBA 2K League.
As of March 31, 2020, the Company maintained the historical operating structure and reported the financial results of its entertainment business (including its sports bookings business) in continuing operations until the Entertainment Distribution Date. After the Entertainment Distribution, the historical financial results of the Company’s entertainment business (including its sports bookings business) will be reflected in the Company’s consolidated financial statements as discontinued operations under U.S. generally accepted accounting principles (“GAAP”) for all periods presented through the Entertainment Distribution Date, effective as of the filing with the U.S. Securities and Exchange Commission (the “SEC”) of the Company’s Annual Report on Form 10-K for the year ending on June 30, 2020.
Description of Business
Given that the Entertainment Distribution did not occur until after March 31, 2020, the accompanying unaudited condensed consolidated interim financial statements include the historical results of the Company and all descriptions of the Company are as of March 31, 2020 unless otherwise indicated. In future filings, the historical results of the Spinco Business will be presented as discontinued operations.
The Company is a live sports and entertainment business. The Company classifies its business interests into two reportable segments: MSG Entertainment and MSG Sports. MSG Entertainment includes live entertainment events, including concerts and other live events, such as family shows, performing arts and special events, which are presented or hosted in the Company’s diverse collection of venues along with live offerings through TAO Group Holdings LLC (“Tao Group Hospitality”) and Boston Calling Events LLC (“BCE”). Tao Group Hospitality is a hospitality group with globally recognized entertainment, dining and nightlife brands including Tao, Marquee, Lavo, Avenue, Beauty & Essex and Cathédrale. BCE owns and operates New England’s premier Boston Calling Music Festival. MSG Entertainment also includes the Company’s original production — the Christmas Spectacular Starring the Radio City Rockettes (the “Christmas Spectacular”).
MSG Sports includes the Company’s professional sports franchises: the Knicks of the NBA, the Rangers of the NHL, the Hartford Wolf Pack of the AHL and the Westchester Knicks of the NBAGL. These professional sports franchises are collectively referred to herein as the “sports teams.” For the three and nine months ended March 31, 2019, MSG Sports also included the New York Liberty (the “Liberty”) of the Women’s National Basketball Association (the “WNBA”), which was sold in January 2019. MSG Sports also includes other live sporting events, including professional boxing, college basketball, college hockey, professional bull riding, mixed martial arts, esports and college wrestling, all of which the Company promotes, produces and/or presents. In addition, MSG Sports includes CLG, a premier North American esports organization, which the Company acquired in July 2017, and Knicks Gaming, the Company’s franchise that competes in the NBA 2K League. CLG and Knicks Gaming are collectively referred to herein as the “esports teams,” and together with the sports teams, the “teams.”
10
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The Company conducts a significant portion of its operations at venues that it either owns or operates under long-term leases. The Company owns the Madison Square Garden Arena (“The Garden”) and Hulu Theater at Madison Square Garden in New York City, the Forum in Inglewood, CA (See Note 3 for further discussion on the sale of the Forum in the fourth quarter of fiscal year 2020) and The Chicago Theatre in Chicago. In addition, the Company leases Radio City Music Hall and the Beacon Theatre in New York City. Additionally, Tao Group Hospitality operates various restaurants, nightlife and hospitality venues under long-term leases and management contracts in New York, Las Vegas, Los Angeles, Chicago, Australia and Singapore.
The Company was incorporated on March 4, 2015 as an indirect, wholly-owned subsidiary of MSG Networks Inc. (“MSG Networks”), formerly known as The Madison Square Garden Company. On September 30, 2015, MSG Networks distributed all of the outstanding common stock of Madison Square Garden to MSG Networks’ stockholders.
Basis of Presentation
The accompanying unaudited consolidated interim financial statements (referred to as the “Financial Statements” herein) have been prepared in accordance with U.S. GAAP and Article 10 of Regulation S-X of the SEC for interim financial information, and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2019 (“fiscal year 2019”). The Financial Statements presented in this Quarterly Report on Form 10-Q are unaudited; however, in the opinion of management, the Financial Statements reflect all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the periods presented are not necessarily indicative of the results that might be expected for future interim periods or for the full year. The dependence of MSG Entertainment on revenues from the Christmas Spectacular generally means it earns a disproportionate share of its revenues in the second quarter of the Company’s fiscal year. The dependence of MSG Sports on revenues from its NBA and NHL sports teams generally means it earns a disproportionate share of its revenues in the second and third quarters of the Company’s fiscal year.
Impact of COVID-19
The Company’s operations and operating results have been materially impacted by the COVID-19 pandemic and government and league actions taken in response. As of the date of this Quarterly Report on Form 10-Q, virtually all of the Company’s business operations have been suspended. On March 11 and 12, 2020, respectively, the NBA and NHL suspended their 2019-20 seasons (but did not cancel) and no Knicks or Rangers games are currently being played. In addition, as a result of government mandated assembly limitations and closures, no events are currently permitted to be held at The Garden, Hulu Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre or The Chicago Theatre. Additionally, public officials have imposed mandates limiting restaurants and bars to only take-out and delivery service and requiring that nightlife venues close in the cities in which Tao Group Hospitality operates. As a result, virtually all Tao Group Hospitality venues in and outside the United States are closed, which has resulted in the business being materially impacted.
Additionally, as a result of operating disruptions due to COVID-19, the Company’s projected cash flows were directly impacted. This disruption along with the macroeconomic industry and market conditions, were considered a “triggering event” for one of the Company’s reporting units, which required the Company to assess the carrying value of its intangible assets, long-lived assets and goodwill, in that order in accordance with ASC 350-30, for that reporting unit for impairment. Based on this evaluation, the Company recorded a non-cash goodwill impairment charge of $80,698 during the three and nine months ended March 31, 2020 associated with Tao Group Hospitality. In addition, during the three and nine months ended March 31, 2020, the Company recorded non-cash impairment charges associated with one venue within the Tao Group Hospitality of $11,573, $6,399 and $3,541, for Right-of-use assets, Property and equipment assets, and a tradename, respectively. No other goodwill or intangible asset balance was impaired as of March 31, 2020 based on the assessment. However, the duration and impact of the COVID-19 pandemic may result in additional future impairment charges that management will evaluate as facts and circumstances evolve through time. Refer to Note 11 for further detail.
11
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 2. Accounting Policies
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of Madison Square Garden Sports Corp. and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. In addition, the consolidated financial statements of the Company include the accounts from Tao Group Hospitality, BCE and CLG, in which the Company has controlling voting interests. The Company’s consolidation criteria are based on authoritative accounting guidance for voting interest, controlling interest or variable interest entities. Tao Group Hospitality, BCE and CLG are consolidated with the equity owned by other shareholders shown as redeemable or nonredeemable noncontrolling interests in the accompanying consolidated balance sheets, and the other shareholders’ portion of net earnings (loss) and other comprehensive income (loss) shown as net income (loss) or comprehensive income (loss) attributable to redeemable or nonredeemable noncontrolling interests in the accompanying consolidated statements of operations and consolidated statements of comprehensive income (loss), respectively. See Note 2 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019 for more information regarding the classification of redeemable noncontrolling interests of Tao Group Hospitality.
Tao Group Hospitality’s results are reported on a three-month lag basis and Tao Group Hospitality reports on a fiscal year reflecting the retail calendar that ends on the last Sunday of the calendar year (containing 4-4-5 week calendar quarters). Accordingly, the Company’s results for the three months ended March 31, 2020 and 2019 include Tao Group Hospitality’s operating results from September 30, 2019 to December 29, 2019 and from October 1, 2018 to December 30, 2018, respectively, and the Company’s results for the nine months ended March 31, 2020 and 2019 include Tao Group Hospitality’s operating results from April 1, 2019 to December 29, 2019 and April 2, 2018 to December 30, 2018, respectively. With the exception of the balances and activities pertaining to the Tao Group Hospitality’s credit agreements entered into in May 2019, which are recorded as of March 31, 2020 and June 30, 2019 and for the three and nine months ended March 31, 2020, as well as cash distributions and COVID-19 impact on goodwill, which resulted in impairment, all other disclosures related to Tao Group Hospitality’s financial position are reported as of December 29, 2019 and March 31, 2019, as applicable. See Note 14 for further details on Tao Group Hospitality’s credit agreements entered in May 2019.
On January 22, 2020, the Company acquired an additional 15% of common equity interest in Tao Group Hospitality from its noncontrolling interest holders in exchange for an issuance of 102 shares of the Company’s Class A Common Stock. The Company now owns 77.5% of common equity interest in Tao Group Hospitality. In connection with the acquisition of the additional 15% of common equity interest, the Company recorded (i) a decrease of $37,715 in the carrying value of redeemable noncontrolling interest, (ii) a decrease of $17,453 in treasury stock, which represents the average cost of the treasury stock, for the issuance of 102 shares of the Company’s Class A Common Stock, and (iii) an increase of additional paid in capital of $20,262 under the caption “Noncontrolling interest non-cash acquisition” in the accompanying consolidated statements of equity and redeemable noncontrolling interests for the three and nine months ended March 31, 2020.
Use of Estimates
The preparation of the accompanying Financial Statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amount of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of accounts receivable, investments, goodwill, intangible assets, other long-lived assets, tax accruals and other liabilities. In addition, estimates are used in revenue recognition, revenue sharing expense (net of escrow), luxury tax, income tax, performance and share-based compensation, depreciation and amortization, litigation matters and other matters, as well as in the valuation of contingent consideration and noncontrolling interests resulting from business combination transactions. Management believes its use of estimates in the Financial Statements to be reasonable.
Management evaluates its estimates on an ongoing basis using historical experience and other factors, including the general economic environment and actions it may take in the future. The Company adjusts such estimates when facts and circumstances dictate. However, these estimates may involve significant uncertainties and judgments and cannot be determined with precision. In addition, these estimates are based on management’s best judgment at a point in time and, as such, these estimates may ultimately differ from actual results. Changes in estimates resulting from weakness in the economic environment or other factors beyond the Company’s control could be material and would be reflected in the Company’s financial statements in future periods.
12
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Recently Issued Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which supersedes existing guidance on accounting for leases in Accounting Standards Codification (“ASC”) Topic 840, Leases. ASU No. 2016-02, among other things, requires (i) lessees to account for leases as either finance leases or operating leases and generally requires all leases to be recorded on the balance sheet, including those leases classified as operating leases under previous accounting guidance, through the recognition of right-of-use assets and corresponding lease liabilities and (ii) extensive qualitative and quantitative disclosures about leasing activities. The accounting applied by a lessor is largely unchanged from that applied under previous accounting guidance. In January 2018, the FASB issued ASU No. 2018-01, Leases (Topic 842) - Land Easement Practical Expedient for Transition to Topic 842, which provides a lessee or lessor the option to not assess at transition whether existing land easements, not currently accounted for as leases under the current lease guidance, should be treated as leases under the new standard. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842) Targeted improvements, which provides an additional (and optional) transition method whereby the new lease standard is applied at the adoption date and recognized as an adjustment to retained earnings.
The Company adopted ASU No. 2016-02 on July 1, 2019 and elected to apply the standard as of the beginning of the first quarter of fiscal year 2020 under the modified-retrospective transition approach. In connection with the adoption of this standard, the Company applied the package of practical expedients intended to ease transition for existing leases by not requiring the Company to reassess (i) its initial lease classification conclusions for existing or expired leases, (ii) whether an existing or expired contract is a lease or contains an embedded lease, and (iii) the capitalization of initial direct costs for existing or expired leases. In addition, the Company elected not to use “hindsight” in accordance with ASC Subtopic 842-10-65-1 (g) in assessing lease terms and impairment of right-of-use (“ROU”) assets for existing or expired leases under the new standard.
Upon adoption of this standard, the Company recorded initial (i) operating lease ROU assets of $261,110, (ii) current operating lease liabilities of $51,389, and (iii) long-term operating lease liabilities of $207,425. The Company did not record any adjustment to retained earnings. As of July 1, 2019, there were no material finance leases for which the Company was a lessee.
See Note 9 for further details on disclosure required under ASC Topic 842.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. ASU No. 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The Company adopted this standard in the third quarter of fiscal year 2020 and applied it prospectively, beginning with the interim goodwill impairment test performed during the quarter ended March 31, 2020. See Note 11 for further details.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses. ASU No. 2016-13 replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that will require the reflection of expected credit losses and will also require consideration of a broader range of reasonable and supportable information to determine credit loss estimates. In May 2019, the FASB issued ASU No. 2019-05, Targeted Transition Relief, which amends ASC Topic 326 to provide an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost. In November 2019, FASB issued ASU No. 2019-11 to provide clarification guidance in a number of areas, including: (i) expected recoveries for purchased financial assets with credit deterioration, (ii) transition relief for troubled debt restructuring, (iii) disclosures related to accrued interest receivables, and (iv) financial assets secured by collateral maintenance provisions. For most financial instruments, the standard will require the use of a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses, which will generally result in the earlier recognition of credit losses on financial instruments. In February 2020, the FASB issued ASU No. 2020-02, Financial Instruments — Credit Losses and Leases, which includes amendments pursuant to SEC Staff Accounting Bulletin No. 119. This standard will be effective for the Company beginning in the first quarter of fiscal year 2021, with early adoption permitted. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
13
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement as part of the FASB’s broader disclosure framework project. ASU No. 2018-13 removes, modifies and adds certain disclosures providing greater focus on requirements that clearly communicate the most important information to the users of the financial statements with respect to fair value measurements. The standard is effective for the Company beginning in the first quarter of fiscal year 2021, with early adoption permitted. Most of the disclosure requirements in ASU No. 2018-13 would need to be applied on a retrospective basis except for the guidance related to (i) unrealized gains and loss included in other comprehensive income, (ii) disclosure related to range and weighted average Level 3 unobservable inputs, and (iii) narrative disclosure requirements on measurement uncertainty, which are required to be applied on a prospective basis. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans — General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans. ASU No. 2018-14 removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures. The standard will be effective for the Company in the fourth quarter of fiscal year 2021, with early adoption permitted. The amendments in ASU No. 2018-14 are required to be applied retrospectively. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles — Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance also specifies that the balance sheet, income statement, and statement of cash flows presentation of capitalized implementation costs and the related amortization should align with the presentation of the hosting (service) element of the arrangement. The standard is effective for the Company in the first quarter of fiscal year 2021, with early adoption permitted. Entities have the option to apply the guidance prospectively to all implementation costs incurred after the date of adoption or retrospectively. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In November 2018, the FASB issued ASU No. 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities. ASU No. 2018-17 amends the variable interest entities (“VIE”) guidance to align the evaluation of a decision maker’s or service provider’s fee in assessing a variable interest with the guidance in the primary beneficiary test. Specifically, indirect interests held by a related party that is under common control will now be considered on a proportionate basis, rather than in their entirety, when assessing whether the fee qualifies as a variable interest. The proportionate basis approach is consistent with the treatment of indirect interests held by a related party under common control when evaluating the primary beneficiary of a VIE. This effectively means that when a decision maker or service provider has an interest in a related party, regardless of whether they are under common control, it will consider that related party’s interest in a VIE on a proportionate basis throughout the VIE model for both the assessment of a variable interest and the determination of a primary beneficiary. The standard will be effective for the Company in the first quarter of fiscal year 2021, with early adoption permitted. The amendments in ASU No. 2018-17 are required to be applied retrospectively. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. ASU No. 2018-18 clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC Topic 606 when the counterparty is a customer. In addition, ASU No. 2018-18 precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. The standard will be effective for the Company in the first quarter of fiscal year 2021, with early adoption permitted. The amendments in ASU No. 2018-18 are required to be applied retrospectively to the date when the Company initially adopted ASC Topic 606. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825 — Financial Instruments. This ASU provides narrow-scope amendments to help apply these recent standards. The transition requirements and effective date of this ASU will be effective for the Company in the first quarter of fiscal year 2021 with early adoption permitted for certain amendments. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
14
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
In November 2019, the FASB issued ASU No. 2019-08, Compensation — Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements — Share-Based Consideration Payable to a Customer. This ASU requires that share-based payment awards issued to a customer in connection with a revenue arrangement be recorded as a reduction of the transaction price in revenue. The amount recorded as a reduction of the transaction price is measured using the grant-date fair value of the award and is classified in accordance with ASC Topic 718. Changes in the measurement of the share-based payments after the grant date that are due to the form of the consideration are not included in the transaction price and are recorded elsewhere in the statement of operations. The award is measured and classified under ASC Topic 718 for its entire life, unless the award is modified after it vests and the grantee is no longer a customer. The new guidance is effective for the Company in the first quarter of fiscal year 2021, with early adoption permitted. The adoption of this standard is not expected to have an impact on the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU eliminates certain exceptions to the general approach in ASC Topic 740 and includes methods of simplification to the existing guidance. The new guidance is effective for the Company in the first quarter of fiscal year 2022, with early adoption permitted. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments-Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The amendments in this ASU clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. In addition, the amendments clarify the accounting for certain forward contracts and purchased options accounted for under Topic 815. The new guidance is effective for the Company in the first quarter of fiscal year 2021, with early adoption permitted. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional expedients and exceptions to the guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate and other interbank offered rates to alternative reference rates. The new guidance was effective upon issuance, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
15
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 3. Assets Held for Sale
On March 24, 2020, the Company entered into a Membership Interest Purchase Agreement (the “MIPA”) with CAPSS LLC pursuant to which the Company agreed to sell the Forum in Inglewood to CAPSS LLC and settle related litigation for a cash purchase price of $400,000, subject to regulatory and other customary closing conditions. The transaction subsequently closed on May 1, 2020. As a result of the MIPA, the assets and liabilities of the Forum were classified as held for sale as of March 31, 2020 in accordance with ASC Subtopic 360-10-45-9. The Forum meets the definition of a business under SEC Regulation S-X Rule 11-01(d)-1 and FASB ASC Topic 805 — Business Combinations. This disposition does not represent a strategic shift with a major effect on the Company’s operations, and as such, has not been reflected as a discontinued operation under FASB ASC subtopic 205-20 — Discontinued Operations. The Company believes the fair value less costs to sell for the assets held for sale exceeds their carrying amount; therefore, no adjustment to their carrying value was recorded for the three and nine month ended March 31, 2020.
The assets and liabilities of the Forum were classified in the consolidated balance sheet as assets and liabilities held for sale as of March 31, 2020 and consist of the following, by major class:
Prepaid expenses | $ | 589 | ||
Other current assets | 381 | |||
Property and equipment, net of accumulated depreciation and amortization | 104,781 | |||
Indefinite-lived intangible assets | 540 | |||
Goodwill | 2,864 | |||
Assets held for sale | 109,155 | |||
Accounts payable and accrued liabilities | 18,444 | |||
Collections due to promoters | 33,715 | |||
Deferred revenue | 18,791 | |||
Other liabilities | 1,861 | |||
Liabilities held for sale | 72,811 | |||
Net assets held for sale | $ | 36,344 | ||
16
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 4. Revenue Recognition
Contracts with Customers
All revenue recognized in the consolidated statements of operations is considered to be revenue from contracts with customers. For the three and nine months ended March 31, 2020 and 2019, the Company did not have any material impairment losses on receivables or contract assets arising from contracts with customers.
Disaggregation of Revenue
The following table disaggregates the Company’s revenue by major source and reportable segment based upon the timing of transfer of goods or services to the customer for the three and nine months ended March 31, 2020 and 2019:
Three Months Ended March 31, 2020 | ||||||||||||||||
MSG Entertainment | MSG Sports | Eliminations | Total | |||||||||||||
Event-related and entertainment dining and nightlife offerings (a) | $ | 115,872 | $ | 123,368 | $ | (359 | ) | $ | 238,881 | |||||||
Sponsorship, signage and suite licenses (b) | 14,352 | 52,331 | (171 | ) | 66,512 | |||||||||||
League distributions (b) | — | 48,027 | — | 48,027 | ||||||||||||
Local media rights fees from MSG Networks (b) | — | 57,263 | — | 57,263 | ||||||||||||
Other (c) | 6,174 | 7,404 | (299 | ) | 13,279 | |||||||||||
Total revenues from contracts with customers | $ | 136,398 | $ | 288,393 | $ | (829 | ) | $ | 423,962 | |||||||
Three Months Ended March 31, 2019 | ||||||||||||||||
MSG Entertainment | MSG Sports | Eliminations | Total | |||||||||||||
Event-related and entertainment dining and nightlife offerings (a) | $ | 144,459 | $ | 159,405 | $ | (685 | ) | $ | 303,179 | |||||||
Sponsorship, signage and suite licenses (b) | 17,666 | 66,714 | (171 | ) | 84,209 | |||||||||||
League distributions (b) | — | 50,996 | — | 50,996 | ||||||||||||
Local media rights fees from MSG Networks (b) | — | 66,073 | — | 66,073 | ||||||||||||
Other (c) | 4,327 | 8,406 | — | 12,733 | ||||||||||||
Total revenues from contracts with customers | $ | 166,452 | $ | 351,594 | $ | (856 | ) | $ | 517,190 | |||||||
Nine Months Ended March 31, 2020 | ||||||||||||||||
MSG Entertainment | MSG Sports | Eliminations | Total | |||||||||||||
Event-related and entertainment dining and nightlife offerings (a) | $ | 534,567 | $ | 278,425 | $ | (455 | ) | $ | 812,537 | |||||||
Sponsorship, signage and suite licenses (b) | 53,279 | 131,577 | (511 | ) | 184,345 | |||||||||||
League distributions (b) | — | 108,871 | — | 108,871 | ||||||||||||
Local media rights fees from MSG Networks (b) | — | 124,001 | — | 124,001 | ||||||||||||
Other (c) | 20,251 | 18,019 | (475 | ) | 37,795 | |||||||||||
Total revenues from contracts with customers | $ | 608,097 | $ | 660,893 | $ | (1,441 | ) | $ | 1,267,549 | |||||||
17
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Nine Months Ended March 31, 2019 | ||||||||||||||||
MSG Entertainment | MSG Sports | Eliminations | Total | |||||||||||||
Event-related and entertainment dining and nightlife offerings (a) | $ | 564,244 | $ | 316,368 | $ | (685 | ) | $ | 879,927 | |||||||
Sponsorship, signage and suite licenses (b) | 57,658 | 149,875 | (511 | ) | 207,022 | |||||||||||
League distributions (b) | — | 107,924 | — | 107,924 | ||||||||||||
Local media rights fees from MSG Networks (b) | — | 130,244 | — | 130,244 | ||||||||||||
Other (c) | 24,017 | 18,378 | — | 42,395 | ||||||||||||
Total revenues from contracts with customers | $ | 645,919 | $ | 722,789 | $ | (1,196 | ) | $ | 1,367,512 | |||||||
_________________
(a) | Consisted of (i) ticket sales and other ticket-related revenues, (ii) Tao Group Hospitality’s entertainment dining and nightlife offerings, (iii) food, beverage and merchandise sales, and (iv) venue license fees from third-party promoters. Event-related revenues and entertainment, dining and nightlife offerings are recognized at a point in time as the related event occurs. As such, these revenues have been included in the same category in the table above. |
(b) | See Note 3 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019 for further details on the pattern of recognition of (i) sponsorship, signage and suite license revenues, (ii) league distributions, and (iii) local media rights fees from MSG Networks. |
(c) | For the three and nine months ended March 31, 2020 and 2019, the Company’s other revenues primarily consisted of managed venue revenues from Tao Group Hospitality and advertising commission revenue from MSG Networks. For the three and nine months ended March 31, 2019, the Company’s other revenues also included revenues from Obscura Digital (“Obscura”). |
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed receivables, contract assets and contract liabilities on the consolidated balance sheet. The following table provides information about contract balances from the Company’s contracts with customers as of March 31, 2020 and June 30, 2019.
March 31, | June 30, | |||||||
2020 | 2019 | |||||||
Receivables from contracts with customers, net (a) | $ | 130,842 | $ | 96,982 | ||||
Contract assets, current (b) | 18,732 | 7,314 | ||||||
Deferred revenue, including non-current portion (c) | 275,078 | 305,821 | ||||||
(a) | Receivables from contracts with customers, which are reported in Accounts receivable, net and Net related party receivables in the Company’s consolidated balance sheets, represent the Company’s unconditional rights to consideration under its contracts with customers. As of March 31, 2020 and June 30, 2019, the Company’s receivables reported above included $18 and $126, respectively, related to various related parties associated with contracts with customers. See Note 20 for further details on these related party arrangements. |
(b) | Contract assets, which are reported as Other current assets in the Company’s consolidated balance sheets, primarily relate to the Company’s rights to consideration for goods or services transferred to the customer, for which the Company does not have an unconditional right to bill as of the reporting date. Contract assets are transferred to accounts receivable once the Company’s right to consideration becomes unconditional. As of March 31, 2020, the Company’s contract assets above included $10,059 of contract assets related to local media rights with MSG Networks. See Note 20 for further details on these related party arrangements. |
18
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(c) | Deferred revenue primarily relates to the Company’s receipt of consideration from customers in advance of the Company’s transfer of goods or services to those customers. Deferred revenue is reduced and the related revenue is recognized once the underlying goods or services are transferred to a customer. The Company’s deferred revenue related to local media rights with MSG Networks was zero as of March 31, 2020 and June 30, 2019. See Note 20 for further details on these related party arrangements. Revenue recognized for the nine months ended March 31, 2020 relating to the deferred revenue balance as of June 30, 2019 was $252,857. |
Transaction Price Allocated to the Remaining Performance Obligations
The following table depicts the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 2020. This primarily relates to performance obligations under sponsorship and suite license arrangements. In developing the estimated revenue, the Company applies the allowable practical expedient and does not disclose information about remaining performance obligations that have original expected durations of one year or less. Additionally, the Company has elected to exclude variable consideration from its disclosure related to the remaining performance obligations under its local media rights arrangements with MSG Networks.
Fiscal Year 2020 (remainder) | $ | 22,157 | ||
Fiscal Year 2021 | 219,870 | |||
Fiscal Year 2022 | 147,472 | |||
Fiscal Year 2023 | 87,246 | |||
Fiscal Year 2024 | 60,257 | |||
Thereafter | 127,619 | |||
$ | 664,621 | |||
Note 5. Team Personnel Transactions
Direct operating and selling, general and administrative expenses in the accompanying consolidated statements of operations include a net expense for transactions relating to the Company’s sports teams for waiver/contract termination costs, player trades and season-ending injuries (“Team personnel transactions”). Team personnel transactions expense was $5,711 and $16,976 for the three months ended March 31, 2020 and 2019, respectively, and $33,598 and $57,063 for the nine months ended March 31, 2020 and 2019, respectively.
Note 6. Computation of Earnings (Loss) per Common Share
The following table presents a reconciliation of weighted-average shares used in the calculations of basic and diluted earnings (loss) per common share attributable to the Company’s stockholders (“EPS”).
Three Months Ended | Nine Months Ended | |||||||||||
March 31, | March 31, | |||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||
Weighted-average shares (denominator): | ||||||||||||
Weighted-average shares for basic EPS | 24,004 | 23,792 | 23,914 | 23,759 | ||||||||
Dilutive effect of shares issuable under share-based compensation plans | — | 89 | — | 109 | ||||||||
Weighted-average shares for diluted EPS | 24,004 | 23,881 | 23,914 | 23,868 | ||||||||
Weighted-average anti-dilutive shares | — | 449 | — | 340 | ||||||||
19
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 7. Cash, Cash Equivalents and Restricted Cash
The following table provides a summary of the amounts recorded as cash, cash equivalents and restricted cash.
As of | ||||||||||||||||
March 31, 2020 | June 30, 2019 | March 31, 2019 | June 30, 2018 | |||||||||||||
Captions on the consolidated balance sheets: | ||||||||||||||||
Cash and cash equivalents | $ | 1,006,293 | $ | 1,086,372 | $ | 1,153,060 | $ | 1,225,638 | ||||||||
Restricted cash (a) | 38,844 | 31,529 | 29,033 | 30,982 | ||||||||||||
Cash, cash equivalents and restricted cash on the consolidated statements of cash flows | $ | 1,045,137 | $ | 1,117,901 | $ | 1,182,093 | $ | 1,256,620 | ||||||||
_________________
(a) | See Note 2 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019 for more information regarding the nature of restricted cash. |
Note 8. Investments and Loans to Nonconsolidated Affiliates
The Company’s investments and loans to nonconsolidated affiliates which are accounted for under the equity method of accounting and equity investments without readily determinable fair values in accordance with ASC Topic 323, Investments - Equity Method and Joint Ventures and ASC Topic 321, Investments - Equity Securities, respectively, consisted of the following:
_________________
Ownership Percentage | Investment | Loan | Total | ||||||||||||
March 31, 2020 | |||||||||||||||
Equity method investments: | |||||||||||||||
SACO Technologies Inc. (“SACO”) | 30 | % | $ | 40,656 | $ | — | $ | 40,656 | |||||||
Others | 8,007 | — | 8,007 | ||||||||||||
Equity investments without readily determinable fair values (a) | 13,335 | — | 13,335 | ||||||||||||
Total investments and loans to nonconsolidated affiliates | $ | 61,998 | $ | — | $ | 61,998 | |||||||||
June 30, 2019 | |||||||||||||||
Equity method investments: | |||||||||||||||
SACO | 30 | % | $ | 44,321 | $ | — | $ | 44,321 | |||||||
Tribeca Enterprises LLC (“Tribeca Enterprises”) (b) | 50 | % | — | 18,000 | 18,000 | ||||||||||
Others | 8,372 | — | 8,372 | ||||||||||||
Equity investments without readily determinable fair values (a) | 13,867 | — | 13,867 | ||||||||||||
Total investments and loans to nonconsolidated affiliates | $ | 66,560 | $ | 18,000 | $ | 84,560 | |||||||||
(a) | In accordance with the ASC Topic 321, Investments - Equity Securities, the Company applies the measurement alternative to its equity investments without readily determinable fair values. The Company recorded an impairment charge of $533 for the nine months ended March 31, 2020. See Note 7 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019 for more information regarding the application of the measurement alternative. |
(b) | On August 5, 2019, immediately prior to the sale of the Company’s equity capital in Tribeca Enterprises for $18,000, the Company contributed the $18,000 of indebtedness under the Company’s revolving credit facility to the Company’s equity capital in Tribeca Enterprises. |
20
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Equity Investment with Readily Determinable Fair Value
In addition to the investments discussed above, the Company holds an investment of 3,208 shares of the common stock of Townsquare Media, Inc. (“Townsquare”). Townsquare is a leading media, entertainment and digital marketing solutions company that is listed on the New York Stock Exchange (“NYSE”) under the symbol “TSQ”. In accordance with ASC Topic 321, Investments - Equity Securities, this investment is measured at readily determinable fair value and is reported under Other assets in the accompanying consolidated balance sheets as of March 31, 2020 and June 30, 2019. See Note 13 for more information on the fair value of the investment in Townsquare.
Note 9. Leases
The Company’s leases primarily consist of certain live-performance venues, entertainment dining and nightlife venues, corporate office space, storage and, to a lesser extent, office and other equipment. The Company determines whether an arrangement contains a lease at the inception of the arrangement. If a lease is determined to exist, the lease term is assessed based on the date when the underlying asset is made available for the Company’s use by the lessor. The Company’s assessment of the lease term reflects the non-cancelable term of the lease, inclusive of any rent-free periods and/or periods covered by early-termination options which the Company is reasonably certain not to exercise, as well as periods covered by renewal options which the Company is reasonably certain of exercising. The Company also determines lease classification as either operating or finance at lease commencement, which governs the pattern of expense recognition and the presentation reflected in the consolidated statements of operations over the lease term.
For leases with a term exceeding 12 months, a lease liability is recorded on the Company’s consolidated balance sheet at lease commencement reflecting the present value of the fixed minimum payment obligations over the lease term. A corresponding ROU asset equal to the initial lease liability is also recorded, adjusted for any prepaid rent and/or initial direct costs incurred in connection with execution of the lease and reduced by any lease incentives received.
The Company includes fixed payment obligations related to non-lease components in the measurement of ROU assets and lease liabilities, as the Company has elected to account for lease and non-lease components together as a single lease component. ROU assets associated with finance leases are presented separate from operating leases ROU assets and are included within Property and equipment, net on the Company’s consolidated balance sheet. For purposes of measuring the present value of the Company’s fixed payment obligations for a given lease, the Company uses its incremental borrowing rate, determined based on information available at lease commencement, as rates implicit in the underlying leasing arrangements are typically not readily determinable. The Company’s incremental borrowing rate reflects the rate it would pay to borrow on a secured basis and incorporates the term and economic environment surrounding the associated lease.
For operating leases, fixed lease payments are recognized as lease expense on a straight-line basis over the lease term. For finance leases, the initial ROU asset is depreciated on a straight-line basis over the lease term, along with recognition of interest expense associated with accretion of the lease liability, which is ultimately reduced by the related fixed payments. For leases with a term of 12 months or less (“short-term leases”), any fixed lease payments are recognized on a straight-line basis over the lease term and are not recognized on the consolidated balance sheet. Variable lease costs for both operating and finance leases, if any, are recognized as incurred and such costs are excluded from lease balances recorded on the consolidated balance sheet. In addition, the Company excluded its ground lease with Las Vegas Sands Corp. (“Sands”) associated with MSG Sphere in Las Vegas from the ROU asset and lease liability balance recorded on the consolidated balance sheet as the ground lease will have no fixed rent. Under the ground lease agreement, Sands will receive priority access to purchase tickets to events at the venue for inclusion in hotel packages or other uses, as well as certain rent-free use of the venue to support its Expo Center business. However, if certain return objectives are achieved, Sands will receive 25% of the after-tax cash flow in excess of such objectives. The ground lease is for a term of 50 years.
As of March 31, 2020, the Company’s existing operating leases, which are recorded on the accompanying financial statements, have remaining lease terms ranging from 3 months to 18.5 years. In certain instances, leases include options to renew, with varying option terms in each case. The exercise of lease renewal options is generally at the Company’s discretion and is considered in the Company’s assessment of the respective lease term. The Company’s lease agreements do not contain material residual value guarantees or material restrictive covenants.
21
MADISON SQUARE GARDEN SPORTS CORP.
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except per share data)
The following table summarizes the ROU assets and lease liabilities recorded on the Company’s consolidated balance sheet as of March 31, 2020:
Line Item in the Company’s Consolidated Balance Sheet | ||||||
Right-of-use assets: | ||||||
Operating leases | Right-of-use lease assets | $ | 235,781 | |||
Lease liabilities: | ||||||
Operating leases, current | Operating lease liabilities, current | $ | 54,875 | |||
Operating leases, noncurrent | Operating lease liabilities, noncurrent | 192,533 | ||||
Total lease liabilities | $ | 247,408 | ||||
The following table summarizes the activity recorded within the Company’s consolidated statement of operations for the three and nine months ended March 31, 2020:
Line Item in the Company’s Consolidated Statement of Operations | Three Months Ended March 31, 2020 | Nine Months Ended March 31, 2020 | ||||||||
Operating lease cost | Direct operating expenses | $ | 8,176 | $ | 24,652 | |||||
Operating lease cost | Selling, general and administrative expenses | 5,347 | 15,065 | |||||||
Short-term lease cost | Direct operating expenses | 24 | 456 | |||||||
Variable lease cost | Direct operating expenses | 830 | 3,287 | |||||||
Variable lease cost | Selling, general and administrative expenses | 14 | 40 | |||||||
Total lease cost | $ | 14,391 | $ | 43,500 | ||||||
Supplemental Information
For the nine months ended March 31, 2020, cash paid for amounts included in the measurement of lease liabilities was $41,102. For the nine months ended March 31, 2020, the Company had two ROU assets of $15,759 obtained in exchange for new operating lease liabilities.
During the three months ended March 31, 2020, a non-cash impairment charge of $11,573 was recorded for Right-of-use lease associated with one venue within the Tao Group Hospitality. See Note 1 for further details.
The weighted average remaining lease term for operating leases recorded on the accompanying consolidated balance sheet as of March 31, 2020 was 6.2 years. The weighted average discount rate was 9.44% as of March 31, 2020 and represented the Company’s estimated incremental borrowing rate, assuming a secured borrowing, based on the remaining lease term at the time of either (i) adoption of the standard or (ii) the period in which the lease term expectation was modified.
Maturities of operating lease liabilities as of March 31, 2020 are as follows:
Fiscal Year 2020 (remainder) | $ | 15,690 | ||
Fiscal Year 2021 | 58,579 | |||
Fiscal Year 2022 | 59,482 | |||
Fiscal Year 2023 | 55,232 | |||
Fiscal Year 2024 | 39,735 | |||
Thereafter | 126,222 | |||
Total lease payments | 354,940 | |||
Less imputed interest | 107,532 | |||
Total lease liabilities (a) | $ | 247,408 | ||
(a) | Operating lease payments exclude minimum lease payments related to a location associated with the entertainment dining and nightlife offerings as the Company has not yet taken possession of the space. |
22
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 10. Property and Equipment
As of March 31, 2020 and June 30, 2019, property and equipment consisted of the following assets:
March 31, 2020 | June 30, 2019 | |||||||
Land(a) | $ | 147,084 | $ | 172,558 | ||||
Buildings(a) | 1,045,878 | 1,126,621 | ||||||
Equipment(a) | 347,820 | 335,932 | ||||||
Aircraft | 38,090 | 38,090 | ||||||
Furniture and fixtures(a) | 42,410 | 53,571 | ||||||
Leasehold improvements | 183,679 | 180,757 | ||||||
Construction in progress(a) | 575,113 | 238,928 | ||||||
2,380,074 | 2,146,457 | |||||||
Less accumulated depreciation and amortization(a)(b) | (798,472 | ) | (766,065 | ) | ||||
$ | 1,581,602 | $ | 1,380,392 | |||||
_________________
(a) | In connection with the execution of the MIPA on March 24, 2020, pursuant to which the Company agreed to sell the Forum in Inglewood to CAPSS LLC (See Note 3 for further details), the Company allocated $104,781 of Property and equipment, net of accumulated depreciation and amortization of $47,609 to assets held for sale. The allocation substantially consisted of buildings and, to a lesser extent, land. |
(b) | During the three months and nine month ended March 31, 2020, the Company recorded a non-cash impairment charge of $6,399 for long-lived assets associated with one venue within the Tao Group Hospitality. See Note 1 for further details. |
The increase in Construction in progress is primarily associated with the development and construction of MSG Spheres in Las Vegas and London. The property and equipment balances above included $77,188 and $35,380 of capital expenditure accruals as of March 31, 2020 and June 30, 2019, respectively, which are reflected in “Other accrued liabilities” in the accompanying consolidated balance sheets.
Depreciation and amortization expense on property and equipment was $24,576 and $24,684 for the three months ended March 31, 2020 and 2019, respectively. For the nine months ended March 31, 2020 and 2019, depreciation and amortization expense on property and equipment was $72,544 and $75,480, respectively.
Note 11. Goodwill and Intangible Assets
The carrying amounts and activity of goodwill, by reportable segment, as of June 30, 2019 through March 31, 2020 are as follows:
MSG Entertainment | MSG Sports | Total | |||||||||
Balance as of June 30, 2019 | $ | 165,558 | $ | 226,955 | $ | 392,513 | |||||
Allocation to assets held for sale (a) | (2,864 | ) | — | (2,864 | ) | ||||||
Goodwill impairment (b) | (80,698 | ) | — | (80,698 | ) | ||||||
Balance as of March 31, 2020 | $ | 81,996 | $ | 226,955 | $ | 308,951 | |||||
(a) | In connection with the execution of the MIPA on March 24, 2020, pursuant to which the Company agreed to sell the Forum in Inglewood to CAPSS LLC (See Note 3 for further details), the Company classified $2,864 of goodwill associated with the Forum to assets held for sale in accordance with FASB ASC Topic 350, Intangibles - Goodwill and Other, ASC subtopics 350-20-40-1 to 350-20-40-7. The allocation of goodwill to the Forum was based on the fair value of the Forum compared to the fair value of the Company’s MSG Entertainment reporting unit (“Relative Fair Value Basis”). The fair |
23
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
value of the Company’s MSG Entertainment reporting unit and the Forum were based on unobservable inputs classified within Level III of the fair value hierarchy, primarily from utilizing the discounted cash flow model, which is an income-based approach.
(b) | During the first quarter of fiscal year 2020, the Company performed its annual impairment test of goodwill and determined that there were no impairments of goodwill identified for any of its reporting units as of the impairment test date. During the third quarter of fiscal year 2020, the Company’s operating results have been, and continue to be, materially impacted by the COVID-19 pandemic (see Note 1 “Impact of COVID-19” for further details). While the Company concluded that the effects of COVID-19 would not more likely than not reduce the fair value of its MSG Sports and MSG Entertainment reporting units below their carrying amounts, the Company concluded a triggering event had occurred for its Tao Group Hospitality reporting unit as of March 31, 2020 and performed an interim impairment test. For the interim impairment test, the Company estimated the fair value of the Tao Group Hospitality reporting unit based on a discounted cash flow model (income approach). This approach relied on numerous assumptions and judgments that were subject to various risks and uncertainties. Principal assumptions utilized, all of which are considered Level III inputs under the fair value hierarchy, include the Company’s estimates of future revenue and terminal growth rates, margin assumptions and the discount rate applied to estimate future cash flows. As a result of the interim impairment test, the Company recorded a non-cash goodwill impairment charge of $80,698 for the three and nine months ended March 31, 2020. |
The Company’s indefinite-lived intangible assets as of March 31, 2020 and June 30, 2019 are as follows:
Sports franchises (MSG Sports) | Trademarks (MSG Entertainment) | Photographic related rights (MSG Sports) | Total | |||||||||||||
Balance as of June 30, 2019 | $ | 111,064 | 62,421 | 3,000 | $ | 176,485 | ||||||||||
Allocation to the assets held for sale (a) | — | (540 | ) | — | (540 | ) | ||||||||||
Balance as of March 31, 2020 | $ | 111,064 | $ | 61,881 | $ | 3,000 | $ | 175,945 | ||||||||
_________________
(a) | In connection with the execution of the MIPA on March 24, 2020, pursuant to which the Company agreed to sell the Forum in Inglewood to CAPSS LLC (See Note 3 for further detail), the Company allocated $540 of trademarks associated with the Forum to assets held for sale in accordance with FASB ASC Topic 350, Intangibles - Goodwill and Other, ASC subtopics 350-20-40-1 to 350-20-40-7. |
During the first quarter of fiscal year 2020, the Company performed its annual impairment test of identifiable indefinite-lived intangible assets and determined that there were no impairments identified as of the impairment test date.
The Company’s intangible assets subject to amortization are as follows:
March 31, 2020 | Gross | Accumulated Amortization | Net | |||||||||
Trade names (a) | $ | 99,830 | $ | (19,750 | ) | $ | 80,080 | |||||
Venue management contracts | 79,000 | (13,310 | ) | 65,690 | ||||||||
Favorable lease assets (b) | — | — | — | |||||||||
Season ticket holder relationships | 50,032 | (50,032 | ) | — | ||||||||
Non-compete agreements | 11,400 | (5,845 | ) | 5,555 | ||||||||
Festival rights | 8,080 | (2,020 | ) | 6,060 | ||||||||
Other intangibles (c) | 7,564 | (5,981 | ) | 1,583 | ||||||||
$ | 255,906 | $ | (96,938 | ) | $ | 158,968 | ||||||
24
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
June 30, 2019 | Gross | Accumulated Amortization | Net | |||||||||
Trade names (a) | $ | 100,830 | $ | (12,228 | ) | $ | 88,602 | |||||
Venue management contracts | 79,000 | (9,887 | ) | 69,113 | ||||||||
Favorable lease assets (b) | 54,253 | (10,382 | ) | 43,871 | ||||||||
Season ticket holder relationships | 50,032 | (47,541 | ) | 2,491 | ||||||||
Non-compete agreements | 11,400 | (4,311 | ) | 7,089 | ||||||||
Festival rights | 8,080 | (1,617 | ) | 6,463 | ||||||||
Other intangibles (c) | 10,064 | (6,987 | ) | 3,077 | ||||||||
$ | 313,659 | $ | (92,953 | ) | $ | 220,706 | ||||||
(a) | During the three and nine month ended March 31, 2020, the company recorded a non-cash impairment charge of $3,541 associated with one venue within the Tao Group Hospitality (see Note 1 “Impact of COVID-19” for further details). |
(b) | Upon adoption of ASC Topic 842, the Company also reclassified favorable lease assets net balance of $43,871, which was recognized in connection with the acquisition of Tao Group Hospitality, from Amortizable intangible assets, net, to Right-of-use lease assets in the accompanying consolidated balance sheet as of July 1, 2019. In addition, the Company also reclassified unfavorable lease liability of $6,841, which was reported in Other liabilities in the accompanying consolidated balance sheet, to Right-of-use lease assets as of July 1, 2019. |
(c) | The decreases in the Other intangibles gross and accumulated amortization balances related to the write-off of an Obscura asset after it was fully amortized on an accelerated basis. |
For the three months ended March 31, 2020 and 2019, amortization expense of intangible assets, excluding the amortization of favorable lease assets of $1,152 for the three months ended March 31, 2019, which is reported in rent expense, was $5,091 and $4,252, respectively. For the nine months ended March 31, 2020 and 2019, amortization expense of intangible assets, excluding the amortization of favorable lease assets of $3,545 for the nine months ended March 31, 2019, which is reported in rent expense, was $14,325 and $13,312, respectively.
Note 12. Commitments and Contingencies
Commitments
As more fully described in Note 10 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019, the Company’s commitments consist primarily of (i) the MSG Sports’ obligations under employment agreements that the Company has with its professional sports teams’ personnel that are generally guaranteed regardless of employee injury or termination and (ii) long-term noncancelable operating lease agreements primarily for Company venues, including Tao Group Hospitality venues, and various corporate offices. The Company adopted ASU No. 2016-02, Leases (Topic 842), on July 1, 2019. As a result, the contractual obligations related to future lease payments, which were historically reported as off-balance sheet commitments, are now reflected on the consolidated balance sheet as lease liabilities as of March 31, 2020. See Note 9 for further details about the lease liabilities. Except as described above with respect to lease accounting, the Company did not have any material changes in its contractual obligations since the end of fiscal year 2019 other than activities in the ordinary course of business.
In connection with the Tao Group Hospitality and CLG acquisitions, the Company has accrued deferred and contingent consideration as part of the purchase price allocation. See Note 13 for further details of the amount outstanding as of March 31, 2020.
Legal Matters
The Company is a defendant in various lawsuits. Although the outcome of these lawsuits cannot be predicted with certainty (including the extent of available insurance), management does not believe that resolution of these lawsuits will have a material adverse effect on the Company.
25
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 13. Fair Value Measurements
The following table presents the Company’s assets that are measured at fair value on a recurring basis, which include cash equivalents, short-term investments in U.S treasury bills and an equity investment with readily determinable fair value:
Fair Value Hierarchy | March 31, 2020 | June 30, 2019 | ||||||||
Assets: | ||||||||||
Commercial paper | I | $ | — | $ | 169,707 | |||||
Money market accounts | I | — | 101,517 | |||||||
Time deposits | I | 67,761 | 789,833 | |||||||
U.S. treasury bills | I | 999,542 | — | |||||||
Equity investment with readily determinable fair value | I | 14,790 | 17,260 | |||||||
Total assets measured at fair value | $ | 1,082,093 | $ | 1,078,317 | ||||||
All assets listed above are classified within Level I of the fair value hierarchy as they are valued using observable inputs that reflect quoted prices for identical assets in active markets. The carrying amount of the Company’s commercial paper, money market accounts, time deposits and U.S. treasury bills approximates fair value due to their short-term maturities.
The carrying value and fair value of the Company’s financial instruments reported in the accompanying consolidated balance sheets are as follows:
March 31, 2020 | June 30, 2019 | |||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Assets | ||||||||||||||||
Notes receivable (a) | $ | 12,566 | $ | 12,566 | $ | 13,348 | $ | 13,348 | ||||||||
Short-term investments (a) | 331,019 | 331,019 | 108,416 | 108,416 | ||||||||||||
Equity investment with readily determinable fair value (b) | 14,790 | 14,790 | 17,260 | 17,260 | ||||||||||||
Subordinated term loan receivable (c) | — | — | 58,735 | 57,711 | ||||||||||||
Liabilities | ||||||||||||||||
Long-term debt, including current portion (d) | $ | 385,287 | $ | 381,597 | $ | 55,000 | $ | 54,883 | ||||||||
_________________
(a) | The Company’s notes receivable are invested with banking institutions as collateral for issuances of letters of credit. In addition, the Company’s short-term investments consist of investments that (i) have original maturities of greater than three months and (ii) can be converted into cash by the Company within one year. The Company’s notes receivable and short-term investments are carried at cost, including interest accruals, which approximate fair value and are classified within Level III of the fair value hierarchy. |
(b) | Aggregate cost basis for the Company’s equity investment with readily determinable fair value in Townsquare, including transaction costs, was $23,222 as of March 31, 2020. The fair value of this investment is determined based on quoted market prices in an active market on the NYSE, which is classified within Level I of the fair value hierarchy. For the three months ended March 31, 2020 and 2019, the Company recorded an unrealized gain (loss) of $(17,196) and $5,261, respectively, and for the nine months ended March 31, 2020 and 2019, the Company recorded an unrealized loss of $(2,471) and $(2,405), respectively, in accordance with ASU No. 2016-01 as a result of changes in the market value related to this investment. The unrealized loss is reported in Miscellaneous income (expense), net in the accompanying consolidated statement of operations. |
(c) | In connection with the sale of the Company’s joint venture interest in Azoff MSG Entertainment LLC (“AMSGE”) in December 2018, the $63,500 outstanding balance under the revolving credit facility extended by the Company to AMSGE was converted to a subordinated term loan with an original maturity date of September 21, 2021. The subordinated loan |
26
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
was assumed by an affiliate of AMSGE. During the three months ended March 31, 2019, the Company received a $4,765 principal repayment. During the three months ended December 31, 2019, the Company received a $58,735 principal repayment for the remaining outstanding balance. The Company’s subordinated term loan receivable as of June 30, 2019 was classified within Level II of the fair value hierarchy as it was valued using quoted indices of similar securities for which the inputs were readily observable.
(d) | On March 12, 2020, the Company drew $200,000 on the New York Knicks, LLC and $150,000 on the New York Rangers, LLC five-year revolving facilities. On May 23, 2019, Tao Group Intermediate Holdings LLC and Tao Group Operating LLC entered into a $40,000 five-year term loan facility and a $25,000 five-year term revolving facility. The outstanding balance of the Company’s long-term debt is classified within Level II of the fair value hierarchy as it is valued using quoted indices of similar securities for which the inputs are readily observable. See Note 14 for further details. |
Contingent Consideration Liabilities
In connection with the Tao Group Hospitality and CLG acquisitions (see Note 11 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019 for further details), the Company recorded certain deferred and contingent consideration liabilities at fair value as part of the preliminary purchase price allocation.
The following table provides a reconciliation of the deferred and contingent consideration liabilities in connection with the acquisitions discussed above: | ||||
Nine Months Ended March 31, 2020 | ||||
Balance as of June 30, 2019 | $ | 3,349 | ||
Contingent consideration payment | (200 | ) | ||
Change in fair value of contingent consideration(a) | (1,875 | ) | ||
Balance as of March 31, 2020 | $ | 1,274 | ||
_________________
(a) | The change in fair value of contingent consideration, including accretion, was recorded within Selling, general and administrative expenses in the accompanying consolidated statement of operations for the three and nine months ended March 31, 2020. |
Redeemable Noncontrolling Interests
The Company has the right to increase its equity interest in Tao Group Hospitality through a call right on the equity of the other Tao Group Hospitality equityholders after the fifth anniversary of the closing date (January 31, 2022) and prior to such date in certain events. The other Tao Group Hospitality equityholders have the right to put to Tao Group Hospitality their equity interests in Tao Group Hospitality after the fifth anniversary of the closing and, in certain circumstances to put to the Company prior to the fifth anniversary. As of March 31, 2020, the put and call prices were at fair market value (or in certain circumstances, subject to a discount). Consideration paid upon the exercise of any such put or call right shall be, at the Company’s option, in cash, debt, or the Company’s Class A Common Stock, subject to certain limitations.
During the three and nine months ended March 31, 2020, the Company reduced the carrying value of redeemable noncontrolling interests by $37,715 to reflect a non-cash purchase of the additional 15% of common equity interest in Tao Group Hospitality on January 22, 2020 (see Note 2 for further details). In addition, the redeemable noncontrolling interests balance was reduced by $22,997, which represents a proportional allocation for impairment of intangibles, long-lived assets, and goodwill from the Tao Group Hospitality reporting unit (See Notes 1, 10 and 11 for further details). Concurrently, the nonredeemable noncontrolling interests carrying value was increased by $16,939 to align with its fair value of $23,000 as of March 31, 2020. The fair value of nonredeemable noncontrolling interests was based on unobservable inputs classified within Level III of the fair value hierarchy, primarily from utilizing the discounted cash flow model, which is an income-based approach.
27
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 14. Credit Facilities
Knicks Revolving Credit Facility
On September 30, 2016, New York Knicks, LLC (“Knicks LLC”), a wholly owned subsidiary of the Company, entered into a credit agreement (the “Knicks Credit Agreement”) with a syndicate of lenders providing for a senior secured revolving credit facility of up to $200,000 with a term of five years (the “Knicks Revolving Credit Facility”) to fund working capital needs and for general corporate purposes. Amounts borrowed may be distributed to the Company except during an event of default.
The Knicks Revolving Credit Facility requires Knicks LLC to comply with a debt service ratio of 1.5:1.0 over a trailing four quarter period. As of March 31, 2020, Knicks LLC was in compliance with this financial covenant.
All borrowings under the Knicks Revolving Credit Facility are subject to the satisfaction of certain customary conditions. Borrowings bear interest at a floating rate, which at the option of Knicks LLC may be either (i) a base rate plus a margin ranging from 0.00% to 0.125% per annum or (ii) LIBOR plus a margin ranging from 1.00% to 1.125% per annum. Knicks LLC is required to pay a commitment fee ranging from 0.20% to 0.25% per annum in respect of the average daily unused commitments under the Knicks Revolving Credit Facility. The outstanding balance under the Knicks Revolving Credit Facility was $200,000 as of March 31, 2020 and was recorded as the noncurrent portion of Long-term debt, net of deferred financing costs in the accompanying consolidated balance sheet. The interest rate on the Knicks Revolving Credit Facility as of March 31, 2020 was 1.81%. No interest payments were made under the Knicks Revolving Credit Facility during the nine months ended March 31, 2020.
All obligations under the Knicks Revolving Credit Facility are secured by a first lien security interest in certain of Knicks LLC’s assets, including, but not limited to, (i) the Knicks LLC’s membership rights in the NBA and (ii) revenues to be paid to the Knicks LLC by the NBA pursuant to certain U.S. national broadcast agreements.
Subject to customary notice and minimum amount conditions, Knicks LLC may voluntarily prepay outstanding loans under the Knicks Revolving Credit Facility at any time, in whole or in part, without premium or penalty (except for customary breakage costs with respect to Eurocurrency loans). Knicks LLC is required to make mandatory prepayments in certain circumstances, including without limitation if the maximum available amount under the Knicks Revolving Credit Facility is greater than 350% of qualified revenues.
In addition to the financial covenant described above, the Knicks Credit Agreement and related security agreements contain certain customary representations and warranties, affirmative covenants and events of default. The Knicks Revolving Credit Facility contains certain restrictions on the ability of Knicks LLC to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the Knicks Revolving Credit Facility, including the following: (i) incurring additional indebtedness and contingent liabilities; (ii) creating liens on certain assets; (iii) making restricted payments during the continuance of an event of default under the Knicks Revolving Credit Facility; (iv) engaging in sale and leaseback transactions; (v) merging or consolidating; and (vi) taking certain actions that would invalidate the secured lenders’ liens on any Knicks LLC’s collateral.
Knicks Unsecured Credit Facility
On September 30, 2016, Knicks LLC entered into an unsecured revolving credit facility with a lender for an initial maximum credit amount of $15,000 and a 364-day term (the “Knicks Unsecured Credit Facility”). Knicks LLC renewed this facility with the lender on the same terms in successive years and the facility has been renewed for a new term effective as of September 27, 2019. There was no borrowing under the Knicks Unsecured Credit Facility as of March 31, 2020. This facility does not have financial covenants.
Rangers Revolving Credit Facility
On January 25, 2017, New York Rangers, LLC (“Rangers LLC”), a wholly owned subsidiary of the Company, entered into a credit agreement (the “Rangers Credit Agreement”) with a syndicate of lenders providing for a senior secured revolving credit facility of up to $150,000 with a term of five years (the “Rangers Revolving Credit Facility”) to fund working capital needs and for general corporate purposes. Amounts borrowed may be distributed to the Company except during an event of default.
28
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The Rangers Revolving Credit Facility requires Rangers LLC to comply with a debt service ratio of 1.5:1.0 over a trailing four quarter period. As of March 31, 2020, Rangers LLC was in compliance with this financial covenant.
All borrowings under the Rangers Revolving Credit Facility are subject to the satisfaction of certain customary conditions. Borrowings bear interest at a floating rate, which at the option of Rangers LLC may be either (i) a base rate plus a margin ranging from 0.125% to 0.50% per annum or (ii) LIBOR plus a margin ranging from 1.125% to 1.50% per annum. Rangers LLC is required to pay a commitment fee ranging from 0.375% to 0.625% per annum in respect of the average daily unused commitments under the Rangers Revolving Credit Facility. The outstanding balance under the Rangers Revolving Credit Facility was $150,000 as of March 31, 2020 and was recorded as the noncurrent portion of Long-term debt, net of deferred financing costs in the accompanying consolidated balance sheet. The interest rate on the Rangers Revolving Credit Facility as of March 31, 2020 was 2.185%. No interest payments were made under the Rangers Revolving Credit Facility during the nine months ended March 31, 2020.
All obligations under the Rangers Revolving Credit Facility are secured by a first lien security interest in certain of Rangers LLC’s assets, including, but not limited to, (i) Rangers LLC’s membership rights in the NHL, (ii) revenues to be paid to Rangers LLC by the NHL pursuant to certain U.S. and Canadian national broadcast agreements, and (iii) revenues to be paid to Rangers LLC pursuant to local media contracts.
Subject to customary notice and minimum amount conditions, Rangers LLC may voluntarily prepay outstanding loans under the Rangers Revolving Credit Facility at any time, in whole or in part, without premium or penalty (except for customary breakage costs with respect to Eurocurrency loans). Rangers LLC is required to make mandatory prepayments in certain circumstances, including without limitation if qualified revenues are less than 17% of the maximum available amount under the Rangers Revolving Credit Facility.
In addition to the financial covenant described above, the Rangers Credit Agreement and related security agreements contain certain customary representations and warranties, affirmative covenants and events of default. The Rangers Revolving Credit Facility contains certain restrictions on the ability of Rangers LLC to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the Rangers Revolving Credit Facility, including the following: (i) incurring additional indebtedness and contingent liabilities; (ii) creating liens on certain assets; (iii) making restricted payments during the continuance of an event of default under the Rangers Revolving Credit Facility; (iv) engaging in sale and leaseback transactions; (v) merging or consolidating; and (vi) taking certain actions that would invalidate the secured lenders’ liens on any of Rangers LLC’s assets securing the obligations under the Rangers Revolving Credit Facility.
TAO Credit Facilities
On May 23, 2019, Tao Group Intermediate Holdings LLC (“TAOIH” or “Intermediate Holdings”) and Tao Group Operating LLC (“TAOG” or “Senior Borrower”), entered into a credit agreement (the “Tao Senior Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, collateral agent and a letter of credit issuer, and the lenders party thereto. Together the Tao Senior Credit Agreement and a $49,000 intercompany subordinated credit agreement (the “Tao Subordinated Credit Agreement”) between a subsidiary of the Company and Tao Group Sub-Holdings LLC, a subsidiary of Tao Group Hospitality replaced the Senior Borrower’s prior credit agreement dated January 31, 2017 (“2017 Tao Credit Agreement”). The 2017 Tao Credit Agreement was terminated on May 23, 2019 in its entirety in accordance with its terms as a result of the repayment of all obligations thereunder from the proceeds of the Tao Senior Credit Agreement and the Tao Subordinated Credit Agreement as well as cash on hand. During the nine months ended March 31, 2020, Tao Group Hospitality repaid $5,000 under the Tao Subordinated Credit Agreement. The balances and interest-related activities pertaining to the Tao Subordinated Credit Agreement have been eliminated in the consolidated financial statements in accordance with ASC Topic 810, Consolidation.
The Tao Senior Credit Agreement provides TAOG with senior secured credit facilities (the “Tao Senior Secured Credit Facilities”) consisting of: (i) an initial $40,000 term loan facility with a term of five years (the “Tao Term Loan Facility”) and (ii) a $25,000 revolving credit facility with a term of five years (the “Tao Revolving Credit Facility”). Up to $5,000 of the Tao Revolving Credit Facility is available for the issuance of letters of credit. All borrowings under the Tao Revolving Credit Facility, including, without limitation, amounts drawn under the revolving line of credit are subject to the satisfaction of customary conditions. The Tao Senior Secured Credit Facilities were obtained without recourse to the Company or any of its affiliates (other than TAOG, TAOIH and its subsidiaries as discussed below).
29
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The Tao Senior Credit Agreement requires Intermediate Holdings to comply with a maximum total leverage ratio of 4.00:1.00 and a maximum senior leverage ratio of 3.00:1.00 from the closing date until December 31, 2021 and a maximum total leverage ratio of 3.50:1.00 and a maximum senior leverage ratio of 2.50:1.00 from and after December 31, 2021. In addition, there is a minimum fixed charge coverage ratio of 1.25:1.00 for TAOIH. As of March 31, 2020, TAOIH was in compliance with these financial covenants.
All obligations under the Tao Senior Credit Agreement are guaranteed by TAOIH and TAOIH’s existing and future direct and indirect domestic subsidiaries (other than (i) TAOG, (ii) domestic subsidiaries substantially all of whose assets consist of controlled foreign corporations and (iii) subsidiaries designated as immaterial subsidiaries or unrestricted subsidiaries) (the “Tao Subsidiary Guarantors”, and together with TAOIH, the “Tao Guarantors”). All obligations under the Tao Senior Credit Agreement, including the guarantees of those obligations, are secured by substantially all of the assets of TAOG and each Guarantor (collectively, “Tao Collateral”), including, but not limited to, a pledge of the equity interests in TAOG held directly by TAOIH and the equity interests in each Tao Subsidiary Guarantor held directly or indirectly by TAOIH.
Borrowings under the Tao Senior Credit Agreement bear interest at a floating rate, which at the option of the Senior Borrower may be either (i) a base rate plus an additional rate ranging from 1.50% to 2.50% per annum (determined based on a total leverage ratio) (the “Base Rate”), or (ii) a Eurocurrency rate plus an additional rate ranging from 2.50% to 3.50% per annum (determined based on a total leverage ratio) (the “Eurocurrency Rate”). The Tao Senior Credit Agreement requires TAOG to pay a commitment fee of 0.50% in respect of the daily unused commitments under the Tao Revolving Credit Facility. TAOG is also required to pay customary letter of credit fees, as well as fronting fees, to banks that issue letters of credit pursuant to the Tao Senior Credit Agreement. The interest rate on the Tao Senior Credit Agreement as of March 31, 2020 was 3.28%. The outstanding amount drawn on the Tao Revolving Credit Facility was $15,000 as of June 30, 2019, which is reported under Long-term debt, net of deferred financing costs in the accompanying consolidated balance sheet. In addition to scheduled repayments required under the Tao Term Loan Facility, Tao Group Hospitality repaid the $15,000 outstanding balance under the Tao Revolving Credit Facility during the nine months ended March 31, 2020. There was no borrowing under the Tao Revolving Credit Facility as of March 31, 2020.
During the nine months ended March 31, 2020 and 2019, the Company made interest payments of $1,531 and $7,395, respectively, under the Tao Senior Credit Agreement and the 2017 Tao Credit Agreement.
In addition to the financial covenants described above, the Tao Senior Credit Agreement and related security agreements contain certain customary representations and warranties, affirmative covenants and events of default. The Tao Senior Credit Agreement contains certain restrictions on the ability of TAOIH, the TAOG and its restricted subsidiaries to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the Tao Senior Credit Agreement, including, without limitation, the following: (i) incurring additional indebtedness and contingent liabilities; (ii) creating liens on certain assets; (iii) making investments, loans or advances in or to other persons; (iv) paying dividends and distributions or repurchasing capital stock; (v) engaging in certain transactions with affiliates; (vi) amending specified agreements; (vii) merging or consolidating; (viii) making certain dispositions; and (ix) entering into agreements that restrict the granting of liens. Intermediate Holdings is subject to a customary passive holding company covenant.
Subject to customary notice and minimum amount conditions, TAOG may voluntarily prepay outstanding loans under the Tao Senior Credit Agreement at any time, in whole or in part, without premium or penalty (except for customary breakage costs with respect to Eurocurrency loans). The initial Tao Term Loan Facility amortizes quarterly in accordance with its terms from June 30, 2019 through March 31, 2024 with a final maturity date on May 23, 2024. TAOG is required to make mandatory prepayments on the Tao Term Loan Facility from the net cash proceeds of certain sales of assets (including Tao Collateral) or casualty insurance and/or condemnation recoveries (in each case, subject to certain reinvestment, repair or replacement rights) and the incurrence of certain indebtedness, subject to certain exceptions.
See Note 12 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019 for more information regarding the Company’s debt maturities for the Tao Senior Secured Credit Facilities.
30
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Deferred Financing Costs
The following table summarizes the presentation of the Tao Term Loan Facility and the related deferred financing costs in the accompanying consolidated balance sheets as of March 31, 2020 and June 30, 2019.
March 31, 2020 | ||||||||||||
Tao Term Loan Facility | Deferred Financing Costs | Total | ||||||||||
Current portion of long-term debt, net of deferred financing costs | $ | 5,000 | $ | (208 | ) | $ | 4,792 | |||||
Long-term debt, net of deferred financing costs (a) | 30,000 | (675 | ) | 29,325 | ||||||||
Total | $ | 35,000 | $ | (883 | ) | $ | 34,117 | |||||
June 30, 2019 | ||||||||||||
Tao Term Loan Facility | Deferred Financing Costs | Total | ||||||||||
Current portion of long-term debt, net of deferred financing costs | $ | 6,250 | $ | (208 | ) | $ | 6,042 | |||||
Long-term debt, net of deferred financing costs (a) | 33,750 | (831 | ) | 32,919 | ||||||||
Total | $ | 40,000 | $ | (1,039 | ) | $ | 38,961 | |||||
(a) | In addition to the outstanding balance associated with the Tao Term Loan Facility disclosed above, the Company’s Long-term debt, net of deferred financing costs in the accompanying consolidated balance sheet as of March 31, 2020 also includes, (i) $200,000 outstanding balance drawn under the Knicks Revolving Credit Facility, (ii) $150,000 outstanding balance drawn under the Rangers Revolving Credit Facility, and (iii) $637 related to a note with respect to a loan received by BCE from its noncontrolling interest holder that is due in April 2021. As of June 30, 2019, the Company’s Long-term debt, net of deferred financing costs in the accompanying consolidated balance sheets also includes $15,000 outstanding balance under the Tao Revolving Credit Facility and $637 related to a note with respect to a loan received by BCE from its noncontrolling interest holder that is due in April 2021 in addition to the outstanding balance associated with the Tao Term Loan Facility disclosed above. |
The following table summarizes deferred financing costs, net of amortization, related to the Knicks Revolving Credit Facility, Rangers Revolving Credit Facility, and Tao Revolving Credit Facility as reported on the accompanying consolidated balance sheet:
March 31, 2020 | June 30, 2019 | |||||||
Other current assets | $ | 760 | $ | 760 | ||||
Other assets | 703 | 1,273 | ||||||
31
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 15. Pension Plans and Other Postretirement Benefit Plan
See Note 13 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019 for more information regarding the Company’s defined benefit pension plans (“Pension Plans”), postretirement benefit plan (“Postretirement Plan”), The Madison Square Garden 401(k) Savings Plan and the MSG Sports & Entertainment, LLC Excess Savings Plan (collectively, the “Savings Plans”), and The Madison Square Garden 401(k) Union Plan (the “Union Savings Plan”).
Defined Benefit Pension Plans and Postretirement Benefit Plan
The following table presents components of net periodic benefit cost for the Pension Plans and Postretirement Plan included in the accompanying consolidated statements of operations for the three and nine months ended March 31, 2020 and 2019. Service cost is recognized in Direct operating expenses and Selling, general and administrative expenses. All other components of net periodic benefit cost are reported in Miscellaneous income (expense), net.
Pension Plans | Postretirement Plan | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Service cost | $ | 24 | $ | 20 | $ | 18 | $ | 28 | ||||||||
Interest cost | 1,326 | 1,473 | 28 | 58 | ||||||||||||
Expected return on plan assets | (1,330 | ) | (781 | ) | — | — | ||||||||||
Recognized actuarial loss | 339 | 318 | 3 | 10 | ||||||||||||
Settlement loss | 67 | — | — | — | ||||||||||||
Amortization of unrecognized prior service credit | — | — | — | (1 | ) | |||||||||||
Net periodic benefit cost | $ | 426 | $ | 1,030 | $ | 49 | $ | 95 | ||||||||
Pension Plans | Postretirement Plan | |||||||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Service cost | $ | 72 | $ | 60 | $ | 53 | $ | 83 | ||||||||
Interest cost | 3,982 | 4,419 | 83 | 173 | ||||||||||||
Expected return on plan assets | (3,989 | ) | (2,344 | ) | — | — | ||||||||||
Recognized actuarial loss | 1,019 | 954 | 8 | 30 | ||||||||||||
Settlement loss | 67 | — | — | — | ||||||||||||
Amortization of unrecognized prior service credit | — | — | — | (4 | ) | |||||||||||
Net periodic benefit cost | $ | 1,151 | $ | 3,089 | $ | 144 | $ | 282 | ||||||||
32
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Defined Contribution Pension Plans
For the three and nine months ended March 31, 2020 and 2019, expenses related to the Savings Plans and Union Savings Plan included in the accompanying consolidated statements of operations are as follows:
Savings Plans | Union Savings Plan | ||||||||||||||||||||||||||||||
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
March 31, | March 31, | March 31, | March 31, | ||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||
$ | (804 | ) | $ | 2,248 | $ | 4,706 | $ | 7,624 | $ | 469 | $ | 450 | $ | 522 | $ | 498 | |||||||||||||||
Note 16. Share-based Compensation
See Note 14 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019 for more information regarding the Company’s 2015 Employee Stock Plan (the “Employee Stock Plan”) and its 2015 Stock Plan for Non-Employee Directors.
Share-based compensation expense was $13,855 and $15,580 for the three months ended March 31, 2020 and 2019, respectively, and $47,440 and $45,984 for the nine months ended March 31, 2020 and 2019, respectively. In addition, capitalized share-based compensation expense was $1,308 and $3,790 for the three and nine months ended March 31, 2020, respectively. Capitalized share-based compensation expense was $1,951 for the three and nine months ended March 31, 2019.
Restricted Stock Units Award Activity
The following table summarizes activity related to the Company’s restricted stock units and performance restricted stock units, collectively referred to as “RSUs,” for the nine months ended March 31, 2020:
Number of | Weighted-Average Fair Value Per Share at Date of Grant | ||||||||
Nonperformance Based Vesting RSUs | Performance Based Vesting RSUs | ||||||||
Unvested award balance, June 30, 2019 | 229 | 359 | $ | 252.02 | |||||
Granted (a) | 123 | 114 | $ | 247.18 | |||||
Vested | (108 | ) | (121 | ) | $ | 214.14 | |||
Forfeited | (6 | ) | (21 | ) | $ | 258.17 | |||
Unvested award balance, March 31, 2020 | 238 | 331 | $ | 264.96 | |||||
(a) | Includes incremental performance based RSUs (“PRSUs”) that were historically reported at a target payout of 100%. Upon meeting the performance objectives, the number of PRSUs vested at 105.5% of target. |
The fair value of RSUs that vested during the nine months ended March 31, 2020 was $59,215. Upon delivery, RSUs granted under the Employee Stock Plan were net share-settled to cover the required statutory tax withholding obligations. To fulfill the employees’ required statutory tax withholding obligations for the applicable income and other employment taxes, 102 of these RSUs, with an aggregate value of $26,447 were retained by the Company and the taxes paid are reflected as financing activity in the accompanying consolidated statement of cash flows for the nine months ended March 31, 2020.
The fair value of RSUs that vested during the nine months ended March 31, 2019 was $51,207. The weighted-average fair value per share at grant date of RSUs granted during the nine months ended March 31, 2019 was $305.40.
33
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Stock Options Award Activity
The following table summarizes activity related to the Company’s stock options for the nine months ended March 31, 2020:
Number of Time Vesting Options | Weighted-Average Exercise Price Per Share | Weighted-Average Remaining Contractual Term (In Years) | Aggregate Intrinsic Value | |||||||||
Balance as of June 30, 2019 | 543 | $ | 325.47 | |||||||||
Granted | — | $ | — | |||||||||
Balance as of March 31, 2020 | 543 | $ | 325.47 | 6.31 | $ | 120 | ||||||
Exercisable as of March 31, 2020 | 175 | $ | 299.67 | 6.62 | $ | 80 | ||||||
Note 17. Stock Repurchase Program
On September 11, 2015, the Company’s Board authorized the repurchase of up to $525,000 of the Company’s Class A Common Stock once the shares of the Company’s Class A Common Stock began “regular way” trading on October 1, 2015. Under the authorization, shares of Class A Common Stock may be purchased from time to time in accordance with applicable insider trading and other securities laws and regulations. The timing and amount of purchases will depend on market conditions and other factors.
During the three and nine months ended March 31, 2020, the Company did not engage in any share repurchase activities under its share repurchase program. As of March 31, 2020, the Company had $259,639 of availability remaining under its stock repurchase authorization.
Note 18. Accumulated Other Comprehensive Loss
The following table details the components of accumulated other comprehensive loss:
Three Months Ended March 31, 2020 | |||||||||||
Pension Plans and Postretirement Plan | Cumulative Translation Adjustments | Accumulated Other Comprehensive Loss | |||||||||
Balance as of December 31, 2019 | $ | (41,395 | ) | $ | 8,325 | $ | (33,070 | ) | |||
Other comprehensive loss before reclassifications | — | (19,946 | ) | (19,946 | ) | ||||||
Amounts reclassified from accumulated other comprehensive loss (a) | 409 | — | 409 | ||||||||
Other comprehensive income (loss) | 409 | (19,946 | ) | (19,537 | ) | ||||||
Balance as of March 31, 2020 | $ | (40,986 | ) | $ | (11,621 | ) | $ | (52,607 | ) | ||
Three Months Ended March 31, 2019 | |||||||||||
Pension Plans and Postretirement Plan | Cumulative Translation Adjustments | Accumulated Other Comprehensive Loss | |||||||||
Balance as of December 31, 2018 | $ | (40,193 | ) | $ | (3,704 | ) | $ | (43,897 | ) | ||
Other comprehensive income before reclassifications | — | 6,383 | 6,383 | ||||||||
Amounts reclassified from accumulated other comprehensive loss (a) | 327 | — | 327 | ||||||||
Other comprehensive income | 327 | 6,383 | 6,710 | ||||||||
Balance as of March 31, 2019 | $ | (39,866 | ) | $ | 2,679 | $ | (37,187 | ) | |||
Nine Months Ended March 31, 2020 | |||||||||||
Pension Plans and Postretirement Plan | Cumulative Translation Adjustments | Accumulated Other Comprehensive Loss | |||||||||
Balance as of June 30, 2019 | $ | (42,080 | ) | $ | (4,843 | ) | $ | (46,923 | ) | ||
Other comprehensive loss before reclassifications | — | (6,778 | ) | (6,778 | ) | ||||||
Amounts reclassified from accumulated other comprehensive loss (a) | 1,094 | — | 1,094 | ||||||||
Other comprehensive income (loss) | 1,094 | (6,778 | ) | (5,684 | ) | ||||||
Balance as of March 31, 2020 | $ | (40,986 | ) | $ | (11,621 | ) | $ | (52,607 | ) | ||
34
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Nine Months Ended March 31, 2019 | |||||||||||||||
Pension Plans and Postretirement Plan | Cumulative Translation Adjustments | Unrealized Gain (Loss) on Available-for-sale Securities (b) | Accumulated Other Comprehensive Loss | ||||||||||||
Balance as of June 30, 2018 | $ | (40,846 | ) | $ | (502 | ) | $ | (5,570 | ) | $ | (46,918 | ) | |||
Reclassification of unrealized loss on available-for-sale securities | — | — | 5,570 | 5,570 | |||||||||||
Other comprehensive income before reclassifications | — | 3,181 | — | 3,181 | |||||||||||
Amounts reclassified from accumulated other comprehensive loss (a) | 980 | — | — | 980 | |||||||||||
Other comprehensive income | 980 | 3,181 | — | 4,161 | |||||||||||
Balance as of March 31, 2019 | $ | (39,866 | ) | $ | 2,679 | $ | — | $ | (37,187 | ) | |||||
(a) | Amounts reclassified from accumulated other comprehensive loss represent the amortization of net actuarial loss and net unrecognized prior service credit included in net periodic benefit cost, which is reflected under Miscellaneous income (expense), net in the accompanying consolidated statements of operations. |
(b) | As of July 1, 2018, upon adoption of ASU No. 2016-01, the Company recorded a transition adjustment to reclassify accumulated other comprehensive loss associated with its investment in Townsquare in the amount of $2,466 pre-tax ($5,570, net of tax) to accumulated deficit. See Notes 13 and 21 for more information related to the investment in Townsquare and its impact on the Company’s operating results for the three and nine months ended March 31, 2020 and 2019, which is reflected under Miscellaneous income (expense), net in the accompanying consolidated statements of operations. |
Note 19. Income Taxes
Income tax benefit for the three months ended March 31, 2020 of $10,904 differs from income tax benefit derived from applying the statutory federal rate of 21% to the pretax loss primarily due to tax expense related to (i) an increase in valuation allowance of $27,412, (ii) tax expense of $4,838 relating to noncontrolling interest, and (iii) tax expense from nondeductible officers’ compensation of $1,523, partially offset by state income tax benefit of $13,043.
Income tax benefit for the nine months ended March 31, 2020 of $9,300 differs from income tax benefit derived from applying the statutory federal rate of 21% to the pretax loss primarily due to (i) tax expense of $20,485 related to an increase in the valuation allowance, (ii) tax expense of $4,531 from nondeductible officers’ compensation, (iii) tax expense of $888 relating to indefinite-lived intangible amortization, and (iv) tax expense of $5,358 relating to noncontrolling interest, partially offset by state income tax benefit of $8,916 and excess tax benefit related to share-based compensation awards of $3,953.
Income tax expense for the three months ended March 31, 2019 of $11,253 differs from income tax expense derived from applying the statutory federal rate of 21% to the pretax income primarily due to a tax benefit related to a decrease in valuation allowance of $7,654, partially offset by (i) state income tax expense of $6,515, (ii) tax expense of nondeductible officers’ compensation of $1,646, and (iii) tax expense relating to noncontrolling interest of $256.
Income tax expense for the nine months ended March 31, 2019 of $12,605 differs from income tax expense derived from applying the statutory federal rate of 21% to the pretax income primarily due to a tax benefit related to a decrease in valuation allowance of $26,630 and excess tax benefit related to share-based compensation awards of $5,793, partially offset by (i) state income tax expense of $14,062, (ii) tax expense relating to nondeductible officers’ compensation of $6,979, (iii) tax expense relating to noncontrolling interest of $1,801, and (iv) tax expense relating to nondeductible expenses of $1,685.
The Company was notified during the third quarter of fiscal year 2018 that the Internal Revenue Service (“IRS”) was commencing an audit of the federal income tax return for the year ended June 30, 2016. In October 2019, the Company was informed by the IRS that the audit resulted in no changes.
35
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The Company was notified in April 2020 that the City of New York was commencing an audit of the state income tax returns for the fiscal years ended June 30, 2016 and 2017. The Company does not expect the examination, when finalized, to result in material changes.
Note 20. Related Party Transactions
Given that the Entertainment Distribution did not occur until after March 31, 2020, the descriptions of the transactions below, unless otherwise indicated, are as of March 31, 2020. Following the Entertainment Distribution, the Company is no longer party to the arrangements described below, except the media rights agreements and the sharing of certain of the Company’s Executive Chairman’s and Vice Chairman’s expenses.
As of March 31, 2020, members of the Dolan family including trusts for members of the Dolan family (collectively, the “Dolan Family Group”), for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, collectively beneficially own all of the Company’s outstanding Class B Common Stock and own approximately 3.5% of the Company’s outstanding Class A Common Stock (inclusive of options exercisable within 60 days of the date hereof). Such shares of the Company’s Class A Common Stock and Class B Common Stock, collectively, represent approximately 70.9% of the aggregate voting power of the Company’s outstanding common stock. Members of the Dolan family are also the controlling stockholders of Madison Square Garden Entertainment Corp., MSG Networks and AMC Networks Inc. (“AMC Networks”).
The Company has various agreements with MSG Networks, including media rights agreements covering the Knicks and the Rangers games, an advertising sales representation agreement, and a services agreement (the “Services Agreement”). Pursuant to the Services Agreement, which was effective July 1, 2019, the Company provides certain services to MSG Networks, such as information technology, accounts payable and payroll, human resources, and other corporate functions, as well as the executive support services described below, in exchange for service fees. MSG Networks also provides certain services to the Company, in exchange for service fees. Effective as of the Entertainment Distribution, this agreement is now between Madison Square Garden Entertainment Corp. and MSG Networks. The Company entered into a separate services agreement with MSG Networks for the provision of certain legal services.
The Company shares certain executive support costs, including office space, executive assistants, security and transportation costs, for (i) the Company’s Executive Chairman with MSG Networks and (ii) the Company’s Vice Chairman with MSG Networks and AMC Networks. Following the Entertainment Distribution, the Company will also share these expenses with Madison Square Garden Entertainment Corp.
Prior to September 2018, the Company had an arrangement with the Dolan Family Office, LLC (“DFO”), an entity owned and controlled by Charles F. Dolan, AMC Networks and MSG Networks providing for the sharing of certain expenses associated with executive office space which is available to James L. Dolan (the Executive Chairman and a director of the Company, the Executive Chairman, Chief Executive Officer and a director of Madison Square Garden Entertainment Corp., the Executive Chairman and a director of MSG Networks, and a director of AMC Networks), Charles F. Dolan (the father of James L. Dolan and the Executive Chairman and a director of AMC Networks and a director of the Company, Madison Square Garden Entertainment Corp. and MSG Networks), and the DFO.
The Company is a party to various Aircraft Support Services Agreements (the “Support Agreements”), pursuant to which the
36
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Company provides certain aircraft support services to entities controlled by (i) James L. Dolan, (ii) Charles F. Dolan, and (iii) Patrick F. Dolan, the son of Charles F. Dolan and brother of James L. Dolan. On December 17, 2018, the Company terminated the agreement providing services to the entity controlled by Charles F. Dolan, and entered into a new agreement with Charles F. Dolan and certain of his children, who are siblings of James L. Dolan, specifically: Thomas C. Dolan (a director of the Company), Deborah Dolan-Sweeney, Patrick F. Dolan, Marianne Dolan Weber (a director of the Company), and Kathleen M. Dolan, which provides substantially the same services as the prior agreement for a new aircraft.
In addition, the Company is party to reciprocal time sharing/dry lease agreements with each of (i) Quart 2C, LLC (“Q2C”), a company controlled by James L. Dolan, and Kristin A. Dolan, his spouse and a director of the Company, and (ii) Charles F. Dolan and Sterling Aviation, LLC, a company controlled by Charles F. Dolan (collectively, “CFD”), pursuant to which the Company has agreed from time to time to make its aircraft available to each of Q2C and CFD, and Q2C, and CFD have agreed from time to time to make their aircraft available to the Company. Pursuant to the terms of the agreements, Q2C and/or CFD may lease on a non-exclusive, “time sharing” basis, the Company’s Gulfstream Aerospace G550 aircraft (the “G550 Aircraft”). On December 17, 2018, in connection with the purchase of a new aircraft (as noted above), the Company replaced the dry lease agreement with CFD with a new dry lease agreement with Sterling2k LLC, an entity owned and controlled by Deborah Dolan-Sweeney, which provides for the Company’s usage of the new aircraft on the same terms as the prior agreement.
On May 6, 2019, the Company entered into a dry lease agreement with Brighid Air, LLC (“Brighid Air”), a company owned and controlled by Patrick F. Dolan, pursuant to which the Company may lease on a non-exclusive basis Brighid Air’s Bombardier BD100-1A10 Challenger 350 aircraft (the “Challenger”). In connection with the dry lease agreement, on May 6, 2019 the Company also entered into a Flight Crew Services Agreement (the “Flight Crew Agreement”) with DFO, an entity owned and controlled by Charles F. Dolan, pursuant to which the Company may utilize pilots employed by DFO for purposes of flying the Challenger when the Company is leasing that aircraft under the Company’s dry lease agreement with Brighid Air.
The Company and each of MSG Networks and AMC Networks are party to certain aircraft time sharing agreements, pursuant to which the Company has agreed from time to time to make its aircraft available to MSG Networks and/or AMC Networks for lease on a “time sharing” basis. Additionally, the Company, MSG Networks and AMC Networks have agreed on an allocation of the costs of certain helicopter use by its shared executives.
In addition to the aircraft arrangements described above, certain executives of the Company are party to aircraft time sharing agreements, pursuant to which the Company has agreed from time to time to make certain aircraft available for lease on a “time sharing” basis for personal use in exchange for payment of actual expenses of the flight (as listed in the agreement).
From time to time the Company enters into arrangements with 605, LLC. Kristin A. Dolan, a director of the Company and spouse of James L. Dolan, is the founder and Chief Executive Officer of 605, LLC. James L. Dolan, the Company’s Executive Chairman and a director, and Kristin A. Dolan own 50% of 605, LLC. 605, LLC provides audience measurement and data analytics services to the Company and its subsidiaries in the ordinary course of business.
As of March 31, 2020 and June 30, 2019, BCE had $637 of notes payable. See Note 14 for further details.
The Company has also entered into certain commercial agreements with its nonconsolidated affiliates in connection with MSG Sphere. For the nine months ended March 31, 2020, the Company recorded approximately $11,137 of capital expenditures in connection with services provided to the Company under these agreements.
37
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Revenues and Operating Expenses (Credits)
The following table summarizes the composition and amounts of the transactions with the Company’s affiliates, primarily MSG Networks. These amounts are reflected in revenues and operating expenses in the accompanying consolidated statements of operations for the three and nine months ended March 31, 2020 and 2019:
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenues | $ | 63,764 | $ | 74,020 | $ | 138,328 | $ | 145,766 | ||||||||
Operating expenses (credits): | ||||||||||||||||
Corporate general and administrative expenses, net — MSG Networks | $ | (2,672 | ) | $ | (2,514 | ) | $ | (7,876 | ) | $ | (7,790 | ) | ||||
Consulting fees | — | — | — | 1,792 | ||||||||||||
Advertising expenses | 316 | 403 | 460 | 749 | ||||||||||||
Other operating expenses, net | 49 | (15 | ) | 35 | 171 | |||||||||||
Revenues
Revenues from related parties primarily consist of local media rights recognized by MSG Sports from the licensing of team-related programming to MSG Networks under the media rights agreements covering the Knicks and Rangers, which provide MSG Networks with exclusive media rights to team games in their local markets, as well as commissions earned in connection with the advertising sales representation agreement pursuant to which the Company has the exclusive right and obligation to sell MSG Networks’ advertising availabilities. As a result of the timing of recognition of media rights revenue, the Company recorded a contract asset of $10,059 in the accompanying consolidated balance sheet as of March 31, 2020.
The Company and Tribeca Enterprises have a service agreement pursuant to which the Company provides marketing inventory, advertising sales and consulting services to Tribeca Enterprises for a fee. On August 5, 2019, the Company sold its equity capital in Tribeca Enterprises. Accordingly, Tribeca Enterprises is no longer a related party of the Company, and thus the related party transactions disclosed herein that relate to Tribeca Enterprises were recognized prior to August 5, 2019. The Company is also a party to certain commercial arrangements with AMC Networks and its subsidiaries.
Corporate General and Administrative Expenses, net — MSG Networks
The Company’s corporate overhead expenses that are charged to MSG Networks are primarily related to centralized functions, including executive compensation, finance, treasury, tax, internal audit, legal, information technology, human resources and risk management functions.
Corporate general and administrative expenses, net — MSG Networks reflects charges from the Company to MSG Networks under the Services Agreement of $2,700 and $2,563 for the three months ended March 31, 2020 and 2019, respectively, and $7,982 and $7,850 for the nine months ended March 31, 2020 and 2019, respectively.
Consulting Fees
On December 5, 2018, the Company’s joint venture interest in AMSGE was sold to Azoff Music, which resulted in the Company no longer being an owner of AMSGE (renamed The Azoff Company). Accordingly, The Azoff Company is not a related party of the Company, and thus the related party transactions disclosed herein that relate to AMSGE were recognized prior to December 5, 2018. Prior to the sale of AMSGE, the Company paid AMSGE and its nonconsolidated affiliates for advisory and consulting services that AMSGE and its nonconsolidated affiliates provide to the Company, and for the reimbursement of certain expenses in connection with such services.
Advertising Expenses
The Company incurs advertising expenses for services rendered by its related parties, primarily MSG Networks, most of which are related to the utilization of advertising and promotional benefits by the Company.
38
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Other Operating Expenses, net
The Company and its related parties enter into transactions with each other in the ordinary course of business. Amounts charged to the Company for other transactions with its related parties are net of amounts charged by the Company to the Knickerbocker Group, LLC, an entity owned by James L. Dolan, for office space equal to the allocated cost of such space and the cost of certain technology services. In addition, other operating expenses include net charges relating to (i) reciprocal aircraft arrangements between the Company and each of Q2C and CFD and (ii) time sharing agreements with MSG Networks and AMC Networks.
Related Party Transactions after the Entertainment Distribution
In connection with the Entertainment Distribution the Company and Madison Square Garden Entertainment Corp. have entered into arrangements with respect to transition services and a number of ongoing commercial relationships, including Arena License Agreements with Madison Square Garden Entertainment Corp. that will require the Knicks and Rangers to play their home games at The Garden. Additionally, On April 17, 2020, MSG NYR Holdings, LLC and MSG NYK Holdings, LLC, entered into a separate delayed draw term loan credit agreements (the “DDTL Facilities”) with a wholly-owned subsidiary of Madison Square Garden Entertainment Corp. as lender. The DDTL Facilities provide for a $110,000 and $90,000 senior unsecured delayed draw term loan facilities, for the Knicks and Rangers, respectively. The DDTL Facilities will mature and any unused commitments thereunder will expire on October 17, 2021.
Note 21. Segment Information
Following the Entertainment Distribution, the Company has a single reportable segment. As of March 31, 2020, the Company was comprised of two reportable segments: MSG Entertainment and MSG Sports. In determining its reportable segments, the Company assessed the guidance of ASC 280-10-50-1, which provides the definition of a reportable segment. In accordance with the FASB’s guidance, the Company takes into account whether two or more operating segments can be aggregated together as one reportable segment as well as the type of discrete financial information that is available and regularly reviewed by its chief operating decision maker. The Company has evaluated this guidance and determined that there are two reportable segments. The Company allocates certain corporate costs and its performance venue operating expenses to each of its reportable segments. Allocated venue operating expenses include the non-event related costs of operating the Company’s venues, and include such costs as rent for the Company’s leased venues, real estate taxes, insurance, utilities, repairs and maintenance, and labor related to the overall management of the venues. Depreciation and amortization expense related to The Garden, Hulu Theater at Madison Square Garden, the Forum, and certain corporate property, equipment and leasehold improvements not allocated to the reportable segments is reported in “Corporate and Other.” Additionally, the Company does not allocate any purchase accounting adjustments to the reporting segments.
The Company evaluates segment performance based on several factors, of which the key financial measure is operating income (loss) before (i) depreciation, amortization and impairments of property and equipment, goodwill and other intangible assets, (ii) share-based compensation expense or benefit, (iii) restructuring charges or credits, and (iv) gains or losses on sales or dispositions of businesses, which is referred to as adjusted operating income (loss), a non-GAAP measure. In addition to excluding the impact of the items discussed above, the impact of purchase accounting adjustments related to business acquisitions is also excluded in evaluating the Company’s consolidated adjusted operating income (loss). Because it is based upon operating income (loss), adjusted operating income (loss) also excludes interest expense (including cash interest expense) and other non-operating income and expense items. Management believes that the exclusion of share-based compensation expense or benefit allows investors to better track the performance of the various operating units of the Company’s business without regard to the settlement of an obligation that is not expected to be made in cash. The Company believes adjusted operating income (loss) is an appropriate measure for evaluating the operating performance of its business segments and the Company on a consolidated basis. Adjusted operating income (loss) and similar measures with similar titles are common performance measures used by investors and analysts to analyze the Company’s performance. The Company uses revenues and adjusted operating income (loss) measures as the most important indicators of its business performance and evaluates management’s effectiveness with specific reference to these indicators.
Adjusted operating income (loss) should be viewed as a supplement to and not a substitute for operating income (loss), net income (loss), cash flows from operating activities, and other measures of performance and/or liquidity presented in accordance with GAAP. Since adjusted operating income (loss) is not a measure of performance calculated in accordance with GAAP, this
39
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
measure may not be comparable to similar measures with similar titles used by other companies. The Company has presented the components that reconcile operating income (loss), the most directly comparable GAAP financial measure, to adjusted operating income (loss).
Information as to the operations of the Company’s reportable segments is set forth below.
Three Months Ended March 31, 2020 | |||||||||||||||||||||||||
MSG Entertainment | MSG Sports | Corporate and Other | Purchase accounting adjustments | Inter-segment eliminations | Total | ||||||||||||||||||||
Revenues | $ | 136,398 | $ | 288,393 | $ | — | $ | — | $ | (829 | ) | $ | 423,962 | ||||||||||||
Direct operating expenses | 98,197 | 173,586 | 178 | 1,068 | (367 | ) | 272,662 | ||||||||||||||||||
Selling, general and administrative expenses | (a) | 50,721 | 63,206 | 40,869 | 50 | (220 | ) | 154,626 | |||||||||||||||||
Depreciation and amortization | (b) | 4,915 | 2,212 | 18,474 | 4,066 | — | 29,667 | ||||||||||||||||||
Impairment of intangibles, long-lived assets and goodwill | (c) | 90,154 | — | — | 12,057 | — | 102,211 | ||||||||||||||||||
Operating income (loss) | $ | (107,589 | ) | $ | 49,389 | $ | (59,521 | ) | $ | (17,241 | ) | $ | (242 | ) | $ | (135,204 | ) | ||||||||
Loss in equity method investments | (1,096 | ) | |||||||||||||||||||||||
Interest income | 3,659 | ||||||||||||||||||||||||
Interest expense | (1,881 | ) | |||||||||||||||||||||||
Miscellaneous expense, net | (d) | (17,448 | ) | ||||||||||||||||||||||
Loss from operations before income taxes | $ | (151,970 | ) | ||||||||||||||||||||||
Reconciliation of operating income (loss) to adjusted operating income (loss): | |||||||||||||||||||||||||
Operating income (loss) | $ | (107,589 | ) | $ | 49,389 | $ | (59,521 | ) | $ | (17,241 | ) | $ | (242 | ) | $ | (135,204 | ) | ||||||||
Add back: | |||||||||||||||||||||||||
Share-based compensation | 2,920 | 3,766 | 7,169 | — | — | 13,855 | |||||||||||||||||||
Depreciation and amortization | 4,915 | 2,212 | 18,474 | 4,066 | — | 29,667 | |||||||||||||||||||
Impairment of intangibles, long-lived assets and goodwill | 90,154 | — | — | 12,057 | — | 102,211 | |||||||||||||||||||
Other purchase accounting adjustments | — | — | — | 1,118 | — | 1,118 | |||||||||||||||||||
Adjusted operating income (loss) | $ | (9,600 | ) | $ | 55,367 | $ | (33,878 | ) | $ | — | $ | (242 | ) | $ | 11,647 | ||||||||||
Other information: | |||||||||||||||||||||||||
Capital expenditures | (e) | $ | 2,266 | $ | 2,434 | $ | 116,208 | $ | — | $ | — | $ | 120,908 | ||||||||||||
40
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Three Months Ended March 31, 2019 | |||||||||||||||||||||||||
MSG Entertainment | MSG Sports | Corporate and Other | Purchase accounting adjustments | Inter-segment eliminations | Total | ||||||||||||||||||||
Revenues | $ | 166,452 | $ | 351,594 | $ | — | $ | — | $ | (856 | ) | $ | 517,190 | ||||||||||||
Direct operating expenses | 108,982 | 200,849 | 101 | 1,031 | (171 | ) | 310,792 | ||||||||||||||||||
Selling, general and administrative expenses | (a) | 54,255 | 52,383 | 32,842 | 88 | (619 | ) | 138,949 | |||||||||||||||||
Depreciation and amortization | (b) | 4,899 | 1,899 | 18,359 | 3,779 | — | 28,936 | ||||||||||||||||||
Operating income (loss) | $ | (1,684 | ) | $ | 96,463 | $ | (51,302 | ) | $ | (4,898 | ) | $ | (66 | ) | $ | 38,513 | |||||||||
Loss in equity method investments | (2,881 | ) | |||||||||||||||||||||||
Interest income | 7,988 | ||||||||||||||||||||||||
Interest expense | (4,405 | ) | |||||||||||||||||||||||
Miscellaneous income, net | (d) | 6,201 | |||||||||||||||||||||||
Income from operations before income taxes | $ | 45,416 | |||||||||||||||||||||||
Reconciliation of operating income (loss) to adjusted operating income (loss): | |||||||||||||||||||||||||
Operating income (loss) | $ | (1,684 | ) | $ | 96,463 | $ | (51,302 | ) | $ | (4,898 | ) | $ | (66 | ) | $ | 38,513 | |||||||||
Add back: | |||||||||||||||||||||||||
Share-based compensation | 4,022 | 4,767 | 6,791 | — | — | 15,580 | |||||||||||||||||||
Depreciation and amortization | 4,899 | 1,899 | 18,359 | 3,779 | — | 28,936 | |||||||||||||||||||
Other purchase accounting adjustments | — | — | — | 1,119 | — | 1,119 | |||||||||||||||||||
Adjusted operating income (loss) | $ | 7,237 | $ | 103,129 | $ | (26,152 | ) | $ | — | $ | (66 | ) | $ | 84,148 | |||||||||||
Other information: | |||||||||||||||||||||||||
Capital expenditures | (e) | $ | 4,098 | $ | 779 | $ | 31,292 | $ | — | $ | — | $ | 36,169 | ||||||||||||
41
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Nine Months Ended March 31, 2020 | |||||||||||||||||||||||||
MSG Entertainment | MSG Sports | Corporate and Other | Purchase accounting adjustments | Inter-segment eliminations | Total | ||||||||||||||||||||
Revenues | $ | 608,097 | $ | 660,893 | $ | — | $ | — | $ | (1,441 | ) | $ | 1,267,549 | ||||||||||||
Direct operating expenses | 366,226 | 406,244 | 309 | 4,458 | (773 | ) | 776,464 | ||||||||||||||||||
Selling, general and administrative expenses | (a) | 151,619 | 170,527 | 123,367 | 156 | 16 | 445,685 | ||||||||||||||||||
Depreciation and amortization | (b) | 14,705 | 5,795 | 55,838 | 10,531 | — | 86,869 | ||||||||||||||||||
Impairment of intangibles, long-lived assets and goodwill | (c) | 90,154 | — | — | 12,057 | — | 102,211 | ||||||||||||||||||
Operating income (loss) | $ | (14,607 | ) | $ | 78,327 | $ | (179,514 | ) | $ | (27,202 | ) | $ | (684 | ) | $ | (143,680 | ) | ||||||||
Loss in equity method investments | (3,739 | ) | |||||||||||||||||||||||
Interest income | 17,244 | ||||||||||||||||||||||||
Interest expense | (5,437 | ) | |||||||||||||||||||||||
Miscellaneous expense, net | (d) | (3,071 | ) | ||||||||||||||||||||||
Loss from operations before income taxes | $ | (138,683 | ) | ||||||||||||||||||||||
Reconciliation of operating income (loss) to adjusted operating income (loss): | |||||||||||||||||||||||||
Operating income (loss) | $ | (14,607 | ) | $ | 78,327 | $ | (179,514 | ) | $ | (27,202 | ) | $ | (684 | ) | $ | (143,680 | ) | ||||||||
Add back: | |||||||||||||||||||||||||
Share-based compensation | 9,938 | 12,883 | 24,619 | — | — | 47,440 | |||||||||||||||||||
Depreciation and amortization | 14,705 | 5,795 | 55,838 | 10,531 | — | 86,869 | |||||||||||||||||||
Impairment of intangibles, long-lived assets and goodwill | 90,154 | — | — | 12,057 | — | 102,211 | |||||||||||||||||||
Other purchase accounting adjustments | — | — | — | 4,614 | — | 4,614 | |||||||||||||||||||
Adjusted operating income (loss) | $ | 100,190 | $ | 97,005 | $ | (99,057 | ) | $ | — | $ | (684 | ) | $ | 97,454 | |||||||||||
Other information: | |||||||||||||||||||||||||
Capital expenditures | (e) | $ | 8,212 | $ | 15,647 | $ | 318,384 | $ | — | $ | — | $ | 342,243 | ||||||||||||
42
MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Nine Months Ended March 31, 2019 | |||||||||||||||||||||||||
MSG Entertainment | MSG Sports | Corporate and Other | Purchase accounting adjustments | Inter-segment eliminations | Total | ||||||||||||||||||||
Revenues | $ | 645,919 | $ | 722,789 | $ | — | $ | — | $ | (1,196 | ) | $ | 1,367,512 | ||||||||||||
Direct operating expenses | 383,781 | 434,882 | 160 | 3,198 | (511 | ) | 821,510 | ||||||||||||||||||
Selling, general and administrative expenses | (a) | 155,681 | 147,913 | 87,439 | 669 | (497 | ) | 391,205 | |||||||||||||||||
Depreciation and amortization | (b) | 13,150 | 5,825 | 56,576 | 13,241 | — | 88,792 | ||||||||||||||||||
Operating income (loss) | $ | 93,307 | $ | 134,169 | $ | (144,175 | ) | $ | (17,108 | ) | $ | (188 | ) | $ | 66,005 | ||||||||||
Earnings in equity method investments | 17,131 | ||||||||||||||||||||||||
Interest income | 22,061 | ||||||||||||||||||||||||
Interest expense | (13,614 | ) | |||||||||||||||||||||||
Miscellaneous expense, net | (d) | (2,895 | ) | ||||||||||||||||||||||
Income from operations before income taxes | $ | 88,688 | |||||||||||||||||||||||
Reconciliation of operating income (loss) to adjusted operating income (loss): | |||||||||||||||||||||||||
Operating income (loss) | $ | 93,307 | $ | 134,169 | $ | (144,175 | ) | $ | (17,108 | ) | $ | (188 | ) | $ | 66,005 | ||||||||||
Add back: | |||||||||||||||||||||||||
Share-based compensation | 10,823 | 12,357 | 22,804 | — | — | 45,984 | |||||||||||||||||||
Depreciation and amortization | 13,150 | 5,825 | 56,576 | 13,241 | — | 88,792 | |||||||||||||||||||
Other purchase accounting adjustments | — | — | — | $ | 3,867 | $ | — | 3,867 | |||||||||||||||||
Adjusted operating income (loss) | $ | 117,280 | $ | 152,351 | $ | (64,795 | ) | $ | — | $ | (188 | ) | $ | 204,648 | |||||||||||
Other information: | |||||||||||||||||||||||||
Capital expenditures | (e) | $ | 18,435 | $ | 2,909 | $ | 95,878 | $ | — | $ | — | $ | 117,222 | ||||||||||||
(a) | Corporate and Other’s selling, general and administrative expenses primarily consist of unallocated corporate general and administrative costs, including expenses associated with the Company’s content development and technology associated with the Company’s MSG Sphere initiative, as well as other business development activities. |
(b) | Corporate and Other principally includes depreciation and amortization of The Garden, Hulu Theater at Madison Square Garden, the Forum, and certain corporate property, equipment and leasehold improvement assets not allocated to the Company’s reportable segments. |
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MADISON SQUARE GARDEN SPORTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
(c) | As a result of operating disruptions due to COVID-19 (see Note 1 for further details), the Company recorded a non-cash impairment charge of $102,211 for the three and nine months ended March 31, 2020 associated with Tao Group Hospitality. This impairment charge included $3,541 related to a tradename and $17,972 related to long-lived assets associated with one venue within the Tao Group Hospitality, in addition to an impairment charge of $80,698, which is related to goodwill. Of the total impairment charge, $90,154, which is associated with goodwill, property and equipment and right-of-use assets, was reflected within the “MSG Entertainment” segment. The remaining $12,057 of the impairment charge was reported as “Purchase accounting adjustments” for segment reporting purposes and primarily relates to intangible assets and certain right-of use assets for favorable lease, as these balances are associated with the purchase price allocations in connection with the acquisition of Tao Group Hospitality on January 25, 2017. |
(d) | Miscellaneous income (expense), net primarily includes unrealized gain (loss) for the Company’s investment in Townsquare in accordance with ASU No. 2016-01 of $(17,196) and $5,261 for the three months ended March 31, 2020 and 2019, respectively, and $(2,471) and $(2,405) for the nine months ended March 31, 2020 and 2019, respectively. In addition, miscellaneous income (expense), net includes dividend income from the investment in Townsquare and non-service cost components of net periodic pension and postretirement benefit cost in accordance with ASU No. 2017-07. See Note 15 for further details on the non-service cost components of net periodic pension and postretirement benefit cost. |
(e) | Substantially all of Corporate and Other’s capital expenditures for the three and nine months ended March 31, 2020 and 2019 are related to the Company’s planned MSG Spheres in Las Vegas and London. MSG Entertainment’s capital expenditures for the nine months ended March 31, 2019 are primarily associated with the opening of a new Tao Group Hospitality venue. |
A significant majority of revenues and assets of the Company’s reportable segments are attributed to or located in the United States and are primarily concentrated in the New York metropolitan area. See Note 1 for further discussion on the effect of COVID-19 due to the geographic concentration of the Company’s operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In this MD&A, there are statements concerning the future operating and future financial performance of Madison Square Garden Sports Corp. (formerly The Madison Square Garden Company) and its direct and indirect subsidiaries (collectively, “we,” “us,” “our,” or the “Company”), including luxury tax payments or receipts and the impact of COVID-19 on our future operations. See additional information in this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 1 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for further discussion of the Entertainment Distribution. Words such as “expects,” “anticipates,” “believes,” “estimates,” “may,” “will,” “should,” “could,” “potential,” “continue,” “intends,” “plans,” and similar words and terms used in the discussion of future operating and future financial performance identify forward-looking statements. Investors are cautioned that such forward-looking statements are not guarantees of future performance, results or events and involve risks and uncertainties and that actual results or developments may differ materially from the forward-looking statements as a result of various factors. Factors that may cause such differences to occur include, but are not limited to:
• | the duration and severity of the coronavirus pandemic and our ability to effectively manage the impacts, including the government and league mandated suspension of our business operations; |
• | the level of our revenues, which depends in part on the popularity and competitiveness of our sports teams; |
• | costs associated with player injuries, waivers or contract terminations of players and other team personnel; |
• | changes in professional sports teams’ compensation, including the impact of signing free agents and trades, subject to league salary caps and the impact of luxury tax; |
• | the level of our capital expenditures and other investments; |
• | general economic conditions, especially in New York City; |
• | the demand for sponsorship arrangements and for advertising; |
• | competition, for example, from other teams, other venues and other sports and entertainment options; |
• | changes in laws, NBA or NHL rules, regulations, guidelines, bulletins, directives, policies and agreements including the leagues’ respective collective bargaining agreements (each a “CBA”) with their players’ associations, salary caps, revenue sharing, NBA luxury tax thresholds and media rights or other regulations under which we operate; |
• | any NBA or NHL work stoppage in addition to those related to COVID-19 impacts; |
• | any economic actions, such as boycotts, protests, work stoppages or campaigns by labor organizations; |
• | seasonal fluctuations and other variations in our operating results and cash flow from period to period; |
• | the level of our expenses, including our corporate expenses; |
• | business, reputational and litigation risk if there is a security incident resulting in loss, disclosure or misappropriation of stored personal information or other breaches of our information security; |
• | activities or other developments that discourage or may discourage congregation at prominent places of public assembly, including The Garden where the home games of the Knicks and the Rangers are played; |
• | the evolution of the esports industry and its potential impact on our esports businesses; |
• | the acquisition or disposition of assets or businesses and/or the impact of, and our ability to successfully pursue, acquisitions or other strategic transactions; |
• | our ability to successfully integrate acquisitions or new businesses into our operations; |
• | the operating and financial performance of our strategic acquisitions and investments, including those we may not control; |
• | the costs associated with, and the outcome of, litigation and other proceedings to the extent uninsured, including litigation or other claims against companies we invest in or acquire; |
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• | the impact of governmental regulations or laws, including changes in how those regulations and laws are interpreted and the continued benefit of certain tax exemptions (including for The Garden) and the ability for us and Madison Square Garden Entertainment Corp. to maintain necessary permits or licenses; |
• | the impact of any government plans to redesign New York City’s Pennsylvania Station; |
• | a default by our subsidiaries under their respective credit facilities; |
• | financial community and rating agency perceptions of our business, operations, financial condition and the industry in which we operate; |
• | our ownership of professional sports franchises in the NBA and NHL and certain related transfer restrictions on our common stock; |
• | the tax-free treatment of the 2015 Distribution and the Entertainment Distribution (defined below); |
• | the performance by Madison Square Garden Entertainment Corp. of its obligations under various agreements with the Company related to the Entertainment Distribution and ongoing commercial arrangements; and |
• | the factors described under “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2019 and this Quarterly Report on Form 10-Q under “Part II — Item 1A. Risk Factors.” |
We disclaim any obligation to update or revise the forward-looking statements contained herein, except as otherwise required by applicable federal securities laws.
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All dollar amounts included in the following MD&A are presented in thousands, except as otherwise noted.
Entertainment Distribution
On April 17, 2020, the Company distributed all of the outstanding common stock of Madison Square Garden Entertainment Corp. to its stockholders. Madison Square Garden Entertainment Corp. owns, directly or indirectly, the entertainment business previously owned and operated by the Company through its MSG Entertainment business segment and the sports booking business previously owned and operated by the Company through its MSG Sports business segment. In the Entertainment Distribution, (a) each holder of the Company’s Class A common stock, par value $0.01 per share, received one share of Madison Square Garden Entertainment Corp. Class A common stock, par value $0.01 per share, for every share of the Company’s Class A common stock held of record as of the close of business, New York City time, on April 13, 2020, and (b) each holder of the Company’s Class B common stock, par value $0.01 per share, received one share of Madison Square Garden Entertainment Corp. Class B common stock, par value $0.01 per share, for every share of the Registrant’s Class B common stock held of record as of the close of business, New York City time, on the Record Date.
The disclosures within this Management’s Discussion and Analysis of Financial Condition and Results of Operations that discuss the quarter ended March 31, 2020, including “— Results of Operations,” are on a consolidated Company basis, which means that they include the results of Madison Square Garden Entertainment Corp. and do not take the Entertainment Distribution into account. In future filings, beginning with our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, the historical results of Madison Square Garden Entertainment Corp. will be presented as discontinued operations and our business will be reported in a single segment. In addition, the unaudited pro forma consolidated balance sheet of the Company as of December 31, 2019 and the unaudited pro forma condensed consolidated statements of operations of the Company for the six months ended December 31, 2019 and the years ended June 30, 2019, 2018 and 2017, in each case giving effect to the Entertainment Distribution, are set forth in Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on April 23, 2020. As a result of the Entertainment Distribution, the accompanying unaudited condensed consolidated interim financial statements of the Company are not indicative of the Company’s future financial position, results of operations or cash flows. See Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, filed on August 20, 2019, for certain risk factors relating to the Distribution.
Introduction
This MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s unaudited financial statements and accompanying notes thereto included in this Quarterly Report on Form 10-Q, as well as the Company’s Annual Report on Form 10-K for the year ended June 30, 2019, to help provide an understanding of our financial condition, changes in financial condition and results of operations. Unless the context otherwise requires, all references to “we,” “us,” “our,” or the “Company” refer collectively to Madison Square Garden Sports Corp., a holding company, and its direct and indirect subsidiaries through which substantially all of our operations are actually conducted. The Company is comprised of two reportable segments: MSG Entertainment and MSG Sports.
MSG Entertainment includes live entertainment events including concerts and other live events, such as family shows, performing arts and special events, which are presented or hosted in the Company’s diverse collection of venues along with live offerings through Tao Group Hospitality and BCE. Tao Group Hospitality is a hospitality group with globally recognized entertainment, dining and nightlife brands including Tao, Marquee, Lavo, Avenue, Beauty & Essex and Cathédrale. BCE owns and operates New England’s premier Boston Calling Music Festival. MSG Entertainment also includes the Company’s original production — the Christmas Spectacular.
MSG Sports includes the Company’s professional sports franchises: the Knicks of the NBA, the Rangers of the NHL, the Hartford Wolf Pack of the AHL, and the Westchester Knicks of the NBAGL. For the three and nine months ended March 31, 2019, MSG Sports also included the Liberty of the WNBA, which was sold in January 2019. Our professional sports franchises are collectively referred to herein as our “sports teams”. MSG Sports also includes CLG, a premier North American esports organization, and Knicks Gaming, the Company’s franchise that competes in the NBA 2K League. CLG and Knicks Gaming are collectively referred to herein as our “esports teams,” and, together with our sports teams, our “teams.” In addition, our sports business also promotes, produces and/or presents a broad array of other live sporting events, including professional boxing, college basketball, college hockey, professional bull riding, mixed martial arts, esports, and college wrestling.
The Company conducts a significant portion of its operations at venues that it either owns or operates under long-term leases. The Company owns The Garden and Hulu Theater at Madison Square Garden in New York City, the Forum in Inglewood, CA (See Note 3 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for further discussion on the sale of the Forum in the fourth quarter of fiscal year 2020) and The Chicago Theatre in Chicago. In addition, the Company leases Radio City Music Hall and the Beacon Theatre in New York City.
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Additionally, Tao Group Hospitality operates various restaurants, nightlife and hospitality venues under long-term leases and management contracts in New York, Las Vegas, Los Angeles, Chicago, Australia and Singapore.
Factors Affecting Results of Operations
Impact of COVID-19 on Our Business
Our operations and operating results have been, and continue to be, materially impacted by the COVID-19 pandemic and government and league actions taken in response. As of the date of this Quarterly Report on Form 10-Q, virtually all of the business operations of the Company and Madison Square Garden Entertainment Corp. have been suspended and it is not clear when those operations will resume.
Effects on MSG Entertainment
As a result of government mandated assembly limitations and closures, no events are currently permitted to be held at any of Madison Square Garden Entertainment Corp.’s venues and it is unclear whether and to what extent those events will be rescheduled. We did not recognize any revenue from canceled events during the three months ended March 31, 2020. Additionally, public officials have imposed mandates limiting restaurants and bars to only take-out and delivery service and requiring that nightlife venues close in the cities in which Tao Group Hospitality operates. As a result, virtually all Tao Group Hospitality venues are closed, which has materially impacted business. It is unclear how long these restrictions will be in effect.
Additionally, as a result of operating disruptions due to COVID-19, the Company’s projected cash flows were directly impacted. This disruption along with the macroeconomic industry and market conditions, were considered a “triggering event” for one of the Company’s reporting units, which required the Company to assess the carrying value of its goodwill for that reporting unit for impairment. Based on this evaluation, the Company recorded a non-cash goodwill impairment charge of $80,698 during the three and nine months ended March 31, 2020 associated with Tao Group Hospitality. In addition, during the three and nine months ended March 31, 2020, the Company recorded non-cash impairment charges of $11,573, $6,399 and $3,541, for Right-of-use assets, Property and equipment assets, and certain intangible assets associated with one venue within the Tao Group Hospitality, respectively. No other goodwill or intangible asset balance was impaired as of March 31, 2020 based on the assessment. However, the duration and impact of the COVID-19 pandemic may result in additional future impairment charges that management will evaluate as facts and circumstances evolve through time. See Notes 1, 10 and 11 to the consolidated financial statements included in “Part I - Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for further details.
Madison Square Garden Entertainment Corp. is currently building a state-of-the-art venue in Las Vegas, called MSG Sphere. This is a complex construction project with cutting-edge technology that relies on subcontractors obtaining components from a variety of sources around the world. The widespread global effects of COVID-19 have resulted in significant impediments to construction that are beyond Madison Square Garden Entertainment Corp.’s control, including disruptions to its supply chain. As a result, in April 2020, Madison Square Garden Entertainment Corp. implemented a temporary suspension of construction and expects to incur additional expenses related to stopping and re-starting construction. At this time, Madison Square Garden Entertainment Corp. is unable to determine the full impact of coronavirus-related disruptions, however they may impact Madison Square Garden Entertainment Corp.’s cost estimates. Madison Square Garden Entertainment Corp. remains committed to building a state-of-the-art venue in Las Vegas and looks forward to quickly and efficiently resuming construction as soon as practicable. As a result of this delay, Madison Square Garden Entertainment Corp. does not expect to achieve its goal of opening the venue in calendar year 2021.
Effects on MSG Sports
On March 11 and 12, 2020, respectively, the NBA and NHL suspended (but did not cancel) their 2019-20 seasons. No Knicks or Rangers games are currently being played, and there is no certainty as to whether the seasons will resume. The disruptions caused by COVID-19 have materially impacted our revenues and we are not recognizing any revenue while games are not played, including for ticket sales, media rights fees, our share of suite licenses, sponsorships, signage and in-venue advertising at The Garden or food, beverage and merchandise sales for home games played at The Garden. In addition, as a result of government mandated assembly limitations and closures, no events are currently permitted to be held at The Garden where the Knicks and Rangers play their home games, and some or all of these mandated restrictions may remain in effect even after the NBA and/or NHL resume their games.
While we currently have the ability to reduce certain operating expenses as a result of the disruptions caused by COVID-19, including (i) rent payments to Madison Square Garden Entertainment Corp. under the Arena License Agreements (defined
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below) while The Garden remains closed, (ii) day-of-game expenses for Knicks and Rangers games and (iii) certain other SG&A and discretionary expenses, those expense reduction opportunities will not fully offset revenue losses.
Subsidiaries of the Company are parties to arena license agreements (the “Arena License Agreements”) with a subsidiary of Madison Square Garden Entertainment Corp. that requires the Knicks and the Rangers to play their home games at The Garden. Under the Arena License Agreements, the Knicks and the Rangers will pay an annual license fee in connection with their respective use of The Garden. For each, the license fee for the initial contract year ending June 30, 2020 will be prorated based on the number of games scheduled to be played at The Garden between the date of the Entertainment Distribution and the end of that contract year. The license fee for the first full contract year ending June 30, 2021 will be approximately $22,500 for the Knicks and approximately $16,700 for the Rangers, and then for each subsequent year, the license fees will be 103% of the license fees for the immediately preceding contract year. If, due to a force majeure event (including the government mandated suspension of events at The Garden as a result of the disruptions caused by COVID-19), capacity at The Garden is limited to 1,000 or fewer attendees, the teams may schedule and play home games at The Garden with amounts payable under the Arena License Agreements reduced by up to 80%. The teams are not required to pay the license fee during a period in which The Garden is unavailable for home games due to a force majeure event. As a result, we have not been required to make any rent payments under the Arena License Agreements and will continue not to be required to make any rent payments during the government mandated suspension of events at The Garden as a result of the disruptions caused by COVID-19. However, once The Garden becomes available following a force majeure event, future rent payments due under the Arena License Agreements will be payable by the Knicks and the Rangers to Madison Square Garden Entertainment Corp. even if the NBA or NHL seasons do not resume simultaneously or at all.
For more information about the risks to the Company as a result of the COVID-19 pandemic and its impact on our operating results, see “Part II — Item 1A. Risk Factors — Our Operations and Operating Results Have Been, and Continue to be, Materially Impacted by the COVID-19 Pandemic and Government and League Actions Taken in Response.”
Obscura’s Operating Results
The results of operations of the Company for the three and nine months ended March 31, 2019 included Obscura’s results of operations from its third party production business. The Company made a decision in the fiscal year 2019 to wind down Obscura’s third party production business to focus on MSG Sphere development.
New York Liberty
For the three and nine months ended March 31, 2019, MSG Sports also included the Liberty of the WNBA, which was sold in January 2019.
Renewal of a Ticketing Agreement
The Company’s consolidated and segment operating results for the three and nine months ended March 31, 2019 were impacted by the recognition of additional revenues for events that took place during previous periods as the result of the renewal of the agreement with the Company’s ticketing platform provider during the quarter ended March 31, 2019. The following table presents the impact on the Company’s consolidated revenues, operating income and adjusted operating income for the three and nine months ended March 31, 2019 from events in the prior periods as a result of the ticketing agreement renewal.
Three Months Ended March 31, 2019 | Nine Months Ended March 31, 2019 | |||||||
MSG Entertainment segment | $ | 3,700 | $ | 1,800 | ||||
MSG Sports segment | 4,600 | 2,900 | ||||||
Total MSG | $ | 8,300 | $ | 4,700 | ||||
This MD&A is organized as follows:
Results of Operations. This section provides an analysis of our unaudited results of operations for the three and nine months ended March 31, 2020 compared to the three and nine months ended March 31, 2019 on a consolidated and segment basis.
Liquidity and Capital Resources. This section focuses primarily on (i) the liquidity and capital resources of the Company following the Entertainment Distribution, (ii) an analysis of the Company’s cash flows for the nine months ended March 31, 2020 compared to the nine months ended March 31, 2019, and (iii) certain contractual obligations of the Company both as of March 31, 2020 and subsequent to the Entertainment Distribution.
Seasonality of Our Business. This section discusses the seasonal performance of our segments.
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Recently Issued Accounting Pronouncements and Critical Accounting Policies. This section discusses accounting pronouncements that have been adopted by the Company, recently issued accounting pronouncements not yet adopted by the Company, as well as the results of the Company’s annual impairment testing of goodwill and identifiable indefinite-lived intangible assets performed during the first quarter of fiscal year 2020. This section should be read together with our critical accounting policies, which are discussed in our Annual Report on Form 10-K for the year ended June 30, 2019 under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recently Issued Accounting Pronouncements and Critical Accounting Policies — Critical Accounting Policies” and in the notes to the consolidated financial statements of the Company included therein.
Results of Operations
Comparison of the three and nine months ended March 31, 2020 versus the three and nine months ended March 31, 2019
Consolidated Results of Operations
The tables below set forth, for the periods presented, certain historical financial information.
Three Months Ended | |||||||||||||||
March 31, | Change (a) | ||||||||||||||
2020 | 2019 | Amount | Percentage | ||||||||||||
Revenues | $ | 423,962 | $ | 517,190 | $ | (93,228 | ) | (18 | )% | ||||||
Direct operating expenses | 272,662 | 310,792 | (38,130 | ) | (12 | )% | |||||||||
Selling, general and administrative expenses | 154,626 | 138,949 | 15,677 | 11 | % | ||||||||||
Depreciation and amortization | 29,667 | 28,936 | 731 | 3 | % | ||||||||||
Impairment of intangibles, long-lived assets and goodwill | 102,211 | — | 102,211 | NM | |||||||||||
Operating income (loss) | (135,204 | ) | 38,513 | (173,717 | ) | NM | |||||||||
Other income (expense): | |||||||||||||||
Loss in equity method investments | (1,096 | ) | (2,881 | ) | 1,785 | 62 | % | ||||||||
Interest income, net | 1,778 | 3,583 | (1,805 | ) | (50 | )% | |||||||||
Miscellaneous income (expense), net | (17,448 | ) | 6,201 | (23,649 | ) | NM | |||||||||
Income (loss) from operations before income taxes | (151,970 | ) | 45,416 | (197,386 | ) | NM | |||||||||
Income tax benefit (expense) | 10,904 | (11,253 | ) | 22,157 | NM | ||||||||||
Net income (loss) | (141,066 | ) | 34,163 | (175,229 | ) | NM | |||||||||
Less: Net loss attributable to redeemable noncontrolling interests | (22,447 | ) | (7 | ) | (22,440 | ) | NM | ||||||||
Less: Net loss attributable to nonredeemable noncontrolling interests | (590 | ) | (1,101 | ) | 511 | 46 | % | ||||||||
Net income (loss) attributable to Madison Square Garden Sports Corp.’s stockholders | $ | (118,029 | ) | $ | 35,271 | $ | (153,300 | ) | NM | ||||||
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Nine Months Ended | |||||||||||||||
March 31, | Change (a) | ||||||||||||||
2020 | 2019 | Amount | Percentage | ||||||||||||
Revenues | $ | 1,267,549 | $ | 1,367,512 | $ | (99,963 | ) | (7 | )% | ||||||
Direct operating expenses | 776,464 | 821,510 | (45,046 | ) | (5 | )% | |||||||||
Selling, general and administrative expenses | 445,685 | 391,205 | 54,480 | 14 | % | ||||||||||
Depreciation and amortization | 86,869 | 88,792 | (1,923 | ) | (2 | )% | |||||||||
Impairment of intangibles, long-lived assets and goodwill | 102,211 | — | 102,211 | NM | |||||||||||
Operating income (loss) | (143,680 | ) | 66,005 | (209,685 | ) | NM | |||||||||
Other income (expense): | |||||||||||||||
Earnings (loss) in equity method investments | (3,739 | ) | 17,131 | (20,870 | ) | NM | |||||||||
Interest income, net | 11,807 | 8,447 | 3,360 | 40 | % | ||||||||||
Miscellaneous expense, net | (3,071 | ) | (2,895 | ) | (176 | ) | (6 | )% | |||||||
Income (loss) from operations before income taxes | (138,683 | ) | 88,688 | (227,371 | ) | NM | |||||||||
Income tax benefit (expense) | 9,300 | (12,605 | ) | 21,905 | NM | ||||||||||
Net income (loss) | (129,383 | ) | 76,083 | (205,466 | ) | NM | |||||||||
Less: Net loss attributable to redeemable noncontrolling interests | (23,851 | ) | (3,662 | ) | (20,189 | ) | NM | ||||||||
Less: Net loss attributable to nonredeemable noncontrolling interests | (1,663 | ) | (4,913 | ) | 3,250 | 66 | % | ||||||||
Net income (loss) attributable to Madison Square Garden Sports Corp.’s stockholders | $ | (103,869 | ) | $ | 84,658 | $ | (188,527 | ) | NM | ||||||
_________________
NM — Percentage is not meaningful
(a) | The Company’s operating results were materially impacted during the three and nine months ended March 31, 2020 by the coronavirus pandemic and government actions taken in response. Please see “— Factors Affecting Results of Operations — Impact of COVID-19 on Our Business” for more information. |
The following tables summarize the changes in our segments’ operating results for the three and nine months ended March 31, 2020 as compared to the prior year periods.
For the Three Months Ended March 31, 2020 | ||||||||||||||||||||||||
Changes attributable to | Revenues | Direct operating expenses | Selling, general and administrative expenses | Depreciation and amortization | Impairment of intangibles, long-lived assets and goodwill | Operating income (loss) | ||||||||||||||||||
MSG Entertainment (a) | $ | (30,054 | ) | $ | (10,785 | ) | $ | (3,534 | ) | $ | 16 | $ | 90,154 | $ | (105,905 | ) | ||||||||
MSG Sports (a) | (63,201 | ) | (27,263 | ) | 10,823 | 313 | — | (47,074 | ) | |||||||||||||||
Corporate and Other | — | 77 | 8,027 | 115 | — | (8,219 | ) | |||||||||||||||||
Purchase accounting adjustments | — | 37 | (38 | ) | 287 | 12,057 | (12,343 | ) | ||||||||||||||||
Inter-segment eliminations | 27 | (196 | ) | 399 | — | — | (176 | ) | ||||||||||||||||
$ | (93,228 | ) | $ | (38,130 | ) | $ | 15,677 | $ | 731 | $ | 102,211 | $ | (173,717 | ) | ||||||||||
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For the Nine Months Ended March 31, 2020 | ||||||||||||||||||||||||
Changes attributable to | Revenues | Direct operating expenses | Selling, general and administrative expenses | Depreciation and amortization | Impairment of intangibles, long-lived assets and goodwill | Operating income (loss) | ||||||||||||||||||
MSG Entertainment (a) | $ | (37,822 | ) | $ | (17,555 | ) | $ | (4,062 | ) | $ | 1,555 | $ | 90,154 | $ | (107,914 | ) | ||||||||
MSG Sports (a) | (61,896 | ) | (28,638 | ) | 22,614 | (30 | ) | — | (55,842 | ) | ||||||||||||||
Corporate and Other | — | 149 | 35,928 | (738 | ) | — | (35,339 | ) | ||||||||||||||||
Purchase accounting adjustments | — | 1,260 | (513 | ) | (2,710 | ) | 12,057 | (10,094 | ) | |||||||||||||||
Inter-segment eliminations | (245 | ) | (262 | ) | 513 | — | — | (496 | ) | |||||||||||||||
$ | (99,963 | ) | $ | (45,046 | ) | $ | 54,480 | $ | (1,923 | ) | $ | 102,211 | $ | (209,685 | ) | |||||||||
_________________
(a) | See “Business Segment Results” for a more detailed discussion relating to the operating results of our segments. |
Selling, general and administrative expenses - Corporate and Other
Selling, general and administrative expenses in Corporate and Other for the three months ended March 31, 2020 increased $8,027, or 24%, to $40,869 as compared to the prior year period. For the nine months ended March 31, 2020, selling, general and administrative expenses in Corporate and Other increased $35,928, or 41%, to $123,367 as compared to the prior year period.
For the three and nine months ended March 31, 2020, the increases were primarily due to (i) higher expenses related to the Company’s MSG Sphere initiative of $13,013 and $31,655, respectively, which include increases in personnel, content development and technology costs, and (ii) higher professional fees of $4,213 and $6,520, respectively, associated with the spin-off of the Company’s Entertainment business. The increases were partially offset by lower employee compensation and related benefits in Corporate of $8,779 and $5,815 for the three and nine months ended March 31, 2020, respectively.
In connection with its MSG Sphere initiative, the Company expects to continue increasing its investment in personnel, content and technology. Based on the timing of these efforts, the Company expects higher expenses for the fourth quarter of fiscal year 2020.
Depreciation & amortization
Depreciation and amortization for the three months ended March 31, 2020 increased $731, or 3%, to $29,667 as compared to the prior year period. For the nine months ended March 31, 2020, depreciation and amortization increased $1,923, or 2%, to $86,869 as compared to the prior year period. For the nine months ended March 31, 2020, the decrease was primarily due to certain assets and purchase accounting adjustments being fully depreciated and amortized, partially offset by depreciation and amortization related to a new entertainment dining and nightlife venue.
Impairment of intangibles, long-lived assets and goodwill
The disruptions caused by COVID-19 directly impacted the Company’s projected cash flows resulting in operating disruptions. This disruption along with the macroeconomic deteriorating conditions and industry/market considerations, were considered a “triggering event” for one of the Company’s reporting units, which required the Company to assess the carrying value of its goodwill for that reporting unit for impairment. In connection with the goodwill impairment test, the Company also evaluated the intangibles and long-lived asset for that reporting unit for impairment. Based on this evaluation, the Company recorded a non-cash impairment charge of $102,211 for the three and nine months ended March 31, 2020, which included impairment charges associated with one venue within the Tao Group Hospitality of $3,541 and $17,972, related to a tradename and certain long-lived assets, respectively, and an impairment charge of $80,698 related to goodwill associated with the Tao Group Hospitality reporting unit.
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Operating loss - Corporate and Other
Operating loss in Corporate and Other for the three months ended March 31, 2020 increased $8,219, or 16%, to $59,521 as compared to the prior year period. For the nine months ended March 31, 2020, operating loss in Corporate and Other increased $35,339, or 25%, to $179,514 as compared to the prior year period. For the three and nine months ended March 31, 2020, the increases were primarily due to higher selling, general and administrative expenses, as discussed above. See Note 21 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussion of depreciation and amortization under Corporate and Other.
Loss in equity method investments
For the three months ended March 31, 2020, the loss in equity method investments decreased $1,785 to $1,096 as compared to the prior year period. For the nine months ended March 31, 2020, the earnings in equity method investments decreased $20,870 to a loss of $3,739 as compared to the prior year period. The decreases were due to the absence of earnings or losses in equity method investments from AMSGE and Tribeca Enterprises as the Company sold these investments in December 2018 and August 2019, respectively. For the three and nine months ended March 31, 2019, the Company reported a net loss in equity method investments of $1,571 and net earnings in equity method investments of $20,415, respectively, from those investments.
Interest income, net
Net interest income for the three months ended March 31, 2020 decreased $1,805, or 50%, to $1,778 as compared to the prior year period. For the nine months ended March 31, 2020, net interest income increased $3,360, or 40%, to $11,807 as compared to the prior year period. The decrease in net interest income for the three months ended March 31, 2020 was primarily due to lower interest income as a result of (i) lower interest rates, (ii) a change in investment mix, and (iii) the absence of interest income earned on loans extended to AMSGE and Tribeca Enterprises as compared to the prior year period since these loans were fully repaid during the first and second quarters of fiscal year 2020, respectively. The decrease in interest income was partially offset by lower interest expense associated with the Tao Group Hospitality, as a result of the refinancing of its credit facility in May 2019, which resulted in a reduction of the outstanding balance payable to the third parties by entering into an intercompany subordinated credit agreement with the Company, as well as lower variable interest rates under the Tao Senior Credit Agreement in the current year period as compared to the previous credit facility in the prior year period. For the nine months ended March 31, 2020, the increase in net interest income was primarily due to lower interest expense associated with the Tao Group Hospitality, partially offset by lower interest income as a result of (i) lower interest rates, (ii) a change in investment mix, and (iii) lower interest earned on loans extended to AMSGE and Tribeca Enterprises. See Note 14 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for further details of the Tao Senior Credit Agreement.
Miscellaneous income (expense), net
Net miscellaneous income for the three months ended March 31, 2020 decreased $23,649 to net miscellaneous expense of $17,448 as compared to net miscellaneous income of $6,201 in the prior year period. For the nine months ended March 31, 2020, net miscellaneous expense increased $176, or 6%, to $3,071. The decrease in net miscellaneous income for the three months ended March 31, 2020 was primarily due to the unrealized losses of $17,196 related to the Company’s investment in Townsquare for the three months ended March 31, 2020 as compared to an unrealized gain of $5,261 for prior year period. See Note 8 and Note 13 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for additional information related to the investment in Townsquare.
Income taxes
See Note 19 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussions of the Company’s income taxes.
Adjusted operating income
The following are the reconciliations of operating income (loss) to adjusted operating income for the three and nine months ended March 31, 2020 as compared to the prior year periods:
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Three Months Ended | |||||||||||||||
March 31, | Change | ||||||||||||||
2020 | 2019 | Amount | Percentage | ||||||||||||
Operating income (loss) | $ | (135,204 | ) | $ | 38,513 | $ | (173,717 | ) | NM | ||||||
Share-based compensation | 13,855 | 15,580 | |||||||||||||
Depreciation and amortization (a) | 29,667 | 28,936 | |||||||||||||
Impairment of intangibles, long-lived assets and goodwill (b) | 102,211 | — | |||||||||||||
Other purchase accounting adjustments | 1,118 | 1,119 | |||||||||||||
Adjusted operating income | $ | 11,647 | $ | 84,148 | $ | (72,501 | ) | (86 | )% | ||||||
Nine Months Ended | |||||||||||||||
March 31, | Change | ||||||||||||||
2020 | 2019 | Amount | Percentage | ||||||||||||
Operating income (loss) | $ | (143,680 | ) | $ | 66,005 | $ | (209,685 | ) | NM | ||||||
Share-based compensation | 47,440 | 45,984 | |||||||||||||
Depreciation and amortization (a) | 86,869 | 88,792 | |||||||||||||
Impairment of intangibles, long-lived assets and goodwill (b) | 102,211 | — | |||||||||||||
Other purchase accounting adjustments | 4,614 | 3,867 | |||||||||||||
Adjusted operating income | $ | 97,454 | $ | 204,648 | $ | (107,194 | ) | (52 | )% | ||||||
_________________
NM — Percentage is not meaningful
(a) | Depreciation and amortization includes purchase accounting adjustments of $4,066 and $3,779 for the three months ended March 31, 2020 and 2019, respectively, and $10,531 and $13,241 for the nine months ended March 31, 2020 and 2019, respectively. |
(b) | For the three and nine months ended March 31, 2020, the Company recorded a non-cash impairment charge of $102,211 associated with Tao Group Hospitality. This impairment charge included impairment charges associated with one venue within the Tao Group Hospitality of $3,541 and $17,972, related to a tradename and long-lived assets, respectively, in addition to an impairment charge of $80,698 related to goodwill associated with Tao Group Hospitality reporting unit. Of the total impairment charge, $90,154, which is associated with goodwill, property and equipment and right-of-use assets, was reflected within the “MSG Entertainment” segment. The remaining $12,057 of the impairment was reported as “Purchase accounting adjustments” for segment reporting purposes and primarily relates to intangible assets and certain right-of use assets for favorable lease, as these balances are associated with the purchase price allocations in connection with the acquisition of Tao Group Hospitality on January 25, 2017. See Note 11 and 21 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for further details. |
Adjusted operating income for the three months ended March 31, 2020 decreased $72,501, or 86%, to $11,647 as compared to the prior year period. For the nine months ended March 31, 2020, adjusting operating income decreased $107,194, or 52%, to $97,454 as compared to the prior year period. The net decreases were attributable to the following:
Three | Nine | ||||||
Months | Months | ||||||
Decrease in adjusted operating income of the MSG Entertainment | $ | (16,837 | ) | $ | (17,090 | ) | |
Decrease in adjusted operating income of the MSG Sports | (47,762 | ) | (55,346 | ) | |||
Other net decreases | (7,726 | ) | (34,262 | ) | |||
Inter-segment eliminations | (176 | ) | (496 | ) | |||
$ | (72,501 | ) | $ | (107,194 | ) | ||
Other net decreases of $7,726 for the three months ended March 31, 2020 were lower than the decrease of operating loss in Corporate and Other of $8,219 due to increases in share-based compensation of $378 and depreciation and amortization of $115. For the nine months ended March 31, 2020, other net decreases of $34,262 were lower than the decrease of operating loss in Corporate and Other of $35,339 due to an increase in share-based compensation of $1,815, partially offset by lower depreciation and amortization of $738.
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Net loss attributable to redeemable and nonredeemable noncontrolling interests
For the three months ended March 31, 2020, the Company recorded $22,447 of net loss attributable to redeemable noncontrolling interests, including proportional share of expenses related to purchase accounting adjustments (“PPA Expenses”) of $22,257, and $590 of net loss attributable to nonredeemable noncontrolling interests, including $155 of PPA Expenses, as compared to $7 of net loss attributable to redeemable noncontrolling interests, including $1,595 of PPA Expenses, and $1,101 of net loss attributable to nonredeemable noncontrolling interests, including $194 of PPA Expenses, for the three months ended March 31, 2019.
For the nine months ended March 31, 2020, the Company recorded $23,851 of net loss attributable to redeemable noncontrolling interests, including $25,547 of PPA Expenses, and $1,663 of net loss attributable to nonredeemable noncontrolling interests, including $472 of PPA Expenses, as compared to $3,662 of net loss attributable to redeemable noncontrolling interests, including $5,499 of PPA Expenses, and $4,913 of net loss attributable to nonredeemable noncontrolling interests, including $779 of PPA Expenses, for the nine months ended March 31, 2019.
These amounts represent the share of net loss from the Company’s investments in Tao Group Hospitality, BCE and CLG that are not attributable to the Company. In addition, PPA Expenses attributable to redeemable noncontrolling interests of $22,257 and $25,547 for the three and nine months ended March 31, 2020, respectively, include $22,997 of proportional charge related to impairment of intangibles, long-lived assets and goodwill for Tao Group Hospitality.
Business Segment Results
MSG Entertainment
The tables below set forth, for the periods presented, certain historical financial information and a reconciliation of operating income (loss) to adjusted operating income (loss) for MSG Entertainment.
Three Months Ended | |||||||||||||||
March 31, | Change (a) | ||||||||||||||
2020 | 2019 | Amount | Percentage | ||||||||||||
Revenues | $ | 136,398 | $ | 166,452 | $ | (30,054 | ) | (18 | )% | ||||||
Direct operating expenses | 98,197 | 108,982 | (10,785 | ) | (10 | )% | |||||||||
Selling, general and administrative expenses | 50,721 | 54,255 | (3,534 | ) | (7 | )% | |||||||||
Depreciation and amortization | 4,915 | 4,899 | 16 | NM | |||||||||||
Impairment of long-lived assets and goodwill | 90,154 | — | 90,154 | NM | |||||||||||
Operating loss | $ | (107,589 | ) | $ | (1,684 | ) | $ | (105,905 | ) | NM | |||||
Reconciliation to adjusted operating income (loss): | |||||||||||||||
Share-based compensation | 2,920 | 4,022 | |||||||||||||
Depreciation and amortization | 4,915 | 4,899 | |||||||||||||
Impairment of long-lived assets and goodwill | 90,154 | — | |||||||||||||
Adjusted operating income (loss) | $ | (9,600 | ) | $ | 7,237 | $ | (16,837 | ) | NM | ||||||
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Nine Months Ended | |||||||||||||||
March 31, | Change (a) | ||||||||||||||
2020 | 2019 | Amount | Percentage | ||||||||||||
Revenues | $ | 608,097 | $ | 645,919 | $ | (37,822 | ) | (6 | )% | ||||||
Direct operating expenses | 366,226 | 383,781 | (17,555 | ) | (5 | )% | |||||||||
Selling, general and administrative expenses | 151,619 | 155,681 | (4,062 | ) | (3 | )% | |||||||||
Depreciation and amortization | 14,705 | 13,150 | 1,555 | 12 | % | ||||||||||
Impairment of long-lived assets and goodwill | 90,154 | — | 90,154 | NM | |||||||||||
Operating income (loss) | $ | (14,607 | ) | $ | 93,307 | $ | (107,914 | ) | NM | ||||||
Reconciliation to adjusted operating income: | |||||||||||||||
Share-based compensation | 9,938 | 10,823 | |||||||||||||
Depreciation and amortization | 14,705 | 13,150 | |||||||||||||
Impairment of long-lived assets and goodwill | 90,154 | — | |||||||||||||
Adjusted operating income | $ | 100,190 | $ | 117,280 | $ | (17,090 | ) | (15 | )% | ||||||
_________________
NM — Percentage is not meaningful
(a) | MSG Entertainment operating results were materially impacted during the three and nine months ended March 31, 2020 by the coronavirus pandemic and government actions taken in response. Please see “— Factors Affecting Results of Operations — Impact of COVID-19 on Our Business — Effects on MSG Entertainment” for more information. |
Revenues
Revenues decreased $30,054, or 18%, to $136,398 for the three months ended March 31, 2020 as compared to the prior year period. Revenue decreased $37,822, or 6%, to $608,097 for the nine months ended March 31, 2020 as compared to the prior year period. The net decreases were attributable to the following:
Three | Nine | |||||||
Months | Months | |||||||
Decrease in event-related revenues from concerts | $ | (17,694 | ) | $ | (22,600 | ) | ||
(Decrease) increase in revenues associated with entertainment dining and nightlife offerings (a) | (5,037 | ) | 1,503 | |||||
Decrease in event-related revenues from other live events | (3,889 | ) | (2,068 | ) | ||||
Decreases in venue-related sponsorship and signage and suite license fee revenues due to the impact of the temporary closure of venues since March 12, 2020 due to COVID-19, partially offset by higher sales of existing sponsorship and signage inventory in the current year period. | (1,628 | ) | (2,650 | ) | ||||
Decrease in revenues from Obscura due to the decision to wind down its third-party production business to focus on the development of MSG Sphere | (1,049 | ) | (9,178 | ) | ||||
Decrease in revenues associated with the expiration of the Wang Theatre booking agreement in February 2019 | (632 | ) | (3,883 | ) | ||||
Increase in revenues from the presentation of the Christmas Spectacular | 275 | 2,044 | ||||||
Other net decreases | (400 | ) | (990 | ) | ||||
$ | (30,054 | ) | $ | (37,822 | ) | |||
(a) | Tao Group Hospitality’s operating results are recorded in the Company’s consolidated statements of operations on a three-month lag basis. Accordingly, the Company’s results for the three and nine months ended March 31, 2020 include Tao Group Hospitality’s operating results from September 30, 2019 to December 29, 2019 and from April 1, 2019 to December 29, 2019, respectively. As such, the Tao Group Hospitality’s operating results reported above did not include the periods impacted by COVID-19, which will be reflected in the fourth quarter of fiscal year 2020. See Note 2 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for further discussion of Tao Group Hospitality’s consolidation. |
56
The decrease in event-related revenues from concerts for the three months ended March 31, 2020 was due to (i) the impact of the temporary closure of venues since March 12, 2020 due to COVID-19, (ii) fewer events held at the Company’s venues prior to the temporary closure of venues since March 12, 2020 as compared to the prior year period, and (iii) the impact of the recognition of additional revenue during the prior year period as a result of the ticketing agreement renewal during the third quarter of fiscal year 2019. For the nine months ended March 31, 2020, the decrease in event-related revenues from concerts was primarily due to (i) lower per-event revenues prior to the temporary closure of venues since March 12, 2020 as compared to the prior year period, (ii) the impact of the temporary closure of venues since March 12, 2020 due to COVID-19, (iii) the impact of the recognition of additional revenue during the prior year period as a result of the ticketing agreement renewal during the third quarter of fiscal year 2019, partially offset by additional events held at the Company’s venues prior to the temporary closure of venues since March 12, 2020 as compared to the prior year period.
The decrease in revenues associated with entertainment dining and nightlife offerings for the three months ended March 31, 2020 was primarily due to lower revenues in New York including the impact of closing one venue in January 2019. For the nine months ended March 31, 2020, the increase in revenues associated with entertainment dining and nightlife offerings was primarily due to the impact of new venues (both owned and managed), partially offset by lower revenues at other venues, including the impact of closing one venue in New York in January 2019.
The decreases in event-related revenues from other live events for the three and nine months ended March 31, 2020 were primarily due to the impact of the temporary closure of venues since March 12, 2020 due to COVID-19. In addition, the decrease in event-related revenues from other live events for the three months ended March 31, 2020 also included lower per-event revenue prior to the temporary closure of venues since March 12, 2020 as compared to the prior year period. For the nine months ended March 31, 2020, the Company had higher per-event revenue from a theatrical production at the Hulu Theater at Madison Square Garden and The Chicago Theatre in the current year period largely offset by the impact of a large-scale special event held at Radio City Music Hall during the prior year period. The Company did not have a comparable special event in the current year period.
For the three months ended March 31, 2020, the increase in revenues from the presentation of the Christmas Spectacular, as compared to the prior year periods, was primarily due to higher per-show ticket-related revenue from an increase in average per-show paid attendance, higher average ticket prices and higher ticket-related fees in the current year periods, largely offset by the impact of the recognition of additional revenue during the prior year period as a result of the ticketing agreement renewal during the third quarter of fiscal year 2019.
For the nine months ended March 31, 2020, the increase in revenues from the presentation of the Christmas Spectacular, as compared to the prior year periods, was primarily due to the following:
• | higher per-show ticket-related revenue from higher average ticket prices, an increase in average per-show paid attendance, and higher ticket-related fees in the current year periods; and |
• | higher merchandise revenue due to recording certain merchandise sales on a gross basis (as principal) as a result of transitioning those operations in-house in the current year periods that were outsourced in the prior year periods. |
The increases in per-show ticket-related revenue and merchandise revenue discussed above were partially offset by the impact on ticket-related revenue due to fewer scheduled performances in the current year periods as compared to the prior year periods. The Company had 199 scheduled Christmas Spectacular performances in this year’s holiday season, of which 186 and 13 took place in the second quarter and third quarter of fiscal year 2020, respectively, as compared to 210 scheduled performances in the prior year’s holiday season, of which 197 and 13 took place in the second quarter and third quarter of fiscal year 2019, respectively. For this year’s holiday season, more than one million tickets were sold, representing a low-single digit percentage decrease as compared to the prior year period.
57
Direct operating expenses
Direct operating expenses decreased $10,785, or 10%, to $98,197 for the three months ended March 31, 2020 as compared to the prior year period. Direct operating expenses decreased $17,555, or 5%, to $366,226 for the nine months ended March 31, 2020 as compared to the prior year period. The net decreases were attributable to the following:
Three | Nine | |||||||
Months | Months | |||||||
Decrease in event-related direct operating expenses associated with concerts primarily due to the impact of the temporary closure of venues since March 12, 2020 due to COVID-19 | $ | (6,883 | ) | $ | (6,958 | ) | ||
Decrease in direct operating expenses associated with entertainment dining and nightlife offerings | (2,880 | ) | (427 | ) | ||||
Decrease in direct operating expenses associated with Obscura due to the decision to wind down its third-party production business to focus on the development of MSG Sphere | (1,822 | ) | (8,314 | ) | ||||
Decrease in event-related direct operating expenses associated with other live events | (1,115 | ) | (2,384 | ) | ||||
Decrease in direct operating expenses associated with the expiration of the Wang Theatre booking agreement in February 2019 | (927 | ) | (2,621 | ) | ||||
(Decrease) increase in direct operating expenses associated with the presentation of the Christmas Spectacular | (85 | ) | 231 | |||||
Increase in venue operating costs primarily associated with higher labor-related venue operating costs as the Company continued to pay certain event-level employees during the temporary closure of its venues | 3,475 | 5,114 | ||||||
Other net decreases | (548 | ) | (2,196 | ) | ||||
$ | (10,785 | ) | $ | (17,555 | ) | |||
For the three months ended March 31, 2020, the decrease in direct operating expenses associated with entertainment dining and nightlife offerings was primarily due to (i) higher expenses during the prior year period at a new venue which opened in September 2018, (ii) lower food and beverage costs and employee compensation and related benefits, and (iii) the absence of costs related to one venue in New York which closed in January 2019.
The decrease in event-related direct operating expenses associated with other live events for the three months ended March 31, 2020 was primarily due to the impact of the temporary closure of venues since March 12, 2020 due to COVID-19. For the nine months ended March 31, 2020, the decrease in event-related direct operating expenses associated with other live events was due to (i) the impact of a large-scale special event held at Radio City Music Hall during the prior year period with no comparable special event during the current year period, and (ii) the impact of the temporary closure of venues since March 12, 2020 due to COVID-19. The decrease was partially offset by higher per-event expenses from a theatrical production at the Hulu Theater at Madison Square Garden and The Chicago Theatre during the second quarter of the current year period.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended March 31, 2020 decreased $3,534, or 7%, to $50,721 as compared to the prior year period. For the nine months ended March 31, 2020, selling, general and administrative expenses decreased $4,062, or 3%, to $151,619 as compared to the prior year period.
For the three and nine months ended March 31, 2020, the decreases were primarily due to (i) lower professional fees of $1,737 and $669, respectively, (ii) the absence of venue pre-opening costs of $1,443 and $5,181, respectively, associated with entertainment dining and nightlife offerings that were recorded in the prior year period, and (iii) lower selling, general and administrative expenses associated with Obscura of $1,413 and $6,542, respectively, due to the Company’s decision to wind down Obscura’s third-party production business to focus on the development of MSG Sphere. These decreases were partially offset by higher employee compensation and related benefits of $1,441 and $8,399 for the three and nine months ended March 31, 2020, respectively.
Depreciation & amortization
Depreciation and amortization for the three months ended March 31, 2020 increased $16 to $4,915 as compared to the prior year period. For the nine months ended March 31, 2020, depreciation and amortization increased $1,555, or 12%, to $14,705 as compared to the prior year period. The increases for the nine months ended March 31, 2020 were primarily due to capital expenditures associated with the opening of a new entertainment dining and nightlife venue in September 2018.
58
Impairment of long-lived assets and goodwill
Due to the operating disruptions from COVID-19, the Company considered that a “triggering event” has occurred in the Tao Group Hospitality reporting unit. Accordingly, the Company performed an impairment test on long-lived assets in connection with the interim goodwill impairment test (See Note 11 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for further details). As a result, the Company recorded a non-cash impairment of $90,154, which includes an impairment related to goodwill associated with Tao Group Hospitality reporting unit, and an impairment related to long-lived assets that are associated with one venue within Tao Group Hospitality for the three and nine months ended March 31, 2020.
Operating income (loss)
Operating loss for the three months ended March 31, 2020 increased $105,905 to $107,589 as compared to the prior year period. The increase in operating loss was primarily due to (i) a non-cash impairment of long-lived asset and goodwill, and (ii) a decrease in revenues, partially offset by lower direct operating expenses and selling, general and administrative expenses, as discussed above. For the nine months ended March 31, 2020, operating income decreased $107,914, or 116%, to $14,607 as compared to the prior year period. The decrease was primarily due to (i) a non-cash impairment of long-lived asset and goodwill, (ii) lower revenues, and (iii) an increase in depreciation and amortization, partially offset by lower direct operating expenses and selling, general and administrative expenses, as discussed above.
Adjusted operating income (loss)
Adjusted operating income for the three months ended March 31, 2020 decreased $16,837 to adjusted operating loss of $9,600 as compared to the prior year period. For the nine months ended March 31, 2020, adjusted operating income decreased $17,090 to $100,190 as compared to the prior year period. The decreases in adjusted operating income were lower than the decreases in operating income primarily due to the impairment of long-lived assets and goodwill of $90,154 for three and nine months ended March 31, 2020.
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MSG Sports
The tables below set forth, for the periods presented, certain historical financial information and a reconciliation of operating income to adjusted operating income for MSG Sports.
Three Months Ended | |||||||||||||||
March 31, | Change (a) | ||||||||||||||
2020 | 2019 | Amount | Percentage | ||||||||||||
Revenues | $ | 288,393 | $ | 351,594 | $ | (63,201 | ) | (18 | )% | ||||||
Direct operating expenses | 173,586 | 200,849 | (27,263 | ) | (14 | )% | |||||||||
Selling, general and administrative expenses | 63,206 | 52,383 | 10,823 | 21 | % | ||||||||||
Depreciation and amortization | 2,212 | 1,899 | 313 | 16 | % | ||||||||||
Operating income | $ | 49,389 | $ | 96,463 | $ | (47,074 | ) | (49 | )% | ||||||
Reconciliation to adjusted operating income: | |||||||||||||||
Share-based compensation | 3,766 | 4,767 | |||||||||||||
Depreciation and amortization | 2,212 | 1,899 | |||||||||||||
Adjusted operating income | $ | 55,367 | $ | 103,129 | $ | (47,762 | ) | (46 | )% | ||||||
Nine Months Ended | |||||||||||||||
March 31, | Change (a) | ||||||||||||||
2020 | 2019 | Amount | Percentage | ||||||||||||
Revenues | $ | 660,893 | $ | 722,789 | $ | (61,896 | ) | (9 | )% | ||||||
Direct operating expenses | 406,244 | 434,882 | (28,638 | ) | (7 | )% | |||||||||
Selling, general and administrative expenses | 170,527 | 147,913 | 22,614 | 15 | % | ||||||||||
Depreciation and amortization | 5,795 | 5,825 | (30 | ) | (1 | )% | |||||||||
Operating income | $ | 78,327 | $ | 134,169 | $ | (55,842 | ) | (42 | )% | ||||||
Reconciliation to adjusted operating income: | |||||||||||||||
Share-based compensation | 12,883 | 12,357 | |||||||||||||
Depreciation and amortization | 5,795 | 5,825 | |||||||||||||
Adjusted operating income | $ | 97,005 | $ | 152,351 | $ | (55,346 | ) | (36 | )% | ||||||
_________________
(a) | MSG Sports operating results were materially impacted during the three and nine months ended March 31, 2020 by the coronavirus pandemic and government actions taken in response. Please see “— Factors Affecting Results of Operations — Impact of COVID-19 on Our Business — Effects on MSG Sports” for more information. |
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Revenues
Revenues decreased $63,201 to $288,393 for the three months ended March 31, 2020 as compared to the prior year period. Revenues decreased $61,896 to $660,893 for the nine months ended March 31, 2020 as compared to the prior year period. The net decreases were attributable to the following:
Three | Nine | |||||||
Months | Months | |||||||
Decrease in professional sports teams’ pre/regular season ticket-related revenues | $ | (27,780 | ) | $ | (28,833 | ) | ||
Decrease in local media rights fees from MSG Networks primarily due to the impact of the suspensions of the NBA and NHL 2019-20 seasons on March 11 and 12, 2020, respectively, due to COVID-19 slightly offset by contractual rate increases | (8,844 | ) | (6,225 | ) | ||||
Decrease in suite license fee revenues primarily due to the impact of the suspensions of the NBA and NHL 2019-20 seasons on March 11 and 12, 2020, respectively, due to COVID-19 | (8,148 | ) | (7,806 | ) | ||||
Decrease in sponsorship and signage revenues and ad sales commission | (7,429 | ) | (9,479 | ) | ||||
Decrease in event-related revenues from other live sporting events | (5,204 | ) | (8,704 | ) | ||||
(Decrease) increase in revenues from league distributions | (2,755 | ) | 1,166 | |||||
Decrease in professional sports teams’ pre/regular season food, beverage and merchandise sales | (2,639 | ) | (2,048 | ) | ||||
Other net (decreases) increases | (402 | ) | 33 | |||||
$ | (63,201 | ) | $ | (61,896 | ) | |||
The decrease in professional sports teams’ pre/regular season ticket-related revenues for the three and nine months ended March 31, 2020 was due to (i) the impact of the suspensions of the NBA and NHL 2019-20 seasons on March 11 and 12, 2020, respectively, due to COVID-19, (ii) the impact of the recognition of additional revenue during the prior year period as a result of the ticketing agreement renewal during the third quarter of fiscal year 2019, and (iii) lower average per-game revenue in the current year period as compared to the prior year period.
The decrease in sponsorship and signage revenues and ad sales commission for the three and nine months ended March 31, 2020 was primarily due to the impact of the suspensions of the NBA and NHL 2019-20 seasons on March 11 and 12, 2020, respectively, due to COVID-19. In addition, the decrease for the nine months ended March 31, 2020 was due to lower sales of existing sponsorship and signage inventory.
The decrease in event-related revenues from other live sporting events for the three months ended March 31, 2020 was primarily due to the cancellation of college basketball events as a result of the temporary closure of venues since March 12, 2020 due to COVID-19 slightly offset by an additional event prior to the temporary closure. The decrease in event-related revenues from other live sporting events for the nine months ended March 31, 2020 was primarily due to the cancellation of college basketball events as a result of the temporary closure of venues since March 12, 2020 due to COVID-19 and fewer events prior to the temporary closure slightly offset by higher per-event revenue.
The decrease in professional sports teams’ pre/regular season food, beverage and merchandise sales for the three and nine months ended March 31, 2020 was due to the impact of the suspensions of the NBA and NHL 2019-20 seasons on March 11 and 12, 2020, respectively, due to COVID-19, slightly offset by higher average per-game revenue.
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Direct operating expenses
Direct operating expenses decreased $27,263, or 14%, to $173,586 for the three months ended March 31, 2020 as compared to the prior year period. Direct operating expenses decreased $28,638, or 7%, to $406,244 for the nine months ended March 31, 2020 as compared to the prior year period. The net decreases were attributable to the following:
Three | Nine | |||||||
Months | Months | |||||||
Decrease in net provisions for certain team personnel transactions | $ | (16,099 | ) | $ | (28,299 | ) | ||
(Decrease) increase in team personnel compensation | (4,260 | ) | 1,990 | |||||
Decrease in other team operating expenses not discussed elsewhere in this table due to the impact of the suspensions of the NBA and NHL 2019-20 seasons on March 11 and 12, 2020, respectively, due to COVID-19 offset by an increase in league assessments and other net increases | (3,666 | ) | (1,867 | ) | ||||
Decrease in net provisions for league revenue sharing expense (excluding playoffs) and NBA luxury tax | (2,639 | ) | (778 | ) | ||||
Decrease in professional sports teams’ pre/regular season expense associated with food, beverage and merchandise sales | (2,185 | ) | (778 | ) | ||||
Decrease in event-related expenses associated with other live sporting events | (1,863 | ) | (3,529 | ) | ||||
Increase in venue operating costs primarily associated with higher labor-related venue operating costs as the Company continued to pay certain event-level employees during the temporary closure of its venues | 3,404 | 4,350 | ||||||
Other net increases | 45 | 273 | ||||||
$ | (27,263 | ) | $ | (28,638 | ) | |||
Net provisions for certain team personnel transactions were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
March 31, | March 31, | |||||||||||||||||||||||
2020 | 2019 | Decrease | 2020 | 2019 | Decrease | |||||||||||||||||||
Net provisions for certain team personnel transactions | $ | 877 | $ | 16,976 | $ | (16,099 | ) | $ | 28,764 | $ | 57,063 | $ | (28,299 | ) | ||||||||||
Team personnel transactions for the three months ended March 31, 2020 reflect waiver/contract terminations of $43, which are net of credits due to the recoveries associated with previously recorded waivers/contract termination costs and player trades of $834. Team personnel transactions for the three months ended March 31, 2019 reflect (i) waivers/contract terminations of $12,379, which are net of credits due to the recoveries associated with previously recorded waivers/contract termination costs, (ii) player trades of $4,055, and (iii) season-ending player injuries of $542.
Team personnel transactions for the nine months ended March 31, 2020 reflect waiver/contract terminations of $26,962 and player trades of $1,802. Team personnel transactions for the nine months ended March 31, 2019 reflect (i) waivers/contract terminations of $50,879, which are net of credits due to the recoveries associated with previously recorded waivers/contract termination costs, (ii) player trades of $5,642, and (iii) season-ending player injuries of $542.
The decrease in team personnel compensation for the three months ended March 31, 2020 was primarily due to the impact of the suspensions of the NBA and NHL 2019-20 seasons on March 11 and 12, 2020, respectively, due to COVID-19 partially offset by roster changes at the Company’s sports teams and other team personnel compensation. The increase in team personnel compensation for the nine months ended March 31, 2020 was primarily due to roster changes at the Company’s sports teams and other team personnel compensation partially offset by the impact of the suspensions of the NBA and NHL 2019-20 seasons on March 11 and 12, 2020, respectively, due to COVID-19.
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Net provisions for league revenue sharing expense (excluding playoffs) and NBA luxury tax were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
March 31, | March 31, | |||||||||||||||||||||||
2020 | 2019 | Decrease | 2020 | 2019 | Decrease | |||||||||||||||||||
Net provisions for league revenue sharing expense (excluding playoffs) and NBA luxury tax | $ | 23,068 | $ | 25,707 | $ | (2,639 | ) | $ | 49,177 | $ | 49,955 | $ | (778 | ) | ||||||||||
The decrease in net provisions for league revenue sharing expense (excluding playoffs) and NBA luxury tax for the three months ended March 31, 2020 reflect lower provisions for league revenue sharing expense of $4,093 slightly offset by $1,454 change to an estimated NBA luxury tax credit as a result of a higher tax credit recorded in the current year period as compared to the prior year period. Lower provisions for league revenue sharing expense primarily reflects lower estimated NBA and NHL revenue sharing expense for the 2019-20 season due to the impact of the suspensions of the NBA and NHL 2019-20 seasons on March 11 and 12, 2020, respectively, due to COVID-19 partially offset by higher estimated NBA and NHL revenue sharing expense for the 2019-20 season games played prior to the suspensions.
The decrease in net provisions for league revenue sharing expense (excluding playoffs) and NBA luxury tax for the nine months ended March 31, 2020 reflect lower provisions for league revenue sharing expense of $3,566 offset by lower estimated NBA luxury tax credit in the current year period as compared to the prior year period of $2,788. Lower provisions for league revenue sharing expense primarily reflects lower estimated NBA and NHL revenue sharing expense for the 2019-20 season due to the impact of the suspensions of the NBA and NHL 2019-20 seasons on March 11 and 12, 2020, respectively, due to COVID-19 partially offset by higher estimated NBA and NHL revenue sharing expense for the 2019-20 season prior to the suspensions.
The Knicks were not a luxury tax payer for the 2018-19 season and, therefore, received an equal share of the portion of luxury tax receipts that were distributed to non-tax paying teams. The Knicks’ roster as of March 31, 2020 would not result in the team being a luxury tax payer for the 2019-20 season and the estimated luxury tax receipt is currently anticipated to be lower than the luxury tax receipt for the 2018-19 season. The actual amounts for the 2019-20 season may vary significantly from the recorded provisions based on actual operating results for each league and all teams within each league for the season and other factors.
The decrease in professional sports teams’ pre/regular season expense associated with food, beverage and merchandise sales for the three and nine months ended March 31, 2020 was due to the impact of the suspensions of the NBA and NHL 2019-20 seasons on March 11 and 12, 2020, respectively, due to COVID-19, slightly offset by higher average per-game expenses.
The decrease in event-related expenses associated with other live sporting events for the three months ended March 31, 2020 was primarily due to the cancellation of college basketball events as a result of the temporary closure of venues since March 12, 2020 due to COVID-19, slightly offset by an additional event prior to the temporary closure and higher per-event expenses. The decrease in event-related expenses associated with other live sporting events for the nine months ended March 31, 2020 was primarily due to the cancellation of college basketball events as a result of the temporary closure of venues since March 12, 2020 due to COVID-19 and fewer events prior to the temporary closure, slightly offset by higher per-event expenses.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended March 31, 2020 increased $10,823, or 21%, to $63,206 as compared to the prior year period. Selling, general and administrative expenses for the nine months ended March 31, 2020 increased $22,614, or 15%, to $170,527 as compared to the prior year period. For the three and nine months ended March 31, 2020, the increases were primarily due to higher employee compensation and related benefits of $6,871 and $16,453, respectively, including severance-related costs attributable to a separation agreement with a team executive, and, to a lesser extent, higher professional fees of $1,889 and $2,649, respectively.
Operating income
Operating income for the three months ended March 31, 2020 decreased $47,074, or 49%, to $49,389 as compared to the prior year period primarily due to lower revenues and, to a lesser extent, higher selling, general and administrative expenses partially offset by lower direct operating expenses, as discussed above.
Operating income for the nine months ended March 31, 2020 decreased $55,842, or 42%, to $78,327 as compared to the prior year period primarily due to lower revenues and higher selling, general and administrative expenses partially offset by lower direct operating expenses, as discussed above.
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Adjusted operating income
Adjusted operating income for the three months ended March 31, 2020 decreased $47,762, or 46%, to $55,367 as compared to the prior year period. The decrease was higher than the decrease in operating income primarily due to lower share-based compensation slightly offset by higher depreciation and amortization.
Adjusted operating income for the nine months ended March 31, 2020 decreased $55,346, or 36%, to $97,005 as compared to the prior year period. The decrease was lower than the decrease in operating income primarily due to higher share-based compensation slightly offset by lower depreciation and amortization.
Liquidity and Capital Resources
Overview
As further described under “— Entertainment Distribution,” on April 17, 2020 the Company completed the Entertainment Distribution. Although the information set forth in this Quarterly Report on Form 10-Q generally does not give effect to the Entertainment Distribution, the information set forth in this section focuses on the liquidity and capital resources of the Company following the Entertainment Distribution.
Our operations and operating results have been, and continue to be, materially impacted by the COVID-19 pandemic and government and league actions taken in response. As of the date of this Quarterly Report on Form 10-Q, nearly all of our business operations have been suspended and it is not clear when those operations will resume. The NBA and NHL suspended their 2019-20 seasons on March 11 and 12, 2020, respectively. No Knicks or Rangers games are currently being played, and it is uncertain if the current seasons will resume. For more information about the impacts and risks to the Company as a result of COVID-19, see “— Impact of COVID-19 on Our Business” and “Item 1A. Risk Factors-Our Operations and Operating Results Have Been, and Continue to be, Materially Impacted by the COVID-19 Pandemic and Government and League Actions Taken in Response.”
Our primary sources of liquidity are $100,000 of cash and cash equivalents, cash flows from the operations of our businesses and borrowing capacity under our revolving credit facilities (described below), of which $15,000 of the $365,000 maximum amount was available as of March 31, 2020, as well as $200,000 of borrowing capacity under the Delayed Draw Term Loan Facilities (“DDTL Facilities”) described below. Our principal uses of cash include working capital-related items, the repayment of outstanding debt, and potential repurchases of shares of the Company’s Class A Common Stock. In addition, as of March 31, 2020, the deferred revenue obligation related to the sports business was approximately $85,000, net of billed, but not yet collected deferred revenue. Of this amount, approximately half is related to the 2019-20 NBA and NHL seasons, which would be addressed, to the extent necessary, through refunds, credits and/or make-goods, as applicable. The decisions of the Company as to the use of its available liquidity will be based upon the ongoing review of the funding needs of the business, the optimal allocation of cash resources, and the timing of cash flow generation. To the extent the Company desires to access alternative sources of funding through the capital and credit markets, restrictions imposed by the NBA and NHL and challenging U.S. and global economic and market conditions could adversely impact its ability to do so at that time.
As of March 31, 2020, we had approximately $1,006,000 in unrestricted cash and cash equivalents and $331,000 of short-term investments. This amount includes $200,000 borrowed by Knicks LLC under the Knicks Revolving Credit Facility in March 2020 and $150,000 borrowed by Rangers LLC under the Rangers Revolving Credit Facility in March 2020. In connection with the Entertainment Distribution, the Company contributed $300,000 of the amounts borrowed under the revolving credit facilities to Madison Square Garden Entertainment Corp. as part of an approximately $1,100,000 cash contribution to Madison Square Garden Entertainment Corp. As a result of the Entertainment Distribution, our balance of unrestricted cash and cash equivalents is approximately $100,000, including the remaining $50,000 drawn under the revolving credit facilities during March 2020. We continue to have $15,000 of borrowing capacity under the Knicks Unsecured Credit Facility.
We regularly monitor and assess our ability to meet our net funding and investing requirements. We believe we have sufficient liquidity, including approximately $100,000 in unrestricted cash and cash equivalents as of April 17, 2020, along with available borrowing capacity under our revolving credit facilities and DDTL Facilities combined with operating cash flows, over the next 12 months, to fund our operations and repay a portion of our outstanding debt (see Note 13 to the consolidated financial statements included in “Part I - Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for a discussion of the Company’s short-term investments).
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Knicks Revolving Credit Facility
On September 30, 2016, New York Knicks, LLC (“Knicks LLC”), a wholly owned subsidiary of the Company, entered into a credit agreement (the “Knicks Credit Agreement”) with a syndicate of lenders providing for a senior secured revolving credit facility of up to $200,000 with a term of five years (the “Knicks Revolving Credit Facility”) to fund working capital needs and for general corporate purposes. Amounts borrowed may be distributed to the Company except during an event of default.
The Knicks Revolving Credit Facility requires Knicks LLC to comply with a debt service ratio of 1.5:1.0 over a trailing four quarter period. As of March 31, 2020, Knicks LLC was in compliance with this financial covenant.
All borrowings under the Knicks Revolving Credit Facility are subject to the satisfaction of certain customary conditions. Borrowings bear interest at a floating rate, which at the option of Knicks LLC may be either (i) a base rate plus a margin ranging from 0.00% to 0.125% per annum or (ii) LIBOR plus a margin ranging from 1.00% to 1.125% per annum. Knicks LLC is required to pay a commitment fee ranging from 0.20% to 0.25% per annum in respect of the average daily unused commitments under the Knicks Revolving Credit Facility. During the three months ended March 31, 2020, Knicks LLC borrowed all $200,000 available under the Knicks Revolving Credit Facility.
All obligations under the Knicks Revolving Credit Facility are secured by a first lien security interest in certain of Knicks LLC’s assets, including, but not limited to, (i) the Knicks LLC’s membership rights in the NBA and (ii) revenues to be paid to the Knicks LLC by the NBA pursuant to certain U.S. national broadcast agreements.
Subject to customary notice and minimum amount conditions, Knicks LLC may voluntarily prepay outstanding loans under the Knicks Revolving Credit Facility at any time, in whole or in part, without premium or penalty (except for customary breakage costs with respect to Eurocurrency loans). Knicks LLC is required to make mandatory prepayments in certain circumstances, including without limitation if the maximum available amount under the Knicks Revolving Credit Facility is greater than 350% of qualified revenues.
In addition to the financial covenant described above, the Knicks Credit Agreement and related security agreements contain certain customary representations and warranties, affirmative covenants and events of default. The Knicks Revolving Credit Facility contains certain restrictions on the ability of Knicks LLC to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the Knicks Revolving Credit Facility, including the following: (i) incurring additional indebtedness and contingent liabilities; (ii) creating liens on certain assets; (iii) making restricted payments during the continuance of an event of default under the Knicks Revolving Credit Facility; (iv) engaging in sale and leaseback transactions; (v) merging or consolidating; and (vi) taking certain actions that would invalidate the secured lenders’ liens on any Knicks LLC’s collateral.
Knicks Unsecured Credit Facility
On September 30, 2016, Knicks LLC entered into an unsecured revolving credit facility with a lender for an initial maximum credit amount of $15,000 and a 364-day term (the “Knicks Unsecured Credit Facility”). Knicks LLC renewed this facility with the lender on the same terms in successive years and the facility was renewed for a new 365-day term effective as of September 27, 2019. There was no borrowing under the Knicks Unsecured Credit Facility as of March 31, 2020. This facility does not have financial covenants.
Rangers Revolving Credit Facility
On January 25, 2017, New York Rangers, LLC (“Rangers LLC”), a wholly owned subsidiary of the Company, entered into a credit agreement (the “Rangers Credit Agreement”) with a syndicate of lenders providing for a senior secured revolving credit facility of up to $150,000 with a term of five years (the “Rangers Revolving Credit Facility”) to fund working capital needs and for general corporate purposes. Amounts borrowed may be distributed to the Company except during an event of default.
The Rangers Revolving Credit Facility requires Rangers LLC to comply with a debt service ratio of 1.5:1.0 over a trailing four quarter period. As of March 31, 2020, Rangers LLC was in compliance with this financial covenant.
All borrowings under the Rangers Revolving Credit Facility are subject to the satisfaction of certain customary conditions. Borrowings bear interest at a floating rate, which at the option of Rangers LLC may be either (i) a base rate plus a margin ranging from 0.125% to 0.50% per annum or (ii) LIBOR plus a margin ranging from 1.125% to 1.50% per annum. Rangers LLC is required to pay a commitment fee ranging from 0.375% to 0.625% per annum in respect of the average daily unused commitments under the Rangers Revolving Credit Facility. During the three months ended March 31, 2020, Rangers LLC borrowed all $150,000 available under the Rangers Revolving Credit Facility.
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All obligations under the Rangers Revolving Credit Facility are secured by a first lien security interest in certain of Rangers LLC’s assets, including, but not limited to, (i) Rangers LLC’s membership rights in the NHL, (ii) revenues to be paid to Rangers LLC by the NHL pursuant to certain U.S. and Canadian national broadcast agreements, and (iii) revenues to be paid to Rangers LLC pursuant to local media contracts.
Subject to customary notice and minimum amount conditions, Rangers LLC may voluntarily prepay outstanding loans under the Rangers Revolving Credit Facility at any time, in whole or in part, without premium or penalty (except for customary breakage costs with respect to Eurocurrency loans). Rangers LLC is required to make mandatory prepayments in certain circumstances, including without limitation if qualified revenues are less than 17% of the maximum available amount under the Rangers Revolving Credit Facility.
In addition to the financial covenant described above, the Rangers Credit Agreement and related security agreements contain certain customary representations and warranties, affirmative covenants and events of default. The Rangers Revolving Credit Facility contains certain restrictions on the ability of Rangers LLC to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the Rangers Revolving Credit Facility, including the following: (i) incurring additional indebtedness and contingent liabilities; (ii) creating liens on certain assets; (iii) making restricted payments during the continuance of an event of default under the Rangers Revolving Credit Facility; (iv) engaging in sale and leaseback transactions; (v) merging or consolidating; and (vi) taking certain actions that would invalidate the secured lenders’ liens on any of Rangers LLC’s assets securing the obligations under the Rangers Revolving Credit Facility.
Delayed Draw Term Loan Credit Facilities
As an additional source of liquidity for the Company in response to the COVID-19 pandemic, on April 17, 2020, MSG NYR Holdings, LLC and MSG NYK Holdings, LLC, two indirect wholly-owned subsidiaries of the Company, each entered into a separate delayed draw term loan credit agreement with MSG Entertainment Group, LLC, a wholly-owned subsidiary of MSG Entertainment, as lender (the “DDTL Lender”). The credit agreement for MSG NYK Holdings, LLC (the “Knicks DDTL Facility Borrower”) provides for a $110,000 senior unsecured delayed draw term loan facility (the “Knicks DDTL Facility”) and the credit agreement for MSG NYR Holdings, LLC (the “Rangers DDTL Facility Borrower”) provides for a $90,000 senior unsecured delayed draw term loan facility (the “Rangers DDTL Facility” and, together with the Knicks DDTL Facility, the “DDTL Facilities”).
The DDTL Facilities will mature and any unused commitments thereunder will expire on October 17, 2021. Borrowings under the DDTL Facilities will bear interest at a variable rate equal to either, at the election of the applicable borrower, (i) LIBOR plus 2.00% per annum or (ii) a base rate plus 1.00% per annum. Subject to the borrowing conditions, each of the DDTL Facilities may be drawn in up to four separate borrowings of $10,000 or more. Proceeds of borrowings under the DDTL Facilities will be used for general corporate purposes.
The availability of each of the DDTL Facilities to the respective borrowers is subject to certain conditions, including (a) the liquidity, including cash on hand and availability under revolving credit commitments, of the Company, MSG Sports, LLC, the Knicks DDTL Facility Borrower and its subsidiaries and the Rangers DDTL Facility Borrower and its subsidiaries (other than any liquidity that is restricted by law or contractual obligation from being transferred to the relevant DDTL Facility Borrower or its subsidiaries) must be (i) less than $50,000 immediately prior to giving effect to any borrowing, and (ii) less than $75,000 immediately after giving effect to any borrowing, and (b) with respect to the Knicks DDTL Facility, the Knicks DDTL Facility Borrower and its subsidiaries must have used commercially reasonable efforts to raise additional financing (“New Third-Party Debt”), including additional commitments under existing revolving facilities, prior to drawing on the Knicks DDTL Facility to the extent permitted by the debt policies of the NBA. In addition, the commitments of the DDTL Lender to make advances under the Knicks DDTL Facility will be permanently reduced and the Knicks DDTL Facility will be subject to mandatory prepayments in an amount equal to the net cash proceeds received by the Company, MSG Sports, LLC, the Knicks DDTL Facility Borrower, or the subsidiaries of the Knicks DDTL Facility Borrower from any New Third-Party Debt.
Pursuant to the NBA debt policies, the NBA has consented (the “NBA Consent Letter”) to the incurrence of the indebtedness under the Knicks DDTL Facility. The NBA Consent Letter provides that the Knicks DDTL Facility Borrower and its subsidiaries (including the Knicks basketball team) will, among other matters, (i) operate the team in a first class manner, consistent with the manner in which NBA teams generally are operated, as determined by the NBA Commissioner in his sole discretion, and (ii) maintain sufficient net working capital and cash reserves to pay expenses, liabilities and obligations of the team in the ordinary course and in a timely fashion. In addition, the Knicks DDTL Facility Borrower and its subsidiaries (including the Knicks basketball team) have agreed with the NBA to not transfer certain basketball-related assets and to not make distributions to the Company without first providing the NBA with advance notice and not receiving the objection of the NBA Commissioner.
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Madison Square Garden Entertainment Corp. Matters
Through the end of the quarter ended March 31, 2020 and prior to the Entertainment Distribution, the Company’s cash expenditures included capital spending in connection with the construction of MSG Sphere at The Venetian, the state-of-the-art entertainment venue currently under construction in Las Vegas. The Company’s actual construction costs for MSG Sphere at The Venetian incurred through March 31, 2020 were approximately $349,000, which is net of $65,000 received from Las Vegas Sands Corp. during the nine months ended March 31, 2020. In addition, the amount of construction costs incurred as of March 31, 2020 includes approximately $67,600 of accrued expenses that were not yet paid as of that date. For additional information regarding the Company’s capital expenditures related to MSG Sphere for the three and nine months ended March 31, 2020, see Note 21 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q.
Prior to the Entertainment Distribution the Company’s business also included the Forum, an arena-sized venue in Inglewood, CA. During the three months ended March 31, 2020, three subsidiaries of Madison Square Garden Entertainment Corp. reached an agreement to sell the Forum and settle related litigation for a cash purchase price of $400,000 pursuant to a Membership Interest Purchase Agreement. All proceeds from the transaction, which closed subsequent to the Entertainment Distribution, and rights and obligations of the parties to the Membership Interest Purchase Agreement were retained by Madison Square Garden Entertainment Corp. and its subsidiaries.
Financing Agreements and Stock Repurchases
See Note 14 and Note 17 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussions of the Company’s debt obligations and various financing agreements, and the Company’s stock repurchases, respectively.
Contractual Obligations
The Company adopted ASU No. 2016-02, Leases (Topic 842), on July 1, 2019. As a result, the contractual obligations related to future lease payments, which were historically reported as off-balance sheet commitments, are now reflected on the consolidated balance sheet as lease liabilities as of March 31, 2020. See Note 9 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for more details about the lease liabilities.
In connection with the Entertainment Distribution, certain contractual obligations, principally those that the Company had in connection with the MSG Sphere in Las Vegas and long-term noncancelable operating lease agreements for entertainment venues and certain office and storage space, were transferred to Madison Square Garden Entertainment Corp.
In connection with the Entertainment Distribution, subsidiaries of the Company are parties to Arena License Agreements with a subsidiary of Madison Square Garden Entertainment Corp. that requires the Knicks and Rangers to play their home games at The Garden. Under the Arena License Agreements, which each have a term of 35 years, the Knicks and Rangers will pay an annual license fee in connection with their respective use of The Garden. For each, the license fee for the initial contract year ending June 30, 2020 will be prorated based on the number of games scheduled to be played at The Garden between the date of the Entertainment Distribution and the end of that contract year. The license fee for the first full contract year ending June 30, 2021 will be approximately $22,500 for the Knicks and approximately $16,700 for the Rangers, and then for each subsequent year, the license fees will be 103% of the license fees for the immediately preceding contract year.
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Cash Flow Discussion
As of March 31, 2020, cash, cash equivalents and restricted cash totaled $1,045,137, as compared to $1,117,901 as of June 30, 2019. The following table summarizes the Company’s cash flow activities for the nine months ended March 31, 2020 and 2019:
Nine Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Net income (loss) | $ | (129,383 | ) | $ | 76,083 | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities | 244,646 | 139,190 | ||||||
Subtotal | $ | 115,263 | $ | 215,273 | ||||
Changes in working capital assets and liabilities | (4,130 | ) | (117,929 | ) | ||||
Net cash provided by operating activities | $ | 111,133 | $ | 97,344 | ||||
Net cash used in investing activities | (494,631 | ) | (159,760 | ) | ||||
Net cash provided by (used in) financing activities | 306,818 | (18,551 | ) | |||||
Effect of exchange rates on cash, cash equivalents and restricted cash | 3,916 | 6,440 | ||||||
Net decrease in cash, cash equivalents and restricted cash | $ | (72,764 | ) | $ | (74,527 | ) | ||
Operating Activities
Net cash provided by operating activities for the nine months ended March 31, 2020 improved by $13,789 to $111,133 as compared to the prior year period primarily due changes in working capital assets and liabilities which include (i) lower increase in accounts receivable as a result of the temporary closure of venues and suspensions of the NBA and NHL seasons due to COVID-19, (ii) higher collections due to promoters as events were postponed as a result of the temporary closure of venues due to COVID-19, (iii) higher increase in accrued and other liabilities primarily due to funds received from Las Vegas Sands Corp. in connection with the ground lease in Las Vegas, partially offset by the waiver of a player in the prior year period. The increase in cash provided by the changes in working capital discussed above was partially offset by the decrease in net income in the current year period adjusted for non-cash items.
Investing Activities
Net cash used in investing activities for the nine months ended March 31, 2020 increased by $334,871 to $494,631 as compared to the prior year period primarily due to (i) an increase in purchase of short-term investments in the current year period as compared to the prior year period, (ii) higher capital expenditures in the current year period as compared to the prior year period, of which substantially all are related to the Company’s planned MSG Spheres in Las Vegas and London, and (iii) lower proceeds received from the sale of the Company’s 50% interest in AMSGE in the prior year period compared to the sale of the Company’s 50% interest in Tribeca in the current year period. This increase was partially offset by (i) proceeds from maturity of short-term investments, (ii) a loan repayment received from subordinated note, (iii) lower investments made in nonconsolidated affiliates in the current year period as compared to the prior year period, and (iv) acquisition of notes receivable during the prior year period as compared to none during the current year period.
Financing Activities
Net cash provided by financing activities for the nine months ended March 31, 2020 was $306,818 as compared to net cash used in financing activities in the prior year period of $18,551. This change is primarily due to proceeds received from the borrowings under the Knicks Revolving Credit Facility and Rangers Revolving Credit Facility slightly offset by a repayment on the Tao Revolving Credit Facility and an increase in taxes paid in lieu of shares issued for equity-based compensation in the current year period as compared to the prior year period.
Seasonality of Our Business
As further described under “— Entertainment Distribution,” on April 17, 2020, the Company completed the Entertainment Distribution. Although the information set forth in this Quarterly Report on Form 10-Q generally does not give effect to the Entertainment Distribution, the information set forth in this section focuses on the seasonality of the Company’s business following the Entertainment Distribution.
The dependence of MSG Sports on revenues from its NBA and NHL sports teams generally means it earns a disproportionate share of its revenues in the second and third quarters of the Company’s fiscal year.
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Recently Issued Accounting Pronouncements and Critical Accounting Policies
Recently Issued Accounting Pronouncements
See Note 2 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussion of recently issued accounting pronouncements.
Critical Accounting Policies
The following discussion has been included to provide the results of our annual impairment testing of goodwill and identifiable indefinite-lived intangible assets performed during the first quarter of fiscal year 2020 and our interim impairment testing of goodwill and long-lived assets during the quarter ended March 31, 2020. Subsequent to the issuance of our Annual Report on Form 10-K for the year ended June 30, 2019, the Company adopted the ASC Topic 842, Leases in the first quarter of fiscal year 2020. See Note 9 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussion of leases. In addition, the Company elected to adopt ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment in the third quarter of fiscal year 2020 in connection with its interim goodwill impairment test performed as of March 31, 2020, as discussed further below. ASU No. 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
There have been no other material changes to the Company’s critical accounting policies from those set forth in our Annual Report on Form 10-K for the year ended June 30, 2019.
Goodwill
Goodwill is tested annually for impairment as of August 31st and at any time upon the occurrence of certain events or substantive changes in circumstances. The Company performs its goodwill impairment test at the reporting unit level, which is one level below the operating segment level. The Company has two operating and reportable segments, MSG Sports and MSG Entertainment, consistent with the way management makes decisions and allocates resources to the business.
For purposes of evaluating goodwill for impairment, the Company has three reporting units across its two operating segments, which are MSG Sports, MSG Entertainment and Tao Group Hospitality.
The goodwill balance reported on the Company’s consolidated balance sheet as of March 31, 2020 by reporting unit was as follows:
MSG Sports | $ | 226,955 | |
MSG Entertainment | 74,111 | ||
Tao Group Hospitality | 7,885 | ||
$ | 308,951 | ||
The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company would not need to perform a quantitative impairment test for that reporting unit. If the Company cannot support such a conclusion or the Company does not elect to perform the qualitative assessment, the first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The estimates of the fair value of the Company’s reporting units are primarily determined using discounted cash flows and comparable market transactions. These valuations are based on estimates and assumptions including projected future cash flows, discount rates, determination of appropriate market comparables and the determination of whether a premium or discount should be applied to comparables. Significant judgments inherent in a discounted cash flow analysis include the selection of the appropriate discount rate, the estimate of the amount and timing of projected future cash flows and identification of appropriate continuing growth rate assumptions. The discount rates used in the analysis are intended to reflect the risk inherent in the projected future cash flows. Subsequent to the adoption of ASU No. 2017-04 in the third quarter of fiscal year 2020, the amount of an impairment loss is measured as the amount by which a reporting unit’s carrying value exceeds its fair value determined in step one, not to exceed the carrying amount of goodwill. Prior to the adoption of ASU No. 2017-04, if the carrying amount of a reporting unit exceeded its fair value, the second step of the goodwill impairment test was performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compared the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeded the implied fair value of that goodwill, an impairment loss was
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recognized in an amount equal to that excess. The implied fair value of goodwill was determined in the same manner as the amount of goodwill that would be recognized in a business combination.
The Company elected to perform the qualitative assessment of impairment for the goodwill for all of the Company’s reporting units for the fiscal year 2020 annual impairment test. These assessments considered factors such as:
• | macroeconomic conditions; |
• | industry and market considerations; |
• | cost factors; |
• | overall financial performance of the reporting units; |
• | other relevant company-specific factors such as changes in management, strategy or customers; and |
• | relevant reporting unit specific events such as changes in the carrying amount of net assets. |
During the first quarter of fiscal year 2020, the Company performed its annual impairment test of goodwill and determined that there were no impairments of goodwill identified for any of its reporting units as of the impairment test date. Based on these impairment tests, the Company’s reporting units had sufficient safety margins, representing the excess of the estimated fair value of each reporting unit, derived from the most recent quantitative assessments, less its respective carrying value (including goodwill allocated to each respective reporting unit). The Company believes that if the fair value of the reporting unit exceeds its carrying value by greater than 10%, a sufficient safety margin has been realized.
During the third quarter of fiscal year 2020, the Company’s operating results have been, and continue to be, materially impacted by the COVID-19 pandemic and government and league actions taken in response, including government mandated assembly limitations and venue, restaurant, bar and nightclub closures impacting all the Company’s reporting units. While the Company concluded that the effects of COVID-19 would not more likely than not reduce the fair value of its MSG Sports and MSG Entertainment reporting units below their carrying amounts, the Company concluded a triggering event had occurred for its Tao Group Hospitality reporting unit as of March 31, 2020 as a result of COVID-19. Accordingly, the Company performed an interim quantitative impairment test as of March 31, 2020 (“interim testing date”) for the Tao Group Hospitality reporting unit, which required the Company to assess the carrying value of its long-lived assets, amortizable intangible assets and goodwill as of the interim test date.
Amortizable intangible assets and other long-lived assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are independent from cash flows from other assets and liabilities. In determining whether an impairment of long-lived assets has occurred, the Company considers both qualitative and quantitative factors. The quantitative analysis involves estimating the undiscounted future cash flows directly related to that asset group and comparing the resulting value against the carrying value of the asset group. If the carrying value of the asset group is greater than the sum of the undiscounted future cash flows, an impairment loss is recognized for the difference between the carrying value of the asset group and its estimated fair value.
For the interim impairment test, the Company estimated the fair value of the Tao Group Hospitality reporting unit based on a discounted cash flow model (income approach). This approach relied on numerous assumptions and judgments that were subject to various risks and uncertainties. Principal assumptions utilized, all of which are considered Level III inputs under the fair value hierarchy (see Note 11 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q), include the Company's estimates of future revenue and terminal growth rates, margin assumptions and the discount rate applied to estimate future cash flows. The assumptions utilized are subject to a high degree of judgment and complexity, particularly in light of economic and operational uncertainty that exists as a result of COVID-19 as of March 31, 2020.
Based upon the results of the Company’s interim quantitative impairment test, the Company concluded that the carrying value of the Tao Group Hospitality reporting unit exceeded its estimated fair value (“Fair Value Deficit”) as of the interim testing date by $102,211. Based on the evaluation of amortizable intangible assets and other long-lived assets, the Company recorded non-cash impairment charges of $11,573, $6,399 and $3,541, for Right-of-use assets, Property and equipment assets, and certain intangible assets, respectively, which were associated with a single venue within the Tao Group Hospitality. The remaining Tao Group Hospitality Fair Value Deficit was allocated to goodwill for a non-cash goodwill impairment charge of $80,698. The goodwill impairment charge was calculated as the amount that the adjusted carrying value of the reporting unit, including any goodwill, exceeded its fair value. Upon completion of the quantitative impairment test and recording of the associated impairments, as of March 31, 2020, the carrying value of the Tao Group Hospitality reporting unit equals its fair value, whereas the Company’s other reporting units still maintain a headroom that is sufficiently in excess of their carrying values. See “Part II
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— Item 1A. Risk Factors” for more information about the risks to the Company’s business operations as a result of the COVID-19 pandemic.
Identifiable Indefinite-Lived Intangible Assets
Identifiable indefinite-lived intangible assets are tested annually for impairment as of August 31st and at any time upon the occurrence of certain events or substantive changes in circumstances. The following table sets forth the amount of identifiable indefinite-lived intangible assets reported in the Company’s consolidated balance sheet as of March 31, 2020 by reportable segment:
Sports franchises (MSG Sports) | Trademarks (MSG Entertainment) | Photographic related rights (MSG Sports) | Total | |||||||||||||
Balance as of June 30, 2019 | $ | 111,064 | 62,421 | 3,000 | $ | 176,485 | ||||||||||
Allocation to the assets held for sale | — | (540 | ) | — | (540 | ) | ||||||||||
Balance as of March 31, 2020 | $ | 111,064 | $ | 61,881 | $ | 3,000 | $ | 175,945 | ||||||||
The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. In the qualitative assessment, the Company must evaluate the totality of qualitative factors, including any recent fair value measurements, that impact whether an indefinite-lived intangible asset other than goodwill has a carrying amount that more likely than not exceeds its fair value. The Company must proceed to conducting a quantitative analysis, if the Company (i) determines that such an impairment is more likely than not to exist, or (ii) forgoes the qualitative assessment entirely. Under the quantitative assessment, the impairment test for identifiable indefinite-lived intangible assets consists of a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
The Company elected to perform the qualitative assessment of impairment for the indefinite-lived intangible assets for all of the Company’s reporting units for the fiscal year 2020 annual impairment test. These assessments considered the events and circumstances that could affect the significant inputs used to determine the fair value of the intangible asset. Examples of such events and circumstances include:
• | cost factors; |
• | financial performance; |
• | legal, regulatory, contractual, business or other factors; |
• | other relevant company-specific factors such as changes in management, strategy or customers; |
• | industry and market considerations; and |
• | macroeconomic conditions. |
During the first quarter of fiscal year 2020, the Company performed its annual impairment test of the identifiable indefinite-lived intangible assets and determined that there were no impairments identified as of the impairment test date. Based on results of the impairment tests performed, the Company’s indefinite-lived intangible assets had sufficient safety margins, representing the excess of each identifiable indefinite-lived intangible asset’s estimated fair value over its respective carrying value. The Company believes that if the fair value of an indefinite-lived intangible asset exceeds its carrying value by greater than 10%, a sufficient safety margin has been realized.
Contingent Consideration
See Note 13 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for more information regarding the fair value of the Company’s deferred and contingent consideration liabilities related to the acquisitions of Tao Group Hospitality and CLG.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Except for the broad effects of COVID-19 as a result of its negative impact on the global economy and major financial markets, there were no material changes to the disclosures regarding market risks in connection with our pension and postretirement plans, interest rate risk exposure, foreign currency exchange rate risk, and commodity risk exposure. See Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the year ended June 30, 2019. In addition, see Item 2, “— Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors Affecting Results of Operations — Impact of COVID-19 on Our Business” of this Quarterly Report on Form 10-Q for discussions of disruptions caused by COVID-19.
Foreign currency exchange rate risk:
As of March 31, 2020, a uniform hypothetical 5% fluctuation in the GBP/USD exchange rate would have resulted in a change of approximately $14.8 million in the Company’s net asset value.
Potential interest rate risk exposure:
We have potential interest rate risk exposure related to outstanding borrowings incurred under our Knicks Revolving Credit Facility and Rangers Revolving Credit Facility, collectively, the “MSG Credit Facilities”, and under the TAO Credit Facilities through our consolidation of Tao Group Hospitality. Changes in interest rates may increase interest expense payments with respect to any borrowings incurred under the MSG Credit Facilities or under the TAO Credit Facilities.
Borrowings under our MSG Credit Facilities and TAO Credit Facilities incur interest, depending on our election, at a floating rate based upon LIBOR, the U.S. Federal Funds Rate or the U.S. Prime Rate, plus, in each case, a fixed spread. As of March 31, 2020, we currently have a total of $385 million borrowings outstanding under our MSG Credit Facilities and TAO Credit Facilities. The effect of a hypothetical 100 basis point increase in floating interest rates prevailing as of March 31, 2020 and continuing for a full year would increase interest expense by approximately $3.85 million.
Item 4. Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2020 the Company’s disclosure controls and procedures were effective.
There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934) during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
On March 29, 2019, a purported stockholder of the Company filed a complaint in the Court of Chancery of the State of Delaware, derivatively on behalf of the Company, against certain directors of the Company who are members of the Dolan family group and against the directors of the Company who are members of the Compensation Committee (collectively, the “Director Defendants”). The Company is also named as a nominal defendant in the complaint. The complaint alleges that the Director Defendants breached their fiduciary duties to the Company’s stockholders in approving the compensation packages for James L. Dolan in his capacity as the Executive Chairman and Chief Executive Officer of the Company. The complaint seeks monetary damages in an unspecified amount from the Director Defendants in favor of the Company; rescission of Mr. Dolan’s employment agreements; restitution and disgorgement by Mr. Dolan in respect of his compensation; and costs and disbursements for the plaintiff. On June 5, 2019, the Board formed a Special Litigation Committee to investigate the claims made by the plaintiff and to determine the Company’s response thereto. The litigation has been stayed while the Special Litigation Committee’s work is ongoing.
The Company is a defendant in various other lawsuits. Although the outcome of these lawsuits cannot be predicted with certainty (including the extent of available insurance), management does not believe that resolution of these lawsuits will have a material adverse effect on the Company.
Item 1A. Risk Factors
The risk factor set forth below should be read carefully in conjunction with the risk factors discussed in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, filed on August 20, 2019, which could materially impact our business, financial condition and results of operations.
Our Operations and Operating Results Have Been, and Continue to be, Materially Impacted by the COVID-19 Pandemic and Government and League Actions Taken in Response.
An outbreak of a novel strain of coronavirus, COVID-19, in December 2019 subsequently became a pandemic after spreading to multiple countries, including the United States. As of the date of this Quarterly Report on Form 10-Q, virtually all of our business operations have been suspended and it is not clear when those operations will resume. The NBA and NHL suspended their 2019-20 seasons on March 11 and 12, 2020, respectively. No Knicks or Rangers games are currently being played, and it is uncertain if the seasons will resume. In addition, as a result of government mandated assembly limitations and closures, no events are currently permitted to be held at The Garden where the Knicks and Rangers play their home games, and some or all of these mandated restrictions may remain in effect even after the NBA and/or NHL resume their games.
As a result, the Company is not recognizing revenue from Knicks or Rangers games or sponsorship and advertising assets. Further, a significant portion of the Company’s revenue is earned from media rights fees from the local broadcast of Knicks and Rangers games and our share of fees paid for league-wide media rights, which will not be earned if those games are not played.
It is possible that continuing concerns related to coronavirus could cause governments and professional sports leagues in the United States, including the NBA and NHL, to mandate that teams play games without an audience once their games resume. Even after the Knicks and the Rangers are able to resume playing games to audiences, it is unclear whether and to what extent coronavirus concerns will impact the demand for attending these games and for our sponsorship and advertising assets.
The impact of the suspended NBA and NHL seasons, and any other continuing effects of the coronavirus on our business operations, will substantially decrease our revenues. We will not be able to reduce our expenses in all cases, as many are fixed over the near-term, to the same degree as our decline in revenues, which will adversely affect our results of operations and cash flow to a greater extent. For example, the Knicks and Rangers are not currently required to pay license fees to Madison Square Garden Entertainment Corp. under the Arena License Agreements while The Garden is closed due to the government mandated suspension of events as a result of coronavirus, but if The Garden reopens, future rent payments due under the Arena License Agreements will be payable by the Knicks and the Rangers even if the NBA or NHL seasons do not resume simultaneously or at all.
Our business is also particularly sensitive to discretionary consumer spending. We cannot predict the time period over which our business will be impacted by coronavirus. Coronavirus could impede economic activity in impacted regions or globally over the long-term, causing a global recession and leading to a further decline in discretionary spending on sporting events and other leisure activities, which could result in long-term effects on our business.
Our business could be subject to additional governmental regulations and/or league determinations which could have a material impact on our business.
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Even after our businesses resume operations, there can be no assurances that fans attending games or vendors and employees working our games at The Garden will not contract coronavirus. Any such occurrence could result in litigation, legal and other costs and reputational risk that could materially impact our business and results of operations.
For the reasons set forth above and other reasons that may come to light as the coronavirus outbreak and protective measures expand, we cannot reasonably estimate the impact to our future revenues, results of operations, cash flows or financial condition, but such impacts have had and will continue to have a significant impact on our business, revenues, results of operations, cash flows and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
As of March 31, 2020, the Company had approximately $260 million remaining under the $525 million Class A Common Stock share repurchase program authorized by the Company’s board of directors on September 11, 2015. Under the authorization, shares of Class A Common Stock may be purchased from time to time in accordance with applicable insider trading and other securities laws and regulations, with the timing and amount of purchases depending on market conditions and other factors. The Company has been funding and expects to continue to fund stock repurchases through a combination of cash on hand and cash generated by operations. During the three months ended March 31, 2020, the Company did not engage in any share repurchase activity under its share repurchase program.
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Item 6. Exhibits
(a) | Index to Exhibits |
EXHIBIT NO. | DESCRIPTION | |
101.INS | XBRL Instance Document — the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH | XBRL Taxonomy Extension Schema. | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | |
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EXHIBIT NO. | DESCRIPTION | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase. | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase. | |
104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 formatted in Inline XBRL and contained in Exhibit 101. | |
_________________
† | This exhibit is a management contract or a compensatory plan or arrangement. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 8th day of May 2020.
Madison Square Garden Sports Corp. | ||
By: | /S/ VICTORIA M. MINK | |
Name: | Victoria M. Mink | |
Title: | Executive Vice President, Chief Financial Officer and Treasurer | |
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