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
Description of Business
MSG Networks Inc. (together with its subsidiaries, the “Company”)
owns and operates two regional sports and entertainment networks, MSG Network and MSG+.
On September 30, 2015, the Company distributed to its stockholders all of the outstanding common stock of The Madison Square Garden Company (“MSG”) (the “Distribution”). Following the Distribution, the Company no longer consolidates the financial results of MSG for purposes of its own financial reporting. Certain transaction costs related to the Distribution are classified in the consolidated statement of operations for the six months ended December 31, 2016 as discontinued operations.
The Company operates and reports financial information in
one
segment. Substantially all revenues and assets of the Company are attributed to or located in the United States and are primarily concentrated in the New York City metropolitan area.
Unaudited Interim Financial Statements
The accompanying interim consolidated unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X, and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended
June 30, 2017
. The financial statements as of
December 31, 2017
and for the
three and six
months ended
December 31, 2017
and
2016
presented in this Quarterly Report on Form 10-Q are unaudited; however, in the opinion of management such 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.
Note
2
. Accounting Policies
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of MSG Networks Inc. and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the accompanying consolidated 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 amount of revenues and expenses. Such estimates include the valuation of accounts receivable, goodwill, intangible assets, other long-lived assets, tax accruals, and other liabilities. In addition, estimates are used in revenue recognition, income tax benefit (expense), performance and share-based compensation, depreciation and amortization, litigation matters, and other matters. Management believes its use of estimates in the consolidated 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.
Recently Adopted Accounting Pronouncements
In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-07,
Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
. This standard was early adopted by the Company in the first quarter of fiscal year 2018, and was applied retrospectively. The adoption of this standard resulted in the non-service cost components of net periodic benefit cost to be presented separately from the service cost component, and the non-service cost components to no longer be included in the subtotal
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
for operating income in the consolidated statements of operations. The presentation of the service cost component of net periodic benefit cost remains unchanged within selling, general and administrative expenses and direct operating expenses in the consolidated statements of operations. As this standard was applied retrospectively, the Company reclassified
$346
and $
766
of net periodic benefit cost from selling, general and administrative expenses and direct operating expenses to a separate line item within other income (expense) in the accompanying consolidated statements of operations for the
three and six
months ended
December 31, 2016
, respectively.
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the
FASB issued ASU
No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which supersedes the revenue recognition requirements in FASB Accounting Standards Codification (
“
ASC
”
) Topic 605,
Revenue Recognition
. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, which defers the effective date of ASU No. 2014-09 for all entities by one year.
In March 2016, the
FASB issued ASU
No. 2016-08,
Revenue from Contracts with Customers (Topic 606):
Principal versus Agent Consideration
s
, which provides clarification on the implementation guidance on principal versus agent considerations outlined in
ASU
No. 2014-09. In April 2016, the
FASB issued ASU
No. 2016-10,
Revenue from Contracts with Customers (Topic 606):
Identifying Performance Obligations and Licensing
, which finalized a
mendments to identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB issued ASU No. 2016-12,
R
evenue from Contracts with Customers (Topic 606):
Narrow-Scope Improvements and Practical Expedients
, which clarifies assessing collectibility, noncash consideration, presentation of sales taxes, completed contracts, and contract modifications at transition. This standard will be effective for the Company beginning in the first quarter of fiscal year 2019, and the Company expects to adopt this standard using the modified retrospective method.
The Company has partially completed its assessment of the new standard to determine the impact it will have on its consolidated financial statements and related disclosures, and expects the remainder of its assessment to be completed by the end of fiscal year 2018.
In February 2016, the FASB issued ASU No. 2016-02
, Leases (Topic 842)
, which supersedes the current guidance in ASC Topic 840,
Leases
. This ASU requires
the recognition of lease assets and lease liabilities on the balance sheet for those
leases classified as operating leases under previous GAAP.
The amended guidance also requires additional quantitative and qualitative disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases in order to provide additional information about the nature of an organization’s leasing activities.
This standard will be effective for the Company beginning in the first quarter of fiscal year 2020, with early adoption permitted, and the modified retrospective approach required. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which amends ASC Topic 230,
Statement of Cash Flows
to eliminate the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows by adding or clarifying guidance on eight specific cash flow issues.
This standard will be effective for the Company beginning in the first quarter of fiscal year 2019, with early adoption permitted and the retrospective approach required. The adoption of this guidance is not expected to have a material impact on the Company
’
s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses, which will effect various areas of accounting including, but not limited to, goodwill and consolidation. This standard will be effective for the Company beginning in the first quarter of fiscal year 2019, with early adoption permitted. The standard is to be applied prospectively.
The adoption of this guidance is not expected to have a material impact on the Company
’
s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, which simplifies the measurement of goodwill impairment by eliminating the requirement of performing a hypothetical purchase price allocation. Instead, impairment will be measured using the difference between the carrying amount and fair value of the reporting unit. The amended guidance also eliminates the requirement for any reporting unit with a zero or a negative carrying amount to perform a qualitative assessment and will require disclosure of the amount of goodwill allocated to
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
each reporting unit with a zero or a negative carrying amount of net assets. This standard will be effective for the Company beginning in the first quarter of fiscal year 2021, with early adoption permitted. The standard is to be applied prospectively. Based on the Company’s most recent annual goodwill impairment test completed in the first quarter of fiscal year 2018, the adoption of this guidance is not expected to have any initial impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting
, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity should account for the effects of a modification unless all of the following characteristics of the modified award are the same as the original award immediately before the original award is modified: (i) the award’s fair value, (ii) the award’s vesting condition, and (iii) the award’s classification as an equity or liability instrument. This standard will be effective for the Company beginning in the first quarter of fiscal year 2019, with early adoption permitted. The standard is to be applied prospectively to an award modified on or after the adoption date. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
Note 3. Computation of Earnings per Common Share
Basic earnings per common share (“EPS”) is based upon net income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the effect of the assumed vesting of restricted stock units (“RSUs”) and exercise of stock options only in the periods in which such effect would have been dilutive.
The following table presents a reconciliation of the weighted-average number of shares used in the calculations of basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
December 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Weighted-average number of shares for basic EPS
|
|
75,458
|
|
|
75,215
|
|
|
75,371
|
|
|
75,159
|
|
Dilutive effect of shares issuable under share-based compensation plans
|
|
298
|
|
|
246
|
|
|
397
|
|
|
277
|
|
Weighted-average number of shares for diluted EPS
|
|
75,756
|
|
|
75,461
|
|
|
75,768
|
|
|
75,436
|
|
Anti-dilutive shares
|
|
1,072
|
|
|
535
|
|
|
615
|
|
|
317
|
|
Note 4. Goodwill and Intangible Assets
During the first quarter of fiscal year 2018, the Company performed its annual impairment test of goodwill, and there was
no
impairment of goodwill identified.
The Company’s intangible assets subject to amortization are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
June 30,
2017
|
Affiliate relationships
|
|
$
|
83,044
|
|
|
$
|
83,044
|
|
Less accumulated amortization
|
|
(44,111
|
)
|
|
(42,381
|
)
|
|
|
$
|
38,933
|
|
|
$
|
40,663
|
|
Affiliate relationships have an estimated useful life of
24
years. Amortization expense for intangible assets was
$865
for the
three months ended
December 31, 2017
and
2016
, and
$1,730
for the
six months ended
December 31, 2017
and
2016
.
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note
5
. Property and Equipment
As of
December 31, 2017
and
June 30, 2017
, property and equipment consisted of the following assets:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
June 30,
2017
|
Equipment
|
|
$
|
41,954
|
|
|
$
|
40,918
|
|
Furniture and fixtures
|
|
1,695
|
|
|
1,695
|
|
Leasehold improvements
|
|
19,285
|
|
|
19,285
|
|
Construction in progress
|
|
269
|
|
|
565
|
|
|
|
63,203
|
|
|
62,463
|
|
Less accumulated depreciation and amortization
|
|
(53,756
|
)
|
|
(50,635
|
)
|
|
|
$
|
9,447
|
|
|
$
|
11,828
|
|
Depreciation and amortization expense on property and equipment was
$1,558
and
$1,715
for the
three months ended
December 31, 2017
and
2016
, respectively, and
$3,144
and
$3,428
for the
six months ended
December 31, 2017
and
2016
, respectively.
Note
6
. Debt
On September 28, 2015, MSGN Holdings L.P. (“MSGN L.P.”), an indirect wholly-owned subsidiary of the Company through which the Company conducts substantially all of its operations, and MSGN Eden, LLC, an indirect subsidiary of the Company and the general partner of MSGN L.P., Regional MSGN Holdings LLC, a direct subsidiary of the Company and the limited partner of MSGN L.P. (collectively with MSGN Eden, LLC, the “Holdings Entities”), and certain subsidiaries of MSGN L.P. entered into a credit agreement (the “Credit Agreement”) with a syndicate of lenders.
The Credit Agreement provides MSGN L.P. with senior secured credit facilities (the “Senior Secured Credit Facilities”) consisting of: (a) an initial
$1,550,000
term loan facility (the “Term Loan Facility”) and (b) a
$250,000
revolving credit facility (the “Revolving Credit Facility”), each with a term of five years. In connection with the Distribution,
$1,450,000
of the proceeds from the Term Loan Facility was contributed to MSG immediately following the closing of the Senior Secured Credit Facilities.
Up to
$35,000
of the Revolving Credit Facility is available for the issuance of letters of credit.
Subject to the satisfaction of certain conditions and limitations, the Credit Agreement allows for the addition of incremental term and/or revolving loan commitments and incremental term and/or revolving loans. Borrowings under the Credit Agreement bear interest at a floating rate, which at the option of MSGN L.P. may be either (a) base rate, representing the higher of: (i) the New York Fed Bank Rate plus
0.50%
; (ii) the U.S. Prime Rate; or (iii) the one-month London Interbank Offered Rate, or LIBOR, plus
1.00%
(the “Base Rate”), plus an additional rate ranging from
0.50%
to
1.25%
per annum (determined based on a total leverage ratio), or (b) a Eurodollar rate (the “Eurodollar Rate”) plus an additional rate ranging from
1.50%
to
2.25%
per annum (determined based on a total leverage ratio), provided that for the period until the delivery of the compliance certificate for the period ending March 31, 2016, the additional rate used in calculating both floating rates was (i)
1.00%
per annum for borrowings bearing interest at the Base Rate, and (ii)
2.00%
per annum for borrowings bearing interest at the Eurodollar Rate. Upon a payment default in respect of principal, interest or other amounts due and payable under the Credit Agreement or related loan documents, default interest will accrue on all overdue amounts at an additional rate of
2.00%
per annum. The Credit Agreement requires that MSGN L.P. pay a commitment fee of
0.30%
in respect of the average daily unused commitments, as well as fronting fees, to banks that issue letters of credit pursuant to the Revolving Credit Facility.
The Credit Agreement generally requires the Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis to comply with a maximum total leverage ratio of 6.00:1.00 from the closing date until September 30, 2016 and a maximum total leverage ratio of 5.50:1.00 from October 1, 2016 until maturity, subject, in each case, to upward adjustment during the continuance of certain events. In addition, there is a minimum interest coverage ratio of 2.00:1.00 for the Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis.
As of
December 31, 2017
,
the Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis were in compliance with the financial covenants of the Credit Agreement. All borrowings under the Credit Agreement are subject to the satisfaction of customary conditions, including absence of a default and accuracy of representations and warranties. As of
December 31, 2017
, there were
no
letters of credit issued and outstanding under the Revolving Credit Facility, which provides full borrowing capacity of
$250,000
. The
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Company has made principal payments aggregating
$266,250
through
December 31, 2017
.
The Term Loan Facility amortizes quarterly in accordance with its terms through June 30, 2020 with a final maturity date on September 28, 2020
.
As of
December 31, 2017
, the principal repayments required under the Term Loan Facility are as follows:
|
|
|
|
|
|
Remainder of fiscal year ending June 30, 2018
|
|
$
|
37,500
|
|
Fiscal year ending June 30, 2019
|
|
75,000
|
|
Fiscal year ending June 30, 2020
|
|
114,375
|
|
Fiscal year ending June 30, 2021
|
|
1,056,875
|
|
|
|
$
|
1,283,750
|
|
All obligations under the Credit Agreement are guaranteed by the Holdings Entities and MSGN L.P.’s existing and future direct and indirect domestic subsidiaries that are not designated as excluded subsidiaries or unrestricted subsidiaries (the “Subsidiary Guarantors,” and together with the Holdings Entities, the “Guarantors”). All obligations under the Credit Agreement, including the guarantees of those obligations, are secured by certain assets of MSGN L.P. and each Guarantor (collectively, “Collateral”), including, but not limited to, a pledge of the equity interests in MSGN L.P. held directly by the Holdings Entities and the equity interests in each Subsidiary Guarantor held directly or indirectly by MSGN L.P. Subject to customary notice and minimum amount conditions, MSGN L.P. may voluntarily prepay outstanding loans under the Credit Agreement at any time, in whole or in part, without premium or penalty (except for customary breakage costs with respect to Eurodollar loans). MSGN L.P. is required to make mandatory prepayments in certain circumstances, including without limitation from the net cash proceeds of certain sales of assets (including Collateral) or casualty insurance and/or condemnation recoveries (subject to certain reinvestment, repair or replacement rights) and the incurrence of certain indebtedness, subject to certain exceptions.
In addition to the financial covenants discussed above, the Credit Agreement and the related security agreement contain certain customary representations and warranties, affirmative covenants, and events of default. The Credit Agreement contains certain restrictions on the ability of the Holdings Entities and MSGN L.P. and its restricted subsidiaries to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the Credit Agreement, including 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) changing their lines of business; (vi) engaging in certain transactions with affiliates; (vii) amending specified material agreements; (viii) merging or consolidating; (ix) making certain dispositions; and (x) entering into agreements that restrict the granting of liens. The Holdings Entities are also subject to customary passive holding company covenants.
The Company is amortizing its deferred financing costs on a straight-line basis over the five-year term of the Senior Secured Credit Facilities which approximates the effective interest method. The following table summarizes the presentation of the Term Loan Facility and the related deferred financing costs in the accompanying consolidated balance sheets as of
December 31, 2017
and
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan Facility
|
|
Deferred Financing Costs
|
|
Total
|
December 31, 2017
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
75,000
|
|
|
$
|
(2,586
|
)
|
|
$
|
72,414
|
|
Long-term debt, net of current portion
|
|
1,208,750
|
|
|
(4,526
|
)
|
|
1,204,224
|
|
Total
|
|
$
|
1,283,750
|
|
|
$
|
(7,112
|
)
|
|
$
|
1,276,638
|
|
June 30, 2017
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
75,000
|
|
|
$
|
(2,586
|
)
|
|
$
|
72,414
|
|
Long-term debt, net of current portion
|
|
1,246,250
|
|
|
(5,819
|
)
|
|
1,240,431
|
|
Total
|
|
$
|
1,321,250
|
|
|
$
|
(8,405
|
)
|
|
$
|
1,312,845
|
|
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
In addition, the Company has deferred financing costs related to the Revolving Credit Facility recorded in the accompanying consolidated balance sheets as summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
June 30, 2017
|
|
|
Other current assets
|
|
$
|
417
|
|
|
$
|
417
|
|
Other assets
|
|
730
|
|
|
938
|
|
The Company made interest payments under the Credit Agreement of
$19,180
and
$17,625
during the
six months ended
December 31, 2017
and
2016
, respectively.
Note
7
. Commitments and Contingencies
Commitments
As more fully described in Notes
9
and
10
to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended
June 30, 2017
, the Company’s contractual obligations not reflected on the balance sheet consist primarily of its obligations under media rights agreements and, to a lesser extent, long-term noncancelable operating lease agreements.
In addition, see Note
6
for the principal repayments required under the Company’s Term Loan Facility.
Legal Matters
The Company is a defendant in various lawsuits. Although the outcome of these matters cannot be predicted with certainty, management does not believe that resolution of these lawsuits will have a material adverse effect on the Company.
Note
8
. Fair Value Measurements
The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs are developed using market data, such as publicly available information about actual events or transactions, and reflect the assumptions that market participants would use when pricing the asset or liability. Unobservable inputs are inputs for which market data is not available and that are developed using the best information available about the assumptions that market participants would use when pricing the asset or liability. The fair value hierarchy consists of the following three levels:
|
|
•
|
Level I — Quoted prices for identical instruments in active markets.
|
|
|
•
|
Level II — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
|
|
|
•
|
Level III — Instruments whose significant value drivers are unobservable.
|
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The following table presents for each of these hierarchy levels, the Company’s assets that are measured at fair value on a recurring basis, which include cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level I
|
|
Level II
|
|
Level III
|
|
Total
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Money market accounts
|
|
$
|
31,292
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
31,292
|
|
Time deposits
|
|
170,623
|
|
|
—
|
|
|
—
|
|
|
170,623
|
|
Total assets measured at fair value
|
|
$
|
201,915
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
201,915
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Money market accounts
|
|
$
|
34,128
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
34,128
|
|
Time deposits
|
|
106,482
|
|
|
—
|
|
|
—
|
|
|
106,482
|
|
Total assets measured at fair value
|
|
$
|
140,610
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
140,610
|
|
Money market accounts and time deposits 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 money market accounts and time deposits approximates fair value due to their short-term maturities.
Other Financial Instruments
The fair value of the Company’s long-term debt (see Note
6
) was approximately $
1,277,000
as of
December 31, 2017
. The Company’s long-term debt is classified within Level II of the fair value hierarchy as it is valued using quoted prices of such securities for which fair value can be derived from inputs that are readily observable.
Note
9
. Pension Plans and Other Postretirement Benefit Plan
As more fully described in Note 13 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2017, the Company sponsors (i) a non-contributory, qualified defined benefit pension plan covering certain of its union employees, (ii) an unfunded non-contributory, non-qualified frozen excess cash balance plan covering certain employees, and (iii) an unfunded non-contributory, non-qualified frozen defined benefit pension plan for the benefit of certain employees who participated in an underlying qualified plan (collectively the “MSG Networks Plans”). The Company also sponsors a contributory welfare plan which provides certain postretirement healthcare benefits to certain employees hired prior to January 1, 2001 (the “Postretirement Plan”).
Components of net periodic benefit cost for the MSG Networks Plans and Postretirement Plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Postretirement Plan
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
December 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
|
$
|
128
|
|
|
$
|
133
|
|
|
$
|
17
|
|
|
$
|
18
|
|
Interest cost
|
|
358
|
|
|
332
|
|
|
30
|
|
|
25
|
|
Expected return on plan assets
|
|
(127
|
)
|
|
(106
|
)
|
|
—
|
|
|
—
|
|
Recognized actuarial loss
(a)
|
|
149
|
|
|
175
|
|
|
—
|
|
|
—
|
|
Amortization of unrecognized prior service credit
(a)
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(6
|
)
|
Settlement gain
(a)
|
|
—
|
|
|
(74
|
)
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
|
$
|
508
|
|
|
$
|
460
|
|
|
$
|
44
|
|
|
$
|
37
|
|
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Postretirement Plan
|
|
|
Six Months Ended
|
|
Six Months Ended
|
|
|
December 31,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
|
$
|
256
|
|
|
$
|
266
|
|
|
$
|
34
|
|
|
$
|
36
|
|
Interest cost
|
|
716
|
|
|
664
|
|
|
60
|
|
|
50
|
|
Expected return on plan assets
|
|
(254
|
)
|
|
(212
|
)
|
|
—
|
|
|
—
|
|
Recognized actuarial loss
(a)
|
|
298
|
|
|
350
|
|
|
—
|
|
|
—
|
|
Amortization of unrecognized prior service credit
(a)
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
(12
|
)
|
Settlement gain
(a)
|
|
—
|
|
|
(74
|
)
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
|
$
|
1,016
|
|
|
$
|
994
|
|
|
$
|
88
|
|
|
$
|
74
|
|
(a)
Reflects amounts reclassified from accumulated other comprehensive loss to other components of net periodic benefit cost in the accompanying consolidated statements of operations.
In addition, as more fully described in Note 13 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2017, the Company sponsors the MSGN Holdings, L.P. Excess Savings Plan and participates in the Madison Square Garden 401(k) Savings Plan, formerly the MSG Holdings, L.P. 401(k) Savings Plan, a multiple employer plan (together, the “Savings Plans”). Expenses related to the Savings Plans included in the accompanying consolidated statements of operations were
$246
and
$222
for the
three months ended
December 31, 2017
and
2016
, respectively, and
$459
and
$399
for the
six months ended
December 31, 2017
and
2016
, respectively.
Note
10
. 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, 2017
for more information regarding (i) the MSG Networks Inc. 2010 Employee Stock Plan, as amended (the “Employee Stock Plan”), and (ii) the MSG Networks Inc. 2010 Stock Plan For Non-Employee Directors, as amended (the “Non-Employee Director Plan”), as well as certain share-based payment awards granted prior to July 1, 2015.
Share-based compensation expense, presented within selling, general and administrative expenses and direct operating expenses, was
$4,798
and
$3,273
for the
three months ended
December 31, 2017
and
2016
, respectively, and
$7,719
and
$5,049
for the
six months ended
December 31, 2017
and
2016
, respectively.
Stock Options Award Activity
The following table summarizes activity relating to holders of the Company’s stock options for the six months ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
Weighted-
Average
Remaining
Contractual
Term (In Years)
|
|
Aggregate Intrinsic
Value
|
|
Nonperformance
Based
Vesting
Options
|
|
Performance
Based
Vesting
Options
|
|
Balance as of June 30, 2017
|
535
|
|
|
534
|
|
|
$
|
17.81
|
|
|
6.71
|
|
$
|
4,960
|
|
Granted
|
426
|
|
|
427
|
|
|
21.60
|
|
|
|
|
|
Balance as of December 31, 2017
|
961
|
|
|
961
|
|
|
$
|
19.49
|
|
|
6.19
|
|
$
|
2,608
|
|
Exercisable as of December 31, 2017
|
178
|
|
|
—
|
|
|
$
|
17.81
|
|
|
6.21
|
|
$
|
435
|
|
In September 2017, the Company granted
853
stock options, of which
50%
are subject to three-year ratable vesting and the remaining
50%
are subject to three-year cliff vesting and the achievement of certain Company performance criteria. These options have an expiration period of
7.5
years. The Company calculated the fair value of these options on the date of grant using the Black-Scholes option pricing model, which resulted in a grant date fair value of
$5.63
per option.
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The following were the key assumptions used to calculate the fair value of this award:
|
|
|
|
|
Risk-free interest rate
|
1.76
|
%
|
Expected term
|
5.25 years
|
|
Expected volatility
|
24.79
|
%
|
The Company’s computation of expected term was calculated using the simplified method (the average of the vesting period and option term) as prescribed in ASC Topic 718-10-S99. The Company’s computation of expected volatility was based on historical volatility of its common stock.
The aggregate intrinsic value is calculated for in-the-money options as the difference between (i) the exercise price of the underlying award and (ii) the quoted price of the Company’s Class A common stock, par value
$0.01
per share (“Class A Common Stock”) at December 31, 2017 and June 30, 2017, as applicable.
Restricted Share Units Award Activity
The following table summarizes activity relating to holders (including Company and MSG employees) of the Company’s RSUs for the
six months ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
Nonperformance
Based
Vesting
RSUs
|
|
Performance
Based
Vesting
RSUs
|
|
Weighted-Average
Fair Value Per Share
At Date of Grant
|
Unvested award balance as of June 30, 2017
|
544
|
|
|
597
|
|
|
$
|
25.79
|
|
Granted
|
181
|
|
|
340
|
|
|
21.31
|
|
Vested
|
(318
|
)
|
|
(132
|
)
|
|
33.25
|
|
Forfeited
|
(3
|
)
|
|
(2
|
)
|
|
35.99
|
|
Unvested award balance as of December 31, 2017
|
404
|
|
|
803
|
|
|
21.04
|
|
Nonperformance based vesting RSUs granted during the
six months ended
December 31, 2017
included
112
RSUs granted under the Employee Stock Plan that are subject to three-year ratable vesting and
69
RSUs granted under the Non-Employee Director Plan which vested upon date of grant. Performance based vesting RSUs granted under the Employee Stock Plan during the
six months ended
December 31, 2017
included
114
RSUs that are subject to three-year ratable vesting and
226
RSUs subject to three-year cliff vesting. RSUs granted under the Employee Stock Plan and Non-Employee Director Plan will settle in shares of the Company’s Class A Common Stock (either from treasury or with newly issued shares), or, at the option of the Compensation Committee, in cash.
RSUs granted under the Non-Employee Director Plan will settle on the first business day after ninety days from the date the director's service on the Board of Directors ceases or, if earlier, upon the director's death.
The fair value of RSUs that vested during the
six months ended
December 31, 2017
was
$9,008
. Upon delivery, RSUs granted under the Employee Stock Plan were net share-settled to cover the required statutory tax withholding obligations and the remaining number of shares were issued from the Company’s treasury shares. To fulfill the employees’ statutory minimum tax withholding obligations for the applicable income and other employment taxes,
182
of these RSUs, with an aggregate value of
$3,649
, were retained by the Company and the taxes paid during the
six months ended
December 31, 2017
are reflected as a financing activity in the accompanying consolidated statement of cash flows.
Note 11. Stock Repurchase Program
On December 7, 2017, the Company’s Board of Directors authorized the repurchase of up to
$150,000
of the Company’s Class A Common Stock. Under the authorization, shares of Class A Common Stock may be purchased from time to time in open market or private transactions, block trades or such other manner as the Company may determine, 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. As of December 31, 2017, the Company had
$150,000
of availability remaining under its stock repurchase authorization.
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note
12
. Related Party Transactions
As of
December 31, 2017
, members of the Dolan family group, for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, including trusts for the benefit of the Dolan family group, collectively beneficially own all of the Company’s outstanding Class B common stock, par value $
0.01
per share (“Class B Common Stock”) and own approximately
2.7%
of the Company’s outstanding Class A Common Stock. Such shares of the Company’s Class A Common Stock and Class B Common Stock, collectively, represent approximately
69.6%
of the aggregate voting power of the Company’s outstanding common stock. Members of the Dolan family are also the controlling stockholders of MSG and AMC Networks Inc. (“AMC Networks”).
On June 16, 2016, the Company entered into an arrangement with the Dolan Family Office, LLC (“DFO”), MSG, and AMC Networks providing for the sharing of certain expenses associated with executive office space which is available to Charles F. Dolan (a director of the Company and MSG, and the Executive Chairman and a director of AMC Networks), James L. Dolan (the Executive Chairman and a director of the Company, the Executive Chairman, Chief Executive Officer, and a director of MSG, and a director of AMC Networks), and the DFO, which is controlled by Charles F. Dolan.
Beginning in June 2016, the Company agreed to share certain executive support costs, including office space, executive assistants, security and transportation costs for (i) the Company’s Executive Chairman with MSG and (ii) the Company’s Vice Chairman with MSG and AMC Networks.
In connection with the Distribution, the Company entered into various agreements with MSG, including media rights agreements covering Knicks and Rangers games, an advertising sales representation agreement, a trademark license agreement, a tax disaffiliation agreement, a transition services agreement (“TSA”), and certain other arrangements. The TSA expired on September 30, 2017. The Company entered into a new services agreement (“Services Agreement”) effective July 1, 2017, which provides for each party to furnish substantially the same services, as well as the executive support services described above, in exchange for service fees.
The Company has entered into various agreements with AMC Networks with respect to a number of ongoing commercial relationships.
Related party transactions
Rights fees
The Company’s media rights agreements with the Knicks and the Rangers, effective as of July 1, 2015, provide the Company with exclusive media rights to team games in their local markets. Rights fees included in the accompanying consolidated statements of operations for the
three months ended
December 31, 2017
and
2016
were
$35,631
and
$33,037
, respectively, and
$70,783
and
$66,837
for the
six months ended
December 31, 2017
and
2016
, respectively.
Origination, master control and technical services
AMC Networks provides certain origination, master control, and technical services to the Company. Amounts charged to the Company for the
three months ended
December 31, 2017
and
2016
were
$1,494
and
$1,543
, respectively and
$2,993
and
$2,991
for the
six months ended
December 31, 2017
and
2016
, respectively.
Commission
The Company’s advertising sales representation agreement with MSG, which has a term through
June 30, 2022
, provides for MSG to act as our advertising sales representative and includes the exclusive right and obligation to sell certain advertising availabilities on our behalf for a commission. All of the Company’s advertising sales personnel were transferred to MSG in connection with the Distribution. The amounts charged to the Company for the
three months ended
December 31, 2017
and
2016
were
$5,140
and
$5,169
, respectively, and
$5,567
and
$5,594
for the
six months ended
December 31, 2017
and
2016
, respectively.
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Other operating expenses
The Company and its related parties enter into transactions with each other in the ordinary course of business. In addition, pursuant to the Services Agreement, the Company outsources (and prior to the expiration of the TSA, the Company outsourced) certain business functions to MSG. These services currently include information technology, accounts payable, payroll, tax, certain legal functions, human resources, insurance and risk management, investor relations, corporate communications, benefit plan administration and reporting, and internal audit. Net amounts charged to the Company for expenses associated with services provided by MSG, executive office space and certain support costs, and for other related party transactions amounted to
$2,496
and
$2,022
for the
three months ended
December 31, 2017
and
2016
, respectively and
$4,822
and
$4,309
for the
six months ended
December 31, 2017
and
2016
, respectively.
Note
13
. Income Taxes
On December 22, 2017 new tax legislation, commonly referred to as the Tax Cuts and Jobs Act, was enacted that significantly changed the existing U.S. tax laws, including a reduction in the corporate federal tax rate from
35%
to
21%
effective January 1, 2018. The Company is required to recognize the effect of tax law changes in the period of enactment even though certain key aspects of the new law became effective January 1, 2018. The Company's income tax provision for interim periods is comprised of the tax on ordinary income (loss) provided at the most recent estimated annual effective tax rate, adjusted for the tax effect of discrete items.
The Company used a blended statutory federal rate of 28% (based upon the number of days for the fiscal year that it will be taxed at the former rate of 35% and the number of days it will be taxed at the new rate of 21%) to calculate its most recent estimated annual effective tax rate.
Income tax benefit attributable to continuing operations for the
three months ended
December 31, 2017
of
$89,632
differs from the income tax expense derived from applying the blended statutory federal rate to pretax income due principally to a deferred income tax benefit of
$106,446
related to the reduction of the Company’s net deferred tax liabilities based upon the new federal rate. Other decreases included the impact of the change in the federal rate on current year to date operations of
$4,609
, the impact of the tax benefits related to the domestic production activities deduction of
$1,130
, state rate changes of
$1,062
, and tax return to book provision adjustments in connection with the filing of the Company’s federal, state and local income tax returns of
$676
. These decreases were partially offset by the impact of state and local income taxes (net of federal benefit) of
$5,514
and other items of
$275
.
Income tax expense attributable to continuing operations for the
three months ended
December 31, 2016
of $
27,479
differs from the income tax expense derived from applying the statutory federal rate to pretax income due principally to the impact of state and local income taxes (net of federal benefit) of
$4,906
and tax return to book provision adjustments in connection with the filing of the Company’s state and local income tax returns of
$414
. These increases were partially offset by the impact of the tax benefits related to the domestic production activities deduction of
$2,069
and other items of
$529
.
Income tax benefit attributable to continuing operations for the
six months ended
December 31, 2017
of
$64,608
differs from the income tax expense derived from applying the blended statutory federal rate to pretax income due principally to a deferred income tax benefit of
$106,446
related to the reduction of the Company’s net deferred tax liabilities based upon the new federal rate. Other decreases included the impact of the tax benefits related to the domestic production activities deduction of
$3,033
, state rate changes of
$1,062
, tax return to book provision adjustments in connection with the filing of the Company’s federal, state and local income tax returns of
$676
, and other items of
$493
. These decreases were partially offset by the impact of state and local income taxes (net of federal benefit) of
$10,030
.
Income tax expense attributable to continuing operations for the
six months ended
December 31, 2016
of
$52,737
differs from the income tax expense derived from applying the statutory federal rate to pretax income due principally to the impact of state and local income taxes (net of federal benefit) of
$9,594
. These increases were partially offset by the impact of the tax benefits related to the domestic production activities deduction of
$3,942
, tax return to book provision adjustments in connection with the filing of the Company’s federal, state and local income tax returns of
$209
and other items of
$430
.
The Company made cash income tax payments (net) of
$37,196
and
$41,295
for the
six months ended
December 31, 2017
and
2016
, respectively.
During the third quarter of fiscal year 2017, the Internal Revenue Service concluded its fieldwork on the audit of the Company’s federal income tax returns as filed for the tax year ended December 31, 2013. The Company does not expect the audit to result in material changes to the tax returns as filed.
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The Company was notified during the third quarter of fiscal year 2017 that the City of New York was commencing an examination of the Company’s New York City income tax returns as filed for the tax years ended December 31, 2013 and 2014. The Company does not expect the examination, when finalized, to result in material changes to the tax returns as filed.
During the fourth quarter of fiscal year 2017, the Company was notified that the City of New York was initiating a review of the Company’s 2014 and 2015 Unincorporated Business Tax Returns. The Company does not expect the examination, when finalized, to result in material changes to the tax returns as filed.
The Company was also notified during the fourth quarter of fiscal year 2017 that the State of New York was commencing an examination of the Company’s New York State income tax returns as filed for the tax years ended December 31, 2013 and 2014. The Company does not expect the examination, when finalized, to result in material changes to the tax returns as filed.
The federal and state statute of limitations are currently open on the Company’s 2013, 2014, 2015 and 2016 tax returns.
Note
14
. Concentrations of Risk
Accounts receivable, net on the accompanying consolidated balance sheets as of
December 31, 2017
and
June 30, 2017
include amounts due from the following individual non-affiliated customers, which accounted for the noted percentages of the gross balance:
|
|
|
|
|
|
|
|
December 31,
2017
|
|
June 30,
2017
|
Customer A
|
26
|
%
|
|
26
|
%
|
Customer B
|
25
|
%
|
|
25
|
%
|
Customer C
|
23
|
%
|
|
22
|
%
|
Customer D
|
14
|
%
|
|
14
|
%
|
Revenues from continuing operations in the accompanying consolidated statements of operations for the
three and six
months ended
December 31, 2017
and
2016
include amounts from the following individual customers, which accounted for the noted percentages of the total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Six Months Ended December 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Customer 1
|
23
|
%
|
|
24
|
%
|
|
24
|
%
|
|
25
|
%
|
Customer 2
|
22
|
%
|
|
22
|
%
|
|
24
|
%
|
|
24
|
%
|
Customer 3
|
20
|
%
|
|
19
|
%
|
|
22
|
%
|
|
21
|
%
|
Customer 4
|
9
|
%
|
|
10
|
%
|
|
10
|
%
|
|
11
|
%
|
The accompanying consolidated balance sheets as of
December 31, 2017
and
June 30, 2017
include the following approximate amounts that are recorded in connection with the Company’s license agreement with the New Jersey Devils:
|
|
|
|
|
|
|
|
|
Reported in
|
December 31, 2017
|
|
June 30,
2017
|
Prepaid expenses
|
$
|
3,000
|
|
|
$
|
3,000
|
|
Other current assets
|
2,000
|
|
|
2,000
|
|
Other assets
|
40,000
|
|
|
41,000
|
|
|
$
|
45,000
|
|
|
$
|
46,000
|
|