Item 1.
Financial Statements
THE MADISON SQUARE GARDEN COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
June 30,
2017
|
|
|
(Unaudited)
|
|
|
ASSETS
|
|
|
|
|
Current Assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,176,554
|
|
|
$
|
1,238,114
|
|
Restricted cash
|
|
27,837
|
|
|
34,000
|
|
Accounts receivable, net
|
|
143,876
|
|
|
102,085
|
|
Net related party receivables
|
|
1,577
|
|
|
2,714
|
|
Prepaid expenses
|
|
37,326
|
|
|
23,358
|
|
Other current assets
|
|
27,404
|
|
|
49,458
|
|
Total current assets
|
|
1,414,574
|
|
|
1,449,729
|
|
Investments and loans to nonconsolidated affiliates
|
|
252,705
|
|
|
242,287
|
|
Property and equipment, net
|
|
1,245,433
|
|
|
1,159,271
|
|
Amortizable intangible assets, net
|
|
250,490
|
|
|
256,975
|
|
Indefinite-lived intangible assets
|
|
174,850
|
|
|
166,850
|
|
Goodwill
|
|
392,378
|
|
|
380,087
|
|
Other assets
|
|
50,751
|
|
|
57,554
|
|
Total assets
|
|
$
|
3,781,181
|
|
|
$
|
3,712,753
|
|
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
26,572
|
|
|
$
|
24,084
|
|
Net related party payables
|
|
27,352
|
|
|
17,576
|
|
Current portion of long-term debt, net of deferred financing costs
|
|
1,811
|
|
|
—
|
|
Accrued liabilities:
|
|
|
|
|
Employee related costs
|
|
107,862
|
|
|
138,858
|
|
Other accrued liabilities
|
|
170,102
|
|
|
191,344
|
|
Deferred revenue
|
|
430,785
|
|
|
390,180
|
|
Total current liabilities
|
|
764,484
|
|
|
762,042
|
|
Long-term debt, net of deferred financing costs
|
|
104,342
|
|
|
105,433
|
|
Defined benefit and other postretirement obligations
|
|
44,678
|
|
|
52,997
|
|
Other employee related costs
|
|
26,985
|
|
|
29,399
|
|
Deferred tax liabilities, net
|
|
80,618
|
|
|
196,436
|
|
Other liabilities
|
|
75,291
|
|
|
65,955
|
|
Total liabilities
|
|
1,096,398
|
|
|
1,212,262
|
|
Commitments and contingencies (see Note 9)
|
|
|
|
|
Redeemable noncontrolling interests
|
|
78,208
|
|
|
80,630
|
|
The Madison Square Garden Company Stockholders’ Equity:
|
|
|
|
|
Class A Common stock, par value $0.01, 120,000 shares authorized; 19,131 and 19,014 shares outstanding as of March 31, 2018 and June 30, 2017, respectively
|
|
204
|
|
|
204
|
|
Class B Common stock, par value $0.01, 30,000 shares authorized; 4,530 shares outstanding as of March 31, 2018 and June 30, 2017
|
|
45
|
|
|
45
|
|
Preferred stock, par value $0.01, 15,000 shares authorized; none outstanding as of March 31, 2018 and June 30, 2017
|
|
—
|
|
|
—
|
|
Additional paid-in capital
|
|
2,808,901
|
|
|
2,832,516
|
|
Treasury stock, at cost, 1,317 and 1,433 shares as of March 31, 2018 and June 30, 2017, respectively
|
|
(224,557
|
)
|
|
(242,077
|
)
|
Retained earnings (accumulated deficit)
|
|
36,834
|
|
|
(148,410
|
)
|
Accumulated other comprehensive loss
|
|
(34,691
|
)
|
|
(34,115
|
)
|
Total The Madison Square Garden Company stockholders’ equity
|
|
2,586,736
|
|
|
2,408,163
|
|
Nonredeemable noncontrolling interests
|
|
19,839
|
|
|
11,698
|
|
Total equity
|
|
2,606,575
|
|
|
2,419,861
|
|
Total liabilities, redeemable noncontrolling interests and equity
|
|
$
|
3,781,181
|
|
|
$
|
3,712,753
|
|
See accompanying notes to consolidated financial statements.
THE MADISON SQUARE GARDEN COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
March 31,
|
|
March 31,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Revenues
(a)
|
|
$
|
459,621
|
|
|
$
|
386,033
|
|
|
$
|
1,241,138
|
|
|
$
|
1,012,878
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Direct operating expenses
(b)
|
|
299,706
|
|
|
252,708
|
|
|
736,249
|
|
|
630,788
|
|
Selling, general and administrative expenses
(c)
|
|
122,154
|
|
|
100,084
|
|
|
349,106
|
|
|
271,365
|
|
Depreciation and amortization
|
|
30,429
|
|
|
26,535
|
|
|
91,519
|
|
|
78,611
|
|
Operating income
|
|
7,332
|
|
|
6,706
|
|
|
64,264
|
|
|
32,114
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Earnings (loss) in equity method investments
|
|
(678
|
)
|
|
(26,319
|
)
|
|
1,439
|
|
|
(28,501
|
)
|
Interest income
(d)
|
|
5,224
|
|
|
3,005
|
|
|
14,988
|
|
|
8,096
|
|
Interest expense
|
|
(3,965
|
)
|
|
(831
|
)
|
|
(11,474
|
)
|
|
(1,732
|
)
|
Miscellaneous income
|
|
553
|
|
|
36
|
|
|
303
|
|
|
1,441
|
|
|
|
1,134
|
|
|
(24,109
|
)
|
|
5,256
|
|
|
(20,696
|
)
|
Income (loss) from operations before income taxes
|
|
8,466
|
|
|
(17,403
|
)
|
|
69,520
|
|
|
11,418
|
|
Income tax benefit (expense)
|
|
(652
|
)
|
|
(440
|
)
|
|
115,418
|
|
|
(754
|
)
|
Net income (loss)
|
|
7,814
|
|
|
(17,843
|
)
|
|
184,938
|
|
|
10,664
|
|
Less: Net income attributable to redeemable noncontrolling interests
|
|
389
|
|
|
—
|
|
|
522
|
|
|
—
|
|
Less: Net loss attributable to nonredeemable noncontrolling interests
|
|
(1,716
|
)
|
|
(298
|
)
|
|
(3,231
|
)
|
|
(891
|
)
|
Net income (loss) attributable to The Madison Square Garden Company’s stockholders
|
|
$
|
9,141
|
|
|
$
|
(17,545
|
)
|
|
$
|
187,647
|
|
|
$
|
11,555
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share attributable to The Madison Square Garden Company’s stockholders
|
|
$
|
0.39
|
|
|
$
|
(0.74
|
)
|
|
$
|
7.94
|
|
|
$
|
0.48
|
|
Diluted earnings (loss) per common share attributable to The Madison Square Garden Company’s stockholders
|
|
$
|
0.38
|
|
|
$
|
(0.74
|
)
|
|
$
|
7.87
|
|
|
$
|
0.48
|
|
Weighted-average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
23,683
|
|
|
23,825
|
|
|
23,623
|
|
|
23,951
|
|
Diluted
|
|
23,809
|
|
|
23,825
|
|
|
23,843
|
|
|
24,147
|
|
_________________
|
|
(a)
|
Include revenues from related parties of
$42,376
and
$41,679
for the three months ended
March 31, 2018
and
2017
, respectively, and
$119,417
and
$114,560
for the
nine
months ended
March 31, 2018
and
2017
, respectively.
|
|
|
(b)
|
Include net charges from related parties of
$262
and
$346
for the three months ended
March 31, 2018
and
2017
, respectively, and
$833
and
$1,035
for the
nine
months ended
March 31, 2018
and
2017
, respectively.
|
|
|
(c)
|
Include net charges to related parties of
$1,048
and
$1,304
for the three months ended
March 31, 2018
and
2017
, respectively, and
$3,672
and
$4,508
for the
nine
months ended
March 31, 2018
and
2017
, respectively.
|
|
|
(d)
|
Includes interest income from nonconsolidated affiliates of
$1,259
and
$1,070
for the three months ended
March 31, 2018
and
2017
, respectively, and
$4,576
and
$3,049
for the
nine
months ended
March 31, 2018
and
2017
, respectively.
|
See accompanying notes to consolidated financial statements.
THE MADISON SQUARE GARDEN COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income (loss)
|
|
|
|
$
|
7,814
|
|
|
|
|
$
|
(17,843
|
)
|
|
|
|
$
|
184,938
|
|
|
|
|
$
|
10,664
|
|
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
|
|
$
|
310
|
|
|
|
|
$
|
336
|
|
|
|
|
$
|
930
|
|
|
|
|
$
|
1,024
|
|
|
|
Amortization of prior service credit included in net periodic benefit cost
|
|
(10
|
)
|
|
300
|
|
|
(12
|
)
|
|
324
|
|
|
(28
|
)
|
|
902
|
|
|
(37
|
)
|
|
987
|
|
Cumulative translation adjustments
|
|
|
|
3,656
|
|
|
|
|
—
|
|
|
|
|
5,933
|
|
|
|
|
—
|
|
Net changes related to available-for-sale securities
|
|
|
|
802
|
|
|
|
|
5,678
|
|
|
|
|
(7,411
|
)
|
|
|
|
15,853
|
|
Other comprehensive income (loss)
|
|
|
|
4,758
|
|
|
|
|
6,002
|
|
|
|
|
(576
|
)
|
|
|
|
16,840
|
|
Comprehensive income (loss)
|
|
|
|
12,572
|
|
|
|
|
(11,841
|
)
|
|
|
|
184,362
|
|
|
|
|
27,504
|
|
Less: Comprehensive income attributable to redeemable noncontrolling interests
|
|
|
|
389
|
|
|
|
|
—
|
|
|
|
|
522
|
|
|
|
|
—
|
|
Less: Comprehensive loss attributable to nonredeemable noncontrolling interests
|
|
|
|
(1,716
|
)
|
|
|
|
(298
|
)
|
|
|
|
(3,231
|
)
|
|
|
|
(891
|
)
|
Comprehensive income (loss) attributable to The Madison Square Garden Company’s stockholders
|
|
|
|
$
|
13,899
|
|
|
|
|
$
|
(11,543
|
)
|
|
|
|
$
|
187,071
|
|
|
|
|
$
|
28,395
|
|
See accompanying notes to consolidated financial statements.
THE MADISON SQUARE GARDEN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
March 31,
|
|
|
2018
|
|
2017
|
Cash flows from operating activities:
|
|
|
|
|
Net income
|
|
$
|
184,938
|
|
|
$
|
10,664
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
91,519
|
|
|
78,611
|
|
Provision for (benefit from) deferred income taxes
|
|
(115,818
|
)
|
|
598
|
|
Share-based compensation expense
|
|
36,892
|
|
|
30,465
|
|
Loss (earnings) in equity method investments
|
|
(1,439
|
)
|
|
29,356
|
|
Purchase accounting adjustments associated with rent-related intangibles and deferred rent
|
|
3,474
|
|
|
—
|
|
Other non-cash expense
|
|
1,819
|
|
|
329
|
|
Change in assets and liabilities, net of acquisitions:
|
|
|
|
|
Accounts receivable, net
|
|
(40,067
|
)
|
|
(49,885
|
)
|
Net related party receivables
|
|
1,137
|
|
|
247
|
|
Prepaid expenses and other assets
|
|
15,169
|
|
|
(15,462
|
)
|
Accounts payable
|
|
2,700
|
|
|
6,040
|
|
Net related party payables
|
|
9,776
|
|
|
16,481
|
|
Accrued and other liabilities
|
|
(58,049
|
)
|
|
(5,850
|
)
|
Deferred revenue
|
|
39,129
|
|
|
5,964
|
|
Net cash provided by operating activities
|
|
171,180
|
|
|
107,558
|
|
Cash flows from investing activities:
|
|
|
|
|
Capital expenditures, net of acquisitions
|
|
(159,113
|
)
|
|
(31,762
|
)
|
Payments for acquisition of assets
|
|
(6,000
|
)
|
|
(1,000
|
)
|
Payments to acquire available-for-sale securities
|
|
—
|
|
|
(23,222
|
)
|
Payments for acquisition of businesses, net of cash acquired
|
|
(8,288
|
)
|
|
(192,095
|
)
|
Investments and loans to nonconsolidated affiliates
|
|
(11,132
|
)
|
|
(4,735
|
)
|
Loan payments received
|
|
2,600
|
|
|
—
|
|
Cash paid for notes receivable
|
|
(1,500
|
)
|
|
—
|
|
Net cash used in investing activities
|
|
(183,433
|
)
|
|
(252,814
|
)
|
Cash flows from financing activities:
|
|
|
|
|
Repurchases of common stock
|
|
(11,830
|
)
|
|
(147,967
|
)
|
Proceeds from stock option exercises
|
|
—
|
|
|
7
|
|
Taxes paid in lieu of shares issued for equity-based compensation
|
|
(33,589
|
)
|
|
(7,034
|
)
|
Noncontrolling interest capital contribution
|
|
3,000
|
|
|
—
|
|
Distributions to noncontrolling interest holders
|
|
(3,750
|
)
|
|
—
|
|
Payment of contingent consideration
|
|
(4,000
|
)
|
|
—
|
|
Payments for financing costs
|
|
(62
|
)
|
|
(3,164
|
)
|
Net cash used in financing activities
|
|
(50,231
|
)
|
|
(158,158
|
)
|
Effect of exchange rates on cash and cash equivalents
|
|
924
|
|
|
—
|
|
Net decrease in cash and cash equivalents
|
|
(61,560
|
)
|
|
(303,414
|
)
|
Cash and cash equivalents at beginning of period
|
|
1,238,114
|
|
|
1,444,317
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,176,554
|
|
|
$
|
1,140,903
|
|
Non-cash investing and financing activities:
|
|
|
|
|
Investments and loans to nonconsolidated affiliates
|
|
$
|
14
|
|
|
$
|
351
|
|
Capital expenditures incurred but not yet paid
|
|
5,127
|
|
|
2,774
|
|
Accrued earn-out liability and other contingencies
|
|
4,573
|
|
|
7,900
|
|
Acquisition of assets not yet paid
|
|
3,000
|
|
|
—
|
|
See accompanying notes to consolidated financial statements.
THE MADISON SQUARE GARDEN COMPANY
CONSOLIDATED STATEMENTS OF EQUITY AND REDEEMABLE NONCONTROLLING INTERESTS
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
Issued
|
|
Additional
Paid-In
Capital
|
|
Treasury
Stock
|
|
Retained Earnings (Accumulated Deficit)
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Total The Madison Square Garden Company Stockholders
’
Equity
|
|
Non -
redeemable
Noncontrolling
Interests
|
|
Total Equity
|
|
Redeemable
Noncontrolling
Interests
|
Balance as of June 30, 2017
|
|
$
|
249
|
|
|
$
|
2,832,516
|
|
|
$
|
(242,077
|
)
|
|
$
|
(148,410
|
)
|
|
$
|
(34,115
|
)
|
|
$
|
2,408,163
|
|
|
$
|
11,698
|
|
|
$
|
2,419,861
|
|
|
$
|
80,630
|
|
Change in accounting policy related to share-based forfeiture rates
|
|
—
|
|
|
2,403
|
|
|
—
|
|
|
(2,403
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
187,647
|
|
|
—
|
|
|
187,647
|
|
|
(3,231
|
)
|
|
184,416
|
|
|
522
|
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(576
|
)
|
|
(576
|
)
|
|
—
|
|
|
(576
|
)
|
|
—
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
187,071
|
|
|
(3,231
|
)
|
|
183,840
|
|
|
522
|
|
Share-based compensation
|
|
—
|
|
|
36,921
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
36,921
|
|
|
—
|
|
|
36,921
|
|
|
—
|
|
Tax withholding associated with shares issued for equity-based compensation
|
|
—
|
|
|
(33,589
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(33,589
|
)
|
|
—
|
|
|
(33,589
|
)
|
|
—
|
|
Common stock issued under stock incentive plans
|
|
—
|
|
|
(29,350
|
)
|
|
29,350
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Repurchases of common stock
|
|
—
|
|
|
—
|
|
|
(11,830
|
)
|
|
—
|
|
|
—
|
|
|
(11,830
|
)
|
|
—
|
|
|
(11,830
|
)
|
|
—
|
|
Distributions to noncontrolling interest holders
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(806
|
)
|
|
(806
|
)
|
|
(2,944
|
)
|
Noncontrolling interests from acquisition
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,182
|
|
|
8,182
|
|
|
—
|
|
Contribution of joint venture interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,996
|
|
|
3,996
|
|
|
|
Balance as of March 31, 2018
|
|
$
|
249
|
|
|
$
|
2,808,901
|
|
|
$
|
(224,557
|
)
|
|
$
|
36,834
|
|
|
$
|
(34,691
|
)
|
|
$
|
2,586,736
|
|
|
$
|
19,839
|
|
|
$
|
2,606,575
|
|
|
$
|
78,208
|
|
See accompanying notes to consolidated financial statements.
THE MADISON SQUARE GARDEN COMPANY
CONSOLIDATED STATEMENTS OF EQUITY AND REDEEMABLE NONCONTROLLING INTERESTS (Continued)
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Issued
|
|
Additional
Paid-In
Capital
|
|
Treasury
Stock
|
|
Accumulated Deficit
|
|
Accumulated
Other
Comprehensive Loss
|
|
Total The Madison Square Garden Company Stockholders
’
Equity
|
|
Non -
redeemable
Noncontrolling
Interests
|
|
Total Equity
|
|
Redeemable
Noncontrolling
Interests
|
Balance as of June 30, 2016
|
|
$
|
249
|
|
|
$
|
2,806,352
|
|
|
$
|
(101,882
|
)
|
|
$
|
(75,687
|
)
|
|
$
|
(42,611
|
)
|
|
$
|
2,586,421
|
|
|
$
|
—
|
|
|
$
|
2,586,421
|
|
|
$
|
—
|
|
Net income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,555
|
|
|
—
|
|
|
11,555
|
|
|
(891
|
)
|
|
10,664
|
|
|
—
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,840
|
|
|
16,840
|
|
|
—
|
|
|
16,840
|
|
|
—
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
28,395
|
|
|
(891
|
)
|
|
27,504
|
|
|
—
|
|
Exercise of stock options
|
|
—
|
|
|
(39
|
)
|
|
46
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
7
|
|
|
—
|
|
Share-based compensation
|
|
—
|
|
|
30,584
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30,584
|
|
|
—
|
|
|
30,584
|
|
|
—
|
|
Tax withholding associated with shares issued for equity-based compensation
|
|
—
|
|
|
(5,702
|
)
|
|
(1,332
|
)
|
|
—
|
|
|
—
|
|
|
(7,034
|
)
|
|
—
|
|
|
(7,034
|
)
|
|
—
|
|
Common stock issued under stock incentive plans
|
|
—
|
|
|
(8,630
|
)
|
|
8,630
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Repurchases of common stock
|
|
—
|
|
|
—
|
|
|
(147,967
|
)
|
|
—
|
|
|
—
|
|
|
(147,967
|
)
|
|
—
|
|
|
(147,967
|
)
|
|
—
|
|
Noncontrolling interests from acquisition
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,394
|
|
|
11,394
|
|
|
85,000
|
|
Balance as of March 31, 2017
|
|
$
|
249
|
|
|
$
|
2,822,565
|
|
|
$
|
(242,505
|
)
|
|
$
|
(64,132
|
)
|
|
$
|
(25,771
|
)
|
|
$
|
2,490,406
|
|
|
$
|
10,503
|
|
|
$
|
2,500,909
|
|
|
$
|
85,000
|
|
See accompanying notes to consolidated financial statements.
THE MADISON SQUARE GARDEN COMPANY
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
The Madison Square Garden Company (together with its subsidiaries, the “Company” or “
Madison Square Garden
”) 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 such as concerts, 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
”) and Boston Calling Events LLC (“
BCE
”).
TAO Group
is a hospitality group with globally-recognized entertainment dining and nightlife brands: TAO, Marquee, Lavo, Avenue, The Stanton Social, Beauty & Essex and Vandal. BCE produces 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
”). In November 2017, the Company acquired a
100%
controlling interest in Obscura Digital (“
Obscura
”), a creative studio, which is now part of the MSG Entertainment segment. See Note
3
for discussion on certain costs incurred by
Obscura
.
MSG Sports includes 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 New York Liberty (the “
Liberty
”) of the Women’s National Basketball Association (the “
WNBA
”), the Hartford Wolf Pack of the American Hockey League (the “
AHL
”) and the Westchester Knicks of the NBA Gatorade League (the “
NBAGL
”). The MSG Sports segment also includes other live sporting events, including professional boxing, college basketball, college hockey, professional bull riding, mixed martial arts, esports, tennis and college wrestling, all of which the Company promotes, produces and/or presents. In July 2017, the Company acquired a controlling interest in Counter Logic Gaming (“
CLG
”), a premier North American esports organization, which is now part of the MSG Sports segment.
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 The Hulu Theater at Madison Square Garden in New York City, the Forum in Inglewood, CA and The Chicago Theatre in Chicago. In addition, the Company leases Radio City Music Hall and the Beacon Theatre in New York City, and has a booking agreement with respect to the Wang Theatre in Boston.
Additionally, TAO Group operates various restaurants, nightlife and hospitality venues under long-term leases and management contracts in New York, Las Vegas, Los Angeles, 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 11, 2015,
MSG Networks
’
board of directors approved the distribution of all the outstanding common stock
of
Madison Square Garden
to MSG Networks’ stockholders (the “
Distribution
”), which occurred on September 30, 2015. See Note 1 to the consolidated and combined financial statements included in the Company’s Annual Report on Form 10-K for the year ended
June 30, 2017
for more information regarding the
Distribution
to its common 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. generally accepted accounting principles (“
GAAP
”) and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (“
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, 2017
. 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 the MSG Sports segment 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. The dependence of the MSG Entertainment segment 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 MADISON SQUARE GARDEN COMPANY
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 The Madison Square Garden Company 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
,
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
,
BCE
and
CLG
are consolidated with the equity owned by other shareholders shown as redeemable or nonredeemable noncontrolling interests in the
accompanying consolidated balance sheet
s, 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 operation
s and
consolidated statements of comprehensive income (loss)
, respectively. See Note 2 to the consolidated and combined financial statements included in the Company’s Annual Report on Form 10-K for the year ended
June 30, 2017
for more information regarding the classification of redeemable noncontrolling interests of
TAO Group
. In addition,
TAO Group
’s results are reported on a
three-month
lag basis and
TAO Group
reports on a fiscal year reflecting the retail-based calendar (containing 4-4-5 week calendar quarters). Accordingly, the Company’s results for the three and
nine
months ended
March 31, 2018
include
TAO Group
’s operating results from
September 25, 2017
to
December 31, 2017
and
March 27, 2017
to
December 31, 2017
, respectively.
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
are 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.
Summary of Significant Accounting Policies
The following is an update to the Company’s Summary of Significant Accounting Policies disclosed in its Annual Report on Form 10-K for the year ended
June 30, 2017
:
Revenue Recognition
Deferred revenue reported in the accompanying consolidated balance sheets as of
March 31, 2018
and
June 30, 2017
includes amounts due to the third-party promoters of
$88,525
and
$72,400
, respectively.
Foreign Currency Translation
The consolidated financial statements are presented in U.S. Dollars. Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, are translated to U.S. Dollars at exchange rates in effect at the balance sheet date. Operating results of non-U.S. subsidiaries are translated at weighted-average exchange rates during the year which approximate the rates in effect at the transaction dates. Foreign currency translation gains and losses are included as a component of accumulated other comprehensive income (loss) as changes in cumulative translation adjustments in the accompanying consolidated balance sheet.
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Recently Issued Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“
FASB
”) issued Accounting Standards Update (“
ASU
”) No. 2016-07,
Investments - Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting
.
ASU
No. 2016-07 eliminates the requirement for an investor to retrospectively apply the equity method when an investment that it had accounted for by another method qualifies for use of the equity method. This standard was adopted by the Company prospectively in the first quarter of fiscal year 2018. The adoption of the standard did not have an impact on the Company’s consolidated financial statements.
In March 2016, the
FASB
issued
ASU
No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-based Payment Accounting
. ASU No. 2016-09, among other things, (i) requires the income tax effects of all awards to be recognized in the statement of operations when the awards vest or are settled, (ii) allows an employer to repurchase more of an employee’s shares for tax withholding purposes than currently allowable, without triggering liability accounting, and provides companies with the option to make a policy election to account for forfeitures as they occur, and (iii) requires companies to present excess tax benefits as operating activity rather than as financing activity on the statement of cash flows. This standard was adopted by the Company in the first quarter of fiscal year 2018. In connection with the Company’s election to record forfeitures as they occur, the Company used the modified retrospective transition method and recorded a cumulative effect of
$2,403
, which was an increase in beginning accumulated deficits with the offset by an equal increase in additional paid in capital. In addition, the Company prospectively adopted the provision regarding the presentation of excess tax benefits in the statement of cash flows, which did not result in a change in the net cash provided by operating activities for the
nine
months ended
March 31, 2018
because the Company currently maintains a 100% valuation allowance on its deferred tax asset.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.
ASU No. 2017-09 provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This standard does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions or award classification and would not be required if the changes are considered non-substantive. This standard was early adopted by the Company prospectively in the first quarter of fiscal year 2018. The adoption of the standard did not have an impact on the Company’s consolidated financial statements.
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
.
ASC
Topic 606
,
among other things,
(i) 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 f
or those goods or services, and (ii) 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 Considerations (Reporting Revenue versus Net)
, which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard under ASU No. 2014-09. ASU No. 2016-08 clarifies how an entity should identify the unit of accounting (i.e. the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. In April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
, which clarifies the principle in ASU No 2014-09 for determining whether a good or service is separately identifiable from other promises in the contract and, therefore, should be accounted for separately. ASU No. 2016-10 also clarifies that entities are not required to identify promised goods or services that are immaterial in the context of the contract and allows entities to elect to account for shipping and handling activities as a fulfillment cost rather than as an additional promised service. In May 2016, the FASB issued ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients
, which clarifies the following aspects in ASU No. 2014-09: collectability, presentation of sales taxes and other similar taxes collected from customers, noncash considerations, contract modifications at transition, completed contracts at
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
transition, and technical correction. In December, the FASB issued ASU No. 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
, which allows entities not to make quantitative disclosures about remaining performance obligations in certain cases and requires entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosures. ASC Topic 606 and the related updates will be effective for the Company beginning in the first quarter of fiscal year 2019 using one of two retrospective application methods. The Company’s evaluation of the impact this standard will have on its consolidated financial statements is ongoing. Based on the review to date, the Company believes that the timing of revenue recognition across the quarters within discrete annual periods will change for certain of its revenue streams that were previously recorded on a straight-line basis over each discrete annual contractual period. While the Company has made substantial progress on the appropriate accounting treatment for most of its revenue streams, the review is ongoing for a few remaining revenue streams. The Company has not decided whether the retrospective or modified retrospective method will be used in adopting the new standard.
In January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,
addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This standard, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income and (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. In February 2018, the FASB issued ASU No. 2018-03,
Technical Corrections and Improvements to Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
, which clarifies certain aspects of the guidance issued in ASU No. 2016-01. Among other items, the amendment clarifies that an entity that uses the measurement alternative for equity securities without readily determinable fair values can change its measurement approach to fair value. Once the election is made, the measurement approach is irrevocable and the entity is required to apply the selected approach to that security and all identical or similar investments of the same issuer. Early adoption of ASU No. 2016-01 is not permitted with the exception of certain provisions related to the presentation of other comprehensive income. This standard will be effective for the Company beginning in the first quarter of fiscal year 2019. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In February 2016, the FASB issued
ASU
No. 2016-02,
Leases (Topic 842)
, which supersedes existing guidance on accounting for leases in FASB ASC Topic 840, Leases. ASU No. 2016-02, among other things, (i) requires 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) requires 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. The effective date and transition requirements for ASU No. 2018-01 are the same as ASU No. 2016-02. This standard, as amended, will be effective for the Company beginning in the first quarter of fiscal year 2020 and is required to be applied using the modified retrospective approach for all leases existing as of the effective date. Early adoption is permitted; however, the Company currently does not plan to adopt this standard early. The Company’s evaluation of the impact this standard will have on its consolidated financial statements is ongoing. Based on efforts to date, the adoption of the standard will result in the recognition of right of use assets and lease liabilities related to the Company’s operating leases.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses
. ASU 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. 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. 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.
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230).
ASU No. 2016-15 addresses eight specific cash flow issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This standard will be effective for the Company beginning in the first quarter of fiscal year 2019. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
. ASU No. 2016-16 requires entities to recognize income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This standard will be effective for the Company beginning in the first quarter of fiscal year 2019. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements have not been issued or made available for issuance. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows: Restricted Cash
. The primary purpose of ASU No. 2016-18 is to reduce the diversity in practice that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. This standard will require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This standard will be effective retrospectively for the Company beginning in the first quarter of fiscal year 2019, and will result in a change to the Company’s presentation of net cash provided by (used in) operating activities in the statement of cash flows for the impact of changes in restricted cash balances. Early adoption is permitted in any interim or annual period.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805) Clarifying the Definition of a Business
. The primary purpose of this ASU is to clarify 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 affect many areas of accounting including acquisitions, disposals, goodwill, and consolidation. This standard will be effective for the Company beginning in the first quarter of fiscal year 2019 and is required to be applied prospectively. Early adoption is permitted. The adoption of this standard 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 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. This standard will be effective for the Company beginning in the first quarter of fiscal year 2021 and is required to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07,
Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
ASU No. 2017-07 requires employers to disaggregate the service cost component from the other components of net benefit cost and disclose by line item the amount of net benefit cost that is included in the statement of operations or capitalized in assets. The standard requires employers to report the service cost component in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period and to report other components of net benefit cost separately and outside the subtotal of operating income. The standard also allows only the service cost component to be eligible for capitalization. This standard will be effective for the Company beginning in the first quarter of fiscal year 2019. The guidance requires application on a retrospective basis for the presentation of the service cost component and the other components of net benefit cost in the statements of operations and on a prospective basis for the capitalization of the service cost component of net benefit cost in assets. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements have not been issued or made available for issuance. For the three months ended
March 31, 2018
, net periodic pension and other postretirement employee benefit cost reported within operating income totaled
$1,045
, of which
$52
represented service cost. For the
nine
months ended
March 31, 2018
, net periodic pension and other postretirement employee benefit cost reported within operating income totaled
$3,138
, of which
$157
represented service cost.
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
In February 2018, the FASB issued ASU No. 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. This standard will be effective for the Company beginning in the first quarter of fiscal year 2020 and is required to be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
Note
3
.
Acquisitions
On July 28, 2017, the Company acquired a
65%
controlling interest in
CLG
, a premier North American esports organization.
CLG
’s results of operations
since the acquisition date, which are included in the Company’s consolidated statements of operations for the three and
nine
months ended
March 31, 2018
, were not material. Pro forma information is not provided since the acquisition was not material when compared with the Company’s consolidated financial statements.
On
November 20, 2017
, the Company acquired a
100%
controlling interest in
Obscura
, a creative studio, globally-recognized for its work in designing and developing next-generation immersive experiences.
Obscura
’s results of operations
since the acquisition date, which are included in the Company’s consolidated statements of operations for the three and
nine
months ended
March 31, 2018
, were not material. Pro forma information is not provided since the acquisition was not material when compared with the Company’s consolidated financial statements. In addition, the Obscura financial results of operations are reflected in the MSG Entertainment segment. Any costs incurred by Obscura that are associated with the Company’s
business development initiatives
are reported in “Corporate and Other.”
Note 4. 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,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Weighted-average shares (denominator):
|
|
|
|
|
|
|
|
|
Weighted-average shares for basic EPS
|
|
23,683
|
|
|
23,825
|
|
|
23,623
|
|
|
23,951
|
|
Dilutive effect of shares issuable under share-based compensation plans
|
|
126
|
|
|
—
|
|
|
220
|
|
|
196
|
|
Weighted-average shares for diluted EPS
|
|
23,809
|
|
|
23,825
|
|
|
23,843
|
|
|
24,147
|
|
Anti-dilutive shares
|
|
94
|
|
|
—
|
|
|
37
|
|
|
4
|
|
Note 5. Team Personnel Transactions and Insurance Recoveries
Direct operating expenses in the accompanying consolidated statements of operations include net provisions for transactions relating to players on the Company’s sports teams for (i) season ending injuries, (ii) trades and (iii) waiver/contract termination costs (“
Team personnel transactions
”).
Team personnel transactions
were
$7,119
and
$1,161
for the three months ended
March 31, 2018
and
2017
, respectively, and
$9,977
and
$7,151
for the
nine
months ended
March 31, 2018
and
2017
, respectively.
Team personnel transactions
for the three and
nine
months ended
March 31, 2018
are reported net of insurance recoveries of
$468
.
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note
6
. Investments and Loans to Nonconsolidated Affiliates
The Company’s investments and loans to nonconsolidated affiliates which are accounted for under the equity method and cost method of accounting in accordance with ASC Topic 323,
Investments - Equity Method and Joint Ventures
, and ASC Topic 325,
Investments - Other
, respectively, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership Percentage
|
|
Investment
|
|
Loan
(a)
|
|
|
Total
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
Equity method investments:
|
|
|
|
|
|
|
|
|
|
Azoff MSG Entertainment LLC (“AMSGE”)
|
|
50
|
%
|
|
$
|
108,321
|
|
|
$
|
97,500
|
|
|
|
$
|
205,821
|
|
Tribeca Enterprises LLC (“Tribeca Enterprises”)
|
|
50
|
%
|
|
10,031
|
|
|
19,196
|
|
(b)
|
|
29,227
|
|
Others
|
|
|
|
|
7,132
|
|
|
—
|
|
|
|
7,132
|
|
Cost method investments
|
|
|
|
10,525
|
|
|
—
|
|
|
|
10,525
|
|
Total investments and loans to nonconsolidated affiliates
|
|
|
|
$
|
136,009
|
|
|
$
|
116,696
|
|
|
|
$
|
252,705
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
Equity method investments:
|
|
|
|
|
|
|
|
|
|
AMSGE
|
|
50
|
%
|
|
$
|
104,024
|
|
|
$
|
97,592
|
|
(c)
|
|
$
|
201,616
|
|
Brooklyn Bowl Las Vegas, LLC (“BBLV”)
|
|
(d)
|
|
|
—
|
|
|
2,662
|
|
(e)
|
|
2,662
|
|
Tribeca Enterprises
|
|
50
|
%
|
|
12,864
|
|
|
14,370
|
|
(b)
|
|
27,234
|
|
Cost method investments
|
|
|
|
10,775
|
|
|
—
|
|
|
|
10,775
|
|
Total investments and loans to nonconsolidated affiliates
|
|
|
|
$
|
127,663
|
|
|
$
|
114,624
|
|
|
|
$
|
242,287
|
|
_________________
|
|
(a)
|
In connection with the Company’s investments in AMSGE and Tribeca Enterprises, the Company provides
$100,000
and
$17,500
revolving credit facilities to these entities, respectively.
Pursuant to their terms, the AMSGE and Tribeca Enterprises revolving credit facilities will terminate on
September 20, 2020
and
June 30, 2021
, respectively.
|
|
|
(b)
|
Includes outstanding payments-in-kind (“
PIK
”) interest of
$1,696
and
$870
as of
March 31, 2018
and
June 30, 2017
, respectively.
PIK
interest owed does not reduce the availability under the revolving credit facility.
|
|
|
(c)
|
Represents the outstanding loan balance, inclusive of amounts due to the Company for interest of
$92
as of
June 30, 2017
.
|
|
|
(d)
|
As of
June 30, 2017
, the Company was entitled to receive back its capital, which was
74%
of BBLV’s total capital, plus a preferred return, after which the Company would own a
20%
interest in BBLV. As of
March 31, 2018
, the Company now owns a
35%
interest in BBLV with no preferred return, as a result of an amendment to the BBLV’s operating agreement.
|
|
|
(e)
|
Represents the outstanding loan balance, inclusive of amounts due to the Company for interest of
$62
as of
June 30, 2017
. In December 2017, in connection with the amendment of the BBLV’s operating agreement, the Company received a payment of
$2,662
, which represented the outstanding loan principal and accrued interest balance. In addition, the Company recognized interest income of
$938
for the
nine
months ended
March 31, 2018
, which was received in connection with the repayment of the loan receivable since the loan balance was on a nonaccrual status.
|
See Note
9
for more information regarding a legal matter associated with
AMSGE
.
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note
7
. Property and Equipment
As of
March 31, 2018
and
June 30, 2017
, property and equipment consisted of the following assets:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
June 30,
2017
|
Land
|
|
$
|
180,895
|
|
|
$
|
91,678
|
|
Buildings
|
|
1,117,337
|
|
|
1,110,366
|
|
Leasehold improvements
|
|
178,081
|
|
|
176,786
|
|
Equipment
|
|
320,414
|
|
|
292,935
|
|
Aircraft
|
|
38,090
|
|
|
38,090
|
|
Furniture and fixtures
|
|
51,889
|
|
|
49,622
|
|
Construction in progress
|
|
58,684
|
|
|
22,880
|
|
|
|
1,945,390
|
|
|
1,782,357
|
|
Less accumulated depreciation and amortization
|
|
(699,957
|
)
|
|
(623,086
|
)
|
|
|
$
|
1,245,433
|
|
|
$
|
1,159,271
|
|
The increase in gross property and equipment during the
nine
months ended
March 31, 2018
includes the impact of the purchase of land in
London
during the second quarter of fiscal year 2018. The purchase price of the land was
$79,518
(
£60,000
), excluding transactional taxes of
$20,661
(
£15,590
). The transactional taxes include a value-added tax of
$15,904
(
£12,000
), which the Company recovered in full during the three months ended
March 31, 2018
.
Depreciation and amortization expense on property and equipment was
$25,246
and
$24,924
for the three months ended
March 31, 2018
and
2017
, respectively, and
$76,790
and
$73,768
for the
nine
months ended
March 31, 2018
and
2017
, respectively.
Note
8
. Goodwill and Intangible Assets
The carrying amounts of
goodwill
, by reportable segment, as of
March 31, 2018
and
June 30, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
June 30,
2017
|
MSG Entertainment
|
|
$
|
165,423
|
|
|
$
|
161,900
|
|
MSG Sports
|
|
226,955
|
|
|
218,187
|
|
|
|
$
|
392,378
|
|
|
$
|
380,087
|
|
The net increase in the carrying amounts of goodwill, as compared to
June 30, 2017
, primarily reflects: (i) purchase price allocations for the
CLG
and
Obscura
acquisitions in the MSG Sports segment and MSG Entertainment segment, respectively, and (ii) measurement period adjustments for certain assets and liabilities for the
TAO Group
acquisition in the MSG Entertainment segment.
During the first quarter of fiscal year
2018
, 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.
The Company’s indefinite-lived intangible assets as of
March 31, 2018
and
June 30, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
June 30,
2017
|
Sports franchises (MSG Sports segment)
|
|
$
|
109,429
|
|
|
$
|
101,429
|
|
Trademarks (MSG Entertainment segment)
|
|
62,421
|
|
|
62,421
|
|
Photographic related rights (MSG Sports segment)
|
|
3,000
|
|
|
3,000
|
|
|
|
$
|
174,850
|
|
|
$
|
166,850
|
|
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The increase in the carrying amount of indefinite-lived intangible assets in MSG Sports segment reflects a franchise fee associated with
CLG
’s
membership
in the “League of Legends” North American League Championship Series
.
During the first quarter of fiscal year
2018
, 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, 2018
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Trade names
|
|
$
|
101,830
|
|
|
$
|
(5,224
|
)
|
|
$
|
96,606
|
|
Venue management contracts
|
|
79,000
|
|
|
(4,183
|
)
|
|
74,817
|
|
Favorable lease assets
|
|
54,253
|
|
|
(4,468
|
)
|
|
49,785
|
|
Season ticket holder relationships
|
|
50,032
|
|
|
(43,372
|
)
|
|
6,660
|
|
Non-compete agreements
|
|
11,400
|
|
|
(1,755
|
)
|
|
9,645
|
|
Festival rights
|
|
9,080
|
|
|
(1,293
|
)
|
|
7,787
|
|
Other intangibles
|
|
10,417
|
|
|
(5,227
|
)
|
|
5,190
|
|
|
|
$
|
316,012
|
|
|
$
|
(65,522
|
)
|
|
$
|
250,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Trade names
|
|
$
|
98,530
|
|
|
$
|
(1,003
|
)
|
|
$
|
97,527
|
|
Venue management contracts
|
|
79,000
|
|
|
(761
|
)
|
|
78,239
|
|
Favorable lease assets
|
|
54,253
|
|
|
(812
|
)
|
|
53,441
|
|
Season ticket holder relationships
|
|
50,032
|
|
|
(40,871
|
)
|
|
9,161
|
|
Non-compete agreements
|
|
9,000
|
|
|
(261
|
)
|
|
8,739
|
|
Festival rights
|
|
9,080
|
|
|
(739
|
)
|
|
8,341
|
|
Other intangibles
|
|
4,217
|
|
|
(2,690
|
)
|
|
1,527
|
|
|
|
$
|
304,112
|
|
|
$
|
(47,137
|
)
|
|
$
|
256,975
|
|
Amortization expense for intangible assets, excluding the amortization of favorable lease assets of
$1,219
for the three months ended
March 31, 2018
, which is reported in rent expense, was
$5,183
and
$1,611
for the three months ended
March 31, 2018
and
2017
, respectively. For the
nine
months ended
March 31, 2018
and
2017
, amortization expense for intangible assets, excluding the amortization of favorable lease assets of
$3,656
for the
nine
months ended
March 31, 2018
, which is reported in rent expense, was
$14,729
and
$4,843
, respectively. The increases in amortization expense reflect the intangible assets recognized in connection with the acquisitions of
TAO Group
,
CLG
and
Obscura
.
Note
9
. Commitments and Contingencies
Commitments
As more fully described in Note 8 to the consolidated and combined financial statements included in the Company’s Annual Report on Form 10-K for the year ended
June 30, 2017
, the Company’s commitments consist primarily of (i) the MSG Sports segment’s obligations under employment agreements that the Company has with its professional sports teams’ personnel that are generally guaranteed regardless of employee injury or termination, (ii)
long-term noncancelable operating lease agreements
primarily for entertainment venues, and corporate offices, and (iii) revolving credit facilities provided by the Company to
AMSGE
and Tribeca Enterprises (see Note
6
). The Company did not have any material changes in its contractual obligations since the end of fiscal year
2017
other than activities in the ordinary course of business.
In connection with the
TAO Group
and
CLG
acquisitions, the Company has accrued contingent consideration as part of the purchase price allocation. See Note
10
for further details of the amount recorded in the accompanying consolidated balance sheet as of
March 31, 2018
. In addition, see Note 10 to the consolidated and combined financial statements included in the
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Company’s Annual Report on Form 10-K for the year ended
June 30, 2017
regarding the principal repayments required under the
TAO Group
’s senior secured term loan facility.
Legal Matters
The Company owns
50%
of
AMSGE
,
which in turn owns a majority interest in Global Music Rights, LLC (“GMR”). GMR is primarily a performance rights organization, whose business includes obtaining the right to license the public performance rights of songs composed by leading songwriters. GMR engaged in negotiations with the Radio Music Licensing Committee (“RMLC”), which represents over ten thousand commercial radio stations. On November 18, 2016, RMLC filed a complaint against GMR in the United States District Court for the Eastern District of Pennsylvania alleging that GMR is violating Section 2 of the Sherman Antitrust Act and seeking an injunction, requiring, among other things, that GMR issue radio stations licenses for GMR’s repertory, upon request, at a rate set through a judicial rate-making procedure, that GMR offer “economically viable alternatives to blanket licenses,” and that GMR offer only licenses for songs which are fully controlled by GMR. GMR and RLMC agreed to an interim license arrangement through September 30, 2017, which has been extended through September 30, 2018. GMR has advised the Company that it believes that the RMLC Complaint is without merit and is vigorously defending itself. On January 20, 2017, GMR filed a motion to dismiss or to transfer venue, asserting that the Eastern District of Pennsylvania is not a proper venue for the matter, lacks personal jurisdiction of GMR and that in any event the complaint fails to state a claim. On December 6, 2016, GMR filed a complaint against RMLC in the United States District Court for the Central District of California, alleging that RMLC operates as an illegal cartel that unreasonably restrains trade in violation of Section 1 of the Sherman Antitrust Act and California state law, and seeking an injunction restraining RMLC and its co-conspirators from enforcing or establishing agreements that unreasonably restrict competition for public performance licenses. The judge in the Central District of California denied RMLC’s motion to dismiss GMR’s claim for lack of ripeness and, on the basis that the two cases involve similar facts, stayed the California action in order to assess the status of the Pennsylvania case. On July 21, 2017, RMLC filed a preliminary injunction motion in the United States District Court for the Eastern District of Pennsylvania to extend the duration of the interim licenses which GMR had granted to certain radio stations. The district court determined that the jurisdictional matter should be decided prior to addressing the motion for preliminary injunction and referred the jurisdictional questions to the Magistrate Judge in the United States District Court Eastern District of Pennsylvania. On November 29, 2017, the Magistrate Judge issued a report and recommendation that personal jurisdiction was not appropriate over GMR in the Eastern District of Pennsylvania and recommending the dismissal of
the RMLC’s action without prejudice. The RMLC has filed objections
to the Magistrate Judge’s report and recommendation.
The Company is a defendant in various other lawsuits. Although the outcome of these other lawsuits cannot be predicted with certainty (including the extent of available insurance, if any), management does not believe that resolution of these other lawsuits will have a material adverse effect on the Company.
Note
10
. 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 and available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy
|
|
March 31,
2018
|
|
June 30,
2017
|
Assets:
|
|
|
|
|
|
|
Commercial Paper
|
|
I
|
|
$
|
105,461
|
|
|
$
|
105,476
|
|
Money market accounts
|
|
I
|
|
149,938
|
|
|
102,884
|
|
Time deposits
|
|
I
|
|
876,436
|
|
|
1,007,302
|
|
Available-for-sale securities
|
|
I
|
|
25,440
|
|
|
32,851
|
|
Total assets measured at fair value
|
|
|
|
$
|
1,157,275
|
|
|
$
|
1,248,513
|
|
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 amounts of the Company’s commercial paper, money market accounts and time deposits approximate fair value due to their short-term maturities.
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The carrying value and fair value of the Company’s financial instruments reported in the accompanying consolidated balance sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
June 30, 2017
|
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
Assets
|
|
|
|
|
|
|
|
|
Notes receivable, including interest accruals
|
|
$
|
4,115
|
|
|
$
|
4,115
|
|
|
$
|
2,610
|
|
|
$
|
2,610
|
|
Available-for-sale securities
(a)
|
|
25,440
|
|
|
25,440
|
|
|
32,851
|
|
|
32,851
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion
(b)
|
|
$
|
110,000
|
|
|
$
|
110,117
|
|
|
$
|
110,000
|
|
|
$
|
110,091
|
|
_________________
|
|
(a)
|
Aggregate cost basis for available-for-sale securities, including transaction costs, was
$23,222
as of
March 31, 2018
. The unrealized gain recorded in accumulated other comprehensive loss was
$2,218
as of
March 31, 2018
. The fair value of the available-for-sale securities is determined based on quoted market prices in an active market at the New York Stock Exchange, which is classified within Level I of the fair value hierarchy.
|
|
|
(b)
|
On January 31, 2017, TAO Group Intermediate Holdings LLC (“
TAOIH
”), TAO Group Operating LLC (“
TAOG
”) and certain of its subsidiaries entered into a
$110,000
senior secured
five
-year term loan facility. 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.
|
Contingent Consideration Liabilities
In connection with the
TAO Group
acquisition (see Note 3 to the consolidated and combined financial statements included in the Company’s Annual Report on Form 10-K for the year ended
June 30, 2017
for further details), the Company recorded certain contingent consideration liabilities at fair value as part of the preliminary purchase price allocation. The fair value was estimated using a Monte-Carlo simulation model which included significant unobservable Level III inputs such as projected financial performance over the earn-out period (
five years
) along with estimates for market volatility and the discount rate applicable to potential cash payouts. As of
March 31, 2018
and
June 30, 2017
, the fair value of contingent consideration liabilities in connection with the
TAO Group
acquisition was
$7,900
.
In connection with the
CLG
acquisition, the Company may be required to make future payments for deferred and contingent consideration up to a total of
$9,150
based upon the achievement of certain specified objectives during the
three years
following the transaction as defined under the membership interest purchase agreement. The Company recorded
$6,586
as the initial fair value of deferred and contingent consideration liabilities as part of the preliminary purchase price allocation. The fair values of these deferred and contingent consideration liabilities were estimated using weighted probabilities of achievement for the possible objective and earn-out events and adjusted for a discount rate applicable to the deferred and potential cash payouts. During the
nine
months ended
March 31, 2018
, the Company made a payment of
$4,000
as one of the objectives for contingent consideration was achieved. As of
March 31, 2018
, the fair value of deferred and contingent consideration liabilities was
$2,655
.
Note
11
. 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.
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, 2018
,
Knicks LLC was in compliance with this financial covenant.
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
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
Knicks Revolving Credit Facility
was undrawn
as of
March 31, 2018
.
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 the related security agreement contain certain customary representations and warranties, affirmative covenants and events of default.
The Knicks Credit Agreement 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 Credit Agreement, 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 Credit Agreement; (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 effective as of September 29, 2017.
This facility
was undrawn
as of
March 31, 2018
.
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.
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, 2018
,
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
Rangers Revolving Credit Facility
was undrawn
as of
March 31, 2018
.
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
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
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 the related security agreement contain certain customary representations and warranties, affirmative covenants and events of default.
The Rangers Credit Agreement 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 Credit Agreement, 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 Credit Agreement; (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
January 31, 2017,
TAOIH
,
TAOG
, and certain of its subsidiaries entered into a credit and guaranty agreement with a syndicate of lenders providing for a senior secured term loan facility of
$110,000
with a term of
five
years (the “TAO Term Loan Facility”) to fund, in part, the acquisition of TAO Group and a senior secured revolving credit facility of up to
$12,000
with a term of
five
years (the “TAO Revolving Credit Facility,” and together with the TAO Term Loan Facility, the “TAO Credit Facilities”) for working capital and general corporate purposes of
TAOG
.
The TAO Credit Facilities were obtained without recourse to MSG or any of its affiliates (other than TAOIH and its subsidiaries).
The TAO Credit Facilities require TAOIH (i) to maintain, for the relevant TAO entities, a minimum consolidated liquidity of $5,000 at all times, (ii) to comply with a maximum total net leverage ratio of 4.00:1.00 initially and stepping down over time to 2.50:1.00 by the first quarter of calendar year 2021 and through the remainder of the term of the TAO Credit Facilities, and (iii) to comply with a minimum fixed charge coverage ratio of 1.50:1.00 initially and stepping down over time to 1.15:1.00 by the second quarter of calendar year 2021 and through the remainder of the term of the TAO Credit Facilities.
TAOIH was in compliance with the financial covenants of the TAO Credit Facilities as of December 31, 2017 (the most recent date at which compliance was assessed under the TAO Credit Facilities).
The TAO Revolving Credit Facility was undrawn as of
March 31, 2018
.
The TAO entities under the TAO Credit Facilities are also subject to certain limitations with respect to making capital expenditures based upon the total net leverage ratio and other factors. The restrictions on capital expenditures are subject to certain “carry-forward” provisions and other customary carve-outs.
All borrowings under the TAO Credit Facilities are subject to the satisfaction of certain customary conditions, including compliance with a maximum leverage multiple, accuracy of representations and warranties and absence of a default or event of default.
Borrowings bear interest at a floating rate, which at the option of TAOG may be either (i) a base rate plus a margin ranging from 6.50% to 7.00% per annum or (ii) LIBOR plus a margin ranging from 7.50% to 8.00% per annum.
TAOG is required to pay a commitment fee of
0.50%
per annum in respect of the average daily unused commitments under the TAO Revolving Credit Facility.
The interest rate on the TAO Credit Facilities as of December 31, 2017 was
9.625%
.
TAO Group
made interest payments under the TAO Term Loan Facility of
$3,423
and
$8,561
for the
three and nine months ended December 31, 2017 (the period for which TAO Group’s operating results are recorded in the Company’s consolidated statements of operations for the three and nine months ended March 31, 2018)
.
All obligations under the TAO Credit Facilities are secured by a first lien security interest in substantially all of the applicable TAO entities’ assets, including, but not limited to, a pledge of all of the capital stock of substantially all of TAOIH’s wholly-owned domestic subsidiaries and 65% of the voting capital stock, and 100% of the non-voting capital stock, of each of its first-tier foreign subsidiaries.
Subject to customary notice and minimum amount conditions, TAOG may voluntarily prepay outstanding loans under the TAO Credit Facilities at any time, in whole or in part (subject to customary breakage costs with respect to LIBOR loans) with premiums due in respect of prepayments of the TAO Term Loan Facility or permanent reduction under the TAO Revolving Credit Facility, in each case, starting at 5.0% initially and stepping down to 0% after three years. Beginning March 31, 2018, TAOG is required to make scheduled amortization payments under the TAO Term Loan Facility in consecutive quarterly installments equal to $688 per quarter initially, stepping up over time to $4,125 per quarter by March 31, 2021 and through the final maturity date of the TAO Term Loan Facility with the final balance payable on such maturity date.
TAOG is also required
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
to make mandatory prepayments under the TAO Credit Facilities in certain circumstances, including, without limitation, 75% of excess cash flow, with a step-down to 50% when the total net leverage ratio is less than 2.00:1.00.
The TAO Credit Facilities contain certain restrictions on the ability of TAOG to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the TAO Credit Facilities, including, without limitation, the following: (i) incurring additional indebtedness; (ii) creating liens on assets; (iii) making distributions, dividends and other restricted payments; (iv) engaging in sale and leaseback transactions; (v) merging or consolidating; (vi) making investments; and (vii) prepaying certain indebtedness.
See Note 10 to the consolidated and combined financial statements included in the Company’s Annual Report on Form 10-K for the year ended
June 30, 2017
for more information regarding the Company’s debt maturities for the
TAO Term Loan Facility
.
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, 2018
and
June 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
TAO Term Loan Facility
|
|
Deferred Financing Costs
|
|
Total
|
Current portion of long-term debt, net of deferred financing costs
|
|
$
|
2,750
|
|
|
$
|
(939
|
)
|
|
$
|
1,811
|
|
Long-term debt, net of deferred financing costs
|
|
107,250
|
|
|
(2,908
|
)
|
|
104,342
|
|
Total
|
|
$
|
110,000
|
|
|
$
|
(3,847
|
)
|
|
$
|
106,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
TAO Term Loan Facility
|
|
Deferred Financing Costs
|
|
Total
|
Current portion of long-term debt, net of deferred financing costs
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Long-term debt, net of deferred financing costs
|
|
110,000
|
|
|
(4,567
|
)
|
|
105,433
|
|
Total
|
|
$
|
110,000
|
|
|
$
|
(4,567
|
)
|
|
$
|
105,433
|
|
The following table summarizes deferred financing costs, net of amortization, related to the
Knicks Revolving Credit Facility
,
Knicks Unsecured Credit Facility
,
Rangers Revolving Credit Facility
, and
TAO Revolving Credit Facility
as reported on the accompanying consolidated balance sheets as of
March 31, 2018
and
June 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
June 30,
2017
|
Other current assets
|
|
$
|
778
|
|
|
$
|
806
|
|
Other assets
|
|
2,101
|
|
|
2,784
|
|
Note
12
. Pension Plans and Other Postretirement Benefit Plan
See Note 11 to the consolidated and combined financial statements included in the Company’s Annual Report on Form 10-K for the year ended
June 30, 2017
for more information regarding the Company’s defined benefit pension plans (“Pension Plans”), postretirement benefit plan (“Postretirement Plan”), Madison Square Garden 401(k) Savings Plan and the MSG Sports & Entertainment, LLC Excess Savings Plan (collectively, the “
Savings Plans
”), and Madison Square Garden 401(k) Union Plan (the “
Union Savings Plan
”).
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Defined Benefit Pension Plans and Postretirement Benefit Plan
Components of net periodic benefit cost for the Pension Plans and Postretirement Plan recognized in direct operating expenses and selling, general and administrative expenses in the accompanying consolidated statements of operations for the three and
nine
months ended
March 31, 2018
and
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Postretirement Plan
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
|
$
|
21
|
|
|
$
|
18
|
|
|
$
|
31
|
|
|
$
|
34
|
|
Interest cost
|
|
1,306
|
|
|
1,237
|
|
|
45
|
|
|
41
|
|
Expected return on plan assets
|
|
(658
|
)
|
|
(596
|
)
|
|
—
|
|
|
—
|
|
Recognized actuarial loss
|
|
310
|
|
|
336
|
|
|
—
|
|
|
—
|
|
Amortization of unrecognized prior service credit
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
|
(12
|
)
|
Net periodic benefit cost
|
|
$
|
979
|
|
|
$
|
995
|
|
|
$
|
66
|
|
|
$
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Postretirement Plan
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
|
$
|
63
|
|
|
$
|
64
|
|
|
$
|
94
|
|
|
$
|
102
|
|
Interest cost
|
|
3,919
|
|
|
3,717
|
|
|
135
|
|
|
122
|
|
Expected return on plan assets
|
|
(1,975
|
)
|
|
(1,788
|
)
|
|
—
|
|
|
—
|
|
Recognized actuarial loss
|
|
930
|
|
|
1,024
|
|
|
—
|
|
|
—
|
|
Amortization of unrecognized prior service credit
|
|
—
|
|
|
—
|
|
|
(28
|
)
|
|
(37
|
)
|
Net periodic benefit cost
|
|
$
|
2,937
|
|
|
$
|
3,017
|
|
|
$
|
201
|
|
|
$
|
187
|
|
Defined Contribution Pension Plans
For the three and
nine
months ended
March 31, 2018
and
2017
, expenses related to the
Savings Plans
and
Union Savings Plan
included in the accompanying consolidated statements of operations are as follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
$
|
2,252
|
|
|
$
|
2,237
|
|
|
$
|
6,394
|
|
|
$
|
6,183
|
|
|
$
|
31
|
|
|
$
|
573
|
|
|
$
|
111
|
|
|
$
|
623
|
|
Note
13
. Share-based Compensation
See Note 12 to the consolidated and combined financial statements included in the Company’s Annual Report on Form 10-K for the year ended
June 30, 2017
for more information regarding the Company’s 2015 Employee Stock Plan (the “
Employee Stock Plan
”) and its 2015 Stock Plan for Non-Employee Directors.
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
For the three months ended
March 31, 2018
and
2017
, share-based compensation expense was recognized in the consolidated statements of operations as a component of direct operating expenses or selling, general and administrative expenses and was
$10,076
and
$10,367
, respectively. For the
nine
months ended
March 31, 2018
and
2017
, share-based compensation expense was
$36,892
and
$30,465
, respectively.
Upon the adoption of ASU No. 2016-09, the Company elected to account for forfeitures as they occur on a prospective basis effective July 1, 2017, rather than estimating expected forfeitures as was required under the prior guidance. See “Note
2
.
Accounting Policies
—
Recently Issued Accounting Pronouncements
” for further discussion on the impact from the adoption of ASU 2016-09.
In addition, for the Company’s stock option awards, the Company applies the fair value recognition provisions of
ASC
Topic 718 “
Compensation — Stock Compensation
”. ASC Topic 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The Company determines the fair value as of the grant date. For awards with graded vesting conditions, the values of the awards are determined by valuing all vesting tranches in the aggregate as one award using an average expected term. For stock options, the Black-Scholes option pricing model considers, among other factors, the expected life of the award and the expected volatility of the Company’s stock price.
The Company determines its assumptions for the Black-Scholes option-pricing model in accordance with ASC Topic 718 and
SEC
Staff Accounting Bulletin (“SAB”) No. 107, “
Share-Based Payment
” based on the following:
|
|
•
|
The expected term of stock options is estimated using the simplified method.
|
|
|
•
|
The expected risk-free interest rate is based on the U.S. Treasury interest rate which term is consistent with the expected term of the stock options.
|
|
|
•
|
The expected volatility is based on the historical volatility of the Company’s stock price.
|
In December 2007, the
SEC
staff issued SAB No. 110, “
Certain Assumptions Used In Valuation Methods — Expected Term
”. SAB No. 110 allows companies to continue to use the simplified method, as defined in SAB No. 107, to estimate the expected term of stock options under certain circumstances. The simplified method for estimating expected term uses the mid-point between the vesting term and the contractual term of the stock option. The Company has analyzed the circumstances in which the use of the simplified method is allowed. The Company has opted to use the simplified method for stock options the Company granted in fiscal year 2018 because management believes that the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term.
Restricted Stock Units Award Activity
The following table summarizes activity related to holders (including the Company’s and MSG Networks’ employees) of the Company’s restricted stock units and performance restricted stock units, collectively referred to as “
RSUs
,” for the
nine
months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
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, 2017
|
208
|
|
|
464
|
|
|
$
|
172.78
|
|
Granted
|
103
|
|
|
180
|
|
|
$
|
211.15
|
|
Vested
|
(88
|
)
|
|
(249
|
)
|
|
$
|
176.90
|
|
Forfeited
|
(12
|
)
|
|
(128
|
)
|
|
$
|
183.89
|
|
Unvested award balance, March 31, 2018
|
211
|
|
|
267
|
|
|
$
|
189.37
|
|
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The fair value of RSUs that vested during the
nine
months ended
March 31, 2018
was
$74,582
. 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’ statutory minimum tax withholding obligations for the applicable income and other employment taxes,
159
of these
RSUs
, with an aggregate value of
$33,589
were retained by the Company and reflected as financing activity in the accompanying consolidated statement of cash flows for the
nine
months ended
March 31, 2018
.
The fair value of RSUs that vested during the
nine
months ended
March 31, 2017
was
$15,209
. The weighted-average fair value per share at grant date of RSUs granted during the
nine
months ended
March 31, 2017
was
$170.98
.
Stock Options Award Activity
The following table summarizes activity related to a holder of the Company’s stock options for the
nine
months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
Granted
|
94
|
|
|
—
|
|
|
$
|
210.13
|
|
|
|
|
|
Balance as of March 31, 2018
|
94
|
|
|
—
|
|
|
$
|
210.13
|
|
|
9.72
|
|
|
$
|
3,347
|
|
Exercisable as of March 31, 2018
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
During the
nine
months ended
March 31, 2018
, the Company granted
94
stock options that vest ratably over
three
years and are being expensed on a straight-line basis over the vesting period of the stock options. The maximum contractual term is
10
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 weighted-average grant-date fair value of
$53.29
.
The following are key assumptions used to calculate the weighted-average grant-date fair value of stock options:
|
|
|
|
Expected term
|
6 years
|
|
Expected volatility
|
20.38
|
%
|
Risk-free interest rate
|
2.22
|
%
|
Note 14. Stock Repurchase Program
On September 11, 2015, the Company’s board of directors 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
nine
months ended
March 31, 2018
, the Company repurchased
56
shares of Class A Common Stock for a total cost of
$11,685
, including commissions and fees. These acquired shares have been classified as treasury stock in the accompanying consolidated balance sheet as of
March 31, 2018
. As of
March 31, 2018
, the Company had
$259,639
of availability remaining under its stock repurchase authorization.
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 15. Accumulated Other Comprehensive Loss
The following table details the components of accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans and
Postretirement
Plan
(a)
|
|
Cumulative Translation Adjustments
|
|
Unrealized Gain on Available-for-sale
Securities
|
|
Accumulated
Other
Comprehensive
Loss
|
Balance as of June 30, 2017
|
$
|
(39,408
|
)
|
|
$
|
—
|
|
|
$
|
5,293
|
|
|
$
|
(34,115
|
)
|
Other comprehensive income (loss) before reclassifications, before income taxes
|
—
|
|
|
5,933
|
|
|
(7,411
|
)
|
|
(1,478
|
)
|
Amounts reclassified from accumulated other comprehensive loss, before income taxes
|
902
|
|
|
—
|
|
|
—
|
|
|
902
|
|
Other comprehensive income (loss)
|
902
|
|
|
5,933
|
|
|
(7,411
|
)
|
|
(576
|
)
|
Balance as of March 31, 2018
|
$
|
(38,506
|
)
|
|
$
|
5,933
|
|
|
$
|
(2,118
|
)
|
|
$
|
(34,691
|
)
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2016
|
$
|
(42,611
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(42,611
|
)
|
Other comprehensive income before reclassifications, before income taxes
|
—
|
|
|
—
|
|
|
15,853
|
|
|
15,853
|
|
Amounts reclassified from accumulated other comprehensive loss, before income taxes
|
987
|
|
|
—
|
|
|
—
|
|
|
987
|
|
Other comprehensive income
|
987
|
|
|
—
|
|
|
15,853
|
|
|
16,840
|
|
Balance as of March 31, 2017
|
$
|
(41,624
|
)
|
|
$
|
—
|
|
|
$
|
15,853
|
|
|
$
|
(25,771
|
)
|
________________
|
|
(a)
|
Amounts reclassified from accumulated other comprehensive loss, before income taxes, represent amortization of net actuarial loss and net unrecognized prior service credit included in net periodic benefit cost, which is reflected in direct operating expenses and selling, general and administrative expenses in the accompanying consolidated statements of operations (see Note
12
).
|
Note 16. Income Taxes
On December 22, 2017, new tax legislation, commonly referred to as the Tax Cuts and Jobs Act, was enacted, which significantly changed the existing U.S. tax laws, including a reduction in the corporate Federal income tax rate from
35%
to
21%
effective January 1, 2018. During the second quarter of fiscal year 2018, the Company was 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 income tax rate of
28%
based upon the number of days 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 expense for the three months ended
March 31, 2018
and
2017
was
$652
and
$440
, respectively. For the
nine
months ended
March 31, 2018
and
2017
, income tax expense (benefit) was
$(115,418)
and
$754
, respectively.
Income tax expense for the three months ended
March 31, 2018
of
$652
differs from the income tax expense derived from applying the blended statutory Federal rate of 28% to pretax income primarily as a result of a decrease of
$2,787
in recorded Federal and state valuation allowances, which offsets tax expense that would otherwise have been recorded on operating income, as well as
a tax benefit of
$1,435
associated with the vesting of restricted stock units
.
These decreases were partially offset by the impact of state and local income taxes (net of Federal benefit) of
$870
, tax expense of
$1,298
primarily related to non-deductible expenses and
$400
of tax expense from investment partnerships.
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Income tax benefit
for the
nine
months ended
March 31, 2018
of
$115,418
differs from the income tax expense derived from applying the blended statutory Federal rate of 28% to pretax income primarily as a result of a deferred income tax benefit of
$113,494
related to the revaluation of the Company’s deferred tax assets and liabilities under provisions contained in the new tax legislation, of which (i)
$51,015
was due to the reduction of net deferred tax liabilities in connection with the lower Federal income tax rate of 21%, and (ii)
$62,479
was due to a reduction in the valuation allowance attributable to the new rules, which provide that future Federal net operating losses have an unlimited carry-forward period. These rules on future Federal net operating losses allow the Company to recognize a portion of its unrecognized deferred tax assets for future deductible items. Other decreases to the statutory rate include the impact of an income tax benefit of
$27,186
in Federal and state valuation allowance decreases recorded, which offsets the income tax expense attributable to most of the operating income, the impact of a change in state tax rates of
$3,110
, and
a tax benefit of
$1,435
associated with the vesting of restricted stock units
.
These decreases were partially offset by the impact of state and local income taxes (net of Federal benefit) of
$7,365
, tax expense of
$2,535
primarily related to non-deductible expenses and
$400
of tax expense from investment partnerships.
Income tax expense
for the three months ended
March 31, 2017
of
$440
differs from income tax benefit derived from applying the
statutory Federal rate of
35%
to pretax loss
primarily as a result of an increase of
$4,588
in recorded Federal and state valuation allowances which offsets tax benefit that would otherwise have been recorded,
as well as tax expense of
$1,943
primarily related to non-deductible expenses.
Income tax expense
for the
nine
months ended
March 31, 2017
of
$754
differs from income tax expense derived from applying the statutory Federal rate
of
35%
to pretax income
primarily as a result of recording an income tax benefit due to a reduction of
$6,525
of recorded Federal and state valuation allowances which offsets tax expense that would have otherwise been recorded on operating income. This income tax benefit is partially offset by tax expense of
$3,284
primarily related to non-deductible expenses.
The results for both the three and nine months ended March 31, 2017
reflect an expense from an increase in deferred tax liability on the amortization of indefinite-lived intangible assets that cannot serve as a source of taxable income to support the realization of deferred tax assets.
The Company has not recorded any unrecognized tax benefits for uncertain tax positions
as of
March 31, 2018
and
June 30, 2017
. The Company’s policy is to reflect interest and penalties associated with uncertain tax positions, if any, as a component of income tax expense.
The Company was notified during the third quarter of fiscal year 2018 that the Internal Revenue Service was commencing an examination of the Company's federal income tax returns as filed for the
tax year ended June 30, 2016
. The Company does not expect the audit to result in any material changes to the return as filed.
Note 17. Related Party Transactions
As of
March 31, 2018
, 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, collectively beneficially own all of the Company’s outstanding Class B Common Stock and own approximately
2.8%
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
71.1%
of the aggregate voting power of the Company’s outstanding common stock. Members of the Dolan family are also the controlling stockholders of
MSG Networks
and AMC Networks Inc. (“
AMC Networks
”).
In connection with the
Distribution
, the Company entered into various agreements with MSG Networks, including media rights agreements covering the Knicks and the Rangers games, an
advertising sales representation agreement
, and a transition services agreement (“
TSA
”). The
TSA
expired on September 30, 2017. The Company entered into a new 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 below, in exchange for service fees.
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 Networks and (ii) the Company’s Vice Chairman with MSG Networks and AMC Networks.
On June 16, 2016, the Company entered into an arrangement with the Dolan Family Office, LLC (“
DFO
”),
AMC Networks
and MSG Networks providing for the sharing of certain expenses associated with executive office space which will be available to James L. Dolan (the Executive Chairman, Chief Executive Officer and a director of the Company, the Executive Chairman and
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
a director of
MSG Networks
, and a director of
AMC Networks
), Charles F. Dolan (the Executive Chairman and a director of
AMC Networks
and a director of the Company and
MSG Networks
), and the
DFO
which is controlled by Charles F. Dolan.
On January 11, 2017, the Company, through a wholly-owned subsidiary, and Quart 2C, LLC (“
Q2C
”), a company controlled by James L. Dolan, the Company’s Executive Chairman, Chief Executive Officer and director, and Kristin A. Dolan, his wife and a director of the Company, entered into reciprocal aircraft lease agreements pursuant to which the Company and
Q2C
have agreed from time to time to make available for lease each party’s aircraft to the other party on a non-exclusive basis for rent at an hourly rate and specified expenses of each flight. On February 8, 2017, the Company, through a wholly-owned subsidiary, and
AMC Networks
entered into aircraft time sharing agreements, pursuant to which the Company has agreed from time to time to make the aircraft owned or leased by it available to
AMC Networks
for lease on a “time sharing” basis.
On May 22, 2017, the Company, through a wholly-owned subsidiary, and Charles F. Dolan, a director of the Company, entered into an aircraft dry lease agreement pursuant to which the Company has agreed to make available for lease its G550 aircraft on a non-exclusive basis for rent at an hourly rate and specified expenses of each flight. Additionally, on May 22, 2017, the Company, through a wholly-owned subsidiary, and Sterling Aviation, LLC, a company controlled by Charles F. Dolan, also entered into a reciprocal aircraft dry lease agreement pursuant to which Sterling Aviation, LLC has agreed to make available for lease its GV aircraft on a non-exclusive basis for rent at an hourly rate and specified expenses of each flight.
The Company, through a wholly-owned subsidiary, and MSG Networks are party to an aircraft time sharing agreement, pursuant to which the Company has agreed from time to time to make its aircraft available to MSG Networks for lease on a “time sharing” basis. Additionally, the Company and MSG Networks have agreed on an allocation of the costs of certain helicopter use by its shared executives.
The Company also has certain arrangements with its nonconsolidated affiliates. See Note
6
for information on outstanding loans provided by the Company to its nonconsolidated affiliates.
Revenues and Operating Expenses
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, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Nine Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Revenues
|
|
$
|
42,376
|
|
|
$
|
41,679
|
|
|
$
|
119,417
|
|
|
$
|
114,560
|
|
Operating expenses (credits):
|
|
|
|
|
|
|
|
|
Corporate general and administrative, net - MSG Networks
|
|
$
|
(2,551
|
)
|
|
$
|
(2,417
|
)
|
|
$
|
(7,501
|
)
|
|
$
|
(7,312
|
)
|
Consulting fees
|
|
1,014
|
|
|
1,006
|
|
|
3,043
|
|
|
2,925
|
|
Advertising expenses
|
|
268
|
|
|
560
|
|
|
898
|
|
|
1,155
|
|
Other, net
|
|
483
|
|
|
(107
|
)
|
|
721
|
|
|
(241
|
)
|
Revenues
Revenues from related parties primarily consist of local media rights recognized by the Company’s Sports segment 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. In addition, 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. The Company is also a party to certain commercial arrangements with
AMC Networks
and its subsidiaries.
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Corporate General and Administrative Expense, net - MSG Networks
The Company’s corporate overhead expenses are primarily related to centralized functions, including executive compensation, finance, treasury, tax, internal audit, legal, information technology, human resources and risk management functions. For the three and
nine
months ended
March 31, 2018
, corporate general and administrative expense, net - MSG Networks amount reflects charges from the Company to MSG Networks of
$2,485
and
$7,457
, respectively, net of general and administrative costs charged to the Company by MSG Networks, under a new services agreement, which became effective July 1, 2017.
For the three and
nine
months ended
March 31, 2017
, corporate general and administrative expense, net - MSG Networks amount reflects charges from the Company to MSG Networks of
$2,109
and
$6,275
, respectively, net of general and administrative costs charged to the Company by MSG Networks, under the
TSA
, which expired on September 30, 2017.
Consulting Fees
The Company pays 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. In the fourth quarter of fiscal year 2016, the Company paid
$5,000
to AMSGE for work performed towards securing the right to lease property to be developed in Las Vegas. That amount is included in other assets in the accompanying consolidated balance sheets as of
March 31, 2018
and
June 30, 2017
and will be amortized over the term of the lease.
Advertising Expenses
The Company incurs advertising expenses for services rendered by its related parties, primarily MSG Networks, most of which related to the utilization of advertising and promotional benefits by the Company.
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, the Executive Chairman, Chief Executive Officer and a director of the Company, 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 DFO/Sterling Aviation, LLC and (ii) time sharing agreements with MSG Networks and AMC Networks.
Note
18
. Segment Information
The Company is comprised of
two
reportable segments: MSG Entertainment and MSG Sports. In determining its reportable segments, the Company assessed the guidance of
FASB
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
, The 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 and 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
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
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 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, 2018
|
|
|
|
MSG
Entertainment
|
|
MSG
Sports
|
|
Corporate and Other
|
|
Purchase
accounting adjustments
|
|
Inter-segment eliminations
|
|
Total
|
Revenues
|
|
|
$
|
159,586
|
|
|
$
|
300,148
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(113
|
)
|
|
$
|
459,621
|
|
Direct operating expenses
|
|
|
102,356
|
|
|
196,276
|
|
|
—
|
|
|
1,187
|
|
|
(113
|
)
|
|
299,706
|
|
Selling, general and administrative expenses
|
(a)
|
|
50,466
|
|
|
49,050
|
|
|
22,513
|
|
|
125
|
|
|
—
|
|
|
122,154
|
|
Depreciation and amortization
|
(b)
|
|
4,686
|
|
|
1,789
|
|
|
19,065
|
|
|
4,889
|
|
|
—
|
|
|
30,429
|
|
Operating income (loss)
|
|
|
$
|
2,078
|
|
|
$
|
53,033
|
|
|
$
|
(41,578
|
)
|
|
$
|
(6,201
|
)
|
|
$
|
—
|
|
|
$
|
7,332
|
|
Loss in equity method investments
|
|
|
|
|
|
|
|
|
|
|
|
|
(678
|
)
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
5,224
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,965
|
)
|
Miscellaneous income
|
|
|
|
|
|
|
|
|
|
|
|
|
553
|
|
Income from operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of operating income (loss) to adjusted operating income (loss):
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
$
|
2,078
|
|
|
$
|
53,033
|
|
|
$
|
(41,578
|
)
|
|
$
|
(6,201
|
)
|
|
$
|
—
|
|
|
$
|
7,332
|
|
Add back:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
2,681
|
|
|
3,733
|
|
|
3,662
|
|
|
—
|
|
|
—
|
|
|
10,076
|
|
Depreciation and amortization
|
|
|
4,686
|
|
|
1,789
|
|
|
19,065
|
|
|
4,889
|
|
|
—
|
|
|
30,429
|
|
Other purchase accounting adjustments
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,312
|
|
|
—
|
|
|
1,312
|
|
Adjusted operating income (loss)
|
|
|
$
|
9,445
|
|
|
$
|
58,555
|
|
|
$
|
(18,851
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
49,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
$
|
9,302
|
|
|
$
|
1,479
|
|
|
$
|
20,648
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
31,429
|
|
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
|
MSG
Entertainment
|
|
MSG
Sports
|
|
Corporate and Other
|
|
Purchase
accounting adjustments
|
|
Total
|
Revenues
|
|
|
$
|
77,348
|
|
|
$
|
308,685
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
386,033
|
|
Direct operating expenses
|
|
|
55,624
|
|
|
197,084
|
|
|
—
|
|
|
—
|
|
|
252,708
|
|
Selling, general and administrative expenses
|
(a)
|
|
26,540
|
|
|
49,099
|
|
|
24,445
|
|
|
—
|
|
|
100,084
|
|
Depreciation and amortization
|
(b) (c)
|
|
2,659
|
|
|
2,652
|
|
|
21,005
|
|
|
219
|
|
|
26,535
|
|
Operating income (loss)
|
|
|
$
|
(7,475
|
)
|
|
$
|
59,850
|
|
|
$
|
(45,450
|
)
|
|
$
|
(219
|
)
|
|
$
|
6,706
|
|
Loss in equity method investments
|
|
|
|
|
|
|
|
|
|
|
(26,319
|
)
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
3,005
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(831
|
)
|
Miscellaneous income
|
|
|
|
|
|
|
|
|
|
|
36
|
|
Loss from operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
$
|
(17,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of operating income (loss) to adjusted operating income (loss):
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
$
|
(7,475
|
)
|
|
$
|
59,850
|
|
|
$
|
(45,450
|
)
|
|
$
|
(219
|
)
|
|
$
|
6,706
|
|
Add back:
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
3,345
|
|
|
3,388
|
|
|
3,634
|
|
|
—
|
|
|
10,367
|
|
Depreciation and amortization
|
|
|
2,659
|
|
|
2,652
|
|
|
21,005
|
|
|
219
|
|
|
26,535
|
|
Adjusted operating income (loss)
|
|
|
$
|
(1,471
|
)
|
|
$
|
65,890
|
|
|
$
|
(20,811
|
)
|
|
$
|
—
|
|
|
$
|
43,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information:
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
$
|
983
|
|
|
$
|
490
|
|
|
$
|
8,523
|
|
|
$
|
—
|
|
|
$
|
9,996
|
|
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, 2018
|
|
|
|
MSG
Entertainment
|
|
MSG
Sports
|
|
Corporate and Other
|
|
Purchase
accounting adjustments
|
|
Inter-segment eliminations
|
|
Total
|
Revenues
|
|
|
$
|
595,083
|
|
|
$
|
646,168
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(113
|
)
|
|
$
|
1,241,138
|
|
Direct operating expenses
|
|
|
355,047
|
|
|
377,787
|
|
|
41
|
|
|
3,487
|
|
|
(113
|
)
|
|
736,249
|
|
Selling, general and administrative expenses
|
(a)
|
|
140,371
|
|
|
140,788
|
|
|
67,798
|
|
|
149
|
|
|
—
|
|
|
349,106
|
|
Depreciation and amortization
|
(b)
|
|
13,209
|
|
|
5,544
|
|
|
58,954
|
|
|
13,812
|
|
|
—
|
|
|
91,519
|
|
Operating income (loss)
|
|
|
$
|
86,456
|
|
|
$
|
122,049
|
|
|
$
|
(126,793
|
)
|
|
$
|
(17,448
|
)
|
|
$
|
—
|
|
|
$
|
64,264
|
|
Earnings in equity method investments
|
|
|
|
|
|
|
|
|
|
|
|
|
1,439
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
14,988
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,474
|
)
|
Miscellaneous income
|
|
|
|
|
|
|
|
|
|
|
|
|
303
|
|
Income from operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
69,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of operating income (loss) to adjusted operating income (loss):
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
$
|
86,456
|
|
|
$
|
122,049
|
|
|
$
|
(126,793
|
)
|
|
$
|
(17,448
|
)
|
|
$
|
—
|
|
|
$
|
64,264
|
|
Add back:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
9,633
|
|
|
11,874
|
|
|
15,385
|
|
|
—
|
|
|
—
|
|
|
36,892
|
|
Depreciation and amortization
|
|
|
13,209
|
|
|
5,544
|
|
|
58,954
|
|
|
13,812
|
|
|
—
|
|
|
91,519
|
|
Other purchase accounting adjustments
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,636
|
|
|
—
|
|
|
3,636
|
|
Adjusted operating income (loss)
|
|
|
$
|
109,298
|
|
|
$
|
139,467
|
|
|
$
|
(52,454
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
196,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
(d)
|
|
$
|
20,415
|
|
|
$
|
3,038
|
|
|
$
|
135,660
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
159,113
|
|
THE MADISON SQUARE GARDEN COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, 2017
|
|
|
|
MSG
Entertainment
|
|
MSG
Sports
|
|
Corporate and Other
|
|
Purchase
accounting adjustments
|
|
Total
|
Revenues
|
|
|
$
|
380,531
|
|
|
$
|
632,347
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,012,878
|
|
Direct operating expenses
|
|
|
253,946
|
|
|
376,842
|
|
|
—
|
|
|
—
|
|
|
630,788
|
|
Selling, general and administrative expenses
|
(a)
|
|
76,422
|
|
|
137,958
|
|
|
56,985
|
|
|
—
|
|
|
271,365
|
|
Depreciation and amortization
|
(b) (c)
|
|
7,718
|
|
|
8,175
|
|
|
62,039
|
|
|
679
|
|
|
78,611
|
|
Operating income (loss)
|
|
|
$
|
42,445
|
|
|
$
|
109,372
|
|
|
$
|
(119,024
|
)
|
|
$
|
(679
|
)
|
|
$
|
32,114
|
|
Loss in equity method investments
|
|
|
|
|
|
|
|
|
|
|
(28,501
|
)
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
8,096
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(1,732
|
)
|
Miscellaneous income
|
(e)
|
|
|
|
|
|
|
|
|
|
1,441
|
|
Income from operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
$
|
11,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of operating income (loss) to adjusted operating income (loss):
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
$
|
42,445
|
|
|
$
|
109,372
|
|
|
$
|
(119,024
|
)
|
|
$
|
(679
|
)
|
|
$
|
32,114
|
|
Add back:
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
10,960
|
|
|
10,972
|
|
|
8,533
|
|
|
—
|
|
|
30,465
|
|
Depreciation and amortization
|
|
|
7,718
|
|
|
8,175
|
|
|
62,039
|
|
|
679
|
|
|
78,611
|
|
Adjusted operating income (loss)
|
|
|
$
|
61,123
|
|
|
$
|
128,519
|
|
|
$
|
(48,452
|
)
|
|
$
|
—
|
|
|
$
|
141,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information:
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
$
|
7,777
|
|
|
$
|
2,847
|
|
|
$
|
21,138
|
|
|
$
|
—
|
|
|
$
|
31,762
|
|
_________________
|
|
(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 business development initiatives.
|
|
|
(b)
|
Corporate and Other
principally includes depreciation and amortization on The Garden, The 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.
|
|
|
(c)
|
MSG Entertainment’s depreciation and amortization for the three and
nine
months ended
March 31, 2017
was reclassified to exclude the impact of purchase accounting adjustments related to the
BCE
acquisition.
|
|
|
(d)
|
Corporate and Other
’s capital expenditures for the
nine
months ended
March 31, 2018
are primarily associated with the purchase of land in London and costs incurred in developing the Company’s new venues in Las Vegas and London. See Note
7
for more information regarding the land purchase. MSG Entertainment’s capital expenditures for the
nine
months ended
March 31, 2018
are primarily associated with certain investments with respect to Radio City Music Hall and capital expenditures made by TAO Group.
|
|
|
(e)
|
Miscellaneous income for the
nine
months ended
March 31, 2017
consists principally of the recovery of certain claims in connection with a third-party bankruptcy proceeding.
|
Substantially all 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.
Results of Operations
Comparison of the
Three Months Ended
March 31, 2018
versus the
Three Months Ended
March 31, 2017
Consolidated Results of Operations
The table below sets forth, for the periods presented, certain historical financial information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
Change
|
|
|
2018
|
|
2017
|
|
Amount
|
|
Percentage
|
Revenues
|
|
$
|
459,621
|
|
|
$
|
386,033
|
|
|
$
|
73,588
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
Direct operating expenses
|
|
299,706
|
|
|
252,708
|
|
|
46,998
|
|
|
19
|
%
|
Selling, general and administrative expenses
|
|
122,154
|
|
|
100,084
|
|
|
22,070
|
|
|
22
|
%
|
Depreciation and amortization
|
|
30,429
|
|
|
26,535
|
|
|
3,894
|
|
|
15
|
%
|
Operating income
|
|
7,332
|
|
|
6,706
|
|
|
626
|
|
|
9
|
%
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Loss in equity method investments
|
|
(678
|
)
|
|
(26,319
|
)
|
|
25,641
|
|
|
97
|
%
|
Interest income, net
|
|
1,259
|
|
|
2,174
|
|
|
(915
|
)
|
|
(42
|
)%
|
Miscellaneous income
|
|
553
|
|
|
36
|
|
|
517
|
|
|
NM
|
|
Income (loss) from operations before income taxes
|
|
8,466
|
|
|
(17,403
|
)
|
|
25,869
|
|
|
NM
|
|
Income tax expense
|
|
(652
|
)
|
|
(440
|
)
|
|
(212
|
)
|
|
(48
|
)%
|
Net income (loss)
|
|
7,814
|
|
|
(17,843
|
)
|
|
25,657
|
|
|
NM
|
|
Less: Net income attributable to redeemable noncontrolling interests
|
|
389
|
|
|
—
|
|
|
389
|
|
|
NM
|
|
Less: Net loss attributable to nonredeemable noncontrolling interests
|
|
(1,716
|
)
|
|
(298
|
)
|
|
(1,418
|
)
|
|
NM
|
|
Net income (loss) attributable to The Madison Square Garden Company’s stockholders
|
|
$
|
9,141
|
|
|
$
|
(17,545
|
)
|
|
$
|
26,686
|
|
|
NM
|
|
_________________
NM — Percentage is not meaningful
The following is a summary of changes in our
segments’ operating results
for the three months ended
March 31, 2018
as compared to the prior year period.
Our results for the three months ended
March 31, 2018
include the operating results of
TAO Group
,
CLG
, and
Obscura
and, as a result, our operating results for the current year period are not directly comparable to our results for the prior year period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes attributable to
|
|
Revenues
|
|
Direct
operating
expenses
|
|
Selling,
general and
administrative
expenses
|
|
Depreciation and amortization
|
|
Operating income (loss)
|
MSG Entertainment segment
(a)
|
|
$
|
82,238
|
|
|
$
|
46,732
|
|
|
$
|
23,926
|
|
|
$
|
2,027
|
|
|
$
|
9,553
|
|
MSG Sports segment
(a)
|
|
(8,537
|
)
|
|
(808
|
)
|
|
(49
|
)
|
|
(863
|
)
|
|
(6,817
|
)
|
Corporate and Other
|
|
—
|
|
|
—
|
|
|
(1,932
|
)
|
|
(1,940
|
)
|
|
3,872
|
|
Purchase accounting adjustments
|
|
—
|
|
|
1,187
|
|
|
125
|
|
|
4,670
|
|
|
(5,982
|
)
|
Inter-segment eliminations
|
|
(113
|
)
|
|
(113
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
73,588
|
|
|
$
|
46,998
|
|
|
$
|
22,070
|
|
|
$
|
3,894
|
|
|
$
|
626
|
|
_________________
|
|
(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, 2018
decreased
$1,932
, or
8%
, to
$22,513
as compared to the prior year period. The decrease was primarily due to lower professional fees and a management fee earned during the current year period for providing management and strategic services to TAO Group, which is eliminated in the Company’s consolidated results of operations presented above, partially offset by the inclusion of Obscura expenses associated with the Company’s business development initiatives.
Depreciation & amortization
Depreciation and amortization for the three months ended
March 31, 2018
increased
$3,894
, or
15%
, to
$30,429
as compared to the prior year period. The increase was primarily due to purchase accounting adjustments associated with the business acquisitions of TAO Group, CLG and Obscura, and the inclusion of depreciation and amortization for
TAO Group
’s property and equipment, partially offset by certain assets being fully depreciated and amortized.
Operating loss -
Corporate and Other
Operating loss in Corporate and Other
for the three months ended
March 31, 2018
improved
$3,872
, or
9%
, to
$41,578
as compared to the prior year period. The improvement was due to a decrease in selling, general and administrative expenses, as discussed above, and lower depreciation and amortization. Lower depreciation and amortization expenses is a result of certain assets being fully depreciated and amortized. See Note
18
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
Loss in equity method investments for the three months ended
March 31, 2018
improved
$25,641
to a loss of
$678
as compared to the prior year period. The year-over-year improvement is primarily due to a pre-tax non-cash impairment charge of $20,613 recorded during the prior year period to write off the carrying value of our equity investment in Fuse Media and an increase in the net earnings attributable to the Company’s investees during the current year period as compared to the prior year period.
Interest income, net
Net interest income for the three months ended
March 31, 2018
decreased
$915
, or
42%
, to
$1,259
as compared to the prior year period primarily due to interest expense incurred under the TAO Term Loan Facility. The decrease was partially offset by higher interest income earned by the Company as a result of higher interest rates and a change in investment mix.
Income taxes
On December 22, 2017, new tax legislation, commonly referred to as the Tax Cuts and Jobs Act, was enacted, which significantly changed the existing U.S. tax laws, including a reduction in the corporate Federal income tax rate from
35%
to
21%
effective January 1, 2018. During the second quarter of fiscal year 2018, the Company was 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 income tax rate of
28%
based upon the number of days 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
expense
for the three months ended
March 31, 2018
was
$652
and income tax
expense
for the three months ended
March 31, 2017
was
$440
.
Income tax expense for the three months ended
March 31, 2018
of
$652
differs from the income tax expense derived from applying the blended statutory Federal rate of 28% to pretax income primarily as a result of a decrease of
$2,787
in recorded Federal and state valuation allowances, which offsets tax expense that would otherwise have been recorded on operating income, as well as
a tax benefit of
$1,435
associated with the vesting of restricted stock units
.
These decreases were partially offset by the impact of state and local income taxes (net of Federal benefit) of
$870
, tax expense of
$1,298
primarily related to non-deductible expenses and
$400
of tax expense from investment partnerships.
Income tax expense
for the three months ended
March 31, 2017
of
$440
differs from income tax benefit derived from applying the
statutory Federal rate of
35%
to pretax loss
primarily as a result of an increase of
$4,588
in recorded Federal and state valuation allowances which offsets tax benefit that would otherwise have been recorded,
as well as tax expense of
$1,943
primarily related to non-deductible expenses.
Adjusted operating income
The following is a reconciliation of
operating income
to
adjusted operating income
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
Change
|
|
|
2018
|
|
2017
|
|
Amount
|
|
Percentage
|
Operating
income
|
|
$
|
7,332
|
|
|
$
|
6,706
|
|
|
$
|
626
|
|
|
9
|
%
|
Share-based compensation
|
|
10,076
|
|
|
10,367
|
|
|
|
|
|
|
Depreciation and amortization
(a)
|
|
30,429
|
|
|
26,535
|
|
|
|
|
|
|
Other purchase accounting adjustments
|
|
1,312
|
|
|
—
|
|
|
|
|
|
Adjusted operating income
|
|
$
|
49,149
|
|
|
$
|
43,608
|
|
|
$
|
5,541
|
|
|
13
|
%
|
_________________
|
|
(a)
|
Depreciation and amortization includes purchase accounting adjustments of
$4,889
and
$219
for the three months ended
March 31, 2018
and
2017
, respectively.
|
Adjusted operating income for the
three months ended
March 31, 2018
increased
by
$5,541
, or
13%
, to adjusted operating income of
$49,149
as compared to the prior year period. The
increase
is attributable to the following:
|
|
|
|
|
Increase in adjusted operating income of the MSG Entertainment segment
|
$
|
10,916
|
|
Decrease in adjusted operating income of the MSG Sports segment
|
(7,335
|
)
|
Other net increases
|
1,960
|
|
|
$
|
5,541
|
|
Other net increases
were primarily due to lower professional fees and the impact of a management fee earned during the current year period for providing management and strategic services to TAO Group, which is eliminated in the Company’s consolidated results of operations presented above, partially offset by the inclusion of Obscura expenses associated with the Company’s business development initiatives.
Net income (loss) attributable to redeemable and nonredeemable noncontrolling interests
For the three months ended
March 31, 2018
, the Company recorded net income attributable to redeemable noncontrolling interests of
$389
and a net loss attributable to nonredeemable noncontrolling interests of
$1,716
as compared to
$298
of net loss attributable to nonredeemable noncontrolling interests for the three months ended
March 31, 2017
. These amounts represent the share of net loss from the Company’s investments in
TAO Group
,
BCE
and
CLG
that are not attributable to the Company. In addition, the net loss attributable to redeemable and nonredeemable noncontrolling interests includes a proportional share of expenses related to purchase accounting adjustments.
Business Segment Results
MSG Entertainment
The table below sets forth, for the periods presented, certain historical financial information and a reconciliation of
operating income (loss)
to
adjusted operating income (loss)
for the Company’s MSG Entertainment segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
Change
|
|
|
2018
|
|
2017
|
|
Amount
|
|
Percentage
|
Revenues
|
|
$
|
159,586
|
|
|
$
|
77,348
|
|
|
$
|
82,238
|
|
|
106
|
%
|
Direct operating expenses
|
|
102,356
|
|
|
55,624
|
|
|
46,732
|
|
|
84
|
%
|
Selling, general and administrative expenses
|
|
50,466
|
|
|
26,540
|
|
|
23,926
|
|
|
90
|
%
|
Depreciation and amortization
|
|
4,686
|
|
|
2,659
|
|
|
2,027
|
|
|
76
|
%
|
Operating income (loss)
|
|
$
|
2,078
|
|
|
$
|
(7,475
|
)
|
|
$
|
9,553
|
|
|
NM
|
|
Reconciliation to adjusted operating income (loss):
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
2,681
|
|
|
3,345
|
|
|
|
|
|
|
Depreciation and amortization
|
|
4,686
|
|
|
2,659
|
|
|
|
|
|
Adjusted operating income (loss)
|
|
$
|
9,445
|
|
|
$
|
(1,471
|
)
|
|
$
|
10,916
|
|
|
NM
|
|
_________________
NM — Percentage is not meaningful
Revenues
Revenues for the three months ended
March 31, 2018
increased
$82,238
, or
106%
, to
$159,586
as compared to the prior year period. The net
increase
is attributable to the following:
|
|
|
|
|
Inclusion of revenues associated with entertainment dining and nightlife offerings
|
$
|
69,140
|
|
Increase in event-related revenues at The Garden
|
6,117
|
|
Increase in event-related revenues at Radio City Music Hall, excluding the
Christmas Spectacular
|
4,879
|
|
Increase in event-related revenues at The Hulu Theater at Madison Square Garden
|
2,281
|
|
Increase in venue-related sponsorship and signage and suite rental fee revenues
|
650
|
|
Decrease in revenues from the presentation of the
Christmas Spectacular
|
(1,607
|
)
|
Other net increases, inclusive of revenues from Obscura
|
778
|
|
|
$
|
82,238
|
|
The inclusion of revenues associated with entertainment dining and nightlife offerings is the result of the acquisition of a 62.5% interest in
TAO Group
on January 31, 2017, and primarily reflects revenues generated from food and beverage sales.
TAO Group
’s operating results are recorded in the Company’s consolidated statements of operations on a three-month lag basis. As a result,
TAO Group
’s related revenues are for the period from
September 25, 2017
to
December 31, 2017
.
The increase in event-related revenues at The Garden
was primarily due to a change in the mix of events (including the impact of a large-scale event held during the current year period) partially offset by fewer events held at the venue during the current year period as compared to the prior year period
.
The increase in event-related revenues at Radio City Music Hall, excluding the
Christmas Spectacular
, was primarily due to additional events held at the venue during the current year period as compared to the prior year period.
The increase in event-related revenues at The Hulu Theater at Madison Square Garden was primarily
due to a change in the mix of events, as well as an additional event held at the venue during the current year period as compared to the prior year period.
The decrease in revenues from the presentation of the
Christmas Spectacular
was primarily due to lower ticket-related revenue,
mainly as a result of fewer scheduled performances as compared to the prior year period. The Company had three scheduled performances in the current year period as compared to six scheduled performances in the prior year period.
Direct operating expenses
Direct operating expenses for the three months ended
March 31, 2018
increased
$46,732
, or
84%
, to
$102,356
as compared to the prior year period. The net
increase
is attributable to the following:
|
|
|
|
|
Inclusion of direct operating expenses associated with entertainment dining and nightlife offerings
|
$
|
36,531
|
|
Increase in event-related direct operating expenses at The Garden
|
5,756
|
|
Increase in event-related direct operating expenses at Radio City Music Hall, excluding the
Christmas Spectacular
|
1,989
|
|
Increase in event-related direct operating expenses at The Hulu Theater at Madison Square Garden
|
1,402
|
|
Increase in venue operating costs
|
1,027
|
|
Decrease in direct operating expenses associated with the presentation of the
Christmas Spectacular
|
(407
|
)
|
Other net increases, inclusive of direct operating expenses from Obscura
|
434
|
|
|
$
|
46,732
|
|
The inclusion of direct operating expenses associated with entertainment dining and nightlife offerings is the result of the acquisition of a 62.5% interest in
TAO Group
on January 31, 2017, and primarily reflects costs associated with food and beverage sales, inclusive of labor costs, as well as venue-related operating expenses.
TAO Group
’s operating results are recorded in the Company’s consolidated statements of operations on a three-month lag basis. As a result,
TAO Group
’s related direct operating expenses are for the period from
September 25, 2017
to
December 31, 2017
.
The increase in event-related direct operating expenses at The Garden
was primarily due to a change in the mix of events (including the impact of a large-scale event held during the current year period) partially offset by fewer events held at the venue during the current year period as compared to the prior year period
.
The increase in event-related direct operating expenses at Radio City Music Hall, excluding the
Christmas Spectacular
, was due to additional events slightly offset by a change in the mix of events held at the venue during the current year period as compared to the prior year period.
The increase in event-related direct operating expenses at The Hulu Theater at Madison Square Garden was primarily due to a change in the mix of events held at the venue during the current year period as compared to the prior year period.
The increase in venue operating costs reflects higher labor costs at the Company’s venues, as well as higher real estate taxes at Radio City Music Hall during the current year period as compared to the prior year period.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended
March 31, 2018
increased
$23,926
, or
90%
, to
$50,466
as compared to the prior year period mainly due to the inclusion of
TAO Group
’s selling, general and administrative costs, including a management fee incurred by
TAO Group
payable to the Company for providing management and strategic services.
Depreciation and amortization
Depreciation and amortization for the three months ended
March 31, 2018
increased
$2,027
, or
76%
, to
$4,686
as compared to the prior year period primarily due to the inclusion of depreciation and amortization for
TAO Group
’s property and equipment.
Operating income (loss)
Operating income for the three months ended
March 31, 2018
improved
$9,553
to
$2,078
as compared to the prior year period due to
an increase in revenues partially offset by higher direct operating expenses, an increase in selling, general and administrative expenses and, to a lesser extent, higher depreciation and amortization, as discussed above
.
Adjusted operating income (loss)
Adjusted operating income for the three months ended
March 31, 2018
improved
$10,916
to
$9,445
as compared to the prior year period due to an increase in revenues partially offset by higher direct operating expenses and selling, general and administrative expenses as discussed above, excluding share-based compensation expense.
MSG Sports
The table below sets forth, for the periods presented, certain historical financial information and a reconciliation of
operating income
to
adjusted operating income
for the Company’s MSG Sports segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
Change
|
|
|
2018
|
|
2017
|
|
Amount
|
|
Percentage
|
Revenues
|
|
$
|
300,148
|
|
|
$
|
308,685
|
|
|
$
|
(8,537
|
)
|
|
(3
|
)%
|
Direct operating expenses
|
|
196,276
|
|
|
197,084
|
|
|
(808
|
)
|
|
NM
|
|
Selling, general and administrative expenses
|
|
49,050
|
|
|
49,099
|
|
|
(49
|
)
|
|
NM
|
|
Depreciation and amortization
|
|
1,789
|
|
|
2,652
|
|
|
(863
|
)
|
|
(33
|
)%
|
Operating income
|
|
$
|
53,033
|
|
|
$
|
59,850
|
|
|
$
|
(6,817
|
)
|
|
(11
|
)%
|
Reconciliation to adjusted operating income:
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
3,733
|
|
|
3,388
|
|
|
|
|
|
Depreciation and amortization
|
|
1,789
|
|
|
2,652
|
|
|
|
|
|
Adjusted operating income
|
|
$
|
58,555
|
|
|
$
|
65,890
|
|
|
$
|
(7,335
|
)
|
|
(11
|
)%
|
_________________
NM — Percentage is not meaningful
Revenues
Revenues for the three months ended
March 31, 2018
decreased
$8,537
, or
3%
, to
$300,148
as compared to the prior year period. The net
decrease
is attributable to the following:
|
|
|
|
|
Decrease in revenues from league distributions
|
$
|
(12,884
|
)
|
Decrease in event-related revenues from other live sporting events
|
(3,632
|
)
|
Decrease in professional sports teams’ regular season food, beverage and merchandise sales
|
(2,543
|
)
|
Increase in professional sports teams’ sponsorship and signage revenues and ad sales commissions
|
6,857
|
|
Increase in suite rental fee revenue
|
1,362
|
|
Increase in professional sports teams’ regular season ticket-related revenue
|
776
|
|
Increase in local media rights fees from MSG Networks
|
597
|
|
Other net increases, inclusive of certain revenues from CLG
|
930
|
|
|
$
|
(8,537
|
)
|
The decrease in revenues from league distributions primarily reflects an NHL expansion fee of $15,500 received during the prior year period partially offset by other net increases,
inclusive of league distributions related to CLG, which was acquired on July 28, 2017
.
The decrease in event-related revenues from other live sporting events was primarily due to a change in the mix of events partially offset by an additional event held during the current year period as compared to the prior year period.
The decrease in professional sports teams’ regular season food, beverage and merchandise sales was primarily due to the Knicks and Rangers playing fewer games at The Garden during the current year period as compared to the prior year period partially offset by higher average per-game revenue during the current year period as compared to the prior year period.
The increase in professional sports teams’ sponsorship and signage revenues and ad sales commissions was primarily due to increased sales of existing sponsorship and signage inventory, sales of new sponsorship and signage inventory, and to a lesser extent, the impact of a marketing partner, upon renewal of its agreement, shifting its
marketing partnership
spend from a combination of entertainment and sports entirely to sports.
The increase in suite rental fee revenue was primarily due to contractual rate increases, as well as higher sales of suite products.
The increase in professional sports teams’ regular season ticket-related revenue was primarily due to higher average Rangers per-game revenue partially offset by the Knicks and Rangers playing fewer games at The Garden during the current year period as compared to the prior year period. The Knicks played four fewer regular season games and the Rangers played two fewer regular season games at The Garden during the current year period as compared to the prior year period.
Direct operating expenses
Direct operating expenses for the three months ended
March 31, 2018
decreased
$808
to
$196,276
as compared to the prior year period. The net
decrease
is attributable to the following:
|
|
|
|
|
Decrease in net provisions for NBA and NHL revenue sharing expense (excluding playoffs) and NBA luxury tax
|
$
|
(4,363
|
)
|
Decrease in event-related expenses associated with other live sporting events
|
(1,994
|
)
|
Decrease in team personnel compensation
|
(1,816
|
)
|
Increase in net provisions for certain team personnel transactions
|
5,958
|
|
Increase in other team operating expenses not discussed elsewhere in this table
|
869
|
|
Other net increases
|
538
|
|
|
$
|
(808
|
)
|
Net provisions for NBA and NHL revenue sharing expense (excluding playoffs) and NBA luxury tax and for certain team personnel transactions were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Increase (Decrease)
|
|
|
March 31,
|
|
|
|
2018
|
|
2017
|
|
Net provisions for NBA and NHL revenue sharing expense (excluding playoffs) and NBA luxury tax
|
|
$
|
24,209
|
|
|
$
|
28,572
|
|
|
$
|
(4,363
|
)
|
Net provisions for certain team personnel transactions
|
|
7,119
|
|
|
1,161
|
|
|
5,958
|
|
The decrease in net provisions for NBA and NHL revenue sharing expense (excluding playoffs) and NBA luxury tax reflects a lower provision for NBA and NHL revenue sharing expense of
$2,903
and a higher estimated NBA luxury tax receipt of
$1,460
. Lower NBA and NHL revenue sharing expense primarily reflects an increase in estimated net player escrow recoveries and positive net adjustments to prior season’s revenue sharing expense partially offset by higher estimated NBA and NHL revenue sharing expense for the 2017-18 season.
The Knicks were not a luxury tax payer for the 2016-17 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, 2018
will not result in luxury tax for the 2017-18 season. The actual amounts for the 2017-18 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.
Team personnel transactions for the three months ended March 31, 2018 reflect provisions recorded for (i) season-ending player injuries of
$4,273
, which is net of insurance recoveries of
$468
, (ii) player trades of
$1,682
, and (iii) player waivers/contract terminations of
$1,164
. Team personnel transactions for the three months ended March 31, 2017 reflect provisions recorded for waivers/contract terminations.
The decrease in event-related expenses associated with other live sporting events was primarily due to a change in the mix of events partially offset by an additional event held during the current year period as compared to the prior year period.
The decrease in team personnel compensation was primarily due to lower overall player salaries during the current year period as a result of a portion of team personnel compensation being recognized as net provisions for certain team personnel transactions. This decrease was partially offset by the impact of roster changes at the Company’s sports teams and the inclusion of team personnel compensation for CLG, which was acquired on July 28, 2017.
Depreciation and amortization
Depreciation and amortization for the three months ended
March 31, 2018
decreased
$863
, or
33%
, to
$1,789
as compared to the prior year period
including the impact of an intangible asset becoming fully amortized
.
Operating income
Operating income for the three months ended
March 31, 2018
decreased
$6,817
, or
11%
, to
$53,033
as compared to the prior year period primarily due to a decrease in revenues partially offset by lower direct operating expenses and a decrease in depreciation and amortization, as discussed above.
Adjusted operating income
Adjusted operating income for the three months ended
March 31, 2018
decreased
$7,335
, or
11%
, to
$58,555
as compared to the prior year period primarily due to a decrease in revenues partially offset by lower direct operating expenses, as discussed above.
The Company results for the fourth quarter of fiscal year 2018 are likely to be impacted by our professional sports teams not participating in their respective league playoffs and contract terminations of certain team personnel that took place during that period.
Comparison of the
Nine Months Ended
March 31, 2018
versus the
Nine Months Ended
March 31, 2017
Consolidated Results of Operations
The table below sets forth, for the periods presented, certain historical financial information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
March 31,
|
|
Change
|
|
|
2018
|
|
2017
|
|
Amount
|
|
Percentage
|
Revenues
|
|
$
|
1,241,138
|
|
|
$
|
1,012,878
|
|
|
$
|
228,260
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
Direct operating expenses
|
|
736,249
|
|
|
630,788
|
|
|
105,461
|
|
|
17
|
%
|
Selling, general and administrative expenses
|
|
349,106
|
|
|
271,365
|
|
|
77,741
|
|
|
29
|
%
|
Depreciation and amortization
|
|
91,519
|
|
|
78,611
|
|
|
12,908
|
|
|
16
|
%
|
Operating income
|
|
64,264
|
|
|
32,114
|
|
|
32,150
|
|
|
100
|
%
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Earnings (loss) in equity method investments
|
|
1,439
|
|
|
(28,501
|
)
|
|
29,940
|
|
|
NM
|
|
Interest income, net
|
|
3,514
|
|
|
6,364
|
|
|
(2,850
|
)
|
|
(45
|
)%
|
Miscellaneous income
|
|
303
|
|
|
1,441
|
|
|
(1,138
|
)
|
|
(79
|
)%
|
Income from operations before income taxes
|
|
69,520
|
|
|
11,418
|
|
|
58,102
|
|
|
NM
|
|
Income tax benefit (expense)
|
|
115,418
|
|
|
(754
|
)
|
|
116,172
|
|
|
NM
|
|
Net income
|
|
184,938
|
|
|
10,664
|
|
|
174,274
|
|
|
NM
|
|
Less: Net income attributable to redeemable noncontrolling interests
|
|
522
|
|
|
—
|
|
|
522
|
|
|
NM
|
|
Less: Net loss attributable to nonredeemable noncontrolling interests
|
|
(3,231
|
)
|
|
(891
|
)
|
|
(2,340
|
)
|
|
NM
|
|
Net income attributable to The Madison Square Garden Company’s stockholders
|
|
$
|
187,647
|
|
|
$
|
11,555
|
|
|
$
|
176,092
|
|
|
NM
|
|
_________________
NM — Percentage is not meaningful
The following is a summary of changes in our
segments’ operating results
for the
nine months ended
March 31, 2018
as compared to the prior year period.
Our results for the fiscal year 2018 include the operating results of
TAO Group
,
CLG
and
Obscura
and, as a result, our operating results for the fiscal year 2018 are not directly comparable to our results for the fiscal year 2017 period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes attributable to
|
|
Revenues
|
|
Direct
operating
expenses
|
|
Selling,
general and
administrative
expenses
|
|
Depreciation and amortization
|
|
Operating income (loss)
|
MSG Entertainment segment
(a)
|
|
$
|
214,552
|
|
|
$
|
101,101
|
|
|
$
|
63,949
|
|
|
$
|
5,491
|
|
|
$
|
44,011
|
|
MSG Sports segment
(a)
|
|
13,821
|
|
|
945
|
|
|
2,830
|
|
|
(2,631
|
)
|
|
12,677
|
|
Corporate and Other
|
|
—
|
|
|
41
|
|
|
10,813
|
|
|
(3,085
|
)
|
|
(7,769
|
)
|
Purchase accounting adjustments
|
|
—
|
|
|
3,487
|
|
|
149
|
|
|
13,133
|
|
|
(16,769
|
)
|
Inter-segment eliminations
|
|
(113
|
)
|
|
(113
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
228,260
|
|
|
$
|
105,461
|
|
|
$
|
77,741
|
|
|
$
|
12,908
|
|
|
$
|
32,150
|
|
_________________
|
|
(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
nine months ended
March 31, 2018
increased
$10,813
, or
19%
, to
$67,798
as compared to the prior year period. The
increase
was primarily due to higher employee compensation and related benefits, as well as the inclusion of Obscura expenses associated with the Company’s business development initiatives, which reflect certain retention bonuses paid in connection with the change of control. The increase was partially offset by a management fee earned during the current year period for providing management and strategic services to TAO Group, which is eliminated in the Company’s consolidated results of operations presented above, and lower professional fees.
Depreciation & amortization
Depreciation and amortization for the nine months ended
March 31, 2018
increased
$12,908
, or
16%
, to
$91,519
as compared to the prior year period. The increase was primarily due to purchase accounting adjustments associated with the business acquisitions of TAO Group, CLG and Obscura, and the inclusion of depreciation and amortization for
TAO Group
’s property and equipment, partially offset by certain assets being fully depreciated and amortized.
Operating loss -
Corporate and Other
Operating loss in
Corporate and Other
for the
nine months ended
March 31, 2018
increased
$7,769
, or
7%
, to
$126,793
as compared to the prior year period. The
increase
was primarily due to higher selling, general and administrative expenses as discussed above, partially offset by lower depreciation and amortization as a result of certain assets being fully depreciated and amortized. See Note
18
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
.
Earnings (loss) in equity method investments
Earnings in equity method investments for the
nine months ended
March 31, 2018
improved
$29,940
to
$1,439
as compared to the prior year period. The year-over-year improvement is primarily due to a pre-tax non-cash impairment charge of $20,613 recorded during the prior year period to write off the carrying value of our equity investment in Fuse Media and an increase in the net earnings attributable to the Company’s investees during the current year period as compared to the prior year period.
Interest income, net
Net interest income for the
nine months ended
March 31, 2018
decreased
$2,850
, or
45%
to
$3,514
as compared to the prior year period primarily due to interest expense incurred under the TAO Term Loan Facility. The decrease was partially offset by higher interest income earned by the Company as a result of higher interest rates and a change in investment mix. In addition, during the
nine months ended
March 31, 2018
, the Company recognized interest income of $937, which was received in connection with the repayment of a loan receivable from one of the Company’s nonconsolidated affiliates that was on a nonaccrual status.
Miscellaneous income
Miscellaneous income for the
nine months ended
March 31, 2018
decreased
$1,138
, or
79%
, to
$303
as compared to the prior year period primarily due to the recovery during the prior year period of certain claims in connection with a third-party bankruptcy proceeding, partially offset by other net increases in miscellaneous income during the current year period.
Income taxes
Income tax
benefit
for the
nine months ended
March 31, 2018
was
$115,418
and income tax
expense
for the
nine months ended
March 31, 2017
was
$754
.
Income tax benefit
for the
nine months ended
March 31, 2018
of
$115,418
differs from the income tax expense derived from applying the blended statutory Federal rate of 28% to pretax income primarily as a result of a deferred income tax benefit of
$113,494
related to the revaluation of the Company’s deferred tax assets and liabilities under provisions contained in the new tax legislation, of which (i)
$51,015
was due to the reduction of net deferred tax liabilities in connection with the lower Federal income tax rate of 21%, and (ii)
$62,479
was due to a reduction in the valuation allowance attributable to the new rules, which provide that future Federal net operating losses have an unlimited carry-forward period. These rules on future Federal net operating losses allow the Company to recognize a portion of its unrecognized deferred tax assets for future deductible items. Other decreases to the statutory rate include the impact of an income tax benefit of
$27,186
in Federal and state valuation allowance decreases recorded, which offsets the income tax expense attributable to most of the operating income, the impact of a change in state tax rates of
$3,110
, and
a tax benefit of
$1,435
associated with the vesting of restricted stock units
.
These
decreases were partially offset by the impact of state and local income taxes (net of Federal benefit) of
$7,365
, tax expense of
$2,535
primarily related to non-deductible expenses and
$400
of tax expense from investment partnerships.
Income tax expense
for the
nine
months ended
March 31, 2017
of
$754
differs from income tax expense derived from applying the statutory Federal rate
of
35%
to pretax income
primarily as a result of recording an income tax benefit due to a reduction of
$6,525
of recorded Federal and state valuation allowances which offsets tax expense that would have otherwise been recorded on operating income. This income tax benefit is partially offset by tax expense of
$3,284
primarily related to non-deductible expenses.
Adjusted operating income
The following is a reconciliation of
operating income
to
adjusted operating income
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
March 31,
|
|
Change
|
|
|
2018
|
|
2017
|
|
Amount
|
|
Percentage
|
Operating income
|
|
$
|
64,264
|
|
|
$
|
32,114
|
|
|
$
|
32,150
|
|
|
100
|
%
|
Share-based compensation
|
|
36,892
|
|
|
30,465
|
|
|
|
|
|
|
Depreciation and amortization
(a)
|
|
91,519
|
|
|
78,611
|
|
|
|
|
|
|
Other purchase accounting adjustments
|
|
3,636
|
|
|
—
|
|
|
|
|
|
Adjusted operating income
|
|
$
|
196,311
|
|
|
$
|
141,190
|
|
|
$
|
55,121
|
|
|
39
|
%
|
_________________
|
|
(a)
|
Depreciation and amortization includes purchase accounting adjustments of
$13,812
and
$679
for the
nine months ended
March 31, 2018
and
2017
, respectively.
|
Adjusted operating income for the
nine months ended
March 31, 2018
increased
$55,121
, or
39%
to
$196,311
as compared to the prior year period. The net
increase
is attributable to the following:
|
|
|
|
|
Increase in adjusted operating income of the MSG Entertainment segment
|
$
|
48,175
|
|
Increase in adjusted operating income of the MSG Sports segment
|
10,948
|
|
Other net decreases
|
(4,002
|
)
|
|
$
|
55,121
|
|
Other net decreases
were primarily due to higher employee compensation and related benefits, excluding share-based compensation expense, and the inclusion of Obscura expenses associated with the Company’s business development initiatives, which reflect retention bonuses paid in connection with the change of control, partially offset by the impact of a management fee earned during the current year period for providing management and strategic services to TAO Group, which is eliminated in the Company’s consolidated results of operations presented above, and lower professional fees.
Net income (loss) attributable to redeemable and nonredeemable noncontrolling interests
For the
nine months ended
March 31, 2018
, the Company recorded net income attributable to redeemable noncontrolling interests of
$522
and a net loss attributable to nonredeemable noncontrolling interests of
$3,231
as compared to
$891
of net loss attributable to nonredeemable noncontrolling interests for the
nine months ended
March 31, 2017
. These amounts represent the share of net income (loss) from the Company’s investments in
TAO Group
,
BCE
, and
CLG
that are not attributable to the Company. In addition, the net income (loss) attributable to redeemable and nonredeemable noncontrolling interests includes a proportional share of expenses related to purchase accounting adjustments.
Business Segment Results
MSG Entertainment
The table below sets forth, for the periods presented, certain historical financial information and a reconciliation of
operating income
to
adjusted operating income
for the Company’s MSG Entertainment segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
March 31,
|
|
Change
|
|
|
2018
|
|
2017
|
|
Amount
|
|
Percentage
|
Revenues
|
|
$
|
595,083
|
|
|
$
|
380,531
|
|
|
$
|
214,552
|
|
|
56
|
%
|
Direct operating expenses
|
|
355,047
|
|
|
253,946
|
|
|
101,101
|
|
|
40
|
%
|
Selling, general and administrative expenses
|
|
140,371
|
|
|
76,422
|
|
|
63,949
|
|
|
84
|
%
|
Depreciation and amortization
|
|
13,209
|
|
|
7,718
|
|
|
5,491
|
|
|
71
|
%
|
Operating income
|
|
$
|
86,456
|
|
|
$
|
42,445
|
|
|
$
|
44,011
|
|
|
104
|
%
|
Reconciliation to adjusted operating income:
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
9,633
|
|
|
10,960
|
|
|
|
|
|
Depreciation and amortization
|
|
13,209
|
|
|
7,718
|
|
|
|
|
|
Adjusted operating income
|
|
$
|
109,298
|
|
|
$
|
61,123
|
|
|
$
|
48,175
|
|
|
79
|
%
|
Revenues
Revenues for the
nine months ended
March 31, 2018
increased
$214,552
, or
56%
, to
$595,083
as compared to the prior year period. The net
increase
is attributable to the following:
|
|
|
|
|
Inclusion of revenues associated with entertainment dining and nightlife offerings
|
$
|
184,281
|
|
Increase in event-related revenues at The Garden
|
10,232
|
|
Increase in event-related revenues at The Hulu Theater at Madison Square Garden
|
8,821
|
|
Increase in event-related revenues at Radio City Music Hall, excluding the
Christmas Spectacular
and the
New York Spectacular
|
8,779
|
|
Increase in revenues from the presentation of the
Christmas Spectacular
|
4,927
|
|
Increase in event-related revenues at the Forum
|
3,979
|
|
Increase in event-related revenues at The Chicago Theatre
|
3,963
|
|
Decrease in revenues from the presentation of the
New York Spectacular
as a result of no scheduled performances in the current year period
|
(11,364
|
)
|
Decrease in venue-related sponsorship and signage and suite rental fee revenues
|
(1,240
|
)
|
Other net increases, inclusive of revenues from Obscura
|
2,174
|
|
|
$
|
214,552
|
|
The inclusion of revenues associated with entertainment dining and nightlife offerings is the result of the acquisition of a 62.5% interest in
TAO Group
on January 31, 2017, and primarily reflects revenues generated from food and beverage sales.
TAO Group
’s operating results are recorded in the Company’s consolidated statements of operations on a three-month lag basis. As a result,
TAO Group
’s related revenues are for the period from
March 27, 2017
to
December 31, 2017
.
The increase in event-related revenues at The Garden
was primarily due to a change in the mix of events (including the impact of a large-scale event held during the current year period) partially offset by fewer events held at the venue during the current year period as compared to the prior year period
.
The increase in event-related revenues at The Hulu Theater at Madison Square Garden was primarily due to a change in the mix of events held at the venue during the current year period as compared to the prior year period.
The increase in event-related revenues at Radio City Music Hall, excluding the
Christmas Spectacular
and the
New York Spectacular Starring the Radio City Rockettes (
the “
New York Spectacular”
), was due to additional events and a change in the mix of events held at the venue during the current year period as compared to the prior year period.
The increase in revenues associated with the presentation of the
Christmas Spectacular
was primarily due to higher ticket-related revenue, mainly as a result of higher average ticket prices and the impact of additional scheduled performances, partially offset by a decrease in average per-show paid attendance in the current year period as compared to the prior year period.
The Company had 200 scheduled performances of the production this holiday season as compared to 197 scheduled performances in fiscal year 2017.
For the 2017 holiday season, more than one million tickets were sold, representing a low single digit percentage decrease as compared to the 2016 holiday season.
The increase in event-related revenues at the Forum was due to a change in the mix of events partially offset by fewer events held at the venue during the current year period as compared to the prior year period.
The increase in event-related revenues at The Chicago Theatre was due to additional events and a change in the mix of events held at the venue during the current year period as compared to the prior year period.
The decrease in revenues from the presentation of the N
ew York Spectacular
was driven by no scheduled performances in the current year period as compared to 56 scheduled performances presented in the prior year period. This was a result of the Company’s decision to suspend the planned 2017 presentation announced in February 2017.
The net decrease in venue-related sponsorship and signage and suite rental fee revenues was primarily due to lower sponsorship and signage revenues, as a result of the impact of a marketing partner, upon renewal of its agreement, shifting its marketing spend from a combination of entertainment and sports, entirely to sports, and the timing of delivering certain contractually obligated sponsorship assets partially offset by increased sales of existing inventory. The decrease in sponsorship and signage was partially offset by an increase in suite rental revenue.
Direct operating expenses
Direct operating expenses for the
nine months ended
March 31, 2018
increased
$101,101
, or
40%
, to
$355,047
as compared to the prior year period. The net
increase
is attributable to the following:
|
|
|
|
|
Inclusion of direct operating expenses associated with entertainment dining and nightlife offerings
|
$
|
101,586
|
|
Increase in event-related direct operating expenses at The Garden
|
5,032
|
|
Increase in event-related direct operating expenses at the Forum
|
4,207
|
|
Increase in event-related direct operating expenses at The Hulu Theater at Madison Square Garden
|
4,176
|
|
Increase in event-related direct operating expenses at The Chicago Theatre
|
2,763
|
|
Increase in event-related direct operating expenses at Radio City Music Hall, excluding the
Christmas Spectacular
and the
New York Spectacular
|
2,610
|
|
Increase in event-related direct operating expenses associated with the presentation of the
Christmas Spectacular
|
1,006
|
|
Decrease in direct operating expenses associated with the presentation of the
New York Spectacular
as a result of no scheduled performances in the current year period
|
(21,859
|
)
|
Other net increases
|
1,580
|
|
|
$
|
101,101
|
|
The inclusion of direct operating expenses associated with entertainment dining and nightlife offerings is the result of the acquisition of a 62.5% interest in
TAO Group
on January 31, 2017, and primarily reflects costs associated with food and beverage sales, inclusive of labor costs, as well as venue-related operating expenses.
TAO Group
’s operating results are recorded in the Company’s consolidated statements of operations on a three-month lag basis. As a result,
TAO Group
’s related direct operating expenses are for the period from
March 27, 2017
to
December 31, 2017
.
The increase in event-related direct operating expenses at The Garden
was primarily due to a change in the mix of events (including the impact of a large-scale event held during the current year period) partially offset by fewer events held at the venue during the current year period as compared to the prior year period
.
The increase in event-related direct operating expenses at the Forum was due to a change in the mix of events partially offset by fewer events held at the venue during the current year period as compared to the prior year period.
The increase in event-related direct operating expenses at The Hulu Theater at Madison Square Garden was due to a change in the mix of events held at the venue during the current year period as compared to the prior year period.
The increase in event-related direct operating expenses at The Chicago Theatre was due to additional events and a change in the mix of events held at the venue during the current year period as compared to the prior year period.
The increase in event-related direct operating expenses at Radio City Music Hall, excluding the
Christmas Spectacular
and the
New York Spectacular
, was primarily due to additional events held at the venue during the current year period as compared to the prior year period.
The increase in direct operating expenses associated with the presentation of the
Christmas Spectacular
was primarily due to higher labor costs, additional scheduled performances and an increase in deferred production cost amortization partially offset by lower marketing expenses during the current year period as compared to the prior year period.
The Company had 200 scheduled performances of the production this holiday season as compared to 197 scheduled performances in fiscal year 2017.
The decrease in direct operating expenses associated with the presentation of the
New York Spectacular
was driven by no scheduled performances in the current year period as compared to 56 scheduled performances presented in the prior year period. This was a result of the Company’s decision to suspend the planned 2017 presentation announced in February 2017.
Selling, general and administrative expenses
Selling, general and administrative expenses for the
nine months ended
March 31, 2018
increased
$63,949
, or
84%
, to
$140,371
as compared to the prior year period mainly due to (i) inclusion of
TAO Group
’s selling, general and administrative costs, including a management fee incurred by
TAO Group
payable to the Company for providing management and strategic services and, to a lesser extent, (ii) higher professional fees and (iii) an increase in corporate general and administrative costs.
Depreciation and amortization
Depreciation and amortization for the
nine months ended
March 31, 2018
increased
$5,491
, or
71%
, to
$13,209
as compared to the prior year period primarily due to the inclusion of depreciation and amortization for
TAO Group
’s property and equipment.
Operating income
Operating income for the
nine months ended
March 31, 2018
increased
$44,011
, or
104%
, to
$86,456
as compared to the prior year period due to
an increase in revenues, partially offset by higher direct operating expenses, selling, general and administrative expenses
and depreciation and amortization, as discussed above.
Adjusted operating income
Adjusted operating income for the
nine months ended
March 31, 2018
increased
$48,175
, or
79%
to
$109,298
as compared to the prior year period due to
an increase in revenues, partially offset by higher direct operating expenses, selling, general and administrative expenses
as discussed above, excluding share-based compensation expense.
MSG Sports
The table below sets forth, for the periods presented, certain historical financial information and a reconciliation of
operating income
to
adjusted operating income
for the Company’s MSG Sports segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
March 31,
|
|
Change
|
|
|
2018
|
|
2017
|
|
Amount
|
|
Percentage
|
Revenues
|
|
$
|
646,168
|
|
|
$
|
632,347
|
|
|
$
|
13,821
|
|
|
2
|
%
|
Direct operating expenses
|
|
377,787
|
|
|
376,842
|
|
|
945
|
|
|
NM
|
|
Selling, general and administrative expenses
|
|
140,788
|
|
|
137,958
|
|
|
2,830
|
|
|
2
|
%
|
Depreciation and amortization
|
|
5,544
|
|
|
8,175
|
|
|
(2,631
|
)
|
|
(32
|
)%
|
Operating income
|
|
$
|
122,049
|
|
|
$
|
109,372
|
|
|
$
|
12,677
|
|
|
12
|
%
|
Reconciliation to adjusted operating income:
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
11,874
|
|
|
10,972
|
|
|
|
|
|
Depreciation and amortization
|
|
5,544
|
|
|
8,175
|
|
|
|
|
|
Adjusted operating income
|
|
$
|
139,467
|
|
|
$
|
128,519
|
|
|
$
|
10,948
|
|
|
9
|
%
|
_________________
NM — Percentage is not meaningful
Revenues
Revenues for the
nine months ended
March 31, 2018
increased
$13,821
, or
2%
, to
$646,168
as compared to the prior year period. The net
increase
is attributable to the following:
|
|
|
|
|
Increase in professional sports teams’ sponsorship and signage revenues and ad sales commissions
|
$
|
11,311
|
|
Increase in professional sports teams’ pre/regular season ticket-related revenue
|
7,306
|
|
Increase in local media rights fees from MSG Networks
|
4,832
|
|
Increase in suite rental fee revenue
|
3,511
|
|
Increase in professional sports teams’ pre/regular season food, beverage and merchandise sales
|
1,601
|
|
Decrease in event-related revenues from other live sporting events
|
(9,942
|
)
|
Decrease in revenues from league distributions
|
(6,527
|
)
|
Other net increases, inclusive of certain revenues from CLG
|
1,729
|
|
|
$
|
13,821
|
|
The increase in professional sports teams’ sponsorship and signage revenues and ad sales commissions was primarily due to sales of new sponsorship and signage inventory, increased sales of existing sponsorship and signage inventory and the impact of a marketing partner, upon renewal of its agreement, shifting its
marketing partnership
spend from a combination of entertainment and sports entirely to sports.
The increase in professional sports teams’ pre/regular season ticket-related revenue was primarily due to higher average Rangers per-game revenue and the Knicks and Rangers playing additional games at The Garden during the current year period as compared to the prior year period, slightly offset by lower average Knicks per-game revenue. The Rangers played two more regular season games and the Knicks played one more regular season game at The Garden during the current year period as compared to the prior year period.
The increase in local media rights fees from MSG Networks was primarily due to contractual rate increases.
The increase in suite rental fee revenue was primarily due to contractual rate increases and, to a lesser extent, higher sales of suite products.
The increase in professional sports teams’ pre/regular season food, beverage and merchandise sales was primarily due to the Knicks and Rangers playing additional games at The Garden during the current year period as compared to the prior year period.
The decrease in event-related revenues from other live sporting events was due to a change in the mix of events held during the current year period as compared to the prior year period and one event that generated lower revenue during the current year period as compared to the prior year period.
The decrease in revenues from league distributions primarily reflects an NHL expansion fee of $15,500 received during the prior year period partially offset by other net increases,
inclusive of league distributions related to CLG, which was acquired on July 28, 2017
.
Direct operating expenses
Direct operating expenses for the
nine months ended
March 31, 2018
increased
$945
to
$377,787
as compared to the prior year period. The net
increase
is attributable to the following:
|
|
|
|
|
Increase in other team operating expenses not discussed below
|
$
|
4,721
|
|
Increase in net provisions for certain team personnel transactions
|
2,826
|
|
Increase in professional sports teams’ pre/regular season expense associated with food, beverage and merchandise sales
|
2,102
|
|
Decrease in event-related expenses associated with other live sporting events
|
(5,152
|
)
|
Decrease in net provisions for NBA luxury tax and NBA and NHL revenue sharing expense (excluding playoffs)
|
(1,853
|
)
|
Decrease in venue operating costs
|
(819
|
)
|
Decrease in team personnel compensation
|
(578
|
)
|
Other net decreases
|
(302
|
)
|
|
$
|
945
|
|
The increase in other team operating expenses was primarily due to higher day-of-event costs, including the impact the Knicks and Rangers playing additional games at The Garden during the current year period as compared to the prior year period, and higher league expenses.
Net provisions for certain team personnel transactions and for NBA luxury tax and NBA and NHL revenue sharing expense (excluding playoffs) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Increase (Decrease)
|
|
|
March 31,
|
|
|
|
2018
|
|
2017
|
|
Net provisions for certain team personnel transactions
|
|
$
|
9,977
|
|
|
$
|
7,151
|
|
|
$
|
2,826
|
|
Net provisions for NBA luxury tax and NBA and NHL revenue sharing expense (excluding playoffs)
|
|
46,089
|
|
|
47,942
|
|
|
(1,853
|
)
|
Team personnel transactions for the
nine
months ended
March 31, 2018
reflect provisions recorded for (i) season-ending player injuries of
$4,273
, which is net of insurance recoveries of
$468
, (ii) player waivers/contract terminations of
$4,022
and (iii) player trades of
$1,682
. Team personnel transactions for the
nine
months ended
March 31, 2017
reflect provisions for a player trade and player waivers/contract terminations of
$5,000
and
$2,151
, respectively.
The decrease in net provisions for NBA luxury tax and NBA and NHL revenue sharing expense (excluding playoffs) reflects a higher estimated NBA luxury tax receipt of
$1,413
and a lower provision for NBA and NHL revenue sharing expense of
$440
. The increase in estimated NBA luxury tax receipt is based on the Knicks’ roster, which as of
March 31, 2018
will not result in luxury tax for the 2017-18 season. The Knicks were not a luxury tax payer for the 2016-17 season and, therefore, received an equal share of the portion of luxury tax receipts that were distributed to non-tax paying teams. Lower NBA and NHL revenue sharing expense primarily reflects an increase in estimated net player escrow recoveries partially offset by higher estimated NBA and NHL revenue sharing expense for the 2017-18 season and, to a lesser extent, net adjustments to prior season’s revenue sharing expense. The actual amounts for the 2017-18 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 increase in professional sports teams’ pre/regular season expense associated with food, beverage and merchandise sales was due to the Knicks and Rangers playing additional games at The Garden during the current year period as compared to the prior year period partially offset by lower average per-game expense during the current year period as compared to the prior year period.
The decrease in event-related expenses associated with other live sporting events was primarily due to a change in the mix of events held during the current year period as compared to the prior year period and, to a lesser extent, one event that generated lower expense during the current year period as compared to the prior year period.
The decrease in venue operating costs was primarily due to the absence of a non-recurring labor-related cost at The Garden partially offset by other net increases.
The decrease in team personnel compensation was primarily due to lower overall player salaries during the current year period as a result of a portion of team personnel compensation being recognized as net provisions for certain team personnel transactions. This decrease was partially offset by the impact of roster changes at the Company’s sports teams and the inclusion of team personnel compensation for CLG, which was acquired on July 28, 2017.
Selling, general and administrative expenses
Selling, general and administrative expenses for the
nine months ended
March 31, 2018
increased
$2,830
, or
2%
, to
$140,788
as compared to the prior year period primarily due to higher employee compensation and related benefits, an increase in corporate general and administrative costs and other net cost increases, partially offset by lower marketing costs.
Depreciation and amortization
Depreciation and amortization for the
nine months ended
March 31, 2018
decreased
$2,631
, or
32%
, to
$5,544
as compared to the prior year period
including the impact of an intangible asset becoming fully amortized
.
Operating income
Operating income for the
nine months ended
March 31, 2018
increased
$12,677
, or
12%
, to
$122,049
as compared to the prior year period primarily due to higher revenues and a decrease in depreciation and amortization partially offset by an increase in selling, general and administrative expenses, as discussed above.
Adjusted operating income
Adjusted operating income for the
nine months ended
March 31, 2018
increased
$10,948
, or
9%
, to
$139,467
, as compared to the prior year period primarily due to higher revenues partially offset by an increase in selling, general and administrative expenses as discussed above, excluding share-based compensation expense.
The Company results for the fourth quarter of fiscal year 2018 are likely to be impacted by our professional sports teams not participating in their respective league playoffs and contract terminations of certain team personnel that took place during that period.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash and cash equivalents, cash flows from the operations of our businesses and available borrowing capacity under our
$377,000
revolving credit facilities (see “Financing Agreements — Knicks Revolving Credit Facility,” “Financing Agreements — Knicks Unsecured Credit Facility,” “Financing Agreements — Rangers Revolving Credit Facility” and “Financing Agreements — TAO Credit Facilities” below). Our principal uses of cash include working capital-related items, capital spending (including our planned construction of
large-scale
venues in Las Vegas and London), investments and related loans that we may fund from time to time, repurchases of shares of the Company’s Class A Common Stock, repayment of debt, and the payment of earn-out obligations and mandatory purchases from prior acquisitions. 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, challenging U.S. and global economic conditions could adversely impact our ability to do so at that time.
The Company plans to continue to grow its live sports and entertainment business, both organically and through acquisition and development, including by expanding its portfolio of venues, and is exploring investing in, acquiring or developing opportunities that range from new content to adjacencies that strengthen the Company’s position in delivering premium live experiences. The Company previously announced plans to build a new venue in Las Vegas which is anticipated to be approximately
600,000
square feet and have more than
18,000
seats. This state-of-the-art facility is expected to be constructed over a
two-and-a-half-year
period. We plan to break ground during the summer of 2018 by starting site preparations. We continue to make progress on developing our design for the venue with the goal of opening the venue by the end of calendar year 2020. In addition, the Company has purchased for approximately
$79,518
(
£60,000
) a nearly
five
-acre parcel of land in London adjacent to Westfield Stratford City Shopping Center as the site of its first international large-scale venue. We are working on submitting our planning application for the London venue by the end of calendar year 2018.
Subject to the timely completion of the planning process, our goal is to have
our London venue debut approximately one year after the Las Vegas venue. As is the case for any large scale real estate development, as the Company moves forward with the planning and construction for these and other major new venues, the Company will need to obtain all necessary and appropriate permits and other regulatory approvals and may face unexpected project delays and costs. In connection with these efforts, the Company
will need to pursue additional capital beyond that which is available from cash on hand, cash flows from operations and borrowings under our revolving credit facilities. There is no assurance that we would be able to obtain such capital. The Company will continue to explore additional domestic and international markets where next generation venues can be successful. See also “—
MSG Sphere
” at the end of Management’s Discussion and Analysis of Financial Condition and Result of Operations.
We regularly monitor and assess our ability to meet our net funding and investing requirements. Over the next 12 months, we believe we have sufficient liquidity, including
$1,176,554
in unrestricted cash and cash equivalents as of
March 31, 2018
, along with available borrowing capacity under our revolving credit facilities combined with operating cash flows to fund our operations, to pursue the development of the new arenas discussed above and other new business opportunities and to repurchase shares of the Company’s Class A Common Stock.
TAO Group
’s principal uses of cash include working capital related items, investments in new venues and repayment of debt.
TAO Group
plans to continue to grow its business through the opening of new venues.
TAO Group
regularly monitors and assesses its ability to meet its funding and investment requirements. Over the next 12 months, the Company believes that
TAO Group
has sufficient liquidity from cash on hand, cash generated from operations and its revolving credit facility to fund its operations, service debt obligations and pursue new business opportunities.
On September 11, 2015, the Company’s board of directors 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 the Company’s 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. As of
March 31, 2018
, the Company had
$259,639
of availability remaining under its stock repurchase authorization.
Financing Agreements
Knicks Revolving Credit Facility
On September 30, 2016,
Knicks LLC
, a wholly owned subsidiary of the Company, entered into a 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 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, 2018
,
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 Knicks Revolving Credit Facility
was undrawn
as of
March 31, 2018
.
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.
The Knicks Credit Agreement 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 Credit Agreement, 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 Credit Agreement; (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.
Knicks LLC renewed this facility with the lender on the same terms effective as of September 29, 2017.
This facility
was undrawn
as of
March 31, 2018
.
Rangers Revolving Credit Facility
On January 25, 2017,
Rangers LLC
, a wholly owned subsidiary of the Company, entered into a 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 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, 2018
,
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
Rangers Revolving Credit Facility
was undrawn as of
March 31, 2018
.
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.
The Rangers Credit Agreement 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 Credit Agreement, 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 Credit Agreement; (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 January 31, 2017,
TAOIH
,
TAOG
, and certain of its subsidiaries entered into a credit and guaranty agreement with a syndicate of lenders providing for a senior secured term loan facility of
$110,000
with a term of
five
years to fund, in part, the acquisition of TAO Group and a senior secured revolving credit facility of up to
$12,000
with a term of
five
years for working capital and general corporate purposes of
TAOG
.
The TAO Credit Facilities were obtained without recourse to MSG or any of its affiliates (other than TAOIH and its subsidiaries).
The TAO Credit Facilities require TAOIH (i) to maintain, for the relevant TAO entities, a minimum consolidated liquidity of $5,000 at all times, (ii) to comply with a maximum total net leverage ratio of 4.00:1.00 initially and stepping down over time to 2.50:1.00 by the first quarter of calendar year 2021 and through the remainder of the term of the TAO Credit Facilities, and (iii) to comply with a minimum fixed charge coverage ratio of 1.50:1.00 initially and stepping down over time to 1.15:1.00 by the second quarter of calendar year 2021 and through the remainder of the term of the TAO Credit Facilities.
TAOIH was in compliance with the financial covenants of the TAO Credit Facilities as of December 31, 2017 (the most recent date at which compliance was assessed under the TAO Credit Facilities).
The TAO Revolving Credit Facility was undrawn as of
March 31, 2018
.
The TAO entities under the TAO Credit Facilities are also subject to certain limitations with respect to making capital expenditures based upon the total net leverage ratio and other factors. The restrictions on capital expenditures are subject to certain “carry-forward” provisions and other customary carve-outs.
All borrowings under the TAO Credit Facilities are subject to the satisfaction of certain customary conditions, including compliance with a maximum leverage multiple, accuracy of representations and warranties and absence of a default or event of default.
Borrowings bear interest at a floating rate, which at the option of TAOG may be either (i) a base rate plus a margin ranging from 6.50% to 7.00% per annum or (ii) LIBOR plus a margin ranging from 7.50% to 8.00% per annum.
The interest rate on the TAO Credit Facilities as of December 31, 2017 was
9.625%
.
TAOG is required to pay a commitment fee of
0.50%
per annum in respect of the average daily unused commitments under the TAO Revolving Credit Facility.
All obligations under the TAO Credit Facilities are secured by a first lien security interest in substantially all of the applicable TAO entities’ assets, including, but not limited to, a pledge of all of the capital stock of substantially all of TAOIH’s wholly-owned domestic subsidiaries and 65% of the voting capital stock, and 100% of the non-voting capital stock, of each of its first-tier foreign subsidiaries.
Subject to customary notice and minimum amount conditions, TAOG may voluntarily prepay outstanding loans under the TAO Credit Facilities at any time, in whole or in part (subject to customary breakage costs with respect to LIBOR loans) with premiums due in respect of prepayments of the TAO Term Loan Facility or permanent reduction under the TAO Revolving Credit Facility, in each case, starting at 5.0% initially and stepping down to 0% after three years. Beginning March 31, 2018, TAOG is required to make scheduled amortization payments under the TAO Term Loan Facility in consecutive quarterly installments equal to $688 per quarter initially, stepping up over time to $4,125 per quarter by March 31, 2021 and through the final maturity date of the TAO Term Loan Facility with the final balance payable on such maturity date.
TAOG is also required to make mandatory prepayments under the TAO Credit Facilities in certain circumstances, including, without limitation, 75% of excess cash flow, with a step-down to 50% when the total net leverage ratio is less than 2.00:1.00.
The TAO Credit Facilities contain certain restrictions on the ability of TAOG to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the TAO Credit Facilities, including, without limitation, the following: (i) incurring additional indebtedness; (ii) creating liens on assets; (iii) making distributions, dividends and other restricted payments; (iv) engaging in sale and leaseback transactions; (v) merging or consolidating; (vi) making investments; and (vii) prepaying certain indebtedness.
See Note 10 to the consolidated and combined financial statements included in the Company’s Annual Report on Form 10-K for the year ended
June 30, 2017
for more information regarding the Company’s debt maturities for the
TAO Term Loan Facility
.
Revolving Credit Facilities Provided to Nonconsolidated Affiliates
In connection with the Company’s investment in AMSGE, the Company provides a
$100,000
revolving credit facility to this entity, of which
$97,500
had been drawn as of
March 31, 2018
. On April 20, 2018, AMSGE repaid
$34,000
of borrowings under the revolving credit facility from the proceeds of its sale of Levity Entertainment Group to AMC Networks. The amount repaid remains available to be redrawn.
In connection with the Company’s investment in Tribeca Enterprises, the Company provides a
$17,500
revolving credit facility to this entity, which facility was fully drawn as of
March 31, 2018
. In addition, in connection with this credit facility, Tribeca Enterprises owed PIK interest of
$1,696
, as of
March 31, 2018
.
Pursuant to their terms, the AMSGE and Tribeca Enterprises revolving credit facilities will terminate on
September 20, 2020
and
June 30, 2021
, respectively.
Bilateral Letters of Credit Lines
The Company has established bilateral credit lines with a bank to issue letters of credit in support of the Company’s business operations. The Company either pays direct fees for the letters of credit or such fees are credited against interest income the Company receives in return from its investments in notes receivable with the same bank. As of
March 31, 2018
, the Company had
$2,610
of letters of credit outstanding pursuant to which fees were credited against a note investment. In addition,
TAO Group
had
three
letters of credit outstanding for
$1,500
as of
December 31, 2017
.
Contractual Obligations
The Company did not have any material changes in its contractual obligations since the end of fiscal year
2017
other than activities in the ordinary course of business.
Cash Flow Discussion
As of
March 31, 2018
, cash and cash equivalents totaled
$1,176,554
, as compared to
$1,238,114
as of
June 30, 2017
. The following table summarizes the Company’s cash flow activities for the
nine
months ended
March 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31,
|
|
|
2018
|
|
2017
|
Net cash provided by operating activities
|
|
$
|
171,180
|
|
|
$
|
107,558
|
|
Net cash used in investing activities
|
|
(183,433
|
)
|
|
(252,814
|
)
|
Net cash used in financing activities
|
|
(50,231
|
)
|
|
(158,158
|
)
|
Effect of exchange rates on cash and cash equivalents
|
|
924
|
|
|
—
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(61,560
|
)
|
|
$
|
(303,414
|
)
|
Operating Activities
Net cash provided by operating activities
for the
nine months ended
March 31, 2018
improved
by
$63,622
to
$171,180
as compared to the prior year period primarily due to an increase in net income adjusted for non-cash items including (i) a reduction in net deferred tax liabilities as a result of the recently enacted Federal tax reform legislation effective January 1, 2018, (ii) an improvement in earnings in equity method investments primarily due to a pre-tax, non-cash impairment charge to write off the carrying value of the Company’s equity investment in Fuse Media in the prior year period, and (iii) increases in depreciation and amortization and share-based compensation expense in the current year period as compared to the prior year period. In addition, the increase in net cash provided by operating activities was impacted by (i) an increase in cash received related to deferred revenue primarily due to timing, mix of events, and higher suite rental fee revenues in fiscal year 2018, partially offset by the impact of the absence of Rangers playoff ticket sales in the current year period, (ii) cash received in the current year period related to a non-recurring league distribution which was accrued for as of June 30, 2017, and (iii) cash paid in the prior year period for the establishment of restricted cash accounts, partially offset by higher employee and team compensation and related benefits payments in the current year period, including severance-related costs attributable to a separation agreement with a team executive.
Investing Activities
Net cash used in investing activities
for the
nine months ended
March 31, 2018
decreased
by
$69,381
to
$183,433
as compared to the prior year period primarily due to (i) net decrease in business acquisition costs and (ii) the acquisition of available-for-sale securities in the prior year period. These net decreases were partially offset by (i) higher capital expenditures in the current year period, primarily associated with the purchase of land in London and costs incurred in developing the Company’s new venues in Las Vegas and London, (ii) new investments made in nonconsolidated affiliates, and (iii) a franchise fee payment made in the current period associated with
CLG
’s
membership
in the “League of Legends” North American League Championship Series
.
Financing Activities
Net cash used in financing activities
for the
nine months ended
March 31, 2018
decreased
by
$107,927
to
$50,231
as compared to the prior year period largely due to lower repurchases of shares of the Company’s Class A Common Stock in the current year period as compared to the prior year period. This decrease was partially offset by higher taxes paid in lieu of shares issued for equity-based compensation in the current year period as compared to the prior year period and a contingent consideration payment related to the acquisition of CLG in the current year period.
Seasonality of Our Business
The dependence of the MSG Sports segment 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. The dependence of the MSG Entertainment segment on revenues from the
Christmas Spectacular
generally means it earns a disproportionate share of its revenues and operating income in the second quarter of the Company’s fiscal year. In addition, while it does not have a material impact on seasonality of our business, the first and third calendar quarters are seasonally lighter quarters for
TAO Group
as compared to its second and fourth calendar quarters. As the Company consolidates
TAO Group
results of operations on a three-month lag basis, the seasonally lighter quarters for
TAO Group
will be reflected in the second and fourth quarters of the Company’s fiscal year.
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
2018
. There have been no 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, 2017
.
Goodwill
Goodwill is tested annually for impairment as of August 31
st
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. During the first quarter of fiscal year 2018, 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. The goodwill balance as of
March 31, 2018
by reporting unit was as follows:
|
|
|
|
|
MSG Entertainment
|
$
|
76,840
|
|
TAO
|
88,583
|
|
MSG Sports
|
226,955
|
|
|
$
|
392,378
|
|
The Company elected to perform the qualitative assessment of impairment for all of the Company’s reporting units for the fiscal year
2018
impairment test. These assessments considered factors such as:
|
|
•
|
macroeconomic conditions;
|
|
|
•
|
industry and market considerations;
|
|
|
•
|
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.
|
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 recently 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.
Identifiable Indefinite-Lived Intangible Assets
Identifiable indefinite-lived intangible assets are tested annually for impairment as of August 31
st
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, 2018
by reportable segment:
|
|
|
|
|
Sports franchises (MSG Sports segment)
|
$
|
109,429
|
|
Trademarks (MSG Entertainment segment)
|
62,421
|
|
Photographic related rights (MSG Sports segment)
|
3,000
|
|
|
$
|
174,850
|
|
During the first quarter of fiscal year
2018
, 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
10
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 contingent consideration liabilities related to the acquisitions of
TAO Group
and
CLG
.
MSG Sphere
The Company is moving forward with its venue strategy to create the “venue of the future.” These iconic structures will use cutting-edge technologies to establish an entirely new platform for creating the next-generation of immersive experiences. The Company will begin in Las Vegas with the construction of the first of these new venues — known as “MSG Sphere” for its iconic, spherical shape. The more than
18,000
seat venue is expected to be constructed over a
two-and-a-half-year
period. We plan to break ground during the summer of 2018 by starting site preparations. We continue to make progress on developing our design for the venue with the goal of opening the venue by the end of calendar year 2020. Key design features of the venue are expected to include (i) a 100% programmable exterior and an interior bowl that features the world’s largest and highest resolution media display known today, (ii) a first-of-its kind video system capable of capturing, curating and distributing both today’s and tomorrow’s content, (iii) an unprecedented, multi-layered audio system that will deliver a spectacular acoustical experience, and (iv) an advanced architecture for connectivity that will enable a broader range of content, greater interaction among guests and more immersive entertainment experiences. The Company intends to employ this state-of-the-art technological platform for a future venue to be built on land acquired in London. We are working on submitting our planning application for the London venue by the end of calendar year 2018.
Subject to the timely completion of the planning process, our goal is to have
our London venue debut approximately one year after the Las Vegas venue. We will continue to explore additional domestic and international markets where next-generation venues can be successful. See also “—
Liquidity and Capital Resources
—
Overview
.”
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
There were no material changes to the disclosures regarding market risks in connection with our pension and postretirement plans, interest rate risk exposure 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, 2017
.
We are exposed to market risk resulting from foreign currency fluctuations, primarily to the British pound sterling through our net investment position initiated with our acquisition of land in
London
. We may evaluate and decide, to the extent reasonable and practical, to reduce the translation risk of foreign currency fluctuations on this underlying nonfunctional currency exposure by entering into foreign currency forward exchange contracts with financial institutions. If we were to enter into such hedging transactions, the market risk resulting from foreign currency fluctuations is unlikely to be entirely eliminated. We do not plan to enter into derivative financial instrument transactions for foreign currency speculative purposes.
As of
March 31, 2018
, a uniform hypothetical 5% fluctuation in the GBP/USD exchange rate would have resulted in a change of approximately
$5.6 million
in net asset value. For additional information, see Note
7
to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussion of our recent acquisition of land in
London
.