Madison Square Garden Sports (MSGS) - 2021 Q4 - Annual Report

PART I Business MSG Sports is a professional sports company owning iconic franchises whose revenue from tickets, media, and sponsorships was impacted by COVID-19 - The company owns a portfolio of professional sports teams, including the New York Knicks (NBA), New York Rangers (NHL), Hartford Wolf Pack (AHL), Westchester Knicks (NBAGL), and two esports franchises, Knicks Gaming and Counter Logic Gaming (CLG)[11] - A key strategy is to maximize the value of live sports content through long-term local and national media rights agreements[15] - The company has long-term (35-year) Arena License Agreements with MSG Entertainment for the Knicks and Rangers to play their home games at Madison Square Garden, which includes revenue sharing[14][23] - The COVID-19 pandemic materially impacted revenues in FY2021 due to shortened seasons, government-mandated limits on fan attendance, and reduced ticket sales, suite licenses, sponsorships, and merchandise sales[27][60] - As of June 30, 2021, the company had approximately 415 full-time and 242 part-time employees, with approximately 16% of the workforce represented by unions[50][54] Risk Factors The company faces significant risks from the COVID-19 pandemic, market competition, team performance, labor disputes, and substantial indebtedness Sports Business Risks - The COVID-19 pandemic has materially impacted operations and operating results, leading to shortened seasons, limited fan attendance, and reduced revenues, with a resurgence posing future risks[59][60][61] - The business faces intense competition for attendance, viewership, and advertising from numerous other professional and collegiate sports teams in the New York City metropolitan area[67][68] - Financial results are substantially dependent on the continued popularity and competitive success of the Knicks and Rangers, which drives ticket sales, sponsorships, and media rights value[72] - Actions by the NBA and NHL, such as changes to media rights, revenue sharing, and league expansion, can have a material negative effect on the company's business[75][78][81] Economic and Business Relationship Risks - Subsidiaries have incurred substantial indebtedness, with $220 million outstanding under the Knicks facility and $135 million under the Rangers facility as of June 30, 2021[86] - The company has a history of operating losses, reporting losses of approximately $78 million in FY2021, $94 million in FY2020, and $58 million in FY2019[93] - The company does not own Madison Square Garden and relies on Arena License Agreements with MSG Entertainment, which expire in 2055[97] - The business is dependent on unionized labor, particularly NBA and NHL players, and future labor disputes could have a material negative effect[108] - The company relies on MSG Entertainment for various services under a transition services agreement, and a breach or termination could cause operational difficulties[109][110][112] Operational Risks - The business is exposed to risks from terrorist activity, pandemics, or other events that discourage public assembly at The Garden, which could reduce attendance and revenue[114] - The company faces continually evolving cybersecurity risks, including data breaches and ransomware attacks, which could lead to business disruption and financial losses[121][123] Corporate Governance Risks - The company is controlled by the Dolan Family Group, which held approximately 70.7% of the total voting power as of July 30, 2021, giving them control over stockholder decisions[138][140] - The company has elected to be a "controlled company" under NYSE rules, allowing it to opt out of certain corporate governance requirements[142] - Overlapping key officers and directors with MSG Entertainment and/or AMC Networks may lead to conflicts of interest[147][148] Properties The company licenses Madison Square Garden, owns a training center in NY, leases a performance center in CA, and subleases its main offices - The company licenses Madison Square Garden from MSG Entertainment for its Knicks and Rangers home games[150] - Owns the Madison Square Garden Training Center in Greenburgh, NY (approx 114,000 sq ft) and leases the CLG Performance Center in Los Angeles, CA (approx 8,000 sq ft)[150] - Subleases approximately 47,000 sq ft of office space for its administrative and executive offices from MSG Entertainment at Two Pennsylvania Plaza, New York City[151] Legal Proceedings The company is a defendant in various lawsuits but management does not believe their resolution will have a material adverse effect - The company is a defendant in various lawsuits, but management does not expect the outcomes to have a material adverse effect[153] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A stock trades on the NYSE, no dividends were paid in FY2021, and $260 million remains under its share repurchase program - Class A Common Stock trades on the NYSE under the symbol "MSGS"; there is no public market for the Class B Common Stock[157][160] - The company did not pay any cash dividends during fiscal year 2021 and does not have current plans to pay dividends in the foreseeable future[162] - As of June 30, 2021, approximately $260 million remained available under the company's $525 million stock repurchase authorization, though no shares were repurchased during FY2021[163] Management's Discussion and Analysis of Financial Condition and Results of Operations COVID-19 heavily impacted FY2021 performance, causing a 31% revenue decrease to $415.7 million and an operating loss of $78.4 million Results of Operations Consolidated Results of Operations (FY2021 vs. FY2020) | | Years Ended June 30, | | Change | | | :--- | :--- | :--- | :--- | :--- | | | 2021 | 2020 | Amount | Percentage | | Revenues | $415,721 | $603,319 | $(187,598) | (31)% | | Direct operating expenses | 281,890 | 359,970 | (78,080) | (22)% | | Selling, general and administrative expenses | 206,700 | 319,675 | (112,975) | (35)% | | Operating loss | (78,443) | (93,866) | 15,423 | 16% | | Loss from continuing operations | (15,897) | (118,641) | 102,744 | 87% | | Net loss attributable to stockholders | (13,954) | (182,388) | 168,434 | 92% | - Revenues decreased by 31% primarily due to lower pre/regular season ticket-related revenues (-$192.4M), suite license fee revenues (-$67.4M), and food, beverage, and merchandise sales (-$35.6M), all driven by COVID-19 restrictions[235] - The revenue decline was partially offset by a $98.3 million increase in league distributions, mainly from higher national media rights fees and a $21.0 million NHL expansion fee[235][239] - Direct operating expenses decreased by 22% due to lower net provisions for league revenue sharing (-$44.2M), reduced team operating expenses, and lower food/beverage costs[242] - Selling, general and administrative (SG&A) expenses decreased by 35%, primarily due to lower corporate overhead costs following the MSGE Distribution[251] Reconciliation of Operating Loss to Adjusted Operating Loss | | Years Ended June 30, | | Change | | | :--- | :--- | :--- | :--- | :--- | | | 2021 | 2020 | Amount | Percentage | | Operating loss | $(78,443) | $(93,866) | $15,423 | 16% | | Deferred rent | 28,305 | — | | | | Depreciation and amortization | 5,574 | 17,540 | | | | Share-based compensation | 30,437 | 48,693 | | | | Restructuring charges | 1,597 | — | | | | Adjusted operating loss | $(12,530) | $(27,466) | $14,936 | 54% | Liquidity and Capital Resources - Primary sources of liquidity are cash on hand ($64.9M as of June 30, 2021), cash flow from operations, and available borrowing capacity[266][268] - As of June 30, 2021, the company had $245 million of additional available borrowing capacity and believes it has sufficient liquidity to fund operations for the next 12 months[270] Outstanding Debt as of June 30, 2021 | Facility | Outstanding Balance (in millions) | | :--- | :--- | | 2020 Knicks Revolving Credit Facility | $220 | | 2020 Rangers Revolving Credit Facility | $135 | | 2021 Rangers NHL Advance | $30 | | 2020 Knicks Holdings Revolving Credit Facility | $0 | Cash Flow Summary (FY2021 vs. FY2020) | | Years Ended June 30, (in thousands) | | | :--- | :--- | :--- | | | 2021 | 2020 | | Net cash provided by (used in) operating activities | $(35,326) | $3,568 | | Net cash used in investing activities | (466) | (514,863) | | Net cash provided by (used in) financing activities | 17,155 | (520,588) | | Net decrease in cash, cash equivalents and restricted cash | $(18,637) | $(1,027,228) | Critical Accounting Policies - For contracts with multiple performance obligations, the transaction price is allocated based on the estimated relative standalone selling price of each obligation, which involves significant management judgment[304][305] - Goodwill and indefinite-lived intangible assets are tested for impairment annually as of August 31; the FY2021 assessment concluded no impairment was likely[308][311][312] - The company accounts for its use of Madison Square Garden under the Arena License Agreements as operating leases, with liabilities measured at the present value of future lease payments[317][328][330] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate fluctuation on its variable-rate debt, with a 1% rate increase adding $3.6 million in annual expense - The company has potential interest rate risk from outstanding borrowings under its credit facilities, which bear interest at floating rates[331][332] - As of June 30, 2021, with $355 million in borrowings outstanding, a hypothetical 100 basis point increase in interest rates would increase annual interest expense by approximately $3.6 million[332] Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective as of June 30, 2021 - Management, including the CEO and CFO, concluded that as of June 30, 2021, the company's disclosure controls and procedures were effective[337] - Management concluded that the company's internal control over financial reporting was effective as of June 30, 2021, a conclusion audited and confirmed by Deloitte & Touche LLP[340][341] PART III Directors, Executive Compensation, Security Ownership, and Principal Accountant Fees Required information on directors, compensation, ownership, and accountant fees is incorporated by reference from the 2021 proxy statement - Information regarding Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accountant Fees is incorporated by reference from the proxy statement for the 2021 annual meeting of shareholders[346][347][348][349][350] PART IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report - This section lists all documents filed as part of the report, including financial statements, schedules, and exhibits such as credit agreements, employment contracts, and related-party agreements[353] Financial Statements and Notes Consolidated Financial Statements For FY2021, the company reported total assets of $1.31 billion, a net loss of $14.0 million, and a stockholders' deficit of $204.3 million Key Balance Sheet Data (as of June 30, 2021) | | Amount (in thousands) | | :--- | :--- | | Total Assets | $1,309,939 | | Cash and cash equivalents | $64,902 | | Right-of-use lease assets | $703,521 | | Goodwill | $226,955 | | Total Liabilities | $1,511,805 | | Long-term debt | $355,000 | | Operating lease liabilities, noncurrent | $691,152 | | Total Madison Square Garden Sports Corp. stockholders' equity | $(204,308) | Key Income Statement Data (for the year ended June 30, 2021) | | Amount (in thousands) | | :--- | :--- | | Revenues | $415,721 | | Operating loss | $(78,443) | | Loss from continuing operations | $(15,897) | | Net loss attributable to stockholders | $(13,954) | | Basic and Diluted EPS | $(0.58) | Notes to Consolidated Financial Statements The notes detail the impact of COVID-19, the MSG Entertainment spin-off, accounting policies, and extensive related-party transactions Note 3. Discontinued Operations - Following the April 17, 2020 distribution, the historical results of the MSG Entertainment business have been classified as discontinued operations for all periods presented[513] Note 8. Leases - The company accounts for its use of Madison Square Garden under 35-year Arena License Agreements as operating leases, resulting in a Right-of-Use asset of $703.5 million and a total lease liability of $733.1 million as of June 30, 2021[557][571] - The weighted average remaining lease term for operating leases was 33.7 years with a weighted average discount rate of 7.13% as of June 30, 2021[573] Note 13. Debt Debt Facilities Summary (as of June 30, 2021) | Facility | Capacity (in thousands) | Outstanding (in thousands) | Maturity | | :--- | :--- | :--- | :--- | | 2020 Knicks Revolving Credit Facility | $275,000 | $220,000 | Nov 2023 | | 2020 Knicks Holdings Revolving Credit Facility | $75,000 | $0 | Nov 2023 | | 2020 Rangers Revolving Credit Facility | $250,000 | $135,000 | Nov 2023 | | 2021 Rangers NHL Advance | $30,000 | $30,000 | On Demand | Note 17. Related Party Transactions - The company has extensive related party transactions with MSG Entertainment, MSG Networks, and AMC Networks, all controlled by the Dolan Family Group[678] - Key agreements include Arena License Agreements, media rights agreements, sponsorship sales agreements, and a Transition Services Agreement with MSG Entertainment[679] - For FY2021, revenues from related parties (primarily MSG Networks) were $147.0 million, representing 35% of total consolidated revenues[694][719]