MADISON SQUARE GARDEN SPORTS CORP. This Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "expects," "anticipates," "believes," "estimates," "may," "will," "should," "could," "potential," "continue," "intends," "plans," and similar words and terms used in the discussion of future operating and financial performance and plans identify forward-looking statements. Investors are cautioned that such forward-looking statements are not guarantees of future performance, results or events and involve risks and uncertainties, and that actual results or developments may differ materially from the forward-looking statements as a result of various factors. Factors that may cause such differences to occur include, but are not limited to: • the demand for our programming among cable, satellite, telephone and other
platforms ("Distributors") and the subscribers thereto, and our ability to
enter into and renew affiliation agreements with Distributors, as well as
the impact of consolidation among Distributors;
• the level of our revenues, which depends in part on the popularity and
competitiveness of the sports teams whose games are broadcast on our
networks and the popularity of other content aired on our networks;
• the ability of our Distributors to maintain, or minimize declines in,
subscriber levels;
• the impact of subscribers selecting Distributors' packages that do not
include our networks or Distributors that do not carry our networks at
all;
• the security of our program signal and electronic data;
• general economic conditions especially in the
area where we conduct the majority of our operations;
• the on-ice and on-court performance of the professional sports teams whose
games we carry;
• the demand for advertising and sponsorship arrangements and viewer ratings
for our networks;
• competition, for example, from other regional sports networks;
• the relocation or insolvency of professional sports teams with which we
have a media rights agreement;
• our ability to maintain, obtain or produce content, together with the cost
of such content;
• our ability to renew or replace our media rights agreements with
professional sports teams;
• the acquisition or disposition of assets and/or the impact of, and our
ability to successfully pursue, acquisitions or other strategic
transactions;
• the costs associated with, and the outcome of, litigation and other
proceedings to the extent uninsured;
• the impact of governmental regulations or laws and changes in suchregulations or laws, including with respect to the legalization of sports
gaming;
• the impact of sports league rules, regulations and/or agreements and
changes thereto;
• our dependence on
and other third-party providers for the provision of certain services;
• cybersecurity and similar risks which could result in the disclosure of
confidential information, disruption of our business or damage to our
brands and reputation;
• our substantial debt;
• any reduction in our access to capital and credit markets or significant
increases in costs to borrow;
• financial community perceptions of our business, operations, financial
condition and the industry in which we operate;
• the tax-free treatment of the Distribution; and
• the factors described under "Item 1A. Risk Factors" in the Company's
Annual Report on Form 10-K for the year ended June 30, 2019 .
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The Company disclaims any obligation to update or revise the forward-looking statements contained herein, except as otherwise required by applicable federal securities laws. All dollar amounts included in the following MD&A are presented in thousands, except as otherwise noted. Introduction MD&A is provided as a supplement to, and should be read in conjunction with, the unaudited consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year endedJune 30, 2019 to help provide an understanding of our financial condition, changes in financial condition and results of operations. Unless the context otherwise requires, all references to "we," "us," "our," or the "Company" refer collectively toMSG Networks Inc. , a holding company, and its direct and indirect subsidiaries through which substantially all of our operations are conducted. The Company owns and operates two regional sports and entertainment networks, MSG Network and MSG+. The Company operates and reports financial information in one segment. This MD&A is organized as follows: Results of Operations. This section provides an analysis of our unaudited consolidated results of operations for the three and six months endedDecember 31, 2019 as compared with the three and six months endedDecember 31, 2018 . Liquidity and Capital Resources. This section provides a discussion of our financial condition and liquidity, as well as an analysis of our cash flows for the six months endedDecember 31, 2019 as compared with the six months endedDecember 31, 2018 . Recently Issued Accounting Pronouncements Not Yet Adopted and Critical Accounting Policies. This section discusses recently issued accounting pronouncements not yet adopted, as well as the results of the Company's annual impairment testing of goodwill performed during the first quarter of fiscal year 2020. This section should be read together with our critical accounting policies, which are discussed in our Annual Report on Form 10-K for the year endedJune 30, 2019 under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Recently Issued Accounting Pronouncements Not Yet Adopted and Critical Accounting Policies - Critical Accounting Policies" and in the notes to the consolidated financial statements included therein. 22
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Results of Operations Comparison of the Three Months EndedDecember 31, 2019 versus the Three Months EndedDecember 31, 2018 The table below sets forth, for the periods presented, certain historical financial information and the percentage that those items bear to revenues. Three Months Ended December 31, Increase 2019 2018 (Decrease) % of % of in Net Amount Revenues Amount Revenues Income Revenues$ 187,730 100 %$ 192,914 100 %$ (5,184 ) Direct operating expenses 84,065 45 % 81,470 42 % (2,595 ) Selling, general and administrative expenses 32,022 17 % 31,294 16 % (728 ) Depreciation and amortization 1,680 1 % 1,800 1 % 120 Operating income 69,963 37 % 78,350 41 % (8,387 ) Other income (expense): Interest income 906 NM 1,422 1 % (516 ) Interest expense (9,934 ) (5 )% (11,693 ) (6 )% 1,759 Debt refinancing expense (2,764 ) (1 )% - NM (2,764 ) Other components of net periodic benefit cost (258 ) NM (413 ) NM 155 (12,050 ) (6 )% (10,684 ) (6 )% (1,366 ) Income from operations before income taxes 57,913 31 % 67,666 35 % (9,753 ) Income tax expense (17,949 ) (10 )% (23,828 ) (12 )% 5,879 Net income$ 39,964 21 %$ 43,838 23 %$ (3,874 ) _________________ NM - Percentage is not meaningful Revenues Revenues for the three months endedDecember 31, 2019 decreased$5,184 , or 3%, to$187,730 as compared with the prior year period. The net decrease was attributable to the following: Decrease in affiliation fee revenue$ (3,071 ) Decrease in advertising revenue (1,406 ) Other net decreases (707 )$ (5,184 ) The decrease in affiliation fee revenue was primarily due to the impact of a decrease in subscribers of approximately 8%, partially offset by the impact of higher affiliation rates and, to a lesser extent, a favorable$2,300 affiliate adjustment recorded in the current year quarter. The decrease in advertising revenue was primarily due to a lower net decrease in deferred revenue related to ratings guarantees and the impact of fewer live professional sports telecasts as compared with the prior year period, partially offset by higher per-game sales from the telecast of live professional sports programming and other net advertising increases, primarily from the Company's non-ratings based advertising initiatives. Other net decreases were largely due to the absence in the current year quarter of revenues associated with certain services provided toFuse Media, Inc. Direct operating expenses Direct operating expenses for the three months endedDecember 31, 2019 increased$2,595 , or 3%, to$84,065 as compared with the prior year period due to higher rights fees expense of$2,407 , principally as a result of contractual rate increases under the Company's media rights agreements with professional sports teams. 23
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Selling, general and administrative expenses Selling, general and administrative expenses for the three months endedDecember 31, 2019 increased$728 , or 2%, to$32,022 as compared with the prior year period due to higher advertising and marketing costs, as well as higher professional fees and other cost increases, partially offset by lower employee compensation and related benefits (including share-based compensation expense). The overall increase includes$600 in expenses in the current year quarter that are not indicative of the Company's core expense base. Operating income Operating income for the three months endedDecember 31, 2019 decreased$8,387 , or 11%, to$69,963 as compared with the prior year period primarily due to (as discussed above) the decrease in revenues, higher direct operating expenses and, to a lesser extent, higher selling, general and administrative expenses (including share-based compensation expense). Interest expense Interest expense for the three months endedDecember 31, 2019 decreased$1,759 , or 15%, to$9,934 as compared with the prior year period primarily due to lower average interest rates for the three months endedDecember 31, 2019 (3.3% as compared with 3.8% in the prior year). Debt refinancing expense Debt refinancing expense was approximately$2,764 for the three months endedDecember 31, 2019 related to refinancing of the Company's senior secured credit facilities. 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 more information on the refinancing of the Company's senior secured credit facilities. Income taxes See Note 15 to the consolidated financial statements included in "Part I - Item 1. Financial Statements" of this Quarterly Report on Form 10-Q for more information on income taxes. Adjusted operating income The Company evaluates performance based on several factors, of which the key financial measure is adjusted operating income. Adjusted operating income is defined as operating income 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. Because it is based upon operating income, adjusted operating income also excludes interest expense (including cash interest expense) and other non-operating income and expense items. We believe that the exclusion of share-based compensation expense or benefit allows investors to better track the performance of the Company without regard to the settlement of an obligation that is not expected to be made in cash. We believe adjusted operating income is an appropriate measure for evaluating the operating performance of our Company. Adjusted operating income and similar measures with similar titles are common performance measures used by investors and analysts to analyze our performance. Internally, we use revenues and adjusted operating income measures as the most important indicators of our business performance, and evaluate management's effectiveness with specific reference to these indicators. Adjusted operating income should be viewed as a supplement to and not a substitute for operating income, net income, cash flows from operating activities, and other measures of performance and/or liquidity presented in accordance withU.S. generally accepted accounting principles ("GAAP"). Since adjusted operating income 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, a GAAP measure, to adjusted operating income: Three Months Ended December 31, Decrease in 2019 2018 Adjusted Operating Income Operating income$ 69,963 $ 78,350 $ (8,387 ) Share-based compensation 5,440 5,611 (171 ) Depreciation and amortization 1,680 1,800 (120 ) Adjusted operating income$ 77,083 $ 85,761 $ (8,678 ) 24
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Adjusted operating income for the three months endedDecember 31, 2019 decreased$8,678 , or 10%, to$77,083 as compared with the prior year period primarily due to (as discussed above) the decrease in revenues, higher direct operating expenses and, to a lesser extent, higher selling, general and administrative expenses (excluding share-based compensation expense). Results of Operations Comparison of the Six Months EndedDecember 31, 2019 versus the Six Months EndedDecember 31, 2018 The table below sets forth, for the periods presented, certain historical financial information and the percentage that those items bear to revenues. Six Months Ended December 31, Increase 2019 2018 (Decrease) % of % of in Net Amount Revenues Amount Revenues Income Revenues$ 348,711 100 %$ 357,378 100 %$ (8,667 ) Direct operating expenses 152,725 44 % 148,125 41 % (4,600 ) Selling, general and administrative expenses 54,342 16 % 48,197 13 % (6,145 ) Depreciation and amortization 3,407 1 % 3,845 1 % 438 Operating income 138,237 40 % 157,211 44 % (18,974 ) Other income (expense): Interest income 2,834 1 % 3,014 1 % (180 ) Interest expense (20,749 ) (6 )% (23,615 ) (7 )% 2,866 Debt refinancing expense (2,764 ) (1 )% - NM (2,764 ) Other components of net periodic benefit cost (516 ) NM (818 ) NM 302 (21,195 ) (6 )% (21,419 ) (6 )% 224 Income from operations before income taxes 117,042 34 % 135,792 38 % (18,750 ) Income tax expense (34,011 ) (10 )% (45,024 ) (13 )% 11,013 Net income$ 83,031 24 %$ 90,768 25 %$ (7,737 ) _________________ NM - Percentage is not meaningful Revenues Revenues for the six months endedDecember 31, 2019 decreased$8,667 , or 2%, to$348,711 as compared with the prior year period. The net decrease was attributable to the following: Decrease in affiliation fee revenue$ (5,183 ) Decrease in advertising revenue (2,044 ) Other net decreases (1,440 )$ (8,667 ) The decrease in affiliation fee revenue was primarily due to the impact of a decrease in subscribers of approximately 8%, partially offset by the impact of higher affiliation rates and, to a lesser extent, a net favorable$1,700 affiliate adjustment recorded in the current year period. The decrease in advertising revenue was primarily due to a lower net decrease in deferred revenue related to ratings guarantees and the impact of fewer live professional sports telecasts as compared with the prior year period, partially offset by higher per-game sales from the telecast of live professional sports programming and other net advertising increases, primarily from the Company's non-ratings based advertising initiatives. Other net decreases were largely due to the absence in the current year period of revenues associated with certain services provided toFuse Media, Inc. 25
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Direct operating expenses Direct operating expenses for the six months endedDecember 31, 2019 increased$4,600 , or 3%, to$152,725 as compared with the prior year period due to higher rights fees expense of$4,251 , principally as a result of contractual rate increases under the Company's media rights agreements with professional sports teams. Selling, general and administrative expenses Selling, general and administrative expenses for the six months endedDecember 31, 2019 increased$6,145 or 13%, to$54,342 as compared with the prior year period primarily due to higher advertising and marketing costs and professional fees. The overall increase includes approximately$1,600 in expenses in the current year period that are not indicative of the Company's core expense base. Operating income Operating income for the six months endedDecember 31, 2019 decreased$18,974 , or 12%, to$138,237 as compared with the prior year period primarily due to (as discussed above) the decrease in revenues, higher selling, general and administrative expenses (including share-based compensation expense) and, to a lesser extent, higher direct operating expenses. Interest expense Interest expense for the six months endedDecember 31, 2019 decreased$2,866 , or 12%, to$20,749 as compared with the prior year period primarily due to a lower average principal balance under the Company's senior secured credit facilities (see "Financing Agreements"), as well as lower average interest rates for the six months endedDecember 31, 2019 (3.5% as compared with 3.7% in the prior year). Debt refinancing expense Debt refinancing expense was approximately$2,764 for the six months endedDecember 31, 2019 related to refinancing of the Company's senior secured credit facilities. See Note 7 to the consolidated financial statements included in "Part I - Item 1. Financial Statements" of this Quarterly Report on Form 10-Q for more information on the refinancing of the Company's senior secured credit facilities. Income taxes See Note 15 to the consolidated financial statements included in "Part I - Item 1. Financial Statements" of this Quarterly Report on Form 10-Q for more information on income taxes. Adjusted operating income The Company has presented the components that reconcile operating income, a GAAP measure, to adjusted operating income: Six Months Ended December 31, Increase (Decrease) 2019 2018 in Adjusted Operating Income Operating income$ 138,237 $ 157,211 $ (18,974 ) Share-based compensation 10,099 9,287 812 Depreciation and amortization 3,407 3,845 (438 ) Adjusted operating income$ 151,743 $ 170,343 $ (18,600 ) Adjusted operating income for the six months endedDecember 31, 2019 decreased$18,600 , or 11%, to$151,743 as compared with the prior year period primarily due to (as discussed above) the decrease in revenues, higher selling, general and administrative expenses (excluding share-based compensation expense) and, to a lesser extent, higher direct operating expenses. Liquidity and Capital Resources Overview Our primary sources of liquidity are cash and cash equivalents, cash flows from the operations of our business and available borrowing capacity under our revolving credit facility. The Company amended and restated its prior credit agreement, datedSeptember 28, 2015 (the "Former Credit Agreement"), in its entirety onOctober 11, 2019 . See "Financing Agreements" below. Our principal uses of cash are expected to include working capital-related items, capital spending, taxes, debt service, and the repurchase of shares of the Company's Class A common stock, par value$0.01 per share ("Class A Common Stock"). The 26
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Company's 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. We believe we have sufficient liquidity, including$115,914 in cash and cash equivalents, as ofDecember 31, 2019 , as well as the available borrowing capacity under our revolving credit facility and our anticipated operating cash flows, to fund our business operations, repurchase shares of the Company's Class A Common Stock and service our outstanding term loan facility (see "Financing Agreements" below) during the next twelve months. However, potential subscriber reductions of our Distributors, changes in the demand for our programming, advertising revenue declines, our ability to maintain or obtain content, and other factors could adversely impact our business and results of operations, which might require that we seek alternative sources of funding through the capital and credit markets that may or may not be available to us. OnDecember 7, 2017 , the Company's Board of Directors (the "Board") authorized the repurchase of up to$150,000 of the Company's Class A Common Stock. OnAugust 29, 2019 , the Board authorized a$300,000 increase to the stock repurchase authorization, which had$136,165 of availability remaining, bringing the total available repurchase authorization for Class A Common Stock to$436,165 as of that date. Under the authorization, shares of Class A Common Stock may be purchased from time to time in open market or private transactions, block trades or such other manner as the Company may determine, in accordance with applicable insider trading and other securities laws and regulations. The timing and amount of purchases will depend on market conditions and other factors. OnOctober 3, 2019 , the Company settled its modified Dutch auction tender offer and repurchased approximately 15 million shares of its Class A Common Stock, at a price of$16.70 per share, for an aggregate purchase price of$250,168 . As ofDecember 31, 2019 , the Company had$185,997 of availability remaining under its stock repurchase authorization. Financing Agreements OnSeptember 28, 2015 ,MSGN Holdings, L.P. ("MSGN L.P. "), an indirect wholly-owned subsidiary of the Company through which the Company conducts substantially all of its operations,MSGN Eden, LLC , an indirect subsidiary of the Company and the general partner ofMSGN L.P. ,Regional MSGN Holdings LLC , a direct subsidiary of the Company and the limited partner ofMSGN L.P. (collectively withMSGN Eden, LLC , the "Holdings Entities"), and certain subsidiaries ofMSGN L.P. entered into the Former Credit Agreement with a syndicate of lenders.MSGN L.P. , the Holdings Entities and certain subsidiaries ofMSGN L.P. amended and restated the Former Credit Agreement effectiveOctober 11, 2019 (the "Credit Agreement"). The Credit Agreement providesMSGN L.P. with senior secured credit facilities consisting of: (i) an initial$1,100,000 term loan facility (the "Term Loan Facility") and (ii) a$250,000 revolving credit facility (the "Revolving Credit Facility"), each with a term of five years. As ofDecember 31, 2019 , there was$1,100,000 outstanding under the Term Loan Facility, and no borrowings under the Revolving Credit Facility. As ofDecember 31, 2019 , theHoldings Entities and MSGN L.P. and its restricted subsidiaries on consolidated basis were in compliance with the financial covenants of the Credit Agreement. 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 more information on the Credit Agreement and the Former Credit Agreement. Contractual Obligations As more fully described in Note 9 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year endedJune 30, 2019 , the Company's contractual obligations not reflected on the consolidated balance sheets consist primarily of its obligations under media rights agreements. In addition, 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 the principal repayments required under the Company's Term Loan Facility. Cash Flow Discussion Operating Activities Net cash provided by operating activities for the six months endedDecember 31, 2019 decreased by$16,434 to$74,021 as compared with the prior year period. This decrease was primarily driven by lower income from operations before taxes, partially offset by other net increases as compared with the prior year period. Investing Activities Net cash used in investing activities for the six months endedDecember 31, 2019 decreased by$1,916 to$1,758 as compared with the prior year period primarily due to an investment made in a nonconsolidated entity in the prior year period. 27
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Financing Activities Net cash used in financing activities for the six months endedDecember 31, 2019 increased by$65,272 to$182,772 as compared with the prior year period. This increase was primarily due to repurchases of the Company's Class A Common Stock, partially offset by the proceeds received from borrowings under the Company's senior secured credit facilities during the current year period, as well as lower principal repayments on the Company's term loan facilities made in the current year period. Recently Issued Accounting Pronouncements Not Yet Adopted and Critical Accounting Policies Recently Issued Accounting Pronouncements Not Yet Adopted InJune 2016 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses, and subsequent ASUs that amended the application of ASU No. 2016-13, which introduces a new impairment model for most financial assets and certain other instruments. For trade and other receivables, the Company will be required to use a forward-looking "expected loss" model that will replace the current "incurred loss" model and generally will result in earlier recognition of allowances for losses. 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. InAugust 2018 , the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which removes, adds, or clarifies disclosure requirements relating to defined benefit plans to improve disclosure effectiveness. This standard will be effective for the Company beginning in the fourth quarter of fiscal year 2021, with early adoption permitted. The standard is to be applied retroactively to all periods presented. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements. InMarch 2019 , the FASB issued ASU No. 2019-02, Entertainment-Films-Other Assets-Film Costs (Subtopic 926-20) and Entertainment-Broadcasters-Intangibles-Goodwill and Other (Subtopic 920-350): Improvements to Accounting for Costs of Films and License Agreements for Program Materials, which amends Accounting Standards Codification ("ASC") Subtopic 920-350 to align the accounting for production costs of an episodic television series with that for the costs of producing films. This standard will be effective for the Company beginning in the first quarter of fiscal year 2021, with early adoption permitted. The standard is to be applied prospectively to all periods presented. The Company is currently evaluating the impact this standard will have on its consolidated financial statements. InDecember 2019 , the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU eliminates certain exceptions to the general approach in ASC Topic 740 and includes methods of simplification to the existing guidance. This standard will be effective for the Company beginning in the first quarter of fiscal year 2022, with early adoption permitted. The standard is to be applied prospectively to all periods presented. The Company is currently evaluating the impact this standard will have on its consolidated financial statements. Critical Accounting Policies The following discussion has been included to provide the results of the Company's annual impairment testing of goodwill performed during the first quarter of fiscal year 2020. There have been no other material changes to the Company's critical accounting policies from those set forth in our Annual Report on Form 10-K for the year endedJune 30, 2019 .Goodwill The goodwill balance reported on the Company's consolidated balance sheet as ofDecember 31, 2019 is$424,508 .Goodwill is tested annually for impairment as ofAugust 31st and at any time upon the occurrence of certain events or substantive changes in circumstances. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company does not need to perform the quantitative goodwill impairment test for that reporting unit. If the Company cannot support such a conclusion or the Company does not elect to perform the qualitative assessment then the Company would perform the quantitative goodwill impairment test. The quantitative goodwill impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The Company has one reporting unit for evaluating goodwill impairment. During the first quarter of fiscal year 2020, the Company performed its annual impairment test of goodwill by comparing the fair value of its reporting unit with its carrying value. As the Company's reporting unit had a negative carrying value of net assets, there was no impairment of goodwill identified. 28
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