MADISON SQUARE GARDEN SPORTS CORP. This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. In this MD&A, there are
statements concerning the future operating and future financial performance of
effectively manage the impacts, including the unavailability of the
Madison Square Garden Arena ("The Garden") and league decisions regarding
the resumption of play;
• the impact of the suspension or cancellation of the 2019-20 or 2020-21 NBA
and NHL seasons on our ability to recognize revenue from national media
rights fees;
• the level of our revenues, which depends in part on the popularity and
competitiveness of our sports teams;
• costs associated with player injuries, waivers or contract terminations of
players and other team personnel;
• changes in professional sports teams' compensation, including the impact
of signing free agents and trades, subject to league salary caps and the
impact of luxury tax;
• the level of our capital expenditures and other investments;
• general economic conditions, especially in the
• the demand for sponsorship arrangements and for advertising;
• competition, for example, from other teams, and other sports and
entertainment options;
• changes in laws, NBA or NHL rules, regulations, guidelines, bulletins,
directives, policies and agreements, including the leagues' respective
collective bargaining agreements (each a "CBA") with their players'
associations, salary caps, escrow requirements, revenue sharing, NBA
luxury tax thresholds and media rights, or other regulations under which
we operate;
• any NBA, NHL or other work stoppage in addition to those related to
COVID-19 impacts;
• any economic, political or other actions, such as boycotts, protests, work
stoppages or campaigns by labor organizations;
• seasonal fluctuations and other variation in our operating results and
cash flow from period to period;
• the level of our expenses, including our corporate expenses;
• business, reputational and litigation risk if there is a security incident
resulting in loss, disclosure or misappropriation of stored personal
information or other breaches of our information security;
• activities or other developments that discourage or may discourage
congregation at prominent places of public assembly, including The Garden
where the home games of the New York Knickerbockers (the "Knicks") and the
New York Rangers (the "Rangers") are played;
• the evolution of the esports industry and its potential impact on our
esports businesses;
• the acquisition or disposition of assets or businesses and/or the impact
of, and our ability to successfully pursue, acquisitions or other
strategic transactions;
• our ability to successfully integrate acquisitions or new businesses into
our operations;
• the operating and financial performance of our strategic acquisitions and
investments, including those we may not control;
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• the impact of governmental regulations or laws, including changes in how
those regulations and laws are interpreted and the continued benefit of
certain tax exemptions (including for The Garden) and the ability for us
and Madison Square Garden Entertainment Corp. ("MSG Entertainment ") to
maintain necessary permits or licenses;
• the impact of any government plans to redesign
• a default by our subsidiaries under their respective credit facilities;
• business, economic, reputational and other risks associated with, and the
outcome of, litigation and other proceedings;
• financial community and rating agency perceptions of our business,
operations, financial condition and the industry in which we operate;
• our ownership of professional sports franchises in the NBA and NHL and
certain related transfer restrictions on our common stock;
• the tax free treatment of the distribution of the outstanding common stock
of the Company to the shareholders of MSG Networks Inc. in fiscal year
2016 and the MSGE Distribution;
• the performance by
agreements with the Company related to the MSGE Distribution and ongoing
commercial arrangements; and
• the factors described under "Part I - Item 1A. Risk Factors" included in
this Annual Report on Form 10-K.
We disclaim 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. MSGE Distribution OnApril 17, 2020 (the "MSGE Distribution Date"), the Company distributed all of the outstanding common stock ofMSG Entertainment to its stockholders (the "MSGE Distribution").MSG Entertainment owns, directly or indirectly, the entertainment business previously owned and operated by the Company through itsMSG Entertainment business segment and the sports booking business previously owned and operated by the Company through itsMSG Sports business segment. In the MSGE Distribution, (a) each holder of the Company's Class A common stock, received one share of MSG Entertainment Class A common stock, par value$0.01 per share, for every share of the Company's Class A common stock held of record as of the close of business,New York City time, onApril 13, 2020 (the "Record Date"), and (b) each holder of the Company's Class B common stock, received one share of MSG Entertainment Class B common stock, par value$0.01 per share, for every share of the Registrant's Class B common stock held of record as of the close of business,New York City time, on the Record Date. Subsequent to the MSGE Distribution, the Company no longer consolidates the financial results ofMSG Entertainment for purposes of its own financial reporting and the historical financial results ofMSG Entertainment have been reflected in the Company's consolidated financial statements as discontinued operations for all periods presented through the MSGE Distribution Date. After giving effect to the MSGE Distribution, the Company operates and reports financial information in one segment. Introduction MD&A is provided as a supplement to, and should be read in conjunction with, the audited consolidated financial statements and footnotes thereto included in Item 8 of this Annual Report on Form 10-K to help provide an understanding of our financial condition, changes in financial condition and results of operations. Our MD&A is organized as follows: Business Overview. This section provides a general description of our business, as well as other matters that we believe are important in understanding our results of operations and financial condition and in anticipating future trends. Results of Operations. This section provides an analysis of our results of operations for the years endedJune 30, 2020 , 2019 and 2018. Liquidity and Capital Resources. This section provides a discussion of our financial condition, as well as an analysis of our cash flows for the years endedJune 30, 2020 and 2019. The discussion of our financial condition and liquidity includes summaries of (i) our primary sources of liquidity and (ii) our contractual obligations and off balance sheet arrangements that existed atJune 30, 2020 . 27
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Seasonality of Our Business. This section discusses the seasonal performance of our Company. Recently Issued Accounting Pronouncements and Critical Accounting Policies. This section includes a discussion of accounting policies considered to be important to our financial condition and results of operations and which require significant judgment and estimates on the part of management in their application. In addition, all of our significant accounting policies, including our critical accounting policies, are discussed in the notes to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. Business Overview The Company owns and operates a portfolio of assets featuring some of the most recognized teams in all of sports, including the Knicks of the NBA and the Rangers of the NHL. Both the Knicks and the Rangers play their home games at The Garden. The Company's other professional franchises include two development league teams - the Hartford Wolf Pack of theAmerican Hockey League ("AHL") and theWestchester Knicks of theNBA G League ("NBAGL"). Our professional sports franchises are collectively referred to herein as "our sports teams." During the periods prior to fiscal year 2020,MSG Sports also included theNew York Liberty (the "Liberty") of theWomen's National Basketball Association (the "WNBA"), which was sold inJanuary 2019 . In addition, the Company owns Knicks Gaming, an esports franchise that competes in the NBA 2K League, as well as a controlling interest in Counter Logic Gaming ("CLG"), a North American esports organization. The Company also operates two professional sports team performance centers - theMadison Square Garden Training Center in Greenburgh, NY and theCLG Performance Center inLos Angeles, CA. CLG and Knicks Gaming are collectively referred to herein as "our esports teams," and together with the sports teams, the "teams." Revenue Sources We earn revenue from several primary sources: ticket sales and a portion of suite rental fees at The Garden, our share of distributions from NHL and NBA league-wide national and international television contracts and other league-wide revenue sources, venue signage and other sponsorships, food and beverage sales at The Garden and merchandising. We also earn substantial fees from MSG Networks for the local media rights to telecast the games of our sports teams. The amount of revenue we earn is influenced by many factors, including the impacts of COVID-19, the popularity and on-court or on-ice performance of our sports teams and general economic conditions. In particular, when our sports teams have strong on-court and on-ice performance, we benefit from increased demand for tickets, potentially greater food and merchandise sales from increased attendance and increased sponsorship opportunities. When our sports teams qualify for the playoffs, we also benefit from the attendance and in-game spending at the playoff games. The year-to-year impact of team performance is somewhat moderated by the fact that a significant portion of our revenue derives from media rights fees, suite rental fees and sponsorship and signage revenue, all of which are generally contracted on a multi-year basis. Nevertheless, the long-term performance of our business is tied to the success and popularity of our sports teams. In addition, due to the NBA and NHL playing seasons, revenues from our business are typically concentrated in the second and third quarters of each fiscal year. The concentration of our revenues and expenses, however, may be different due to the effects of the COVID-19 pandemic. Ticket Sales and Facility and Ticketing Fees Ticket sales have historically constituted our largest single source of revenue. Tickets to our sports teams' home games are sold through season tickets (full and partial plans), which are typically held by long-term season subscribers, through group sales, and through single-game tickets, which are purchased by fans either individually or in multi-game packages. We generally review and set the price of our tickets before the start of each team's season. However, we dynamically price our individual tickets based on opponent, seat location, day of the week and other factors. We do not earn revenue from ticket sales for games played by our teams at their opponents' arenas. We also earn revenues in the form of certain fees added to ticket prices, which currently include a facility fee the Company charges on tickets it sells to our sports teams' games, except for season tickets. Media Rights We earn revenue from the licensing of media rights for our sports teams' home and away games and also through the receipt of our share of fees paid for league-wide media rights, which are awarded under contracts negotiated and administered by each league. The Company and MSG Networks are parties to media rights agreements covering the local telecast rights for the Knicks and Rangers. The financial success of the Company is significantly dependent on the rights fees we receive from MSG Networks in connection with the telecast of our Knicks and Rangers games. National and international telecast arrangements differ by league. Fees paid by telecasters under these arrangements are pooled by each league and then generally shared equally among all teams. 28
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Suites and Clubs We earn revenue through the sale of suite and premium club licenses at The Garden, which are generally sold byMSG Entertainment to corporate customers pursuant to multi-year licenses. Under standard licenses, the licensees pay an annual license fee, which varies depending on the location and type of the suite or club. The license fee includes, for each seat in the suite or club, tickets for our home games and other events at The Garden that are presented byMSG Entertainment for which tickets are sold to the general public, subject to certain exceptions. In addition, suite holders separately pay for food and beverage service in their suites at The Garden. Food and non-alcoholic beverage service is included in the annual license fee paid by club members. Because suite and club licenses cover both our games and events thatMSG Entertainment presents at The Garden, suite and club rental revenue is shared between us andMSG Entertainment under the arena license agreements (the "Arena License Agreements") we entered into in connection with the MSGE Distribution. Pursuant to the Arena Licenses Agreements, the Knicks and the Rangers are entitled to 35% and 32.5%, respectively, of the revenues received byMSG Entertainment in connection with suite and club licenses. Venue Signage and Sponsorships We earn revenues through the sale of sponsorships and signage specific to the teams. Sales of team specific signage generally involve the sale of advertising space within The Garden during our sports teams' home games and include the sale of signage on the ice and on the boards of the hockey rink during Rangers games, courtside during Knicks games, and/or on the various scoreboards and display panels at The Garden. We offer both television camera-visible and non-camera-visible signage space. We also earn a portion of revenues throughMSG Entertainment's sale of venue indoor signage space and sponsorship rights at The Garden that are not specific to our teams pursuant to the Arena License Agreements. Sponsorship rights generally require the use of the name, logos and other trademarks of a sponsor in the advertising and in promotions for The Garden in general or our teams specifically during our sports events. Sponsorship arrangements may be exclusive within a particular sponsorship category or non-exclusive and generally permit a sponsor to use the name, logos and other trademarks of our teams and, in the case of sponsorship arrangements shared withMSG Entertainment ,MSG Entertainment's venues and brands in connection with their own advertising and in promotions in The Garden or in the community. Food, Beverage and Merchandise Sales We earn revenues from the sale of food and beverages during our sports teams' games at The Garden. In addition to concession-style sales of food and beverages, which represent the majority of food and beverage revenues, The Garden also provides higher-end dining at full service restaurants and premium clubs as well as catering for suites. Pursuant to the Arena License Agreements, the Knicks and the Rangers receive 50% of net profits from the sales of food and beverages during their games at The Garden. We also earn revenues from the sale of our sports teams' merchandise both through the in-venue (and in some cases, online) sale of items bearing the logos or other marks of our teams and through our share of sports league distributions of royalties and other revenues from the sports leagues' licensing of team and sports league trademarks, which revenues are generally shared equally among the teams in the sports leagues. Pursuant to the Arena License Agreements, the Knicks and the Rangers payMSG Entertainment a commission equal to 30% of revenues from the sales of their merchandise at The Garden. By agreement among the teams, each of the sports leagues in which we operate acts as an agent for the sports teams to license their logos and other marks, as well as the marks of the leagues, subject to certain rights retained by the teams to license these marks within their arenas and the geographic areas in which they operate. Other Amounts collected for ticket sales, sponsorships, venue signage and suite licenses and clubs in advance of an event are recorded as deferred revenue and are recognized as revenues when earned for both accounting and tax purposes. Expenses The most significant expenses are player and other team personnel salaries and charges for transactions relating to players for career-ending and season-ending injuries, trades, and waivers and contract termination costs of players and other team personnel, including team executives. We also incur costs for travel, player insurance, league operating assessments (including a 6% NBA assessment on regular season ticket sales), NHL and NBA revenue sharing and, when applicable, NBA luxury tax. In addition, in connection with the MSGE Distribution, the Company entered into the Arena License Agreements withMSG Entertainment which require the Company to pay arena license fees toMSG Entertainment in exchange for the right to use The Garden for home games of the Knicks and the Rangers for a 35-year term. Under the Arena License Agreements, the Knicks 29
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and the Rangers will pay an annual license fee in connection with their respective use of The Garden. The license fee for the first full contract year endingJune 30, 2021 will be approximately$22,500 for the Knicks and approximately$16,700 for the Rangers, and then for each subsequent year, the license fees will be 103% of the license fees for the immediately preceding contract year. The teams are not, however, required to pay the license fee during a period in which The Garden is unavailable for home games due to a force majeure event (including the government mandated suspension of events at The Garden as a result of the disruptions caused by COVID-19). As a result, we have not been required to make any rent payments under the Arena License Agreements since the MSGE Distribution Date and will continue not to be required to make any rent payments during the government mandated suspension of events at The Garden as a result of the disruptions caused by COVID-19. If The Garden reopens without capacity limitations, future monthly rent payments due under the Arena License Agreements will be payable by the Knicks and the Rangers, even if the NBA or NHL seasons do not resume simultaneously or at all. If the Knicks or Rangers play games at the Garden subject to government mandated capacity constraints due to COVID-19, the applicable rent for such periods will be reduced by up to 80% depending on the size of the capacity constraint. See "- Factors Affecting Results of Operations - Impact of COVID-19 on Our Business" for more information. Player Salaries, Escrow System/Revenue Sharing and NBA Luxury Tax The amount we pay an individual player is typically determined by negotiation between the player (typically represented by an agent) and us, and is generally influenced by the player's past performance, the amounts paid to players with comparable past performance by other sports teams and restrictions in the CBAs, including the salary floors and caps and NBA luxury tax. The leagues' CBAs typically contain restrictions on when players may move between league clubs following expiration of their contracts and what rights their current and former clubs have. NBA CBA. The NBA CBA expires after the 2023-24 season (although each of the NBA and theNational Basketball Players Association ("NBPA") has the right to terminate the CBA effective following the 2022-23 season). In addition, the NBA and the NBPA currently have the right to terminate the CBA throughOctober 15, 2020 (unless extended). The NBA CBA contains a salary floor (i.e., a floor on each team's aggregate player salaries with a requirement that the team pay any deficiency to the players on its roster) and a "soft" salary cap (i.e., a cap on each team's aggregate player salaries but with certain exceptions that enable teams to pay players more, sometimes substantially more, than the cap). NBA Luxury Tax. Amounts in this paragraph are in thousands, except for luxury tax rates. The NBA CBA generally provides for a luxury tax that is applicable to all teams with aggregate player salaries exceeding a threshold that is set prior to each season based upon projected league-wide revenues (as defined under the NBA CBA). The luxury tax rates for teams with aggregate player salaries above such threshold start at$1.50 for each$1.00 of team salary above the threshold up to$5,000 and scale up to$3.25 for each$1.00 of team salary that is from$15,000 to$20,000 over the threshold, and an additional tax rate increment of$0.50 applies for each additional$5,000 (or part thereof) of team salary in excess of$20,000 over the threshold. In addition, for teams that are taxpayers in at least three of four previous seasons, the above tax rates are increased by$1.00 for each increment. Fifty percent of the aggregate luxury tax payments is a funding source for the revenue sharing plan (described below) and the remaining 50% of such payments is distributed in equal shares to non-taxpaying teams. For the 2019-20, 2018-19, and 2017-18 seasons, the Knicks were not a luxury tax payer and we recorded approximately$230 ,$3,100 , and$2,200 , respectively, of luxury tax proceeds from tax-paying teams. Tax obligations for years beyond the 2019-20 season will be subject to contractual player payroll obligations and corresponding NBA luxury tax thresholds. The Company recognizes the estimated amount associated with luxury tax expense or the amount it expects to receive as a non-tax paying team, if applicable, on a straight-line basis over the NBA regular season as a component of direct operating expenses. NBA Escrow System/Revenue Sharing. The NBA CBA also provides that players collectively receive a designated percentage of league-wide revenues (net of certain direct expenses) as compensation (approximately 51%), and the teams retain the remainder. The percentage of league-wide revenues paid as compensation and retained by the teams does not apply evenly across all teams and, accordingly, the Company may pay its players a higher or lower percentage of the Knicks' revenues than other NBA teams. Throughout each season, NBA teams withhold 10% of each player's salary and contribute the withheld amounts to an escrow account. If the league's aggregate player compensation exceeds the designated percentage of league-wide revenues, some or all of such escrowed amounts are distributed equally to all NBA teams. In the event that the league's aggregate player compensation is below the designated percentage of league-wide revenues, the teams with the shortfall will remit the shortfall in equal shares to the NBPA for distribution to the players. The NBA also has a revenue sharing plan that generally requires the distribution of a pool of funds to teams with below-average net revenues (as defined in the plan), subject to reduction or elimination based on individual team market size and profitability. The plan is funded by a combination of disproportionate contributions from teams with above-average net revenues, subject to certain profit-based limits (each as defined in the plan); 50% of aggregate league-wide luxury tax proceeds (see above); and collective league sources, if necessary. Additional amounts may also be distributed on a discretionary basis, funded by 30
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assessments on playoff ticket revenues and through collective league sources. We record our revenue sharing expense net of the amount we expect to receive from the escrow. Our net provision for these items for the year endedJune 30, 2020 was approximately$6,529 . The actual amounts for the 2019-20 season may vary significantly from the recorded provision based on actual operating results for the league and all NBA teams for the season and other factors, including the NBA's return-to-play plans to complete the 2019-20 season. NHL CBA. The current NHL CBA was set to expire onSeptember 15, 2022 , but theNHL and NHL Players' Association ("NHLPA") have recently agreed on terms by which the CBA will be extended through and includingSeptember 15, 2026 (with the possibility of an additional one year extension in certain circumstances). The NHL CBA provides for a salary floor (i.e., a floor on each team's aggregate player salaries) and a "hard" salary cap (i.e., teams may not exceed a stated maximum, which has been adjusted each season thereafter based upon league-wide revenues). See Note 21 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for summary of the principal aspects of the new NHL CBA and revenue sharing plan. NHL Escrow System/Revenue Sharing. The NHL CBA provides that each season the players receive as player compensation 50% of that season's league-wide revenues. Because the aggregate amount to be paid to the players is based upon league-wide revenues and not on a team-by-team basis, the Company may pay its players a higher or lower percentage of the Rangers' revenues than other NHL teams pay of their own revenues. In order to implement the salary cap system, NHL teams withhold a portion of each player's salary and contribute the withheld amounts to an escrow account. If the league's aggregate player compensation for a season exceeds the designated percentage (50%) of that season's league-wide revenues, the excess is retained by the league. Any such excess funds are distributed to all teams in equal shares. As ofJuly 2020 , the NHL CBA limits the amount of deductions to be withheld from player salaries each year. If annual excess deductions from player salaries are insufficient to limit league-wide player salaries to 50% of that season's league-wide revenues, any shortfall will be carried forward to future seasons and remain due from the players to the league. The NHL CBA also provides for a revenue sharing plan. The plan generally requires the distribution of a pool of funds approximating 6.055% of league-wide revenues to certain qualifying lower-revenue teams and is funded as follows: (a) 50% from contributions by the top ten revenue earning teams (based on preseason and regular season revenues, net of arena costs) in accordance with a formula; (b) then from payments by teams participating in the playoffs, with each team contributing 35% of its gate receipts for each home playoff game; and (c) the remainder from centrally-generated NHL sources. We record our revenue sharing expense net of the amount we expect to receive from the escrow. Our net provisions for these items for the year endedJune 30, 2020 was approximately$133 . The actual amounts for the 2019-20 season may vary significantly from the recorded provision based on actual operating results for the league and all NHL teams for the season and other factors, including the NHL's return-to-play plans to complete the 2019-20 season. Other Team Operating Expenses Our teams also pay expenses associated with day-to-day operations, including for travel, equipment maintenance and player insurance. Direct variable day-of-event costs incurred at The Garden, such as the costs of front-of-house and back-of-house staff, including electricians, laborers, box office staff, ushers, security, and event production are charged to the Company. In addition, our team operating expenses include operating costs of the Company's training center in Greenburgh, NY. The operation of the Hartford Wolf Pack is reported as a net Rangers player development expense. As members of the NBA and NHL, the Knicks and Rangers, respectively, are also subject to league assessments. The governing bodies of each league determine the amount of each season's league assessments that are required from each member team. The NBA imposed on each team a 6% assessment on regular season ticket revenue. We also incur costs associated with VIP amenities provided to certain ticket holders. Other Expenses Selling, general and administrative ("SG&A") expenses primarily consist of administrative costs, including compensation, professional fees, as well as sales and marketing costs, including non-event related advertising expenses. SG&A expenses for periods prior to the MSGE Distribution include certain corporate overhead expenses that do not meet the criteria for inclusion in discontinued operations. Factors Affecting Operating Results Our operating results are largely dependent on the continued popularity and/or on-ice or on-court competitiveness of our Rangers and Knicks teams, which have a direct effect on ticket sales for the teams' home games and are each team's largest single source of revenue. As with other sports teams, the competitive positions of our sports teams depend primarily on our ability to develop, obtain and retain talented players, for which we compete with other professional sports teams. A significant 31
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factor in our ability to attract and retain talented players is player compensation. The Company's operating results reflect the impact of high costs for player salaries (including NBA luxury tax, if any) and salaries of non-player team personnel. In addition, we have incurred significant charges for costs associated with transactions relating to players on our sports teams for season-ending and career-ending injuries and for trades, waivers and contract terminations of players and other team personnel, including team executives. Waiver and termination costs reflect our efforts to improve the competitiveness of our sports teams. These transactions can result in significant charges as the Company recognizes the estimated ultimate costs of these events in the period in which they occur, although amounts due to these individuals are generally paid over their remaining contract terms. For example, the expense for these items was$33,690 ,$53,134 and$27,514 for fiscal years 2020, 2019 and 2018, respectively. These expenses add to the volatility of our operating results. We expect to continue to pursue opportunities to improve the overall quality of our sports teams and our efforts may result in continued significant expenses and charges. Such expenses and charges may result in future operating losses although it is not possible to predict their timing or amount. Our performance has been, and may in the future be, impacted by work stoppages. See "Part I - Item 1A. Risk Factors - Organized Labor MattersMay Have a Material Negative Effect on Our Business and Results of Operations." In addition to our future performance being dependent upon the continued popularity and/or on-ice or on-court competitiveness of our Rangers and Knicks teams, it is also dependent on general economic conditions, in particular those in theNew York City metropolitan area, and the effect of these conditions on our customers. An economic downturn could adversely affect our business and results of operations as it may lead to lower demand for suite licenses and tickets to the games of our sports teams, which would also negatively affect merchandise and concession sales, as well as decrease levels of sponsorship and venue signage revenues. Factors Affecting Results of Operations Impact of COVID-19 on Our Business OnMarch 11 and 12, 2020, the NBA and NHL, respectively, suspended their 2019-20 seasons due to COVID-19. At the time the seasons were suspended, the Knicks had 16 games remaining, including eight home games, and the Rangers had 12 games remaining, including five home games. OnMay 26, 2020 , the NHL announced return-to-play plans for 24 teams which beganAugust 1, 2020 . The Rangers were among the teams that returned to play in a 24-team tournament. OnJune 4, 2020 , the NBA announced plans to resume play onJuly 30, 2020 with 22 teams. The Knicks were not among the teams that returned to competition. As a result of government-mandated assembly limitations and closures due to the COVID-19 pandemic, no events are currently permitted to be held at The Garden where the Knicks and Rangers play their home games, and some or all of these mandated restrictions may remain in effect even after the NBA and/or NHL resume for the 2020-21 seasons. No assurances can be made that games will be played at The Garden or will be played with any in-arena audiences or without limited-capacity in-arena audiences. COVID-19 disruptions have materially impacted the Company's revenues and we are recognizing materially less revenues across a number of areas. Those areas include: ticket sales; media rights fees; our share of suite licenses; sponsorships; signage and in-venue advertising at The Garden; and food, beverage and merchandise sales. While we currently have the ability to reduce certain operating expenses as a result of the disruptions caused by COVID-19, including (i) rent payments toMSG Entertainment under the Arena License Agreements while The Garden remains closed, (ii) NBA league assessments and day-of-game expenses for the Knicks and Rangers games and (iii) certain other selling, general and administrative and discretionary expenses, those expense reduction opportunities will not fully offset revenue losses. Subsidiaries of the Company are parties to the Arena License Agreements with a subsidiary ofMSG Entertainment that requires the Knicks and the Rangers to play their home games at The Garden. Under the Arena License Agreements, the Knicks and the Rangers will pay an annual license fee in connection with their respective use of The Garden. The license fee for the first full contract year endingJune 30, 2021 will be approximately$22,500 for the Knicks and approximately$16,700 for the Rangers, and then for each subsequent year, the license fees will be 103% of the license fees for the immediately preceding contract year. The Garden, however, is currently closed due to the COVID-19 pandemic and monthly rent is not required to be paid by the Knicks or Rangers. If The Garden reopens without capacity limitations, future monthly rent payments due under the Arena License Agreements will be payable by the Knicks and the Rangers, even if the NBA or NHL seasons do not resume simultaneously or at all. If the Knicks or Rangers play games at the Garden subject to government mandated capacity constraints due to COVID-19, the applicable rent for such periods will be reduced by up to 80% depending on the size of the capacity constraint. For more information about the risks to the Company as a result of the COVID-19 pandemic and its impact on our operating results, see "Part I - Item 1A. Risk Factors - Our Operations and Operating Results Have Been, and Continue to be, Materially Impacted by the COVID-19 Pandemic and Government andLeague Actions Taken in Response." 32
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New York Liberty The Company's operating results for fiscal year 2019 also included the Liberty of theWomen's National Basketball Association , which was sold inJanuary 2019 . Renewal of a Ticketing Agreement The Company's operating results for the year endedJune 30, 2019 were impacted by the recognition of revenue for events that took place during the prior year due to the renewal of the agreement with the Company's ticketing platform provider during fiscal year 2019. The impact on the Company's consolidated revenues, operating income and adjusted operating income for the year endedJune 30, 2019 from games played in the prior year as a result of the ticketing agreement renewal was$2,753 . Results of Operations Comparison of the Year EndedJune 30, 2020 versus the Year EndedJune 30, 2019 The table below sets forth, for the periods presented, certain historical financial information. Years Ended June 30, Change (a) 2020 2019 Amount Percentage Revenues$ 603,319 $ 729,404 $ (126,085 ) (17 )% Direct operating expenses 359,970 440,081 (80,111 ) (18 )% Selling, general and administrative expenses 319,675 327,441 (7,766 ) (2 )% Depreciation and amortization 17,540 20,077 (2,537 ) (13 )% Operating loss (93,866 ) (58,195 ) (35,671 ) (61 )% Other income (expense): Interest expense, net (3,761 ) (3,779 ) 18 - %
Miscellaneous income (expense), net (421 ) 1,333 (1,754 ) NM Loss from continuing operations before income taxes
(98,048 ) (60,641 ) (37,407 ) (62 )%
Income tax benefit (expense) (20,593 ) 12,619 (33,212 ) NM
Loss from continuing operations (118,641 ) (48,022 ) (70,619 ) (147 )% Income (loss) from discontinued operations, net of taxes
(90,222 ) 44,905 (135,127 ) NM
Net loss (208,863 ) (3,117 ) (205,746 ) NM
Less: Net loss attributable to
nonredeemable noncontrolling
interests from continuing operations (2,342 ) (2,300 ) (42 ) (2 )%
Less: Net loss attributable to
redeemable noncontrolling interests
from discontinued operations (24,013 ) (7,299 ) (16,714 ) NM
Less: Net loss attributable to
nonredeemable noncontrolling
interests from discontinued
operations (120 ) (4,945 ) 4,825 98 %
Net income (loss) attributable to
Madison Square Garden Sports Corp.'s
stockholders $ (182,388 ) $ 11,427 $ (193,815 ) NM
NM - Percentage is not meaningful
(a) Operating results were materially impacted by the coronavirus pandemic.
Please see "- Factors Affecting Results of Operations - Impact of COVID-19 on
Our Business" for more information.
For all periods through the MSGE Distribution, the reported financial results of
the Company reflect the results of the MSG Entertainment business segment and
the sports booking business, previously owned and operated by the Company
through its MSG Sports business segment, as discontinued operations. In
addition, results from continuing operations for these periods include certain
corporate overhead expenses that the Company did not incur in the period after
the completion of the MSGE Distribution and does not expect to incur in future
periods, but which do not meet the criteria for inclusion in discontinued
operations. The reported financial results of the Company for the periods after
the MSGE Distribution reflect the Company's results on a standalone basis,
including the Company's actual corporate overhead.
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Revenues
Revenues for the year ended
$ (43,815 ) Decrease in revenues from league distributions (34,529 )
Decrease in suite license fee revenues primarily due to the impact of the suspensions of the 2019-20 NBA and NHL regular seasons
(18,722 )
Decrease in sponsorship and signage revenues (18,011 )
Decrease in local media rights fees from MSG Networks (9,280 )
Decrease in pre/regular season food, beverage and merchandise sales
(4,805 )
Other net increases, including revenues that do not meet the criteria for inclusion in discontinued operations
3,077
$ (126,085 )
The decrease in pre/regular season ticket-related revenues was primarily due to
fewer Knicks and Rangers home games as compared to the prior year due to the
suspensions of the 2019-20 NBA and NHL regular seasons. The Knicks and Rangers
played 36 and 39 home games, respectively, at The Garden during the 2019-20
seasons as compared to 44 home games each during the 2018-19 seasons. To a
lesser extent, the decrease also reflects the impact of the recognition of
additional revenue during the prior year as a result of the ticketing agreement
renewal during the third quarter of fiscal year 2019. We will not receive
professional sports teams' pre/regular season ticket revenues until the Knicks
and the Rangers again play home games at The Garden with fans in attendance.
The decrease in revenues from league distributions was primarily due to lower
recognition of national media rights fees in fiscal year 2020 as compared to the
prior year. This was primarily due to the suspensions of the 2019-20 NBA and NHL
regular seasons. Based on the completion of the 2019-20 NBA and NHL seasons, the
Company would recognize the remainder of national media rights fees related to
those seasons that otherwise would have been recognized during the third and
fourth quarters of fiscal year 2020 in the first quarter of fiscal year 2021.
The decrease in sponsorship and signage revenues was primarily due to fewer
Knicks and Rangers home games at The Garden in fiscal year 2020 as compared to
the prior year due to the suspensions of the 2019-20 NBA and NHL regular
seasons. We will continue earning significantly lower sponsorship and signage
revenues until the Knicks and Rangers resume playing home games at The Garden
with fans in attendance. To a lesser extent, the decrease also reflects lower
sales of existing sponsorship and signage inventory.
The decrease in local media rights fees from MSG Networks was due to the impact
of the Knicks and Rangers not achieving the contractually obligated minimum
threshold of games delivered for broadcast to MSG Networks for the 2019-20
seasons. This decrease was partially offset by contractual rate increases. Based
on the leagues' return-to-play plans, MSG Networks broadcasted play-in games of
the Rangers and, as a result, a portion of local media rights fees associated
with the Rangers will be recognized during the first quarter of fiscal year
2021.
The decrease in pre/regular season food, beverage and merchandise sales was due
to fewer Knicks and Rangers home games at The Garden in fiscal year 2020 as
compared to the prior year due to the suspensions of the 2019-20 NBA and NHL
regular seasons. This decrease was slightly offset by higher average per-game
revenue. We will not receive revenues from professional sports teams'
pre/regular season food, beverage and merchandise sales until the Knicks and
Rangers again play home games at The Garden with fans in attendance.
Direct operating expenses
Direct operating expenses primarily include:
• compensation expense for our sports teams' players and certain other team
personnel;
• cost of team personnel transactions for season-ending player injuries (net
of anticipated insurance recoveries), trades, and waivers/contract
termination costs of players and other team personnel;
• NBA luxury tax, NBA and NHL revenue sharing and league assessments; and
• the cost of merchandise and food and beverage sales.
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Direct operating expenses for the year ended
$ (49,750 )
Decrease in net provisions for certain team personnel transactions (24,277 ) Decrease in other team operating expenses not discussed elsewhere in this table
(8,743 )
Decrease in pre/regular season expense associated with food, beverage and merchandise sales
(2,356 )
Increase in team personnel compensation 3,508
Other net increases, including expenses that do not meet the criteria for inclusion in discontinued operations
1,507
$ (80,111 ) Net provisions for league revenue sharing expense (net of escrow and excluding playoffs) and NBA luxury tax were as follows:
Years Ended June 30,
2020 2019 Decrease
Net provisions for league revenue sharing
expense (net of escrow and excluding playoffs)
and NBA luxury tax $ 6,433 $ 56,183 $ (49,750 )
The decrease in net provisions for league revenue sharing expense (net of escrow
and excluding playoffs) and NBA luxury tax reflect lower provisions for league
revenue sharing expense of $52,654 offset by a lower estimated NBA luxury tax
credit in the current year as compared to the prior year of $2,903 . Lower
provisions for league revenue sharing expense primarily reflects lower estimated
NBA and NHL revenue sharing expense for the 2019-20 season and higher estimated
net player escrow recoveries due to the impact of the suspensions of the 2019-20
NBA and NHL regular seasons, as well as the format and timing of the leagues'
return-to-play. Based on the completion of the 2019-20 NBA and NHL seasons, the
Company would recognize a portion of revenue sharing expense (net of escrow)
related to those seasons that otherwise would have been recognized during the
third and fourth quarters of fiscal year 2020 in the first quarter of fiscal
year 2021. We expect that our revenue sharing expense will be lower in the
2020-21 season if the NBA and NHL play their games without fans in attendance
and/or if the NBA and NHL either shorten their seasons or if the 2020-21 season
extends beyond the end of our 2021 fiscal year.
The Knicks were not a luxury tax payer for the 2018-19 season and, therefore,
received an equal share of the portion of luxury tax receipts that were
distributed to non-tax paying teams. The Knicks' roster as of June 30,
2020 would not result in the team being a luxury tax payer for the 2019-20
season and the estimated luxury tax receipt is currently anticipated to be lower
than the luxury tax receipt for the 2018-19 season. The actual amounts for the
2019-20 season may vary significantly from the recorded provisions based on
actual operating results for each league and all teams within each league for
the season and other factors.
Net provisions for certain team personnel transactions were as follows:
Years Ended June 30,
2020 2019 Decrease
Net provisions for certain team personnel
transactions $ 28,857 $ 53,134 $ (24,277 ) Team personnel transactions for the year ended
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The increase in team personnel compensation was primarily due to roster changes at the Company's sports teams and other team personnel compensation partially offset by the impact of the suspensions of the 2019-20 NBA and NHL regular seasons, as well as the format and timing of the leagues' return-to-play. Based on the completion of the 2019-20 NBA and NHL seasons, the Company would recognize a portion of the expense that otherwise would have been recognized during the third and fourth quarters of fiscal year 2020 in the first quarter of fiscal year 2021. We expect that our team personnel compensation during the 2020-21 season will be proportionally lower (relative to the number of games played) if the NBA and NHL either shorten their seasons or if the 2020-21 season extends beyond the end of our 2021 fiscal year. Selling, general and administrative expenses Selling, general and administrative expenses primarily consist of administrative costs, including compensation, professional fees, and sales and marketing costs. Selling, general and administrative expenses for the year endedJune 30, 2020 decreased$7,766 , or 2%, to$319,675 as compared to the prior year primarily due to lower corporate overhead costs. The results for the periods prior to the MSGE Distribution include certain corporate expenses that the Company does not expect to incur in future periods. Partially offsetting this decrease are corporate costs incurred during the period following the MSGE Distribution (April 18, 2020 throughJune 30, 2020 ), as well as an increase in employee compensation and related benefits, including severance-related costs attributable to a separation agreement with a team executive and higher professional fees. Depreciation and amortization Depreciation and amortization for the year endedJune 30, 2020 decreased$2,537 , or 13%, to$17,540 as compared to the prior year primarily due to certain assets being fully depreciated and amortized. Operating loss Operating loss for the year endedJune 30, 2020 increased$35,671 , or 61%, to$93,866 as compared to the prior year. The increase was primarily due to lower revenue slightly offset by lower direct operating expenses and, to a lesser extent, lower selling, general and administrative expenses and depreciation and amortization as discussed above. Miscellaneous income (expense), net The decrease of$1,754 in miscellaneous income, net for the year endedJune 30, 2020 to miscellaneous expense, net of$421 primarily reflects changes in miscellaneous income (expense) that the Company did not earn or incur, and does not expect to earn or incur in future periods, but which do not meet the criteria for inclusion in discontinued operations. Income taxes Income tax expense for the year endedJune 30, 2020 of$20,593 differs from the income tax benefit derived from applying the statutory federal rate of 21% to pretax loss primarily due to an increase in valuation allowance of$46,310 tax expense of$492 relating to noncontrolling interests, and tax expense of$762 relating to nondeductible expenses, partially offset by state and local tax benefit of$7,332 . See Note 18 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further details on the components of income tax and a reconciliation of the statutory federal rate to the effective tax rate. Income tax benefit for the year endedJune 30, 2019 of$12,619 differs from the income tax benefit derived from applying the statutory federal rate of 21% to pretax loss primarily due to state income tax benefit of$2,873 , excess tax benefit on share-based payment awards of$4,555 , partially offset by tax expense of$8,521 relating to nondeductible officers' compensation. Adjusted operating income (loss) The Company evaluates performance based on several factors, of which the key financial measure is operating income (loss) excluding (i) deferred rent expense under the arena license agreements withMSG Entertainment , (ii) depreciation, amortization and impairments of property and equipment, goodwill and other intangible assets, (iii) share-based compensation expense or benefit, (iv) restructuring charges or credits, (v) gains or losses on sales or dispositions of businesses, and (vi) the impact of purchase accounting adjustments related to business acquisitions, which is referred to as adjusted operating income (loss), a non-GAAP measure. Management believes that the exclusion of share-based compensation expense or benefit allows investors to better track the performance of the Company's business without regard to the settlement of an obligation that is not expected to be made in cash. In addition, management believes that given the length of the arena license agreements and resulting magnitude of the difference in deferred rent expense and the cash rent payments, the exclusion of deferred rent expense provides investors with a clearer picture of the Company's operating performance. The Company believes adjusted operating income (loss) is an appropriate measure for evaluating the operating performance of the Company. Adjusted operating income (loss) and similar measures with similar titles are common performance measures used by 36
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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).
The following is a reconciliation of operating loss to adjusted operating income
(loss):
Years Ended June 30, Change
2020 2019 Amount Percentage
Operating loss $ (93,866 ) $ (58,195 ) $ (35,671 ) (61 )%
Share-based compensation (a) 48,693 49,113
Depreciation and amortization (a) (b) 17,540 20,077 Other purchase accounting adjustments 167
200
Adjusted operating income (loss)
________________
NM - Percentage is not meaningful (a) For periods through the MSGE Distribution, share-based compensation includes
expenses that the Company does not expect to incur in future periods, but
which do not meet the criteria for inclusion in discontinued operations.
(b) Depreciation and amortization included purchase accounting adjustments of
Adjusted operating income for the year ended
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Comparison of the Year EndedJune 30, 2019 versus the Year EndedJune 30, 2018 Factors Affecting Operating Results from Acquisitions CLG's Operating Results The results of operations of the Company for the year endedJune 30, 2018 include CLG's results of operations from the date of acquisition, which wasJuly 28, 2017 . The Company's results for the year endedJune 30, 2017 do not include any of CLG's operating results. The table below sets forth, for the periods presented, certain historical financial information. Years Ended June 30, Change 2019 2018 Amount Percentage Revenues$ 729,404 $ 712,415 $ 16,989 2 % Direct operating expenses 440,081 419,069 21,012 5 % Selling, general and administrative expenses 327,441 290,718 36,723 13 % Depreciation and amortization 20,077 20,807 (730 ) (4 )% Operating loss (58,195 ) (18,179 ) (40,016 ) NM Other income (expense): Interest expense, net (3,779 ) (2,591 ) (1,188 ) (46 )% Miscellaneous income (expense), net 1,333 (518 ) 1,851 NM Loss from operations before income taxes (60,641 ) (21,288 ) (39,353 ) NM Income tax benefit 12,619 59,392 (46,773 ) (79 )% Income (loss) from continuing operations (48,022 ) 38,104 (86,126 ) NM Income from discontinued operations, net of taxes 44,905 96,344 (51,439 ) (53 )% Net income (loss) (3,117 ) 134,448 (137,565 ) NM Less: Net loss attributable to nonredeemable noncontrolling interests from continuing operations (2,300 ) (2,136 ) (164 ) (8 )% Less: Net loss attributable to redeemable noncontrolling interests from discontinued operations (7,299 ) (628 ) (6,671 ) NM Less: Net loss attributable to nonredeemable noncontrolling interests from discontinued operations (4,945 ) (4,382 ) (563 ) (13 )% Net income attributable toMadison Square Garden Sports Corp.'s stockholders$ 11,427 $ 141,594 $ (130,167 ) (92 )% NM - Percentage is not meaningful Revenues Revenues for the year endedJune 30, 2019 increased$16,989 , or 2%, to$729,404 as compared to the prior year. The net increase is attributable to the following: Increase in revenues from league distributions$ 13,883 Increase in local media rights fees from MSG Networks 5,750 Increase in suite license fee revenues 3,594 Decrease in pre/regular season ticket-related revenues (6,174 )
Decrease in pre/regular season food, beverage and merchandise sales
(1,670 )
Decrease in sponsorship and signage revenues (419 )
Other net increases, including revenues that do not meet the criteria for inclusion in discontinued operations
2,025
$ 16,989
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The increase in revenues from league distributions included the impact of timing. The increase in local media rights fees from MSG Networks was primarily due to contractual rate increases. The increase in suite license fee revenue was primarily due to rate increases, partially offset by lower sales of suite products. The decrease in sponsorship and signage revenues was primarily due to the impact of the new revenue recognition standard in fiscal year 2019, partially offset by decreased sales of existing sponsorship and signage inventory. The decrease in pre/regular season ticket-related revenues was primarily due to lower average Rangers, Knicks and Liberty per-game revenue, partially offset by the impact of the recognition of$2,753 during fiscal year 2019 associated with games played in the prior year as a result of the ticketing agreement renewal. The decrease in pre/regular season food, beverage and merchandise sales was primarily due to lower average per-game revenue during fiscal year 2019 as compared to the prior year and the Liberty playing fewer games at The Garden during fiscal year 2019 as compared to the prior year. The Liberty played ten fewer regular season games at The Garden during fiscal year 2019 year as compared to the prior year, as the Liberty played the majority of their home games at the Westchester County Center, located inWhite Plains, NY , during fiscal year 2019. Additionally, the Liberty was sold inJanuary 2019 . Direct operating expenses Direct operating expenses for the year endedJune 30, 2019 increased$21,012 , or 5%, to$440,081 as compared to the prior year. The net increase is attributable to the following: Increase in net provisions for certain team personnel transactions$ 25,620 Increase in other team operating expenses not discussed elsewhere in this table 3,846
Increase in net provisions for league revenue sharing expense (excluding playoffs) and NBA luxury tax
733
Decrease in team personnel compensation primarily due to roster changes
(11,513 )
Other net increases, including expenses that do not meet the criteria for inclusion in discontinued operations
2,326
$ 21,012 The increase in other team operating expenses was primarily due to an increase
in league assessments and other net increases, partially offset by lower player
insurance costs and lower day-of-event costs, primarily driven by the Liberty
playing fewer games at The Garden during the fiscal year 2019 as compared to the
prior year. During fiscal year 2019, the majority of the Liberty's home games
were played at the Westchester County Center, located in
Years Ended June 30,
2019 2018 Increase
Net provisions for certain team personnel
transactions $ 53,134 $ 27,514 $ 25,620 Team personnel transactions for the year ended
Years Ended June 30,
2019 2018 Increase
Net provisions for league revenue sharing
expense (excluding playoffs) and NBA luxury tax $ 56,183 $ 55,450 $ 733 The increase in net provisions for league revenue sharing expense (excluding
playoffs) and NBA luxury tax reflects higher provisions for league revenue
sharing expense of
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seasons' revenue sharing expense. The actual amounts for the 2018-19 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 Knicks were not a luxury tax payer for the 2018-19 and 2017-18 seasons and, therefore, received equal share of the portion of luxury tax receipts that were distributed to non-tax paying teams. Selling, general and administrative expenses Selling, general and administrative expenses for the year endedJune 30, 2019 increased$36,723 , or 13%, to$327,441 as compared to prior year. The increase was primarily due to (i) higher corporate overhead costs for the periods prior to the MSGE Distribution that the Company does not expect to incur in future periods and, to a lesser extent, (ii) higher employee compensation and related benefits, and (iii) an increase in marketing costs. Depreciation and amortization Depreciation and amortization for the year endedJune 30, 2019 decreased$730 , or 4%, to$20,077 as compared to the prior year. Operating loss Operating loss for the year endedJune 30, 2019 increased$40,016 to$58,195 as compared to the prior year. The increase was primarily due to higher selling, general and administrative expenses and direct operating expenses, slightly offset by higher revenue as discussed above. Interest expense, net Net interest expense for the year endedJune 30, 2019 increased$1,188 , or 46%, to$3,779 as compared to the prior year. Miscellaneous expense, net The decrease of$1,851 in miscellaneous expense, net for the year endedJune 30, 2019 to miscellaneous income, net of$1,333 primarily reflects lower net periodic benefit costs associated pension plans and postretirement benefit plan. Income taxes Income tax benefit for the year endedJune 30, 2019 was$12,619 and income tax benefit for the year endedJune 30, 2018 was$59,392 . Income tax benefit for the year endedJune 30, 2019 of$12,619 differs from the income tax benefit derived from applying the statutory federal rate of 21% to pretax loss primarily due to state income tax benefit of$2,873 , excess tax benefit on share-based payment awards of$4,555 , partially offset by tax expense of$8,521 relating to nondeductible officers' compensation. For the fiscal year endedJune 30, 2018 , the Company used a blended statutory federal income rate of 28% based upon the number of days that it would be taxed at the former rate of 35% and the number of days it would be taxed at the new rate of 21%, effectiveJanuary 1, 2018 . Income tax benefit for the year endedJune 30, 2018 of$59,392 differs from the income tax benefit derived from applying the blended statutory Federal rate of 28% to pretax loss primarily as a result of a deferred income tax benefit of$50,169 related to the reduction of net deferred tax liabilities in connection with the lower Federal income tax rate of 21% and state and local income tax expense of$1,909 . Adjusted operating income The following is a reconciliation of operating loss to adjusted operating income: Years Ended June 30, Change 2019 2018 Amount Percentage Operating loss$ (58,195 ) $ (18,179 ) $ (40,016 ) NM Share-based compensation (a) 49,113 40,594
Depreciation and amortization (a) (b) 20,077 20,807 Other purchase accounting adjustments 200
90
Adjusted operating income $ 11,195 $ 43,312 $ (32,117 ) (74 )%
________________
NM - Percentage is not meaningful
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(a) For periods through the MSGE Distribution, includes expenses that the
Company did not incur and does not expect to incur in future periods, but
which do not meet the criteria for inclusion in discontinued operations.
(b) Depreciation and amortization included purchase accounting adjustments of
$1,630 and $2,946 for the years ended June 30, 2019 and 2018, respectively.
Adjusted operating income for the year ended June 30, 2019 decreased $32,117 , or
74%, to $11,195 as compared to the prior year. The decrease was lower than the
increase in operating loss primarily due to higher share-based compensation.
Net loss attributable to nonredeemable noncontrolling interests from continuing
operations
For the year ended June 30, 2019 , the Company recorded a net loss attributable
to nonredeemable noncontrolling interests from continuing operations of $2,300
as compared to $2,136 of net loss attributable to nonredeemable noncontrolling
interests from continuing operations for the year ended June 30, 2018 . These
amounts represent the share of net loss of CLG that are not attributable to the
Company. In addition, the net loss attributable to nonredeemable noncontrolling
interests from continuing operations includes a proportional share of expenses
related to purchase accounting adjustments.
Liquidity and Capital Resources
Overview
Our operations and operating results have been, and continue to be, materially
impacted by the COVID-19 pandemic and government and league actions taken in
response. The NBA and NHL suspended their 2019-20 seasons on March 11 and 12,
2020, respectively. On May 26, 2020 , the NHL announced return-to-play plans for
24 teams which began August 1, 2020 . The Rangers were among the teams that
returned to play in a 24-team tournament. On June 4, 2020 , the NBA announced
plans to resume play on July 30, 2020 with 22 teams. The Knicks were not among
the teams that returned to competition. For more information about the impacts
and risks to the Company as a result of COVID-19, see "- Impact of COVID-19 on
Our Business" and "Item 1A. Risk Factors - Our Operations and Operating Results
Have Been, and Continue to be, Materially Impacted by the COVID-19 Pandemic and
Government and League Actions Taken in Response"
Prior to the suspension of the NBA and NHL seasons and the MSGE Distribution,
our primary sources of liquidity had been cash and cash equivalents, cash flows
from the operations of our businesses and maximum borrowing capacity under our
$365,000 revolving credit facilities which are described below.
In connection with the MSGE Distribution, we (i) borrowed the full $350,000
available under the Knicks Revolving Credit Facility and the Rangers Revolving
Credit Facility (each as defined below) and (ii) entered into the $200,000 DDTL
Facilities" (as defined below).
As a result, until the 2020-21 NBA and NHL seasons commence, our primary sources
of liquidity are cash and cash equivalents, $15,000 of borrowing capacity under
the Knicks Unsecured Credit Facility (which expires on September 24, 2021 ) and
$200,000 of borrowing capacity under the DDTL Facilities (which expire on
October 17, 2021 ). The ability to draw down on the delayed draw term loan
facilities depends on the liquidity of MSG Entertainment , which may be
materially impacted by the COVID-19 pandemic. Once the 2020-21 NBA and NHL
seasons commence, we also expect to have access to cash flow from our operations
as a source of liquidity.
Our principal uses of cash include the operation of our businesses, working
capital-related items, the repayment of outstanding debt, and potential
repurchases of shares of the Company's Class A Common Stock.
As of June 30, 2020 , we had $78,000 in unrestricted cash and cash equivalents.
As of June 30, 2020 , the Company had approximately $126,000 in current deferred
revenue obligations. Of this amount, approximately $61,000 is related to the
2019-20 NBA and NHL seasons, including approximately $42,000 associated with
national media rights fees. Based on the completion of the 2019-20 NBA and NHL
seasons, the Company would recognize national media rights fees in the first
quarter of fiscal year 2021. The balance of deferred revenue obligations related
to the 2019-20 seasons is comprised of obligations in connection with suites and
sponsorships, which will be addressed, to the extent necessary, through credits,
make-goods and/or refunds, as applicable.
We regularly monitor and assess our ability to meet our net funding and
investment requirements. 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, management's view of a favorable allocation of cash resources,
and the timing of cash flow generation. To the extent the Company desires to
access alternative sources of funding through the capital and credit markets,
restrictions imposed by the NBA and NHL and challenging U.S. and global economic
and market conditions could adversely impact its ability to do so at that time.
We believe we have sufficient liquidity, including approximately $78,000 in
unrestricted cash and cash equivalents as of June 30, 2020 , along with available
borrowing capacity under $15,000 Knicks Unsecured Credit Facility and $200,000
DDTL Facilities, to fund our operations and repay any outstanding debt that
becomes due over the next 12 months. We plan to refinance the Knicks
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Revolving Credit Facility (which is currently due onSeptember 30, 2021 ) and the Rangers Revolving Credit Facility (which is currently due onJanuary 25, 2022 ) prior to the maturities thereof. If we were not able to do so,$350,000 of indebtedness outstanding as ofJune 30, 2020 (plus any amount borrowed under the DDTL Facilities) will be due during fiscal 2022. Financing Agreements and Stock Repurchases Knicks Revolving Credit Facility OnSeptember 30, 2016 ,New York Knicks, LLC ("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 (the "Knicks Revolving Credit Facility") to fund working capital needs and for general corporate purposes. Amounts borrowed may be distributed to the Company except during an event of default. The Knicks Revolving Credit Facility requiresKnicks LLC to comply with a debt service ratio of 1.5:1.0 over a trailing four quarter period. As ofJune 30, 2020 ,Knicks LLC was in compliance with this financial covenant. The Knicks Revolving Credit Facility will mature and any unused commitments thereunder will expire onSeptember 30, 2021 . 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 ofKnicks LLC may be either (i) a base rate plus a margin ranging from 0.00% to 0.125% per annum or (ii) the London Inter-Bank Offered Rate ("LIBOR") plus a margin ranging from 1.00% to 1.125% per annum.Knicks LLC is required to pay a commitment fee ranging from 0.20% to 0.25% per annum in respect of the average daily unused commitments under the Knicks Revolving Credit Facility. The outstanding balance under the Knicks Revolving Credit Facility was$200,000 as ofJune 30, 2020 . All obligations under the Knicks Revolving Credit Facility are secured by a first lien security interest in certain ofKnicks LLC's assets, including, but not limited to, (i) theKnicks LLC's membership rights in the NBA and (ii) revenues to be paid to theKnicks LLC by the NBA pursuant to certainU.S. national broadcast agreements. Subject to customary notice and minimum amount conditions,Knicks LLC may voluntarily prepay outstanding loans under the Knicks Revolving Credit Facility at any time, in whole or in part, without premium or penalty (except for customary breakage costs with respect to Eurocurrency loans).Knicks LLC is required to make mandatory prepayments in certain circumstances, including without limitation if the maximum available amount under the Knicks Revolving Credit Facility is greater than 350% of qualified revenues. In addition to the financial covenant described above, the Knicks Credit Agreement and related security agreements contain certain customary representations and warranties, affirmative covenants and events of default. The Knicks Revolving Credit Facility contains certain restrictions on the ability ofKnicks LLC to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the Knicks Revolving Credit Facility, including the following: (i) incurring additional indebtedness and contingent liabilities; (ii) creating liens on certain assets; (iii) making restricted payments during the continuance of an event of default under the Knicks Revolving Credit Facility; (iv) engaging in sale and leaseback transactions; (v) merging or consolidating; and (vi) taking certain actions that would invalidate the secured lenders' liens on anyKnicks LLC's collateral. Knicks Unsecured Credit Facility OnSeptember 30, 2016 ,Knicks LLC entered into an unsecured revolving credit facility with a lender for an initial maximum credit amount of$15,000 and a 364-day term (the "Knicks Unsecured Credit Facility").Knicks LLC renewed this facility with the lender on the same terms in successive years and the facility has been renewed for a new term effective as ofSeptember 25, 2020 . There was no borrowing under the Knicks Unsecured Credit Facility as ofJune 30, 2020 . This facility does not have financial covenants. Rangers Revolving Credit Facility OnJanuary 25, 2017 ,New York Rangers, LLC ("Rangers LLC "), a wholly owned subsidiary of the Company, entered into a credit agreement (the "Rangers Credit Agreement") with a syndicate of lenders providing for a senior secured revolving credit facility of up to$150,000 with a term of five years (the "Rangers Revolving Credit Facility") to fund working capital needs and for general corporate purposes. Amounts borrowed may be distributed to the Company except during an event of default. The Rangers Revolving Credit Facility requiresRangers LLC to comply with a debt service ratio of 1.5:1.0 over a trailing four quarter period. As ofJune 30, 2020 ,Rangers LLC was in compliance with this financial covenant. The Rangers Revolving Credit Facility will mature and any unused commitments thereunder will expire onJanuary 25, 2022 . All borrowings under the Rangers Revolving Credit Facility are subject to the satisfaction of certain customary conditions. 42
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Borrowings bear interest at a floating rate, which at the option ofRangers LLC may be either (i) a base rate plus a margin ranging from 0.125% to 0.50% per annum or (ii) LIBOR plus a margin ranging from 1.125% to 1.50% per annum.Rangers LLC is required to pay a commitment fee ranging from 0.375% to 0.625% per annum in respect of the average daily unused commitments under the Rangers Revolving Credit Facility. The outstanding balance under the Rangers Revolving Credit Facility was$150,000 as ofJune 30, 2020 . All obligations under the Rangers Revolving Credit Facility are secured by a first lien security interest in certain ofRangers LLC's assets, including, but not limited to, (i)Rangers LLC's membership rights in the NHL, (ii) revenues to be paid toRangers LLC by the NHL pursuant to certainU.S. and Canadian national broadcast agreements, and (iii) revenues to be paid toRangers LLC pursuant to local media contracts. Subject to customary notice and minimum amount conditions,Rangers LLC may voluntarily prepay outstanding loans under the Rangers Revolving Credit Facility at any time, in whole or in part, without premium or penalty (except for customary breakage costs with respect to Eurocurrency loans).Rangers LLC is required to make mandatory prepayments in certain circumstances, including without limitation if qualified revenues are less than 17% of the maximum available amount under the Rangers Revolving Credit Facility. In addition to the financial covenant described above, the Rangers Credit Agreement and related security agreements contain certain customary representations and warranties, affirmative covenants and events of default. The Rangers Revolving Credit Facility contains certain restrictions on the ability ofRangers LLC to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the Rangers Revolving Credit Facility, including the following: (i) incurring additional indebtedness and contingent liabilities; (ii) creating liens on certain assets; (iii) making restricted payments during the continuance of an event of default under the Rangers Revolving Credit Facility; (iv) engaging in sale and leaseback transactions; (v) merging or consolidating; and (vi) taking certain actions that would invalidate the secured lenders' liens on any ofRangers LLC's assets securing the obligations under the Rangers Revolving Credit Facility. Delayed Draw Term Loan Credit Facilities As an additional source of liquidity for the Company in response to the COVID-19 pandemic, onApril 17, 2020 ,MSG NYR Holdings, LLC andMSG NYK Holdings, LLC , two indirect wholly-owned subsidiaries of the Company, each entered into a separate delayed draw term loan credit agreement withMSG Entertainment Group, LLC , a wholly-owned subsidiary ofMSG Entertainment , as lender (the "DDTL Lender"). The credit agreement forMSG NYK Holdings, LLC (the "Knicks DDTL Facility Borrower") provides for a$110,000 senior unsecured delayed draw term loan facility (the "Knicks DDTL Facility") and the credit agreement forMSG NYR Holdings, LLC (the "Rangers DDTL Facility Borrower") provides for a$90,000 senior unsecured delayed draw term loan facility (the "Rangers DDTL Facility" and, together with the Knicks DDTL Facility, the "DDTL Facilities"). The DDTL Facilities will mature and any unused commitments thereunder will expire onOctober 17, 2021 . Borrowings under the DDTL Facilities will bear interest at a variable rate equal to either, at the election of the applicable borrower, (i) LIBOR plus 2.00% per annum or (ii) a base rate plus 1.00% per annum. Subject to the borrowing conditions, each of the DDTL Facilities may be drawn in up to four separate borrowings of$10,000 or more. Proceeds of borrowings under the DDTL Facilities will be used for general corporate purposes. The availability of each of the DDTL Facilities to the respective borrowers is subject to certain conditions, including (a) the liquidity, including cash on hand and availability under revolving credit commitments, of the Company,MSG Sports, LLC , the Knicks DDTL Facility Borrower and its subsidiaries and the Rangers DDTL Facility Borrower and its subsidiaries (other than any liquidity that is restricted by law or contractual obligation from being transferred to the relevant DDTL Facility Borrower or its subsidiaries) must be (i) less than$50,000 immediately prior to giving effect to any borrowing, and (ii) less than$75,000 immediately after giving effect to any borrowing, and (b) with respect to the Knicks DDTL Facility, the Knicks DDTL Facility Borrower and its subsidiaries must have used commercially reasonable efforts to raise additional financing ("New Third-Party Debt"), including additional commitments under existing revolving facilities, prior to drawing on the Knicks DDTL Facility to the extent permitted by the debt policies of the NBA. In addition, the commitments of the DDTL Lender to make advances under the Knicks DDTL Facility will be permanently reduced and the Knicks DDTL Facility will be subject to mandatory prepayments in an amount equal to the net cash proceeds received by the Company,MSG Sports, LLC , the Knicks DDTL Facility Borrower, or the subsidiaries of the Knicks DDTL Facility Borrower from any New Third-Party Debt. Pursuant to the NBA debt policies, the NBA has consented (the "NBA Consent Letter") to the incurrence of the indebtedness under the Knicks DDTL Facility. The NBA Consent Letter provides that the Knicks DDTL Facility Borrower and its subsidiaries (including the Knicks basketball team) will, among other matters, (i) operate the team in a first class manner, consistent with the manner in which NBA teams generally are operated, as determined by theNBA Commissioner in his sole discretion, and (ii) maintain sufficient net working capital and cash reserves to pay expenses, liabilities and obligations of the team in the ordinary 43
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course and in a timely fashion. In addition, the Knicks DDTL Facility Borrower and its subsidiaries (including the Knicks) have agreed with the NBA to not transfer certain basketball-related assets and to not make distributions to the Company without first providing the NBA with advance notice and not receiving the objection of theNBA Commissioner . There was no borrowing under the DDTL Facilities as ofJune 30, 2020 . Financing Agreements and Stock Repurchases See Note 13 and Note 16 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for discussions of the Company's debt obligations and various financing agreements, and the Company's stock repurchases, respectively. Cash Flow Discussion The following table summarizes the Company's cash flow activities for the years endedJune 30, 2020 , 2019 and 2018: Years Ended June 30, 2020 2019 2018 Net income (loss)$ (208,863 ) $ (3,117 ) $ 134,448 Adjustments to reconcile net income (loss) to net cash provided by operating activities 264,259 184,322 65,097 Subtotal$ 55,396 $ 181,205 $ 199,545
Changes in working capital assets and liabilities (51,828 ) (19,952 ) 18,084 Net cash provided by operating activities
$ 3,568 $ 161,253 $ 217,629 Net cash used in investing activities (514,863 ) (232,895 ) (182,357 ) Net cash used in financing activities (520,588 ) (71,746 ) (51,097 )
Effect of exchange rates on cash, cash equivalents and restricted cash
4,655 4,669 331
Net decrease in cash, cash equivalents and
restricted cash $ (1,027,228 ) $ (138,719 ) $ (15,494 )
Operating Activities
Net cash provided by operating activities for the year ended June 30, 2020
decreased by $157,685 to $3,568 as compared to the prior year primarily due to
the decrease in net income, both from continued and discontinued operations,
adjusted for non-cash items. The decrease was driven by the impact of the
COVID-19 pandemic and the MSGE Distribution. As a result of government-mandated
assembly limitations and closures due to the COVID-19 pandemic, no events have
been held since mid-March at The Garden where the Knicks and Rangers play their
home games and the Company had recognized materially less revenues across a
number of areas. In addition, the temporary closure of The Garden and other MSG
Entertainment venues had a material impact on the results from discontinued
operations.
Net cash provided by operating activities for the year ended June 30, 2019
decreased by $56,376 to $161,253 as compared to the prior year primarily due to
changes in certain assets and liabilities, as well as a decrease in net income
to a net loss in fiscal year 2019 adjusted for non-cash items. The changes in
certain assets and liabilities are driven by decreases in collections due to
promoters and prepaid expenses and other assets, partially offset by higher
accrued and other liabilities, all due to timing. The decrease in net income
adjusted for non-cash items was impacted by earnings in equity method
investments in fiscal year 2019 as compared to a loss in the prior year and
lower depreciation and amortization in fiscal year 2019.
Investing Activities
Net cash used in investing activities for the year ended June 30, 2020 increased
by $281,968 to $514,863 as compared to the prior year, principally driven by
investing activities in discontinued operations. The changes in investing
activities included in discontinued operations primarily consisted of (i) an
increase in purchase of short-term investments in fiscal year 2020 as compared
to the prior year, (ii) higher capital expenditures in fiscal year 2020 as
compared to the prior year, of which substantially all are related to the MSG
Entertainment planned MSG Spheres in Las Vegas and London , and (iii) lower
proceeds received from the sale of interest in a nonconsolidated affiliate in
the prior year compared to the sale of interest in a nonconsolidated affiliate
in the current year. This increase was partially offset by (i) proceeds from the
maturity of short-term investments, (ii) a loan repayment received from a
subordinated note, (iii) lower investments made in nonconsolidated affiliates in
the current year as compared to the prior year, and (iv) acquisition of notes
receivable during the prior year as compared to none during the current year.
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Net cash used in investing activities for the year endedJune 30, 2019 increased by$50,538 to$232,895 as compared to the prior year primarily principally driven by investing activities in discontinued operations. The changes in investing activities included in discontinued operations primarily consisted of the investment in a British pound-denominated time deposit and an investment in a nonconsolidated affiliate, partially offset by proceeds received from the sale of interest in another nonconsolidated affiliate. Financing Activities Net cash used in financing activities for the year endedJune 30, 2020 increased by$448,842 to$520,588 as compared to the prior year. This increase in cash used in financing activities primarily consisted of the distribution of cash toMSG Entertainment , partially offset by the proceeds received from the borrowings under the Knicks Revolving Credit Facility and Rangers Revolving Credit Facility and other net financing activities included in discontinued operations. Net cash used in financing activities for the year endedJune 30, 2019 increased by$20,649 to$71,746 as compared to the prior year. The increase is driven primarily by financing activities included in discontinued operations partially offset by (i) lower taxes paid in lieu of shares issued for equity-based compensation in fiscal year 2019 as compared to the prior year and (ii) repurchases of shares of the Company's Class A Common Stock in the prior year as compared to no repurchases in fiscal year 2019, and other net financing activities. Contractual Obligations and Off Balance Sheet Arrangements Future cash payments required under contracts entered into by the Company in the normal course of business as ofJune 30, 2020 are summarized in the following table: Payments Due by Period Year Years Years More Than Total 1 2-3 4-5 5 Years Off balance sheet arrangements: (a)$ 395,600 $ 150,672 $ 142,664 $ 75,073 $ 27,191 Contractual obligations reflected on the balance sheet Leases (b) 2,376,994 41,865 87,503 88,940 2,158,686 Long-term debt (c) 350,000 - 350,000 - -
Contractual obligations (d) 91,740 53,139 20,539 6,350 11,712
2,818,734 95,004 458,042 95,290 2,170,398
Total (e) $ 3,214,334 $ 245,676 $ 600,706 $ 170,363 $ 2,197,589
_________________(a) Contractual obligations not reflected on the balance sheet consist
principally of the Company's obligations under employment agreements that
the Company has with certain of its professional sports teams' personnel
that are to be performed in future periods and that are generally guaranteed
regardless of employee injury or termination.
(b) Includes contractually obligated minimum lease payments for operating leases
having an initial noncancelable term in excess of one year. These
commitments are presented exclusive of the imputed interest used to reflect
the payment's present value. See Note 9 to the consolidated financial
statements included in Item 8 of this Annual Report on Form 10-K for
information on the contractual obligations related to future lease payments,
which are reflected on the consolidated balance sheet as lease liabilities
as of June 30, 2020 .
(c) Consists of amounts drawn under the Knicks Revolving Credit Facility and
Rangers Revolving Credit Facility. See Note 13 to the consolidated financial
statements included in Item 8 of this Annual Report on Form 10-K for further
details.
(d) Contractual obligations reflected on the balance sheet consist principally
of the Company's obligations under employment agreements that the Company
has with certain of its professional sports teams' personnel that have been
fully performed and that are being paid on a deferred basis.
(e) Pension obligations have been excluded from the table above as the timing of
the future cash payments is uncertain. See Note 14 to the consolidated
financial statements included in Item 8 of this Annual Report on Form 10-K
for more information on the future funding requirements under our pension
obligations.
See Note 11 to the consolidated financial statements included in Item 8 of this
Annual Report on Form 10-K for further details of the amount reflected on the
balance sheet as of
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Seasonality of Our Business The Company's dependence on revenues from its NBA and NHL sports teams generally means that we earn a disproportionate share of its revenues in the second and third quarters of the Company's fiscal year. OnMarch 11 and 12, 2020, respectively, the NBA and NHL suspended their 2019-20 seasons due to COVID-19. InJuly 2020 , the NBA and NHL restarted their seasons. As a result, based on the completion of the 2019-20 NBA and NHL seasons, the Company would recognize certain revenues that otherwise would have been recognized during the third and fourth quarter of fiscal year 2020 during the first quarter of fiscal year 2021. Recently Issued Accounting Pronouncements and Critical Accounting Policies Recently Issued Accounting Pronouncements See Note 2 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for discussion of recently issued accounting pronouncements. Critical Accounting Policies The preparation of the Company's consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Management believes its use of estimates in the consolidated financial statements to be reasonable. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following: Arrangements with Multiple Performance Obligations See Note 4 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for discussion of the Company's arrangements with multiple performance obligations, primarily multi-year sponsorship agreements. Impairment of Long-Lived and Indefinite-Lived AssetsThe Company's long-lived and indefinite-lived assets accounted for approximately 31% of the Company's consolidated total assets as ofJune 30, 2020 and consisted of the following:Goodwill $ 226,955 Indefinite-lived intangible assets 112,144
Amortizable intangible assets, net of accumulated amortization 2,754 Property and equipment, net
39,597
$ 381,450
In assessing the recoverability of the Company's long-lived and indefinite-lived
assets, the Company must make estimates and assumptions regarding future cash
flows and other factors to determine the fair value of the respective assets.
These estimates and assumptions could have a significant impact on whether an
impairment charge is recognized and also the magnitude of any such charge. Fair
value estimates are made at a specific point in time, based on relevant
information. These estimates are subjective in nature and involve significant
uncertainties and judgments and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates. If these
estimates or material related assumptions change in the future, the Company may
be required to record impairment charges related to its long-lived and/or
indefinite-lived assets.
Goodwill
Goodwill is tested annually for impairment as of August 31st and at any time
upon the occurrence of certain events or changes in circumstances. The Company
performs its goodwill impairment test at the reporting unit level, which is the
same as or one level below the operating segment level. Excluding discontinued
operations, the Company has one operating and reportable segment, and for the
year ended June 30, 2020 , the Company had one reporting unit for goodwill
impairment testing purposes.
The Company has the option to perform a qualitative assessment to determine if
an impairment is more likely than not to have occurred. If the Company can
support the conclusion that it is not more likely than not that the fair value
of a reporting unit is less than its carrying amount, the Company would not need
to perform a quantitative impairment test for that reporting unit. If the
Company cannot support such a conclusion or the Company does not elect to
perform the qualitative assessment, the first step of the goodwill impairment
test is used to identify potential impairment by comparing the fair value of a
reporting unit with its carrying amount, including goodwill. The estimates of
the fair value of the Company's reporting units are primarily determined using
discounted cash flows and comparable market transactions. These valuations are
based on estimates and assumptions including projected future cash flows,
discount rates, determination of appropriate market comparables and the
determination of
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whether a premium or discount should be applied to comparables. Significant judgments inherent in a discounted cash flow analysis include the selection of the appropriate discount rate, the estimate of the amount and timing of projected future cash flows and identification of appropriate continuing growth rate assumptions. The discount rates used in the analysis are intended to reflect the risk inherent in the projected future cash flows. Subsequent to the adoption of ASU No. 2017-04 in the third quarter of fiscal year 2020, the amount of an impairment loss is measured as the amount by which a reporting unit's carrying value exceeds its fair value determined in step one, not to exceed the carrying amount of goodwill. Prior to the adoption of ASU No. 2017-04, if the carrying amount of a reporting unit exceeded its fair value, the second step of the goodwill impairment test was performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compared the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeded the implied fair value of that goodwill, an impairment loss was recognized in an amount equal to that excess. The implied fair value of goodwill was determined in the same manner as the amount of goodwill that would be recognized in a business combination. The Company elected to perform the qualitative assessment of impairment for the Company's reporting unit for the fiscal year 2020 impairment test. These assessments considered factors such as: • macroeconomic conditions;
• industry and market considerations;
• market capitalization; • cost factors;
• overall financial performance of the reporting unit;
• 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.
The Company performed its most recent annual impairment test of goodwill during
the first quarter of fiscal year 2020, and there was no impairment of goodwill.
Based on this impairment test, the Company's reporting unit had sufficient
safety margins, defined as the excess of the amount by which the estimated fair
value of the reporting unit exceeded the carrying value of the reporting unit,
including goodwill. The most recent quantitative assessments were used in making
this determination. The Company believes that if the fair value of a reporting
unit exceeds its carrying value by greater than 10%, a sufficient safety margin
has been realized.
As a result of operating disruptions due to COVID-19, the Company's projected
cash flows were directly impacted. This disruption along with the macroeconomic
industry and market conditions, resulted in the evaluation of whether there was
a "triggering event", which required the Company to assess the carrying value of
its goodwill and intangible assets for impairment. Based on the assessment,
management determined that it was not more likely than not that an impairment
exists and there was no goodwill or intangible asset balance that was impaired
as of June 30, 2020 . However, the duration and impact of the COVID-19 pandemic
may result in future impairment charges that management will evaluate as facts
and circumstances evolve through time.
Identifiable Indefinite-Lived Intangible Assets
Identifiable indefinite-lived intangible assets are tested annually for
impairment as of August 31st and at any time upon the occurrence of certain
events or substantive changes in circumstances. The following table sets forth
the amount of identifiable indefinite-lived intangible assets reported in the
Company's consolidated balance sheet as of June 30, 2020 by reportable segment:
Sports franchises $ 111,064 Photographic related rights 1,080
$ 112,144
The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. In the qualitative assessment, the Company must evaluate the totality of qualitative factors, including any recent fair value measurements, that impact whether an indefinite-lived intangible asset other than goodwill has a carrying amount that more likely than not exceeds its fair value. The Company must proceed to conducting a quantitative analysis, if the Company (i) determines that such an impairment is more likely than not to exist, or (ii) forgoes the qualitative assessment entirely. Under the quantitative assessment, the impairment test for identifiable indefinite-lived intangible assets consists of a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. For all periods presented, the Company elected to perform a qualitative assessment of impairment for the indefinite-lived intangible assets. These assessments considered the events
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and circumstances that could affect the significant inputs used to determine the fair value of the intangible asset. Examples of such events and circumstances include: • cost factors;
• financial performance;
• legal, regulatory, contractual, business or other factors;
• other relevant company-specific factors such as changes in management,
strategy or customers;
• industry and market considerations; and
• macroeconomic conditions.
The Company performed its most recent annual impairment test of identifiable indefinite-lived intangible assets during the first quarter of fiscal year 2020, and there were no impairments identified. Based on this impairment test, 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. Lease Accounting The Company's leases primarily consist of the lease of the Company's corporate offices under the Sublease Agreement withMSG Entertainment (the "Sublease Agreement") for our principal executive offices atTwo Pennsylvania Plaza inNew York and the lease ofCLG Performance Center . In, addition, the Company accounts for the rights of use of The Garden pursuant to the Arena License Agreements as leases under the Accounting Standards Codification Topic 842, Leases. The Company determines whether an arrangement contains a lease at the inception of the arrangement. If a lease is determined to exist, the lease term is assessed based on the date when the underlying asset is made available for the Company's use by the lessor. The Company's assessment of the lease term reflects the non-cancelable term of the lease, inclusive of any rent-free periods and/or periods covered by early-termination options which the Company is reasonably certain not to exercise, as well as periods covered by renewal options which the Company is reasonably certain of exercising. The Company also determines lease classification as either operating or finance at lease commencement, which governs the pattern of expense recognition and the presentation reflected in the consolidated statements of operations over the lease term. For leases with a term exceeding 12 months, a lease liability is recorded on the Company's consolidated balance sheet at lease commencement reflecting the present value of the fixed minimum payment obligations over the lease term. A corresponding ROU asset equal to the initial lease liability is also recorded, adjusted for any prepaid rent and/or initial direct costs incurred in connection with execution of the lease and reduced by any lease incentives received. The Company includes fixed payment obligations related to non-lease components in the measurement of ROU assets and lease liabilities, as the Company has elected to account for lease and non-lease components together as a single lease component. ROU assets associated with finance leases are presented separate from operating leases ROU assets and are included within Property and equipment, net on the Company's consolidated balance sheet. For purposes of measuring the present value of the Company's fixed payment obligations for a given lease, the Company uses its incremental borrowing rate, determined based on information available at lease commencement, as rates implicit in the underlying leasing arrangements are typically not readily determinable. The Company's incremental borrowing rate reflects the rate it would pay to borrow on a secured basis and incorporates the term and economic environment surrounding the associated lease. OnApril 17, 2020 , in connection with the MSGE Distribution, we entered into a sublease agreement withMSG Entertainment (the "Sublease Agreement") for our principal executive offices atTwo Pennsylvania Plaza inNew York . The Sublease Agreement right of use assets and liabilities are recorded on the balance sheet at lease commencement based on the present value of minimum base rent and other fixed payments over the reasonably certain lease term, which endsApril 30, 2024 . In addition, in connection with the MSGE Distribution we entered into a long term lease withMSG Entertainment that endsJune 30, 2055 and will allow the Knicks and the Rangers to continue to play their home games at The Garden. The Arena License Agreements provide for fixed payments to be made from inception throughJune 30, 2055 in 12 equal installments during each year of the contractual term. The Garden was not available for use onApril 17, 2020 due to the COVID-19 pandemic and local government restrictions on gatherings; however, the licenses were viewed as a continuation of an existing pre-spin relationship where the Knicks and Rangers used The Garden through an inter-company cost-sharing arrangement and therefore the licenses were viewed to have commenced onApril 17, 2020 . However, due to the force majeure clause,MSG Sports is not required to make payments until The Garden is available for use, and atJune 30, 2020 the asset and liability were remeasured utilizing the same discount rate as ofApril 17, 2020 . 48
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The Knicks and Rangers are entitled to use The Garden on home game days, which are usually nonconsecutive, for a pre-defined period of time from before and after the game. In evaluating the Company's lease cost, the Company considered the timing of payments throughout the lease terms and the nonconsecutive periods of use, provided for within each license. While payments are made throughout the contract year in twelve equal installments under each arrangement, the periods of use only span each of the individual team event days. As such, the Company concluded that the related straight-line rent expense should be recorded by each team equally over the home game days as each takes place. In the event a team were to qualify for the playoffs in a given season, a prospective adjustment may be recorded to adjust for the additional use days within that season, while the total expense for the team's season would remain the same. There were no events and thus no rent expense was recorded during the period from lease inception as ofApril 17, 2020 toJune 30, 2020 . As part of Arena License Agreements, we recognized operating lease liabilities and a right of use assets. We measured the lease liabilities at the present value of the future lease payments as ofApril 17, 2020 . We use our incremental borrowing rates based on the remaining lease term to determine the present value of future lease payments. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. This rate is also used for the Sublease Agreement. Our incremental borrowing rate is calculated as the weighted average risk-free rate plus a spread to reflect our current unsecured credit rating. We subsequently measure the lease liability at the present value of the future lease payments as of the reporting date with a corresponding adjustment to the right-to-use asset. Absent a lease modification we will continue to utilize theApril 17, 2020 incremental borrowing rate. The Company's accounting during the period of force majeure applies FASB Staff Q&A, issued onApril 10, 2020 , providing guidance on accounting for COVID-19 related rent concessions. Estimation of the incremental borrowing rate requires judgment by management and reflects an assessment of credit standing to derive an implied secured credit rating and corresponding yield curve. Changes in management's estimates of discount rate assumptions could result in a significant overstatement or understatement of right of use assets or lease liabilities, resulting in an adverse impact toMSG Sports' financial position. See Note 9 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for more information on our leases. Item 7A. Quantitative and Qualitative Disclosures About Market Risk We have potential interest rate risk exposure related to outstanding borrowings incurred under our Knicks Revolving Credit Facility and Rangers Revolving Credit Facility, collectively, the "MSG Sports Credit Facilities". Changes in interest rates may increase interest expense payments with respect to any borrowings incurred under the MSG Sports Credit Facilities. Borrowings under our MSG Sports Credit Facilities incur interest, depending on our election, at a floating rate based upon LIBOR, theU.S. Federal Funds Rate or theU.S. Prime Rate, plus, in each case, a fixed spread. If appropriate, we may seek to reduce such exposure through the use of interest rate swaps or similar instruments. See Note 13 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for more information on our MSG Sports Credit Facilities. As ofJune 30, 2020 , we had a total of$350 million in debt outstanding under our MSG Sports Credit Facilities. The effect of a hypothetical 100 basis point increase in floating interest rates prevailing as ofJune 30, 2020 and continuing for a full year would increase interest expense approximately$3.5 million . In addition, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting Results of Operations - Impact of COVID-19 on Our Business" for discussions of disruptions caused by COVID-19.
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