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MarketScreener Homepage  >  Equities  >  Nyse  >  MSG Networks Inc.    MSGN

MSG NETWORKS INC.

(MSGN)
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MSG : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/02/2020 | 08:33am EST
This Management's Discussion and Analysis of Financial Condition and Results of
Operations, or MD&A, contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, including those regarding
the Company's revenues and adjusted operating income and the timing and number
of games played as a result of the novel coronavirus ("COVID-19") pandemic.
Words such as "expects," "anticipates," "believes," "estimates," "may," "will,"
"should," "could," "potential," "continue," "intends," "plans," and similar
words and terms used in the discussion of future operating and financial
performance and plans identify forward-looking statements. Investors are
cautioned that such forward-looking statements are not guarantees of future
performance, results or events and involve risks and uncertainties, and that
actual results or developments may differ materially from the forward-looking
statements as a result of various factors. Factors that may cause such
differences to occur include, but are not limited to:
•the demand for our programming among cable, satellite, telephone and other
platforms ("Distributors") and the subscribers thereto, and our ability to enter
into and renew affiliation agreements with Distributors, as well as the impact
of consolidation among Distributors;
•the level of our revenues, which depends in part on the popularity and
competitiveness of the sports teams whose games are broadcast on our networks
and the popularity of other content aired on our networks;
•the ability of our Distributors to maintain, or minimize declines in,
subscriber levels;
•the impact of subscribers selecting Distributors' packages that do not include
our networks or Distributors that do not carry our networks at all;
•the impact of the COVID-19 pandemic on our business, operations, and the
markets and communities in which we and our Distributors, advertisers, viewers
and teams operate, including actions of the National Basketball Association
("NBA"), National Hockey League ("NHL"), NBA and NHL players and any
governmental authority or legislation relating to COVID-19, including with
respect to the number and timing of games played;
•the security of our program signal and electronic data;
•general economic conditions especially in the New York City metropolitan area
where we conduct the majority of our operations;
•the on-ice and on-court performance of the professional sports teams whose
games we carry;
•the demand for advertising and sponsorship arrangements and viewer ratings for
our networks;
•competition, for example, from other regional sports networks;
•the relocation or insolvency of professional sports teams with which we have a
media rights agreement;
•our ability to maintain, obtain or produce content, together with the cost of
such content;
•our ability to renew or replace our media rights agreements with professional
sports teams;
•the acquisition or disposition of assets and/or the impact of, and our ability
to successfully pursue, acquisitions or other strategic transactions;
•the costs associated with, and the outcome of, litigation and other proceedings
to the extent uninsured;
•the impact of governmental regulations or laws and changes in such regulations
or laws, including with respect to the legalization of sports gaming;
•the impact of sports league rules, regulations and/or agreements and changes
thereto;
•any NBA, NHL or other work stoppage due to COVID-19 or otherwise;
•our dependence on Madison Square Garden Sports Corp. (formerly, The Madison
Square Garden Company) (together with its subsidiaries, "MSGS"), Madison Square
Garden Entertainment Corp. (together with its subsidiaries, "MSGE") and other
third-party providers for the provision of certain services;
•cybersecurity and similar risks which could result in the disclosure of
confidential information, disruption of our business or damage to our brands and
reputation;
•our substantial debt and high leverage;
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•any reduction in our access to capital and credit markets or significant
increases in costs to borrow;
•financial community perceptions of our business, operations, financial
condition and the industry in which we operate;
•the tax-free treatment of the Distribution (as defined below); and
•the factors described under "Item 1A. Risk Factors" in the Company's Annual
Report on Form 10-K for the year ended June 30, 2020.
The Company disclaims any obligation to update or revise the forward-looking
statements contained herein, except as otherwise required by applicable federal
securities laws.
All dollar amounts included in the following MD&A are presented in thousands,
except as otherwise noted.
Introduction
MD&A is provided as a supplement to, and should be read in conjunction with, the
unaudited consolidated financial statements and notes thereto included in this
Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the
year ended June 30, 2020 to help provide an understanding of our financial
condition, changes in financial condition and results of operations. Unless the
context otherwise requires, all references to "we," "us," "our," or the
"Company" refer collectively to MSG Networks Inc., a holding company, and its
direct and indirect subsidiaries through which substantially all of our
operations are conducted.
The Company owns and operates two regional sports and entertainment networks,
MSG Network and MSG+ collectively the "MSG Networks," that feature a wide range
of compelling sports content, including exclusive live local games and other
programming of the New York Knicks (the "Knicks") of the NBA; the New York
Rangers (the "Rangers"), New York Islanders (the "Islanders"), New Jersey Devils
and Buffalo Sabres of the NHL; as well as significant coverage of the New York
Giants and Buffalo Bills of the National Football League. The Company operates
and reports financial information in one segment.
On September 30, 2015, the Company distributed to its stockholders all of the
outstanding common stock of MSGS (the "Distribution"). On April 17, 2020, MSGS
distributed to its stockholders all of the outstanding common stock of MSGE (the
"Entertainment Distribution").
This MD&A is organized as follows:
Results of Operations. This section provides an analysis of our unaudited
consolidated results of operations for the three months ended September 30, 2020
as compared with the three months ended September 30, 2019.
Liquidity and Capital Resources. This section provides a discussion of our
financial condition and liquidity, as well as an analysis of our cash flows for
the three months ended September 30, 2020 as compared with the three months
ended September 30, 2019.
Recently Issued Accounting Pronouncements Not Yet Adopted and Critical
Accounting Policies. This section discusses recently issued accounting
pronouncements not yet adopted, as well as the results of the Company's annual
impairment testing of goodwill performed during the first quarter of fiscal year
2021. This section should be read together with our significant accounting
policies, including our critical accounting policies, which are discussed in our
Annual Report on Form 10-K for the year ended June 30, 2020 under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recently Issued Accounting Pronouncements Not Yet Adopted and
Critical Accounting Policies - Critical Accounting Policies" and in the notes to
the consolidated financial statements included therein.
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Results of Operations
Comparison of the Three Months Ended September 30, 2020 versus the Three Months
Ended September 30, 2019
The table below sets forth, for the periods presented, certain historical
financial information and the percentage that those items bear to revenues.

                                                                         Three Months Ended September 30,                                    Increase
                                                                  2020                                         2019                         (Decrease)
                                                                               % of                                      % of                 in Net
                                                      Amount                 Revenues              Amount              Revenues               Income
Revenues                                        $       157,363                    100  %       $ 160,981                    100  %       $    (3,618)

Direct operating expenses                                65,072                     41  %          68,660                     43  %             3,588
Selling, general and administrative
expenses                                                 22,527                     14  %          22,320                     14  %              (207)
Depreciation and amortization                             1,828                      1  %           1,727                      1  %              (101)
Operating income                                         67,936                     43  %          68,274                     42  %              (338)
Other income (expense):
Interest income                                             477                        NM           1,928                      1  %            (1,451)
Interest expense                                         (5,219)                    (3) %         (10,815)                    (7) %             5,596

Other components of net periodic benefit
cost                                                       (207)                       NM            (258)                       NM                51
                                                         (4,949)                    (3) %          (9,145)                    (6) %             4,196
Income from operations before income
taxes                                                    62,987                     40  %          59,129                     37  %             3,858
Income tax expense                                      (27,976)                   (18) %         (16,062)                   (10) %           (11,914)
Net income                                      $        35,011                     22  %       $  43,067                     27  %       $    (8,056)

_________________

NM - Percentage is not meaningful
Due to the COVID-19 pandemic, in March 2020, the 2019-20 NHL and NBA seasons
were suspended. The NHL and NBA resumed their respective 2019-20 seasons, with
the NHL and NBA completing their 2019-20 seasons in September 2020 and October
2020, respectively, which is expected to impact the start of each league's
2020-21 season. To date, neither league has announced any decisions regarding
the number of games the Company would expect to receive during the 2020-21
seasons.
The full extent of the impact of the COVID-19 pandemic on our business,
operations and financial results will depend on numerous evolving factors that
we cannot predict. See "Item 1A. Risk Factors- Our Operations and Operating
Results Have Been, and Continue to be, Impacted by the COVID-19 Pandemic and
Actions Taken in Response" in the Company's Annual Report on Form 10-K for the
year ended June 30, 2020 for additional details.
Revenues
Revenues for the three months ended September 30, 2020 decreased $3,618, or 2%,
to $157,363 as compared with the prior year period. The net decrease was
attributable to the following:
Decrease in affiliation fee revenue    $ (7,203)
Increase in advertising revenue           3,598
Other net decreases                         (13)
                                       $ (3,618)


The decrease in affiliation fee revenue was primarily due to the impact of a
decrease in subscribers of approximately 8.5% and, to a lesser extent, an
unfavorable affiliate adjustment of approximately $1,000 recorded in the current
year period. This was partially offset by the impact of higher affiliation rates
and, to a lesser extent, the absence of an unfavorable $700 affiliate adjustment
recorded in the prior year period. The Company and a small Connecticut-based
distributor (that is in bankruptcy) were unable to reach a renewal agreement on
October 1, 2020 for carriage of the Company's networks. This non-renewal will
not have a material impact on the Company's revenues and adjusted operating
income.
The increase in advertising revenue was due to higher sales related to live
professional sports telecasts, which reflects the Rangers' and Islanders'
participation in the 2019-20 NHL return to play.
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Direct operating expenses
Direct operating expenses for the three months ended September 30, 2020
decreased $3,588, or 5%, to $65,072 as compared with the prior year period due
to lower rights fees expense of $2,781 and a decrease in other programming and
production-related costs of $807. The decline in rights fees expense was due to
a reduction in media rights fees related to the 2019-20 NHL season, partially
offset by contractual rate increases under the Company's media rights
agreements.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended
September 30, 2020 increased $207, or 1%, to $22,527 as compared with the prior
year period primarily due to higher advertising sales commissions, partially
offset by lower professional fees. The decrease in professional fees reflects
the absence of $1,000 in expenses recorded in the prior year period that were
not indicative of the Company's core expense base, partially offset by other net
increases.
Operating income
Operating income for the three months ended September 30, 2020 decreased $338,
or less than 1%, to $67,936 as compared with the prior year period primarily due
to (as discussed above) the decrease in revenues and, to a lesser extent, higher
selling, general and administrative expenses (including share-based compensation
expense), largely offset by lower direct operating expenses.
Interest expense
Interest expense for the three months ended September 30, 2020 decreased $5,596,
or 52%, to $5,219 as compared with the prior year period primarily due to lower
average interest rates for the three months ended September 30, 2020 (1.7% as
compared with 3.7% in the prior year period), partially offset by a higher
average principal balance under the Company's senior secured credit facilities
(see "Liquidity and Capital Resources - Financing Agreements").
Income taxes
See Note 15 to the consolidated financial statements included in "Part I - Item
1. Financial Statements" of this Quarterly Report on Form 10-Q for more
information on income taxes.
Adjusted operating income
The Company evaluates performance based on several factors, of which the key
financial measure is adjusted operating income. Adjusted operating income is
defined as operating income before (i) depreciation, amortization and
impairments of property and equipment and intangible assets, (ii) share-based
compensation expense or benefit, (iii) restructuring charges or credits and (iv)
gains or losses on sales or dispositions of businesses. Because it is based upon
operating income, adjusted operating income also excludes interest expense
(including cash interest expense) and other non-operating income and expense
items. We believe that the exclusion of share-based compensation expense or
benefit allows investors to better track the performance of the Company without
regard to the settlement of an obligation that is not expected to be made in
cash. We believe adjusted operating income is an appropriate measure for
evaluating the operating performance of our Company. Adjusted operating income
and similar measures with similar titles are common performance measures used by
investors and analysts to analyze our performance. Internally, we use revenues
and adjusted operating income measures as the most important indicators of our
business performance, and evaluate management's effectiveness with specific
reference to these indicators. Adjusted operating income should be viewed as a
supplement to and not a substitute for operating income, net income, cash flows
from operating activities, and other measures of performance and/or liquidity
presented in accordance with U.S. generally accepted accounting principles
("GAAP"). Since adjusted operating income is not a measure of performance
calculated in accordance with GAAP, this measure may not be comparable to
similar measures with similar titles used by other companies.
The Company has presented the components that reconcile operating income, a GAAP
measure, to adjusted operating income:

                                        Three Months Ended
                                          September 30,              Increase (Decrease) in
                                        2020           2019        Adjusted Operating Income
Operating income                    $   67,936$ 68,274      $                     (338)
Share-based compensation                 4,627         4,659                             (32)
Depreciation and amortization            1,828         1,727                             101
Adjusted operating income           $   74,391$ 74,660      $                     (269)



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Adjusted operating income for the three months ended September 30, 2020
decreased $269, or less than 1%, to $74,391 as compared with the prior year
period primarily due to (as discussed above) the decrease in revenues and, to a
lesser extent, higher selling, general and administrative expenses (excluding
share-based compensation expense), largely offset by lower direct operating
expenses.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash and cash equivalents, cash flows from
the operations of our business and available borrowing capacity under our
revolving credit facility. The Company amended and restated its prior credit
agreement, dated September 28, 2015 (the "Former Credit Agreement"), on October
11, 2019 in its entirety. See "Financing Agreements" below. Our principal uses
of cash are expected to include working capital-related items, capital spending,
taxes, debt service, and the repurchase of shares of the Company's Class A
common stock, par value $0.01 per share ("Class A Common Stock"). The Company's
use of its available liquidity will be based upon the ongoing review of the
funding needs of the business, its view of a favorable allocation of cash
resources, and the timing of cash flow generation.
We believe we have sufficient liquidity, including $254,380 in cash and cash
equivalents, as of September 30, 2020, as well as the available borrowing
capacity under our revolving credit facility and our anticipated operating cash
flows, to fund our business operations, repurchase shares of the Company's Class
A Common Stock and service our outstanding term loan facility (see "Financing
Agreements" below) during the next twelve months. However, potential subscriber
reductions of our Distributors, changes in the demand for our programming,
advertising revenue declines, our ability to maintain or obtain content, and
other factors could adversely impact our business and results of operations,
which might require that we seek alternative sources of funding through the
capital and credit markets that may or may not be available to us. In addition,
the COVID-19 pandemic has caused disruption in the capital markets, which could
make financing more difficult and/or expensive and we may not be able to obtain
such financing on terms acceptable to us or at all.
On December 7, 2017, the Company's Board of Directors (the "Board") authorized
the repurchase of up to $150,000 of the Company's Class A Common Stock. On
August 29, 2019, the Board authorized a $300,000 increase to the stock
repurchase authorization, which had $136,165 of availability remaining, bringing
the total available repurchase authorization for Class A Common Stock to
$436,165 as of that date. Under the authorization, shares of Class A Common
Stock may be purchased from time to time in open market or private transactions,
block trades or such other manner as the Company may determine, in accordance
with applicable insider trading and other securities laws and regulations. The
timing and amount of purchases will depend on market conditions and other
factors. As of September 30, 2020, the Company had $145,864 of availability
remaining under its stock repurchase authorization.
Financing Agreements
On September 28, 2015, MSGN Holdings, L.P. ("MSGN L.P."), an indirect
wholly-owned subsidiary of the Company through which the Company conducts
substantially all of its operations, MSGN Eden, LLC, an indirect subsidiary of
the Company and the general partner of MSGN L.P., Regional MSGN Holdings LLC, a
direct subsidiary of the Company and the limited partner of MSGN L.P.
(collectively with MSGN Eden, LLC, the "Holdings Entities"), and certain
subsidiaries of MSGN L.P. entered into the Former Credit Agreement with a
syndicate of lenders.
MSGN L.P., the Holdings Entities and certain subsidiaries of MSGN L.P. amended
and restated the Former Credit Agreement effective October 11, 2019 (the "Credit
Agreement"). The Credit Agreement provides MSGN L.P. with senior secured credit
facilities consisting of: (i) an initial $1,100,000 term loan facility (the
"Term Loan Facility") and (ii) a $250,000 revolving credit facility (the
"Revolving Credit Facility"), each with a term of five years.
The Company has made principal repayments aggregating to $20,625 through
September 30, 2020 under the Credit Agreement. The Term Loan Facility amortized
quarterly in accordance with its terms. As of September 30, 2020, there was
$1,079,375 outstanding under the Term Loan Facility, and no borrowings under the
Revolving Credit Facility. As of September 30, 2020, the Holdings Entities and
MSGN L.P. and its restricted subsidiaries on a consolidated basis were in
compliance with the financial covenants of the Credit Agreement.
See Note 7 to the consolidated financial statements included in "Part I - Item
1. Financial Statements" of this Quarterly Report on Form 10-Q for more
information on the Credit Agreement.
Contractual Obligations
As more fully described in Note 9 to the consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended June 30,
2020, the Company's contractual obligations not reflected on the consolidated
balance sheets consist primarily of its obligations under media rights
agreements.
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In addition, see Notes 7 and 8 to the consolidated financial statements included
in "Part I - Item 1. Financial Statements" of this Quarterly Report on Form 10-Q
for the principal repayments required under the Company's Term Loan Facility and
maturities of the Company's operating lease liabilities, respectively.
Cash Flow Discussion
Operating Activities
Net cash provided by operating activities for the three months ended
September 30, 2020 increased by $11,110 to $68,259 as compared with the prior
year period. This increase was primarily due to the impact of certain working
capital items and higher income from operations before income taxes, partially
offset by higher income taxes paid as compared with the prior year period.
Investing Activities
Net cash used in investing activities for the three months ended September 30,
2020 increased by $508 to $1,741 as compared with the prior year period due to
higher capital expenditures in the current year period.
Financing Activities
Net cash used in financing activities for the three months ended September 30,
2020 was $8,975 as compared with net cash provided by financing activities in
the prior year period of $78,024. This change is primarily due to the absence of
proceeds received in the prior year period from borrowings under the Company's
senior secured credit facilities, partially offset by lower principal repayments
on the Company's term loan facilities as compared with the prior year period.
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Recently Issued Accounting Pronouncements Not Yet Adopted and Critical
Accounting Policies
Recently Issued Accounting Pronouncements Not Yet Adopted
See Note 2 to the consolidated financial statements included in "Part I - Item
1. Financial Statements" of this Quarterly Report on Form 10-Q for information
regarding recently issued accounting pronouncements not yet adopted.
Critical Accounting Policies
The following discussion has been included to provide the results of the
Company's annual impairment testing of goodwill performed during the first
quarter of fiscal year 2021. There have been no other material changes to the
Company's critical accounting policies from those set forth in our Annual Report
on Form 10-K for the year ended June 30, 2020.
Goodwill
The goodwill balance reported on the Company's consolidated balance sheet as of
September 30, 2020 is $424,508. Goodwill is tested annually for impairment as of
August 31st and at any time upon the occurrence of certain events or substantive
changes in circumstances. The Company has the option to perform a qualitative
assessment to determine if an impairment is more likely than not to have
occurred. If the Company can support the conclusion that it is not more likely
than not that the fair value of a reporting unit is less than its carrying
amount, the Company does not need to perform the quantitative goodwill
impairment test for that reporting unit. If the Company cannot support such a
conclusion or the Company does not elect to perform the qualitative assessment
then the Company would perform the quantitative goodwill impairment test. The
quantitative goodwill impairment test, used to identify both the existence of
impairment and the amount of impairment loss, compares the fair value of a
reporting unit with its carrying amount, including goodwill. If the fair value
of a reporting unit exceeds its carrying amount, goodwill of the reporting unit
is considered not impaired. If the carrying amount of a reporting unit exceeds
its fair value, an impairment loss shall be recognized in an amount equal to
that excess, limited to the total amount of goodwill allocated to that reporting
unit.
The Company has one reporting unit for evaluating goodwill impairment. During
the first quarter of fiscal year 2021, the Company performed its annual
impairment test of goodwill by comparing the fair value of its reporting unit
with its carrying value. As the Company's reporting unit had a negative carrying
value of net assets, there was no impairment of goodwill identified.
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