Madison Square Garden Sports Corp. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 Madison Square Garden Sports Corp. and its direct and indirect subsidiaries (collectively, “we,” “us,” “our,” “MSG Sports,” or the “Company”) including the impact of COVID-19 on our future operations. 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 future financial performance 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 duration and severity of the COVID-19 pandemic and our ability to effectively manage the impacts, including the availability of The Garden with no or limited fans, league decisions regarding play and other matters, the cancellation of games, the impact of governmental restrictions, reduced tourism, and general hesitancy among the public to engage in public activities due to COVID-19; • 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; • general economic conditions, especially in the New York City metropolitan area; • 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 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; • labor market disruptions due to the COVID-19 pandemic or otherwise; • 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 Knicks and the Rangers are played; • a default by our subsidiaries under their respective credit facilities; • 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; • 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 MSG Entertainment to maintain necessary permits or licenses; 24 Table of Contents • the impact of any government plans to redesign New York City’s Pennsylvania Station; • 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 MSGS Distribution and the MSGE Distribution; • the performance by MSG Entertainment and its subsidiaries of its obligations under various agreements with the Company related to the MSGE Distribution and ongoing commercial arrangements; and • the factors described under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022. We disclaim any obligation to update or revise the forward-looking statements contained herein, except as otherwise required by applicable federal securities laws. 25 Table of Contents All dollar amounts included in the following MD&A are presented in thousands, except as otherwise noted. Introduction This MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s unaudited financial statements and accompanying notes thereto included in this Quarterly Report on Form 10-Q, as well as the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022, 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,” “MSG Sports,” or the “Company” refer collectively to Madison Square Garden Sports Corp., a holding company, and its direct and indirect subsidiaries through which substantially all of our operations are conducted. The Company operates and reports financial information in one segment. Factors Affecting Results of Operations Impact of COVID-19 on Our Business During fiscal years 2020 and 2021, COVID-19 disruptions and actions taken in response by governmental authorities and the leagues materially impacted the Company’s revenues and the Company recognized materially less revenues, or in some cases, no revenues, across a number of areas. In fiscal year 2022, the Company’s operations and operating results were also impacted by temporary declines in attendance due to ongoing reduced tourism levels as well as an increase in COVID-19 cases during certain months of the fiscal year. See Note 1, Description of Business and Basis of Presentation, to the Company’s audited consolidated financial statements and notes thereto for the year ended June 30, 2022 included in the Company’s Annual Report on Form 10-K for more information regarding the impact of the COVID-19 pandemic on our business during fiscal years 2020, 2021 and 2022. It is unclear to what extent COVID-19, including new variants, could result in renewed governmental and league restrictions on attendance or otherwise impact the Company’s operations and operating results. This MD&A is organized as follows: Results of Operations. This section provides an analysis of our unaudited results of operations for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. Liquidity and Capital Resources. This section focuses primarily on (i) the liquidity and capital resources of the Company, (ii) an analysis of the Company’s cash flows for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, and (iii) certain contractual obligations. Seasonality of Our Business. This section discusses the seasonal performance of our business . Critical Accounting Policies. This section discusses accounting pronouncements that have been adopted by the Company, if any, as well as the results of the Company’s annual impairment testing of goodwill and identifiable indefinite-lived intangible assets performed during the first quarter of fiscal year 2023. This section should be read together with our critical accounting policies, which are discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recently Issued Accounting Pronouncements and Critical Accounting Policies — Critical Accounting Policies” and in the notes to the consolidated financial statements of the Company included therein. 26 Table of Contents Results of Operations Comparison of the three months ended September 30, 2022 versus the three months ended September 30, 2021 The table below sets forth, for the periods presented, certain historical financial information. Three Months Ended September 30, Change 2022 2021 $ % Revenues $ 24,089 $ 18,794 $ 5,295 28 % Direct operating expenses 3,681 8,578 (4,897) (57) % Selling, general and administrative expenses 55,281 43,728 11,553 26 % Depreciation and amortization 1,025 1,426 (401) (28) % Operating loss (35,898) (34,938) (960) (3) % Other expense: Interest expense, net (2,956) (3,053) 97 3 % Miscellaneous expense, net (166) (63) (103) NM Loss from operations before income taxes (39,020) (38,054) (966) (3) % Income tax benefit 20,493 21,169 (676) (3) % Net loss (18,527) (16,885) (1,642) (10) % Less: Net loss attributable to nonredeemable noncontrolling interests (707) (480) (227) (47) % Net loss attributable to Madison Square Garden Sports Corp.’s stockholders $ (17,820) $ (16,405) $ (1,415) (9) % Revenues Revenues increased $5,295, or 28%, to $24,089 for the three months ended September 30, 2022 as compared to the prior year period. The net increase was attributable to the following: Increase in suite license fee revenues $ 1,543 Increase in pre/regular season ticket-related revenues 1,099 Increase in revenues from league distributions 910 Other net increases 1,743 $ 5,295 The increase in suite license fee revenues for the three months ended September 30, 2022 was primarily due to suite licenses including preseason home games at The Garden in the current year period compared to suites sold primarily on a single-event basis in the prior year period. The increase in pre/regular season ticket-related revenues for the three months ended September 30, 2022 was primarily due to higher average per-game revenue. Direct operating expenses Direct operating expenses decreased $4,897, or 57%, to $3,681 for the three months ended September 30, 2022 as compared to the prior year period. The net decrease was attributable to the following: Decrease in net provisions for league revenue sharing expense (net of escrow and excluding playoffs) and NBA luxury tax $ (3,630) Decrease in net provisions for certain team personnel transactions (1,056) Other net decreases (211) $ (4,897) The decrease in net provisions for league revenue sharing expense (net of escrow and excluding playoffs) and NBA luxury tax for the three months ended September 30, 2022 was primarily due to the net impact of adjustments to prior seasons’ revenue sharing expense (net of escrow). 27 Table of Contents Net provisions for certain team personnel transactions were as follows: Three Months Ended September 30, 2022 2021 Increase (Decrease) Waivers/contract terminations $ (1,421) $ 727 $ (2,148) Player trades 1,092 — 1,092 Net provisions for certain team personnel transactions $ (329) $ 727 $ (1,056) Selling, general and administrative expenses Selling, general and administrative expenses for the three months ended September 30, 2022 increased $11,553, or 26%, to $55,281 as compared to the prior year period primarily due to higher employee compensation and related benefits, including the impact of staffing increases relative to the prior year period reflecting the business’ return to normal operations and executive management transition costs recorded in the current year period, as well as higher other general and administrative expenses. Depreciation and amortization Depreciation and amortization for the three months ended September 30, 2022 decreased $401, or 28%, to $1,025 as compared to the prior year period. Operating loss Operating loss for the three months ended September 30, 2022 increased $960, or 3%, to $35,898 as compared to the prior year period primarily due to an increase in selling, general and administrative expenses, partially offset by higher revenues and lower direct operating expenses. Interest expense, net Net interest expense for the three months ended September 30, 2022 decreased $97, or 3%, to $2,956 as compared to the prior year period primarily due to lower interest expense on the Rangers revolving credit facilities as there were no borrowings outstanding during the three months ended September 30, 2022, and higher interest income due to higher cash balances along with increased earned interest rates, partially offset by higher interest expense associated with the Knicks revolving credit facilities due to higher interest rates. Income taxes See Note 16 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussions of the Company’s income taxes. Adjusted operating 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 with MSG 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, (vi) the impact of purchase accounting adjustments related to business acquisitions, and (vii) gains and losses related to the remeasurement of liabilities under the Company’s Executive Deferred Compensation Plan (which was established in November 2021), which is referred to as adjusted operating income (loss), a non-GAAP measure. 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. 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 the exclusion of gains and losses related to the remeasurement of liabilities under the Company’s Executive Deferred Compensation Plan provides investors with a clearer picture of the Company’s operating performance given that, in accordance with GAAP, gains and losses related to the remeasurement of liabilities under the Company’s Executive Deferred Compensation Plan are recognized in Operating (income) loss whereas gains and losses related to the remeasurement of the assets under the Company’s Executive Deferred Compensation Plan, which are equal to and therefore fully offset the gains and losses related to the remeasurement of liabilities, are recognized in Miscellaneous income (expense), net, which is not reflected in Operating income (loss). 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 28 Table of Contents 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 are the reconciliations of operating loss to adjusted operating loss for the three months ended September 30, 2022 as compared to the prior year period: Three Months Ended September 30, Change 2022 2021 $ % Operating loss $ (35,898) $ (34,938) $ (960) (3) % Deferred rent 506 529 Depreciation and amortization 1,025 1,426 Share-based compensation 7,220 4,851 Remeasurement of deferred compensation plan liabilities (103) — Adjusted operating loss $ (27,250) $ (28,132) $ 882 3 % Adjusted operating loss for the three months ended September 30, 2022 decreased $882 to $27,250 as compared to the prior year period primarily due to higher revenues and lower direct operating expenses, partially offset by an increase in selling, general and administrative expenses. Liquidity and Capital Resources Overview Our operations and operating results were materially impacted by the COVID-19 pandemic and government and league actions taken in response during fiscal years 2020 and 2021. Our operations and operating results were also impacted by temporary declines in fan attendance in fiscal year 2022, due to ongoing reduced tourism levels as well as an increase in cases during certain months of the fiscal year due to COVID-19 variants. For more information about the impacts and risks to the Company as a result of COVID-19, see “— Factors Affecting Results of Operations — Impact of COVID-19 on Our Business” and “Item 1A. Risk Factors — Sports Business Risks — Our Operations and Operating Results Have Been, and May in the Future be, Materially Impacted by the COVID-19 Pandemic and Government and League Actions Taken in Response” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022. In addition, see also Note 1 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for further information. Our primary sources of liquidity are cash and cash equivalents and available borrowing capacity under our credit facilities as well as cash flow from our operations. On December 14, 2021, the Company amended and extended the 2020 Knicks Credit Agreement and the 2020 Rangers Credit Agreement. In addition, in March 2021, pursuant to the 2021 Rangers NHL Advance Agreement (the “2021 Rangers NHL Advance Agreement”), the NHL advanced the Company $30,000, which the league made available to each team. See Note 11 to the consolidated financial statements included in “Part I - Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for a discussion of the 2021 Knicks Credit Agreement”, 2021 Rangers Credit Agreement, and 2021 Rangers NHL Advance Agreement. Our principal uses of cash include the operation of our businesses, working capital-related items, the repayment of outstanding debt, the payment of a special, one-time cash dividend of $7.00 per share (expected to be approximately $172,749) (the “Special Dividend”), and repurchases of shares of the Company’s Class A Common Stock, including approximately $75,000 under the accelerated share repurchase (“ASR”) program announced by the Company on October 6, 2022. As of September 30, 2022, we had approximately $81,000 in Cash and cash equivale nts. In addition, as of September 30, 2022, the Company’s deferred revenue obligations were approximately $266,439, net of billed, but not yet collected deferred revenue. This balance is primarily comprised of obligations in connection with tickets, suites and local media rights. In addition, the Company’s deferred revenue obligations included $30,000 from the NBA, which the league provided to each team. We regularly monitor and assess our ability to meet our net funding and investing 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 29 Table of Contents 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 approximatel y $81,000 in Cash and cash equivalents as of September 30, 2022, along with $305,000 of additional available borrowing capacity under existing credit facilities, to fund our operations and satisfy any obligations, including with respect to the payment of the Special Dividend and the repurchase of shares of the Company’s Class A Common Stock under the ASR program, for the foreseeable future. Financing Agreements and Stock Repurchases See Note 11 and Note 14 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for discussions of the Company’s debt obligations and various financing agreements, and the Company’s stock repurchases, respectively. Special Dividend and Accelerated Share Repurchase On October 6, 2022, the Company announced that its Board of Directors declared the Special Dividend. The Special Dividend is payable on October 31, 2022 to shareholders of record on October 17, 2022. In addition, the Company’s Board of Directors has authorized a $75,000 ASR program under the Company’s existing share repurchase authorization. As discussed in Note 14, the Company had $259,639 of availability remaining under its stock repurchase authorization as of September 30, 2022 and prior to the execution of the ASR program. Borrowings under Revolving Credit Facilities In connection with the special dividend and ASR, on October 27, 2022, the Company borrowed an additional $55,000 under the 2021 Knicks Revolving Credit Facility and $160,000 under the 2021 Rangers Revolving Credit Facility. Following the additional borrowings, the Company has $90,000 of additional available borrowing capacity under existing credit facilities. Contractual Obligations The Company did not have any material changes in its contractual obligations since the end of fiscal year 2022 other than activities in the ordinary course of business. Cash Flow Discussion The following table summarizes the Company’s cash flow activities for the three months ended September 30, 2022 and 2021: Three Months Ended September 30, 2022 2021 Net loss $ (18,527) $ (16,885) Adjustments to reconcile net loss to net cash used in operating activities (11,994) (14,455) Subtotal (30,521) (31,340) Changes in working capital assets and liabilities 31,806 12,030 Net cash provided by (used in) operating activities 1,285 (19,310) Net cash used in investing activities (271) (306) Net cash used in financing activities (10,996) (12,142) Net decrease in cash, cash equivalents and restricted cash $ (9,982) $ (31,758) Operating Activities Net cash provided by operating activities for the three months ended September 30, 2022 was $1,285 as compared to net cash used in operating activities in the prior year period of $19,310. This was primarily due to the impact of changes in working capital assets and liabilities and, to a lesser extent, the decrease in net loss adjusted for non-cash items. Investing Activities Net cash used in investing activities for the three months ended September 30, 2022 decreased by $35 to $271 as compared to the prior year period primarily due to higher other investing activities in the prior year period as compared to the current year period. 30 Table of Contents Financing Activities Net cash used in financing activities for the three months ended September 30, 2022 decreased by $1,146 to $10,996 as compared to the prior year period primarily due to higher taxes paid in lieu of shares issued for equity-based compensation in the prior year period as compared to the current year period. Seasonality of Our Business The Company’s dependence on revenues from its NBA and NHL sports teams generally means that it earns a disproportionate share of its revenues in the second and third quarters of the Company’s fiscal year. Critical Accounting Policies Critical Accounting Policies The following discussion has been included to provide the results of our annual impairment testing of goodwill and identifiable indefinite-lived intangible assets performed during the first quarter of fiscal year 2023. There have been no material changes to the Company’s critical accounting policies from those set forth in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022. Goodwill The carrying amount of goodwill as of September 30, 2022 was $226,955. Goodwill is tested annually for impairment as of August 31 st 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. The Company has one operating and reportable segment, and 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 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. 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. The Company elected to perform the qualitative assessment of impairment for the Company’s reporting unit for the fiscal year 2023 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 2023, 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. 31 Table of Contents Identifiable Indefinite-Lived Intangible Assets Identifiable indefinite-lived intangible assets are tested annually for impairment as of August 31 st and at any time upon the occurrence of certain events or substantive changes in circumstances. The following table sets forth the amount of identifiable indefinite-lived intangible assets reported in the Company’s consolidated balance sheet as of September 30, 2022: 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 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 2023, 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.