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 increased expenses as a result of higher team personnel compensation and corresponding NBA luxury tax. 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 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 executing 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; • developments affecting the regional sports network industry, including the effects of such developments on MSG Networks Inc.’s (“MSG Networks”) solvency and ability to perform its obligations under its local media rights agreements with us; • changes in laws, National Basketball Association (“NBA”) or National Hockey League (“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; • the performance by our affiliates of their obligations under various agreements with the Company; • a pandemic or public health emergency and our ability to effectively manage the impacts, including labor market disruptions; • any NBA, NHL or other work stoppage; • 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; • operational, business, reputational, litigation and other risk if there is a security incident resulting in loss, disclosure or misappropriation of stored personal information or other breaches of our information security or if third party facilities, systems and/or software upon which we rely are interrupted or unavailable; • activities or other developments that discourage or may discourage congregation at prominent places of public assembly, including Madison Square Garden Arena (“The Garden”) where the home games of the New York Knickerbockers (the “Knicks”) and the New York Rangers (the “Rangers”) are played; • a default by our subsidiaries under their respective credit facilities; • 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 and the operating and financial performance of 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 Madison Square Garden Entertainment Corp. (“MSG Entertainment”) to maintain necessary permits or licenses; 25 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; • certain restrictions on transfer and ownership of our common stock related to our ownership of professional sports franchises in the NBA and NHL; • the tax-free treatment of the distribution of all of the outstanding common stock of Sphere Entertainment Co. (“Sphere Entertainment”) to its stockholders, which was completed on April 17, 2020; and • the factors described under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2024 and in this Quarterly Report on Form 10-Q. 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. 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, 2024, 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. 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, 2024 compared to the three months ended September 30, 2023. 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, 2024 compared to the three months ended September 30, 2023, and (iii) certain contractual obligations. Seasonality of Our Business. This section discusses the seasonal performance of our business . Recent Accounting Pronouncements and 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 2025. 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, 2024 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, 2024 versus the three months ended September 30, 2023 The table below sets forth, for the periods presented, certain historical financial information. Three Months Ended September 30, Change 2024 2023 $ % Revenues $ 53,307 $ 43,046 $ 10,261 24 % Direct operating expenses 8,211 3,520 4,691 NM Selling, general and administrative expenses 52,587 53,556 (969) 2 % Depreciation and amortization 782 794 (12) 2 % Operating loss (8,273) (14,824) 6,551 44 % Other income (expense): Interest income 864 453 411 91 % Interest expense (6,055) (6,929) 874 13 % Miscellaneous expense, net (1,126) (12,665) 11,539 91 % Loss before income taxes (14,590) (33,965) 19,375 57 % Income tax benefit 7,048 15,144 (8,096) (53) % Net loss $ (7,542) $ (18,821) $ 11,279 60 % ______________ NM - Percentage is not meaningful Revenues Revenues increased $10,261, or 24%, to $53,307 for the three months ended September 30, 2024 as compared to the prior year period. The net increase was attributable to the following: Increase in revenues from league distributions $ 9,727 Other net increases 534 $ 10,261 The increase in revenues from league distributions for the three months ended September 30, 2024 was primarily due to an increase in certain league distributions unrelated to national media rights fees. Direct operating expenses Direct operating expenses increased $4,691 to $8,211 for the three months ended September 30, 2024 as compared to the prior year period. The net increase was attributable to the following: Increase in net provisions for league revenue sharing expense (net of escrow and excluding playoffs) and NBA luxury tax $ 4,126 Increase in net provisions for certain team personnel transactions 833 Other net decreases (268) $ 4,691 The increase 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, 2024 was due to the net impact of adjustments to prior seasons’ revenue sharing expense (net of escrow). Net provisions for certain team personnel transactions for the three months ended September 30, 2024 reflect provisions recorded for waiver/contract terminations of $833. Direct operating expenses for fiscal year 2025 are expected to reflect higher team personnel compensation and corresponding NBA luxury tax due to the Knicks 2024-25 season roster. Based on the current roster, the Knicks would be a significant luxury tax payer for the 2024-25 season. 27 Table of Contents Selling, general and administrative expenses Selling, general and administrative expenses primarily consist of (i) administrative costs, including compensation, costs under the Company’s Services Agreement, professional fees, and operating lease costs, (ii) fees related to the Company’s sponsorship sales and service representation agreements, and (iii) sales and marketing costs. Selling, general and administrative expenses generally do not fluctuate in line with changes in the Company’s revenues and direct operating expenses. Selling, general and administrative expenses for the three months ended September 30, 2024 decreased $969, or 2%, to $52,587 as compared to the prior year period driven by (i) lower sales and marketing costs of $744, (ii) lower employee compensation and related benefits of $617, and (iii) lower other general and administrative expenses, partially offset by higher professional fees of $1,181. Depreciation and amortization Depreciation and amortization for the three months ended September 30, 2024 decreased $12, or 2%, to $782 as compared to the prior year period. Operating loss Operating loss for the three months ended September 30, 2024 decreased $6,551, or 44%, to $8,273 as compared to the prior year period primaril y due to higher revenues and, to a lesser extent, lower selling, general and administrative expenses, partially offset by higher direct operating expenses. Interest income Interest income for the three months ended September 30, 2024 increased $411, or 91%, to $864 as compared to the prior year period primarily due to higher average cash balances in the current year period. Interest expense Interest expense for the three months ended September 30, 2024 decreased $874, or 13%, to $6,055 as compared to the prior year period primarily due to lower average borrowings under the Rangers Revolving Credit Facility in the current year period, partially offset by higher average borrowings under the Knicks Revolving Credit Facility in the current year period. Miscellaneous expense, net Miscellaneous expense, net for the three months ended September 30, 2024 decreased $11,539, or 91%, to $1,126 as compared to the prior year period primarily due to lower unrealized losses in the current year period related to the Company’s investments in Xtract One common stock and warrants. Income taxes See Note 17 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 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) depreciation, amortization and impairments of property and equipment, goodwill and other intangible assets, (ii) share-based compensation expense or benefit, (iii) restructuring charges or credits, (iv) gains or losses on sales or dispositions of businesses, (v) the impact of purchase accounting adjustments related to business acquisitions, and (vi) gains and losses related to the remeasurement of liabilities under the Company’s Executive Deferred Compensation Plan, 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 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 investors and analysts to analyze the Company’s performance. The Company uses revenues and adjusted operating 28 Table of Contents 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, 2024 and 2023: Three Months Ended September 30, Change 2024 2023 $ % Operating loss $ (8,273) $ (14,824) $ 6,551 44 % Depreciation and amortization 782 794 Share-based compensation 4,268 4,149 Remeasurement of deferred compensation plan liabilities 965 (104) Adjusted operating loss (a) $ (2,258) $ (9,985) $ 7,727 77 % _________________ (a) Adjusted operating loss includes operating lease costs which is comprised of a contractual cash component plus or minus a non-cash component for each period presented. Pursuant to GAAP, recognition of operating lease costs is recorded on a straight-line basis over the term of the agreement based upon the value of total future payments under the arrangement. Adjusted operating loss includes operating lease costs of (i) $854 and $829 of expense paid in cash for the three months ended September 30, 2024 and 2023, respectively, and (ii) a non-cash expense of $457 and $482, for the three months ended September 30, 2024 and 2023, respectively. For the three months ended September 30, 2024, adjusted operating loss decreased $7,727, or 77%, to $2,258 as compared to the prior year period. The decrease in adjusted operating loss was primarily due to higher revenues and, to a lesser extent, lower selling, general and administrative expenses, partially offset by higher direct operating expenses. Adjusted operating income (loss) for fiscal year 2025 is expected to reflect higher team personnel compensation and corresponding NBA luxury tax due to Knicks 2024-25 season roster. 29 Table of Contents Liquidity and Capital Resources Overview Our primary sources of liquidity are cash and cash equivalents, cash flow from operations and available borrowing capacity under our credit facilities. See Note 12 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 Knicks Credit Agreement, the Rangers Credit Agreement, and the Rangers NHL Advance Agreement (each as defined therein). Our principal uses of cash include the operation of our businesses, working capital-related items, the repayment of outstanding debt, repurchases of shares of the Company’s Class A Common Stock, dividends, if declared, and investments. As of September 30, 2024, we had $52,252 in C ash and cash equivale nts. In addition, as of September 30, 2024, the Company’s deferred revenue obligations were $272,957, 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. 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 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 potentially 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 $52,252 in Cash and cash equivalents as of September 30, 2024, along with $250,000 of additional available borrowing capacity under existing credit facilities, to fund our operations and satisfy any obligations for the foreseeable future. If MSG Networks were to experience a bankruptcy or insolvency event (as set forth in each of the credit facilities), we would be prevented, absent a cure or waiver, from making borrowings under our revolving credit facilities. The Rangers Credit Agreement also includes an event of default that is implicated by a bankruptcy or insolvency event with respect to a material media rights counterparty, including MSG Networks. There were no borrowings under the Rangers Revolving Credit Facility as of September 30, 2024. Financing Agreements and Stock Repurchases See Note 12 and Note 15 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. Contractual Obligations The Company did not have any material changes in its contractual obligations since the end of fiscal year 2024 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, 2024 and 2023: Three Months Ended September 30, 2024 2023 Net loss $ (7,542) $ (18,821) Adjustments to reconcile net loss to net cash used in operating activities: 195 2,445 Changes in working capital assets and liabilities (18,811) (37,765) Net cash used in operating activities (26,158) (54,141) Net cash used in investing activities (1,163) (1,729) Net cash (used in) provided by financing activities (9,502) 67,830 Net (decrease) increase in cash, cash equivalents and restricted cash $ (36,823) $ 11,960 Operating Activities Net cash used in operating activities for the three months ended September 30, 2024 decreased by $27,983 to $26,158 as compared to the prior year period. The decrease was primarily due to changes in working capital assets and liabilities and the decrease in net loss adjusted for non-cash items. The changes in working capital assets and liabilities were primarily driven by (i) a higher increase in deferred revenue of $25,806 primarily due to higher collections of ticket, suites, and sponsorship sales in advance of recognition, (ii) a lower decrease in accrued and other liabilities of $10,914 primarily due to lower payments related to employee compensation in the current year period, and (iii) a lower decrease in net related party receivables of $8,552 primarily due to primarily due to the 30 Table of Contents timing of collections related to the Company’s arena license agreements. These changes were partially offset by (i) an increase in accounts receivable, net of $16,851 primarily due to higher receivables related to league distributions in the current year period and (ii) a higher increase in prepaid expenses and other assets of $5,034 primarily due to higher prepayments related to team personnel compensation in the current year period. Investing Activities Net cash used in investing activities for the three months ended September 30, 2024 decreased by $566 to $1,163 as compared to the prior year period primarily due to lower purchases of investments in the current year period. Financing Activities Net cash used in financing activities for the three months ended September 30, 2024 was $9,502 as compared to net cash provided by financing activities for the three months ended September 30, 2023 of $67,830. This was primarily due to additional borrowings under the Company’s credit facilities in the prior 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, which is when the majority of the sports teams’ games are played. Recent Accounting Pronouncements and Critical Accounting Policies Recent Accounting Pronouncements 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 discussion of recent accounting pronouncements. 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 2025. 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, 2024. Goodwill The carrying amount of goodwill as of September 30, 2024 was $226,523. 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, quantitative assessment is performed 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, not to exceed the carrying amount of goodwill. 31 Table of Contents The Company elected to perform the qualitative assessment of impairment for the Company’s reporting unit for the fiscal year 2025 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 2025, and there was no impairment of goodwill. Based on this impairment test, the Company concluded it was not more likely than not that the fair value of the reporting unit was less than its carrying amount. 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, 2024: Sports franchises $ 102,564 Photographic related rights 1,080 $ 103,644 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 2025, and there were no impairments identified. Based on this impairment test, the Company concluded it was not more likely than not that the fair value of the indefinite-lived intangible assets was less than their carrying amount. 32 Table of Contents