Washington, D.C. 20549
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
MSG NETWORKS INC.
See accompanying notes to consolidated financial statements.
MSG NETWORKS INC.
See accompanying notes to consolidated financial statements.
MSG NETWORKS INC.
See accompanying notes to consolidated financial statements.
MSG NETWORKS INC.
See accompanying notes to consolidated financial statements.
MSG NETWORKS INC.
See accompanying notes to consolidated financial statements.
All amounts included in the following Notes to Consolidated Financial Statements are presented in thousands, except per share data or as otherwise noted.
MSG Networks Inc. (together with its subsidiaries, the “Company”), incorporated on July 29, 2009, owns and operates 2 regional sports and entertainment networks, MSG Network and MSG+. , collectively “MSG Networks.” MSG Networks 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 National Basketball Association (“NBA”); the New York Rangers (the “Rangers”), New York Islanders, New Jersey Devils (the “Devils”) and Buffalo Sabres of the National Hockey League (“NHL”); as well as significant coverage of the New York Giants and Buffalo Bills of the National Football League.
On September 30, 2015, the Company distributed to its stockholders all of the outstanding common stock of Madison Square Garden Sports Corp. (formerly, The Madison Square Garden Company (“MSG”Company) (together with its subsidiaries, “MSGS”) (the “Distribution”).
The Company operates and reports financial information in 1 segment. Substantially all revenues and assets of the Company are attributed to or located in the United States and are primarily concentrated in the New York City metropolitan area.
Note 2. Accounting Policies
The consolidated financial statements of the Company include the accounts of MSG Networks Inc. and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
The preparation of the accompanying 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 amount of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amount of revenues and expenses. Such estimates include the valuation of accounts receivable, investments, goodwill, other long-lived assets, pension and other postretirement benefit obligations and the related net periodic benefit cost, tax accruals, and other liabilities. In addition, estimates are used in revenue recognition, rights fees expense, income tax expense, performance and share-based compensation, depreciation and amortization, litigation matters, and other matters. Management believes its use of estimates in the consolidated financial statements to be reasonable.
Management evaluates its estimates on an ongoing basis using historical experience and other factors, includingfactors. Due to the general economic environmentnovel coronavirus (“COVID-19”) pandemic, in March 2020, the 2019-20 NHL and actions it may takeNBA 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 future.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.
these estimates may ultimately differ from actual results. Changes in estimates resulting from weakness in the economic environment or other factors beyond the Company’s control, including government and league actions taken to contain or mitigate the COVID-19 pandemic, could be material and would be reflected in the Company’s financial statements in future periods.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU eliminates certain exceptions to the general approach in ASC Topic 740 and includes methods of simplification to the existing guidance. This standard will be effective for the Company beginning in the first quarter of fiscal year 2022, with early adoption permitted. The standard is to be applied prospectively to all periods presented. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
Note 3. Revenue Recognitionand Accounts Receivable
The Company generates revenues principally from affiliation fees charged to cable, satellite, telephone and other platforms (“Distributors”) for the right to carry its networks, as well as from the sale of advertising. The Company’s advertising revenue is largely derived from the sale of inventory in its live professional sports programming, and as such, a disproportionate share of this revenue has historically been earned in the Company’s second and third fiscal quarters. The Company’s revenue recognition policies that describe the nature, amount, timing and uncertainty associated with each major source of revenue from contracts with customers are summarized below.
Affiliation fee revenue is earned from Distributors for the right to carry the Company’s networks under contracts, commonly referred to as “affiliation agreements.” The Company’s performance obligation under its affiliation agreements is satisfied as the Company provides its programming over the term of the affiliation agreement.
The Company primarily earns advertising revenue through the sale of commercial time and other advertising inventory during its programming. In general, these advertising arrangements either do not exceed one year or are primarily multi-year media banks, the elements of which are agreed upon each year. Advertising revenue is recognized as advertising is aired. In certain advertising arrangements, the Company guarantees specified viewer ratings for its programming. In such cases, the promise to deliver the guaranteed viewer ratings by airing the advertising represents the Company’s performance obligation. A contract liability is recognized as deferred revenue to the extent any guaranteed viewer ratings are not met and the customer is expected to exercise any right for additional advertising time, and is subsequently recognized as revenue either when the Company provides the required additional advertising time, or additional performance requirements become remote, which may be at the time the guarantee obligation contractually expires.
The Company enters into nonmonetary transactions, primarily with its Distributors, that involve the exchange of products or services, such as advertising and promotional benefits, for the Company’s services. For arrangements that are subject to sales-based and usage-based royalty guidance, the Company measures noncash consideration that it receives at fair value as the sale or usage occurs. For other arrangements, the Company measures the estimated fair value of the noncash consideration that it receives at contract inception. If the Company cannot reasonably estimate the fair value of the noncash consideration, the Company measures the fair value of the consideration indirectly by reference to the standalone selling price of the services promised to the customer in exchange for the consideration.
Substantially all of the Company’s affiliation agreements are licenses of functional intellectual property where revenue is derived from sales-based and usage-based royalty arrangements, and generally the Company’s advertising arrangements either do not exceed one year or are primarily multi-year media banks, the elements of which are agreed upon each year. For these types of arrangements, the Company applies a practical expedient that allows it to omit disclosure of the aggregate amount of consideration the Company expects to receive in exchange for transferring services to a customer (transaction price) that is allocated to performance obligations that have not yet been satisfied. As of December 31, 2019,September 30, 2020, the aggregate amount of transaction price allocated to remaining performance obligations, other than for contracts that the Company has applied the practical expedient, was $12,567,$10,609, of which $11,191$9,515 will be recognized through fiscal year 2023 and $1,376$1,094 thereafter.
An account receivable is recorded when there is an unconditional right to consideration based on a contract with a customer. When considerationThe Company’s payment terms generally do not exceed 60 days after revenue is received from a customer prior to transferring services to the customer under the terms of a contract, a contract liability (deferred revenue) is recorded.
The following table provides information about current contract balances from contracts with customers:
Note 4. Computation of Earnings per Common Share
Basic earnings per common share (“EPS”) is based upon net income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the effect of the assumed vesting of restricted stock units (“RSUs”) and exercise of stock options only in the periods in which such effect would have been dilutive.
Affiliate relationships have an estimated useful life of 24 years. Amortization expense for intangible assets was $865 for the three months ended December 31, 2019September 30, 2020 and 2018, and $1,730 for the six months ended December 31, 2019 and 2018.
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 a credit agreement (the “Former Credit Agreement”) with a syndicate of lenders. The Former Credit Agreement provided MSGN L.P. with senior secured credit facilities (the “Former Senior Secured Credit Facilities”) that consisted of: (a) an initial $1,550,000 term loan facility (the “Former Term Loan Facility”) and (b) a $250,000 revolving credit facility (the “Former Revolving Credit Facility”).facility.
On October 11, 2019, MSGN L.P., the Holdings Entities and certain subsidiaries of MSGN L.P. amended and restated the Former Credit Agreement in its entirety (the “Credit Agreement”). The Credit Agreement provides MSGN L.P. with senior secured credit facilities (the “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. Proceeds from the Term Loan Facility were used by MSGN L.P. to repay outstanding indebtedness under the Former Credit Agreement. Up to $35,000 of the Revolving Credit Facility is available for the issuance of letters of credit. Subject to the satisfaction of certain conditions and limitations, the Credit Agreement allows for the addition of incremental term and/or revolving loan commitments and incremental term and/or revolving loans.
Borrowings under the Credit Agreement bear interest at a floating rate, which at the option of MSGN L.P. may be either (i) a base rate plus an additional rate ranging from 0.25% to 1.25% per annum (determined based on a total net leverage ratio) (the “Base Rate”), or (ii) a Eurodollar rate plus an additional rate ranging from 1.25% to 2.25% per annum (determined based on a total net leverage ratio) (the “Eurodollar Rate”), provided that for the period following the effective date of the Credit Agreement until the delivery of the compliance certificate for the second full fiscal quarter of MSGN L.P. following the effective date, the additional rate used in calculating the floating rate will be (i) 0.50% per annum for borrowings bearing the Base Rate, and (ii) 1.50% per annum for borrowings bearing the Eurodollar Rate.. Upon a payment default in respect of principal, interest or other amounts due and payable under the Credit Agreement or related loan documents, default interest will accrue on all overdue amounts at an additional rate of 2.00% per annum. The Credit Agreement requires that MSGN L.P. pay a commitment fee ranging from 0.225% to 0.30% (determined based on a total net leverage ratio) in respect of the average daily unused commitments under the Revolving Credit Facility. MSGN L.P. will also be required to pay customary letter of credit fees, as well as fronting fees, to banks that issue letters of credit.
The Credit Agreement generally requires the Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis to comply with a maximum total leverage ratio of 5.50:1.00, subject, at the option of MSGN L.P. to an upward adjustment to 6.00:1.00 during the continuance of certain events. In addition, the Credit Agreement requires a minimum interest coverage ratio of 2.00:1.00 for the Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis. As of December 31, 2019,September 30, 2020, the Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis were in compliance with the applicable financial covenants. All borrowings under the Credit Agreement are subject to the satisfaction of customary conditions, including absence of a default and accuracy of representations and warranties. As of December 31, 2019,September 30,
| | | | | | | | |
| Remainder of fiscal year ending June 30, 2021 | | $ | 31,625 | |
| Fiscal year ending June 30, 2022 | | 49,500 | |
| Fiscal year ending June 30, 2023 | | 66,000 | |
| Fiscal year ending June 30, 2024 | | 82,500 | |
| Fiscal year ending June 30, 2025 | | 849,750 | |
| | $ | 1,079,375 | |
All obligations under the Credit Agreement are guaranteed by the Holdings Entities and MSGN L.P.’s existing and future direct and indirect domestic subsidiaries that are not designated as excluded subsidiaries or unrestricted subsidiaries (the “Subsidiary Guarantors,” and together with the Holdings Entities, the “Guarantors”). All obligations under the Credit Agreement, including the guarantees of those obligations, are secured by certain assets of MSGN L.P. and each Guarantor (collectively, “Collateral”), including, but not limited to, a pledge of the equity interests in MSGN L.P. held directly by the Holdings Entities and the equity interests in each Subsidiary Guarantor held directly or indirectly by MSGN L.P.
Subject to customary notice and minimum amount conditions, MSGN L.P. may voluntarily prepay outstanding loans under the Credit Agreement at any time, in whole or in part, without premium or penalty (except for customary breakage costs with respect to Eurodollar loans). MSGN L.P. is required to make mandatory prepayments in certain circumstances, including without limitation from the net cash proceeds of certain sales of assets (including Collateral) or casualty insurance and/or condemnation recoveries (subject to certain reinvestment, repair or replacement rights) and the incurrence of certain indebtedness, subject to certain exceptions.
In addition to the financial covenants discussed above, the Credit Agreement and the related security agreement containscontain certain customary representations and warranties, affirmative covenants, and events of default. The Credit Agreement contains certain restrictions on the ability of MSGN L.P. and its restricted subsidiaries to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the Credit Agreement, including the following: (i) incurring additional indebtedness and contingent liabilities; (ii) creating liens on certain assets; (iii) making investments, loans or advances in or to other persons; (iv) paying dividends and distributions or repurchasing capital stock; (v) changing their lines of business; (vi) engaging in certain transactions with affiliates; (vii) amending specified material agreements; (viii) merging or consolidating; (ix) making certain dispositions; and (x) entering into agreements that restrict the granting of liens. The Holdings Entities are also subject to customary passive holding company covenants.
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The Company is amortizing deferred financing costs of the Term Loan Facility using the effective interest method over its five-year term.
The following table summarizes the presentation of the
Term Loan Facility and the Former Term Loan Facility, and the related deferred financing costs, in the accompanying consolidated balance sheets as of
December 31, 2019September 30, 2020 and June 30,
2019: |
| | | | | | | | | | | | |
| | | Term Loan Facilities | | Deferred Financing Costs | | Net |
| December 31, 2019 | | | | | | |
| Current portion of long-term debt | | $ | 27,500 |
| | $ | (1,263 | ) | | $ | 26,237 |
|
| Long-term debt, net of current portion | | 1,072,500 |
| | (4,598 | ) | | 1,067,902 |
|
| Total | | $ | 1,100,000 |
| | $ | (5,861 | ) | | $ | 1,094,139 |
|
| June 30, 2019 | | | | | | |
| Current portion of long-term debt | | $ | 114,375 |
| | $ | (2,586 | ) | | $ | 111,789 |
|
| Long-term debt, net of current portion | | 906,875 |
| | (647 | ) | | 906,228 |
|
| Total | | $ | 1,021,250 |
| | $ | (3,233 | ) | | $ | 1,018,017 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Term Loan Facilities | | Deferred Financing Costs | | Net |
| September 30, 2020 | | | | | | |
| Current portion of long-term debt | | $ | 44,000 | | | $ | (1,269) | | | $ | 42,731 | |
| Long-term debt, net of current portion | | 1,035,375 | | | (3,654) | | | 1,031,721 | |
| Total | | $ | 1,079,375 | | | $ | (4,923) | | | $ | 1,074,452 | |
| June 30, 2020 | | | | | | |
| Current portion of long-term debt | | $ | 38,500 | | | $ | (1,271) | | | $ | 37,229 | |
| Long-term debt, net of current portion | | 1,047,750 | | | (3,970) | | | 1,043,780 | |
| Total | | $ | 1,086,250 | | | $ | (5,241) | | | $ | 1,081,009 | |
In addition, the Company has recorded deferred financing costs related to the Revolving Credit Facility and the Former Revolving Credit Facility in the accompanying consolidated balance sheets as summarized in the following table:
|
| | | | | | | | |
| | | December 31, 2019 | | June 30, 2019 |
| Other current assets | | $ | 344 |
| | $ | 417 |
|
| Other assets | | 1,289 |
| | 104 |
|
| | | | | | | | | | | | | | |
| | September 30,
2020 | | June 30,
2020 |
| Other current assets | | $ | 343 | | | $ | 343 | |
| Other assets | | 1,037 | | | 1,123 | |
Total amortization expenseof deferred financing costs was $1,188$404 and $1,501 during$751 for the sixthree months ended December 31,September 30, 2020 and 2019, and 2018, respectively, and is included in interest expense in the accompanying consolidated statements of operations.
The Company made interest payments under the Credit Agreement and Former Credit Agreement of $19,405$4,782 and $22,243$10,299 during the sixthree months ended December 31,September 30, 2020 and 2019, and 2018, respectively.
Note 8. Leases
The Company has various operating leases for office and studio space, as well as equipment, expiring at various dates through 2024.fiscal year 2025. The Company currently has 0 finance leases. Some leases include options to extend the lease term, or terminate the lease prior to the end of the lease term. The exercise of lease renewal options is generally at the Company’s discretion. The depreciable life of leasehold improvements are limited by the expected lease term unless there is a transfer of title or purchase option reasonably certain of exercise.
The leases generally provide for fixed annual rentals plus certain other costs. Certain leases include variable payments based on the Company’s use of the respective assets. The Company’s lease agreements do not include any material residual value guarantees or material restrictive covenants. Since the Company’s leases do not provide an implicit interest rate, the Company useduses its incremental borrowing rate as of Adoption Datethe lease commencement date to determine the present value of future lease paymentspayments. Upon the adoption of ASC Topic 842, Leases, the Company used the incremental borrowing rate on July 1, 2019 for all operating leases that commenced prior to that date.
Operating leaseLease cost consists of the following: |
| | | | | | | | |
| | | Three Months Ended | | Six Months Ended |
| | | December 31,
2019 | | December 31,
2019 |
| Operating lease cost | | $ | 1,372 |
| | $ | 2,744 |
|
| Variable lease cost | | 728 |
| | 781 |
|
| Total operating lease cost | | $ | 2,100 |
| | $ | 3,525 |
|
| | | | | | | | | | | | | | |
| | Three Months Ended |
| | September 30, |
| | 2020 | | 2019 |
| Operating lease cost | | $ | 1,398 | | | $ | 1,372 | |
| Variable lease cost | | 0 | | | 53 | |
| Total lease cost | | $ | 1,398 | | | $ | 1,425 | |
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The following table summarizes the weighted-average remaining lease term and discount rate for operating leases: |
| | | |
| | December 31,
2019 |
Weighted-average discount rate for operating leases | | 3.29 | % |
Weighted-average remaining operating lease term in years | | 3.82 |
|
| | | | | | | | | | | | | | |
| | September 30, |
| | 2020 | | 2019 |
| Weighted-average discount rate for operating leases | | 3.33 | % | | 3.29 | % |
| Weighted-average remaining operating lease term in years | | 3.39 | | 3.99 |
As of
December 31, 2019,September 30, 2020, the maturities of the Company’s operating lease liabilities are as follows:
|
| | | | |
| Remainder of fiscal year ending June 30, 2020 | | $ | 2,919 |
|
| Fiscal year ending June 30, 2021 | | 4,374 |
|
| Fiscal year ending June 30, 2022 | | 3,672 |
|
| Fiscal year ending June 30, 2023 | | 3,379 |
|
| Fiscal year ending June 30, 2024 | | 2,816 |
|
| Thereafter | | — |
|
| Total undiscounted operating lease payments | | 17,160 |
|
| Less: imputed interest | | 1,033 |
|
| Total operating lease liabilities | | 16,127 |
|
| Less: current portion of operating lease liabilities | | 4,689 |
|
| Non-current operating lease liabilities | | $ | 11,438 |
|
| | | | | | | | |
| Remainder of fiscal year ending June 30, 2021 | | $ | 4,457 | |
| Fiscal year ending June 30, 2022 | | 5,241 | |
| Fiscal year ending June 30, 2023 | | 4,949 | |
| Fiscal year ending June 30, 2024 | | 4,135 | |
| Fiscal year ending June 30, 2025 | | 17 | |
| Total undiscounted operating lease payments | | 18,799 | |
| Less: imputed interest | | 1,012 | |
| Total operating lease liabilities | | 17,787 | |
| Less: current portion of operating lease liabilities | | 5,469 | |
| Non-current operating lease liabilities | | $ | 12,318 | |
Supplemental cash flow information related to operating leases:
|
| | | | |
| | | Six Months Ended |
| | | December 31,
2019 |
| Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 2,830 |
|
| Cash paid for variable lease payments not included in measurement of operating lease liabilities | | 481 |
|
| Total | | $ | 3,311 |
|
| | | | | | | | | | | | | | |
| | Three Months Ended |
| | September 30, |
| | 2020 | | 2019 |
| Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 1,503 | | | $ | 1,468 | |
| | | | |
| | | | |
Note 9. Commitments and Contingencies
Commitments
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, 2019,2020, the Company’s contractual obligations not reflected on the consolidated balance sheets consist primarily of its obligations under media rights agreements.
In addition, see Note 7 for the principal repayments required under the Company’s Term Loan Facility.
Legal Matters
The Company is a defendant in various lawsuits. Although the outcome of these matters cannot be predicted with certainty, management does not believe that resolution of these lawsuits will have a material adverse effect on the Company.
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 10. Fair Value Measurements
The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs are developed using market data, such as publicly available information about actual events or transactions, and reflect the assumptions that market participants would use when pricing the asset or liability. Unobservable inputs are inputs for which market data is not available and that are developed using the best information available about the assumptions that market participants would use when pricing the asset or liability.
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
The fair value hierarchy consists of the following three levels:
•Level I — Quoted prices for identical instruments in active markets.
•Level II — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
•Level III — Instruments whose significant value drivers are unobservable.
The following table presents for each of these hierarchy levels, the Company’s assets that are measured at fair value on a recurring basis, which include cash equivalents:
|
| | | | | | | | | | | | | | | | |
| | | Level I | | Level II | | Level III | | Total |
| December 31, 2019 | | | | | | | | |
| Assets: | | | | | | | | |
| Money market accounts | | $ | 17,817 |
| | $ | — |
| | $ | — |
| | $ | 17,817 |
|
| Time deposits | | 96,452 |
| | — |
| | — |
| | 96,452 |
|
| Total assets measured at fair value | | $ | 114,269 |
| | $ | — |
| | $ | — |
| | $ | 114,269 |
|
| June 30, 2019 | | | | | | | | |
| Assets: | | | | | | | | |
| Money market accounts | | $ | 17,619 |
| | $ | — |
| | $ | — |
| | $ | 17,619 |
|
| Time deposits | | 201,524 |
| | — |
| | — |
| | 201,524 |
|
| Total assets measured at fair value | | $ | 219,143 |
| | $ | — |
| | $ | — |
| | $ | 219,143 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Level I | | Level II | | Level III | | Total |
| September 30, 2020 | | | | | | | | |
| Assets: | | | | | | | | |
| Money market accounts | | $ | 151,125 | | | $ | 0 | | | $ | 0 | | | $ | 151,125 | |
| Time deposits | | 95,763 | | | 0 | | | 0 | | | 95,763 | |
| Total assets measured at fair value | | $ | 246,888 | | | $ | 0 | | | $ | 0 | | | $ | 246,888 | |
| June 30, 2020 | | | | | | | | |
| Assets: | | | | | | | | |
| Money market accounts | | $ | 129,609 | | | $ | 0 | | | $ | 0 | | | $ | 129,609 | |
| Time deposits | | 65,713 | | | 0 | | | 0 | | | 65,713 | |
| Total assets measured at fair value | | $ | 195,322 | | | $ | 0 | | | $ | 0 | | | $ | 195,322 | |
Money market accounts and time deposits are classified within Level I of the fair value hierarchy as they are valued using observable inputs that reflect quoted prices for identical assets in active markets. The carrying amount of the Company’s money market accounts and time deposits approximates fair value due to their short-term maturities.
Other Financial Instruments
The fair value of the Company’s long-term debt (see Note 7) was approximately $1,089,000$1,063,000 as of December 31, 2019.September 30, 2020. The Company’s long-term debt is classified within Level II of the fair value hierarchy as it is valued using quoted prices of such securities for which fair value can be derived from inputs that are readily observable. observable, including activity in and the state of the capital markets.
Investment in Nonconsolidated Entity The Company’s investment in a nonconsolidated entity, which is included in other assets in the accompanying consolidated balance sheets, does not have a readily determinable fair value. As such, the Company has elected to account for it at cost, which would be adjusted for impairment and changes resulting from observable price fluctuations in orderly transactions for an identical or a similar investment of the same issuer (referred to as the measurement alternative method). Investments accounted for under the measurement alternative method are classified within Level III of the fair value hierarchy. As of September 30, 2020, the carrying amount of the Company’s equity investment in the nonconsolidated entity was $2,000, and the Company did not identify any potential adjustments to the cost of its investment through September 30, 2020.
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 11.11. Pension Plans and Other Postretirement Benefit Plan
As more fully described in Note 12 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019,2020, the Company sponsors (i) a non-contributory, qualified defined benefit pension plan covering certain of its union employees, (ii) an unfunded non-contributory, non-qualified frozen excess cash balance plan covering certain employees who participated in an underlying qualified plan, and (iii) an unfunded non-contributory, non-qualified frozen defined benefit pension plan for the benefit of certain employees who participated in an underlying qualified plan (collectively the “Pension Plans”). The Company also sponsors a contributory welfare plan which provides certain postretirement healthcare benefits to certain employees hired prior to January 1, 2001 (the “Postretirement Plan”).
Components of net periodic benefit cost for the three and six months ended December 31,September 30, 2020 and 2019 and 2018 are as follows: |
| | | | | | | | | | | | | | | | |
| | | Pension Plans | | Postretirement Plan |
| | | Three Months Ended | | Three Months Ended |
| | | December 31, | | December 31, |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| Service cost | | $ | 121 |
| | $ | 111 |
| | $ | 13 |
| | $ | 18 |
|
| Other components of net periodic benefit cost: | | | | | | | | |
| Interest cost | | 354 |
| | 402 |
| | 15 |
| | 38 |
|
| Expected return on plan assets | | (244 | ) | | (144 | ) | | — |
| | — |
|
Recognized actuarial loss (a) | | 134 |
| | 119 |
| | — |
| | — |
|
Amortization of unrecognized prior service credit (a) | | — |
| | — |
| | (1 | ) | | (2 | ) |
| Net periodic benefit cost | | $ | 365 |
| | $ | 488 |
| | $ | 27 |
| | $ | 54 |
|
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
|
| | | | | | | | | | | | | | | | |
| | | Pension Plans | | Postretirement Plan |
| | | Six Months Ended | | Six Months Ended |
| | | December 31, | | December 31, |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| Service cost | | $ | 242 |
| | $ | 222 |
| | $ | 26 |
| | $ | 36 |
|
| Other components of net periodic benefit cost: | | | | | | | | |
| Interest cost | | 708 |
| | 804 |
| | 30 |
| | 76 |
|
| Expected return on plan assets | | (488 | ) | | (288 | ) | | — |
| | — |
|
Recognized actuarial loss (a) | | 268 |
| | 238 |
| | — |
| | — |
|
Amortization of unrecognized prior service credit (a) | | — |
| | — |
| | (2 | ) | | (4 | ) |
Settlement gain (a) | | — |
| | (8 | ) | | — |
| | — |
|
| Net periodic benefit cost | | $ | 730 |
| | $ | 968 |
| | $ | 54 |
| | $ | 108 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Plans | | Postretirement Plan |
| | Three Months Ended | | Three Months Ended |
| | September 30, | | September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Service cost | | $ | 101 | | | $ | 121 | | | $ | 9 | | | $ | 13 | |
| Other components of net periodic benefit cost: | | | | | | | | |
| Interest cost | | 257 | | | 354 | | | 9 | | | 15 | |
| Expected return on plan assets | | (185) | | | (244) | | | 0 | | | 0 | |
Recognized actuarial loss (a) | | 126 | | | 134 | | | 0 | | | 0 | |
Amortization of unrecognized prior service credit (a) | | 0 | | | 0 | | | 0 | | | (1) | |
| Net periodic benefit cost | | $ | 299 | | | $ | 365 | | | $ | 18 | | | $ | 27 | |
(a) Reflects amounts reclassified from accumulated other comprehensive loss to other components of net periodic benefit cost in the accompanying consolidated statements of operations.
In addition, as more fully described in Note 12 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019,2020, the Company sponsors the MSGN Holdings, L.P. Excess Savings Plan and participates in The Madison Square Garden 401(k) Savings Plan, formerly the MSG Holdings, L.P. 401(k) Savings Plan, a multiple employer plan (together, the “Savings Plans”). The Madison Square Garden 401(k) Savings Plan was sponsored by MSGS until the Entertainment Distribution (as defined in Note 14), and thereafter by MSGE. Expenses related to the Savings Plans included in the accompanying consolidated statements of operations were $284$215 and $279$245 for the three months ended December 31,September 30, 2020 and 2019, and 2018, respectively, and $529 and $508 for the six months ended December 31, 2019 and 2018, respectively.
Note 12. Share-based Compensation
See Note 13 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 20192020 for more information regarding (i) the MSG Networks Inc. 2010 Employee Stock Plan, as amended (the “Employee Stock Plan”), and (ii) the MSG Networks Inc. 2010 Stock Plan Forfor Non-Employee Directors, (the “Non-Employee Director Plan”), as amended. On December 6, 2019, the Company’s stockholders amended the Non-Employee Director Plan to increase the shares available for issuance thereunder to 400 and to extend the expiration date to December 6, 2029.
Share-based compensation expense, presented within selling, general and administrative expenses and direct operating expenses, was $5,440$4,627 and $5,611$4,659 for the three months ended December 31,September 30, 2020 and 2019, and 2018, respectively, and $10,099 and $9,287 for the six months ended December 31, 2019 and 2018, respectively.
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Non-Qualified Stock Options (“NQSOs”) Award Activity
The following table summarizes activity relating to holders of the Company’s NQSOs for the sixthree months ended December 31, 2019:September 30, 2020:
|
| | | | | | | | | | | | | | | |
| | Number of | | Weighted- Average Exercise Price Per Share | | Weighted- Average Remaining Contractual Term (In Years) | | Aggregate Intrinsic Value |
| | Nonperformance Based Vesting
NQSOs | | Performance Based Vesting
NQSOs | |
| Balance as of June 30, 2019 | 1,277 |
| | 1,277 |
| | $ | 20.87 |
| | 5.52 | | $ | 3,132 |
|
Granted(a) | 556 |
| | 557 |
| | 14.33 |
| | | | |
| Balance as of December 31, 2019 | 1,833 |
| | 1,834 |
| | 18.88 |
| | 5.67 | | 3,422 |
|
| Exercisable as of December 31, 2019 | 924 |
| | 536 |
| | $ | 19.07 |
| | 4.54 | | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of | | Weighted-
Average
Exercise
Price Per
Share | | Weighted-Average Remaining Contractual Term (In Years) | | Aggregate Intrinsic
Value |
| Nonperformance
Based
Vesting
NQSOs | | Performance
Based
Vesting
NQSOs | | | |
| Balance as of June 30, 2020 | 1,833 | | | 1,834 | | | $ | 18.88 | | | 5.17 | | $ | 0 | |
Adjustment upon final determination of level of performance objective(a) | 0 | | | (2) | | | 21.60 | | | | | |
| Balance as of September 30, 2020 | 1,833 | | | 1,832 | | | $ | 18.88 | | | 4.92 | | 0 | |
| Exercisable as of September 30, 2020 | 1,357 | | | 961 | | | $ | 19.58 | | | 4.23 | | $ | 0 | |
(a) Includes incremental sharesan adjustment of awards issued with respect to performance based NQSOs that were historically reported at a target payoutgranted in fiscal year 2018 upon certification of 100%. Upon meetingthe level of achievement of the performance objective, the number of performance based NQSOs vested at a payout of 100.3% of target.
Nonperformance based vesting NQSOs granted under the Employee Stock Plan during the six months ended December 31, 2019 are subject to three-year ratable vesting. Performance based vesting NQSOs granted under the Employee Stock Plan
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
during the six months ended December 31, 2019 are subject to three-year cliff vesting and the achievement of certain Company performance criteria. These NQSOs have an expiration period of 7.5 years. The Company calculated the fair value of these NQSOs on the date of grant using the Black-Scholes option pricing model, which resulted in a grant date fair value of $4.32 per NQSO.
The following were the key assumptions used to calculate the fair value of this award:
|
| | | |
Risk-free interest rate | 1.4 | % |
Expected term | 5.25 years | |
Expected volatility | 30.68 | % |
The Company’s computation of expected term was calculated using the simplified method (the average of the vesting period and option term) as prescribed in ASC Topic 718-10-S99. The Company’s computation of expected volatility was based on historical volatility of its common stock.targets for such awards.
The aggregate intrinsic value is calculated for in-the-money NQSOs as the difference between (i) the exercise price of the underlying award and (ii) the quoted price of the Company’s Class A common stock, par value $0.01 per share (“Class A Common Stock”) at December 31, 2019September 30, 2020 and June 30, 2019,2020, as applicable.
Restricted Share Units Award Activity
The following table summarizes activity relating to holders of the Company’s RSUs for the sixthree months ended December 31, 2019:September 30, 2020:
|
| | | | | | | | | |
| | Number of | | |
| | Nonperformance
Based Vesting RSUs | | Performance Based Vesting RSUs | | Weighted-Average Fair Value Per Share At Date of Grant |
| Unvested award balance as of June 30, 2019 | 541 |
| | 836 |
| | $ | 23.08 |
|
Granted(a) | 388 |
| | 316 |
| | 14.51 |
|
| Vested | (328 | ) | | (279 | ) | | 20.62 |
|
| Forfeited | (2 | ) | | (3 | ) | | 19.14 |
|
| Unvested award balance as of December 30, 2019 | 599 |
| | 870 |
| | $ | 20.00 |
|
| | | | | | | | | | | | | | | | | |
| Number of | | |
| Nonperformance
Based
Vesting
RSUs | | Performance
Based
Vesting
RSUs | | Weighted-Average
Fair Value Per Share
At Date of Grant |
| Unvested award balance as of June 30, 2020 | 595 | | | 870 | | | $ | 20.01 | |
| Granted | 723 | | | 720 | | | 10.22 | |
| Vested | (231) | | | (293) | | | 21.24 | |
Adjustment upon final determination of level of performance objective(a) | 0 | | | (1) | | | 21.60 | |
| Unvested award balance as of September 30, 2020 | 1,087 | | | 1,296 | | | $ | 13.80 | |
(a) Includes incremental sharesan adjustment of awards issued with respect to performance based RSUs that were historically reported at a target payoutgranted in fiscal year 2018 upon certification of 100%. Upon meetingthe level of achievement of the performance objective, the number of performance based RSUs vested at a payout of 100.3% of target.targets for such awards.
Nonperformance based vesting RSUs granted under the Employee Stock Plan during the sixthree months ended December 31, 2019September 30, 2020 are subject to three-year ratable vesting and RSUs granted under the Non-Employee Director Plan vest upon date of grant.vesting. Performance based vesting RSUs granted under the Employee Stock Plan during the sixthree months ended December 31, 2019September 30, 2020 are subject to three-year cliff vesting. RSUs granted under the Employee Stock Plan and Non-Employee Director Plan will settle in shares of the Company’s Class A Common Stock (either from treasury or with newly issued shares), or, at the option of the Compensation Committee of the Board of Directors in cash. RSUs granted under the Non-Employee Director Plan will settle on the first business day after ninety days from the date the director’s service on the Board of Directors (the “Board”) ceases or, if earlier, upon the director’s death., in cash.
The fair value of RSUs that vested during the sixthree months ended December 31, 2019September 30, 2020 was $9,659.$5,127. Upon delivery, RSUs granted under the Employee Stock Plan were net share-settled to cover the required statutory tax withholding obligations and the remaining number of shares were issued from the Company’s treasury shares. To fulfill the employees’ statutory tax withholding obligations for the applicable income and other employment taxes, 264216 of these RSUs, with an aggregate value of $4,235$2,100 were retained by the Company and the taxes paid during the sixthree months ended December 31, 2019September 30, 2020 are reflected as a financing activity in the accompanying consolidated statement of cash flows.
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 13. Stock Repurchase Program
On December 7, 2017, the Company’s 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
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
$136,165 $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.
On October 3,During the three months ended September 30, 2019, the Company settled itsaccepted for purchase under a modified Dutch auction tender offer (the “Tender Offer”) and repurchased 14,980 shares of its Class A Common Stock, at a price of $16.70 per share, for an aggregate purchase price of $250,168.Stock. The purchase price of these shares, and the fees relating to the Tender Offer, have been classified as Treasury stock in the accompanying consolidated balance sheet as of December 31,transaction settled on October 3, 2019.
As of December 31, 2019,September 30, 2020, the Company had $185,997$145,864 of availability remaining under its stock repurchase authorization. There were 0 shares repurchased by the Company during the three months ended September 30, 2020.
Note 14. Related Party Transactions
As of December 31, 2019,September 30, 2020, members of the Dolan family group, for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, including trusts for the benefit of the Dolan family group (collectively, the “Dolan Family Group”), collectively beneficially own all of the Company’s outstanding Class B common stock, par value $0.01 per share (“Class B Common Stock”) and own approximately 6.3%8.3% of the Company’s outstanding Class A Common Stock (inclusive of options exercisable within 60 days of the date hereof). Such shares of the Company’s Class A Common Stock and Class B Common Stock, collectively, represent approximately 76.1%76.9% of the aggregate voting power of the Company’s outstanding common stock. The Dolan Family Group also controls MSG and AMC Networks Inc. (“AMC Networks”).
The Company had an arrangement with the Dolan Family Office, LLC (“DFO”), MSG,MSGS and AMC Networks providing for the sharingMSGE (the outstanding common stock of certain expenses associated with executive office space which is availablewas distributed by MSGS to Charles F. Dolan (a director of the Company and MSG, and the Executive Chairman and a director of AMC Networks), James L. Dolanits stockholders on April 17, 2020 (the Executive Chairman and a director of the Company, the Executive Chairman, Chief Executive Officer, and a director of MSG, and a director of AMC Networks), and the DFO, which is controlled by Charles F. Dolan. Effective September 2018, the Company is no longer party to this arrangement.“Entertainment Distribution”)).
The Company shares certain executive support costs, including office space, executive assistants, security and transportation costs for (i) the Company’s Executive Chairman with MSGMSGS and (ii) the Company’s Vice Chairman with MSGMSGS and AMC Networks. Following the Entertainment Distribution, the Company now also shares such costs with MSGE.
The Company and MSGMSGE are also party to aircraft time sharing agreements, pursuant to which MSGMSGE has agreed from time to time to make certain aircraft available to the Company for use on a “time sharing” basis. Prior to the Entertainment Distribution, the Company was party to such time sharing agreements with MSGS. Additionally, the Company, MSGMSGS, AMC Networks, and AMC Networksfollowing the Entertainment Distribution, MSGE, have agreed on an allocation of the costs of certain other aircraft, including helicopter, use by shared executives.
The Company has various agreements with MSG,MSGS, including media rights agreements covering the New York Knicks (the “Knicks”) and the New York Rangers (the “Rangers”) games, and a tax disaffiliation agreement. As a result of the Entertainment Distribution, certain of the agreements which were previously between the Company and MSGS are, as of April 17, 2020, between the Company and MSGE, including an advertising sales representation agreement, a trademark license agreement, a tax disaffiliation agreement, and certain other arrangements, including a services agreement (the “Services Agreement”) pursuant to which the Company outsources certain business functions to MSG. Thesefunctions. The services currently outsourced include information technology, accounts payable, payroll, tax, certain legal functions, human resources, insurance and risk management, investor relations, corporate communications, benefit plan administration and reporting and internal audit, as well as certain executive support services described above. The Company provides certain services to MSGMSGE pursuant to the Services Agreement. In connection with the Entertainment Distribution, the Company entered into a services agreement with MSGS, pursuant to which MSGS provides the Company certain legal services previously provided under the Services Agreement. The Services Agreement expired on June 30, 2019. The2020. In connection therewith, the Company entered into an interim agreement with MSG,MSGE, pursuant to which each party provides the other with the services on the same terms. The Company expects to enter into a new services agreement with MSGE which will be retroactive to July 1, 2019.2020.
The Company has also entered into various agreements with AMC Networks with respect to a number of ongoing commercial relationships.
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Related Party Transactions
Rights Fees
The Company’s media rights agreements with the Knicks and the Rangers,MSGS, effective as of July 1, 2015, provide the Company with the exclusive media rights to the teams’Knicks and Rangers games in their local markets. Rights fees included in the accompanying consolidated statements of operations for the three months ended December 31,September 30, 2020 and 2019 were $39,541 and 2018 were $38,611 and $37,094, respectively, and $76,631 and $73,652 for the six months ended December 31, 2019 and 2018,$38,020, respectively.
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Origination, Master Control and Technical Services
AMC Networks provides certain origination, master control, and technical services to the Company. Amounts incurred by the Company for the three months ended December 31,September 30, 2020 and 2019 were $1,184 and 2018 were $1,161, and $790, respectively, and $2,322 and $2,310 for the six months ended December 31, 2019 and 2018, respectively.
Commission
The Company’s advertising sales representation agreement, with MSG, which has a term through June 30, 2022, provides for MSGMSGE (MSGS prior to the Entertainment Distribution) to act as the Company’s advertising sales representative and includes the exclusive right and obligation to sell certain advertising availabilities on the Company’s behalf for a commission. The amounts incurred by the Company for the three months ended December 31,September 30, 2020 and 2019 and 2018 were $6,088 and $6,038, respectively, and $6,424 and $6,445 for the six months ended December 31, 2019 and 2018,were $1,195 and $336, respectively.
General and Administrative Expenses
Amounts incurred by the Company for expenses associated with the Services Agreement and the services agreement with MSGS, net, amountedamounted to $2,657$2,613 and $2,573$2,657 for the three months ended December 31,September 30, 2020 and 2019, and 2018, respectively, and $5,314 and $5,145 for the six months ended December 31, 2019 and 2018, respectively.
Other Operating Expenses
The Company and its related parties enter into other transactions with each other in the ordinary course of business. Net amounts incurred by the Company for other related party transactions amounted to $193$107 and $361$20 for the three months ended December 31,September 30, 2020 and 2019, and 2018, respectively, and $213 and $476 for the six months ended December 31, 2019 and 2018, respectively.
Note 15. Income Taxes
Income tax expense for the three months ended December 31, 2019September 30, 2020 of $17,949$27,976 differs from the income tax expense derived fromby applying the statutory federal rate of 21% to pre-tax income principally due to the impact from a change in the estimated applicable tax rate used to determine deferred taxes of $6,746, the impact of state and local income taxes (net of federal benefit) of $5,945, and tax expense of $1,224 resulting from the distribution of certain share-based compensation awards. The change in the estimated applicable tax rate used to determine deferred taxes was due to a change in state apportionment methodology in accordance with an amendment to a state regulation.
Income tax expense for the three months ended September 30, 2019 of $16,062 differs from the income tax expense derived by applying the statutory federal rate of 21% to pre-tax income principally due to the impact of state and local income taxes (net of federal benefit) of $4,988.
Income tax expense for the three months ended December 31, 2018 of $23,828 differs from the income tax expense derived from applying the statutory federal rate of 21% to pre-tax income due principally to the impact of state and local income taxes (net of federal benefit) of $5,950, changes in the applicable state rate used to measure deferred taxes of $2,069, and a return to provision adjustment in connection with the filing of the Company’s prior year’s state and local income tax returns of $1,450.
Income tax expense for the six months ended December 31, 2019 of $34,011 differs from the income tax expense derived from applying the statutory federal rate of 21% to pre-tax income due principally to the impact of state and local income taxes (net of federal benefit) of $9,828,$4,840, partially offset by excess tax benefit related to share-based paymentshare based-payment awards of $1,590.
Income tax expense for the six months ended December 31, 2018 of $45,024 differs from the income tax expense derived from applying the statutory federal rate of 21% to pre-tax income due principally to the impact of state and local income taxes (net of federal benefit) of $11,552, changes in the applicable state rate used to measure deferred taxes of $2,069, and a return to provision adjustment in connection with the filing of the Company’s state and local income tax returns of $1,450.$1,663.
The Company made cash income tax payments (net) of $43,387$8,434 and $43,595$8,182 for the sixthree months ended December 31,September 30, 2020 and 2019, and 2018, respectively.
The Company was notified during the fourth quarter of fiscal year 2017 that the State of New York was commencing an examination of the Company’s New York State income tax returns as filed for the tax years ended December 31, 2013 and 2014. In January 2020, the Company closed the examination with no material changes to the tax returns as filed.
The Company was notified during the first quarter of fiscal year 2019 that the City of New York was commencing an examination of the Company’s New York City general corporate income tax returns as filed for the tax years ended December 31, 2015 and 2016. The Company does not expect the examination, when finalized, to result in material changes to the tax returns as filed.
The Company was notified during the fourth quarter of fiscal year 2019 that the City of New York was commencing an examination of the Company’s Unincorporated Business Tax Returns as filed for the tax years ended December 31, 2016 and
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
2017, and June 30, 2018. In October 2019, the Company closed the examination with no material changes to the tax returns as filed.
The Company was notified during the fourth quarter of fiscal year 2019 that the State of New Jersey initiated an examination of the Company’s income tax returns for the tax years ended December 31, 2015 through December 31, 2017. The Company does not expect the examination, when finalized, to result in material changes to the tax returns as filed.
The federal and state statute of limitations are currently open on the Company’s tax returns for 2016 and 2013,2015, respectively, and forward.
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
Note 16. Concentrations of Risk
Accounts receivable, net on the accompanying consolidated balance sheets as of December 31, 2019September 30, 2020 and June 30, 20192020 include amounts due from the following individual customers, which accounted for the noted percentages of the gross balance: | | | | December 31,
2019 | | June 30,
2019 | | September 30,
2020 | | June 30,
2020 |
| Customer A | 25 | % | | 25 | % | Customer A | 26 | % | | 26 | % |
| Customer B | 24 | % | | 25 | % | Customer B | 26 | % | | 25 | % |
| Customer C | 24 | % | | 23 | % | Customer C | 22 | % | | 22 | % |
| Customer D | 13 | % | | 14 | % | Customer D | 11 | % | | 11 | % |
Revenues in the accompanying consolidated statements of operations for the three and six months ended December 31,September 30, 2020 and 2019 and 2018 include amounts from the following individual customers, which accounted for the noted percentages of the total:
|
| | | | | | | | | | | |
| | Three Months Ended December 31, | | Six Months Ended December 31, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Customer 1 | 24 | % | | 23 | % | | 26 | % | | 24 | % |
| Customer 2 | 22 | % | | 21 | % | | 23 | % | | 23 | % |
| Customer 3 | 20 | % | | 19 | % | | 21 | % | | 21 | % |
| Customer 4 | 8 | % | | 10 | % | | 9 | % | | 11 | % |
| | | | | | | | | | | | |
| Three Months Ended September 30, | |
| 2020 | | 2019 | |
| Customer 1 | 28 | % | | 27 | % | |
| Customer 2 | 26 | % | | 26 | % | |
| Customer 3 | 21 | % | | 23 | % | |
| Customer 4 | 9 | % | | 11 | % | |
The accompanying consolidated balance sheets as of December 31, 2019September 30, 2020 and June 30, 20192020 include the following approximate amounts that are recorded in connection with the Company’s license agreement with the New Jersey Devils:
|
| | | | | | | |
| Reported in | December 31,
2019 | | June 30,
2019 |
| Prepaid expenses | $ | 3,000 |
| | $ | 1,000 |
|
| Other current assets | 4,000 |
| | 4,000 |
|
| Other assets | 35,000 |
| | 36,000 |
|
| | $ | 42,000 |
| | $ | 41,000 |
|
| | | | | | | | | | | |
| Reported in | September 30,
2020 | | June 30,
2020 |
| Prepaid expenses | $ | 1,000 | | | $ | 3,000 | |
| Other current assets | 4,000 | | | 4,000 | |
| Other assets | 33,000 | | | 34,000 | |
| $ | 38,000 | | | $ | 41,000 | |
As of December 31, 2019,September 30, 2020, approximately 490340 full-time and part-time employees, who represent approximately 73%66% of the Company’s workforce, are subject to collective bargaining agreements (“CBAs”). As of December 31, 2019,September 30, 2020, approximately 48%65% of the Company’s workforce that is subject to a CBA is covered by a CBA that has expired. In addition, as of December 31, 2019,September 30, 2020, approximately 18%29% of the Company’s workforce that is subject to a CBA is covered by a CBA that expires withinwill expire during the next year.
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, or MD&A, may containcontains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.1995, 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, AMC Networks Inc.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;debt and high leverage;
•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;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, 2019.
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, 20192020 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 and six months ended December 31, 2019September 30, 2020 as compared with the three and six months ended December 31, 2018.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 sixthree months ended December 31, 2019September 30, 2020 as compared with the sixthree months ended December 31, 2018.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 2020.2021. 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, 20192020 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.
Results of Operations
Comparison of the Three Months Ended December 31, 2019September 30, 2020 versus the Three Months Ended December 31, 2018September 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 December 31, | | Increase (Decrease) in Net Income | | Three Months Ended September 30, | | Increase
(Decrease)
in Net
Income |
| | | 2019 | | 2018 | | | 2020 | | 2019 | |
| | | Amount | | % of Revenues | | Amount | | % of Revenues | | | Amount | | % of
Revenues | | Amount | | % of
Revenues | |
| Revenues | | $ | 187,730 |
| | 100 | % | | $ | 192,914 |
| | 100 | % | | $ | (5,184 | ) | Revenues | | $ | 157,363 | | | 100 | % | | $ | 160,981 | | | 100 | % | | $ | (3,618) | |
| | | | | | | | | | | | |
| Direct operating expenses | | 84,065 |
| | 45 | % | | 81,470 |
| | 42 | % | | (2,595 | ) | Direct operating expenses | | 65,072 | | | 41 | % | | 68,660 | | | 43 | % | | 3,588 | |
| Selling, general and administrative expenses | | 32,022 |
| | 17 | % | | 31,294 |
| | 16 | % | | (728 | ) | Selling, general and administrative expenses | | 22,527 | | | 14 | % | | 22,320 | | | 14 | % | | (207) | |
| Depreciation and amortization | | 1,680 |
| | 1 | % | | 1,800 |
| | 1 | % | | 120 |
| Depreciation and amortization | | 1,828 | | | 1 | % | | 1,727 | | | 1 | % | | (101) | |
| Operating income | | 69,963 |
| | 37 | % | | 78,350 |
| | 41 | % | | (8,387 | ) | Operating income | | 67,936 | | | 43 | % | | 68,274 | | | 42 | % | | (338) | |
| Other income (expense): | | | | | | | | | | | Other income (expense): | | | | | | |
| Interest income | | 906 |
| | NM |
| | 1,422 |
| | 1 | % | | (516 | ) | Interest income | | 477 | | | NM | | 1,928 | | | 1 | % | | (1,451) | |
| Interest expense | | (9,934 | ) | | (5 | )% | | (11,693 | ) | | (6 | )% | | 1,759 |
| Interest expense | | (5,219) | | | (3) | % | | (10,815) | | | (7) | % | | 5,596 | |
| Debt refinancing expense | | (2,764 | ) | | (1 | )% | | — |
| | NM |
| | (2,764 | ) | |
| | Other components of net periodic benefit cost | | (258 | ) | | NM |
| | (413 | ) | | NM |
| | 155 |
| Other components of net periodic benefit cost | | (207) | | | NM | | (258) | | | NM | | 51 | |
| | | (12,050 | ) | | (6 | )% | | (10,684 | ) | | (6 | )% | | (1,366 | ) | | (4,949) | | | (3) | % | | (9,145) | | | (6) | % | | 4,196 | |
| Income from operations before income taxes | | 57,913 |
| | 31 | % | | 67,666 |
| | 35 | % | | (9,753 | ) | Income from operations before income taxes | | 62,987 | | | 40 | % | | 59,129 | | | 37 | % | | 3,858 | |
| Income tax expense | | (17,949 | ) | | (10 | )% | | (23,828 | ) | | (12 | )% | | 5,879 |
| Income tax expense | | (27,976) | | | (18) | % | | (16,062) | | | (10) | % | | (11,914) | |
| Net income | | $ | 39,964 |
| | 21 | % | | $ | 43,838 |
| | 23 | % | | $ | (3,874 | ) | 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 December 31, 2019September 30, 2020 decreased $5,184,$3,618, or 3%2%, to $187,730$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) | |
|
| | | |
| Decrease in affiliation fee revenue | $ | (3,071 | ) |
| Decrease in advertising revenue | (1,406 | ) |
| Other net decreases | (707 | ) |
| | $ | (5,184 | ) |
The decrease in affiliation fee revenue was primarily due to the impact of a decrease in subscribers of approximately 8%,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, a favorable $2,300the absence of an unfavorable $700 affiliate adjustment recorded in the currentprior year quarter.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 decreaseincrease in advertising revenue was primarily due to a lower net decrease in deferred revenuehigher sales related to ratings guarantees and the impact of fewer live professional sports telecasts, as compared withwhich reflects the prior year period, partially offset by higher per-game sales from the telecast of live professional sports programmingRangers' and other net advertising increases, primarily from the Company’s non-ratings based advertising initiatives.
Other net decreases were largely due to the absenceIslanders' participation in the current year quarter2019-20 NHL return to play.
Direct operating expenses
Direct operating expenses for the three months ended December 31, 2019 increased $2,595,September 30, 2020 decreased $3,588, or 3%5%, to $84,065$65,072 as compared with the prior year period due to higherlower rights fees expense of $2,407, principally as$2,781 and a resultdecrease 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 with professional sports teams.
agreements.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended December 31, 2019September 30, 2020 increased $728,$207, or 2%1%, to $32,022$22,527 as compared with the prior year period primarily due to higher advertising and marketing costs, as well as higher professional fees and other cost increases,sales commissions, partially offset by lower employee compensation and related benefits (including share-based compensation expense).professional fees. The overall increase includes $600decrease in professional fees reflects the absence of $1,000 in expenses recorded in the currentprior year quarterperiod that arewere not indicative of the Company’sCompany's core expense base.base, partially offset by other net increases.
Operating income
Operating income for the three months ended December 31, 2019September 30, 2020 decreased $8,387,$338, or 11%less than 1%, to $69,963$67,936 as compared with the prior year period primarily due to (as discussed above) the decrease in revenues higher direct operating expenses and, to a lesser extent, higher selling, general and administrative expenses (including share-based compensation expense)., largely offset by lower direct operating expenses.
Interest expense
Interest expense for the three months ended December 31, 2019September 30, 2020 decreased $1,759,$5,596, or 15%52%, to $9,934$5,219 as compared with the prior year period primarily due to lower average interest rates for the three months ended December 31, 2019 (3.3%September 30, 2020 (1.7% as compared with 3.8%3.7% in the prior year).
Debt refinancing expense
Debt refinancing expense was approximately $2,764 for the three months ended December 31, 2019 related to refinancing ofyear period), partially offset by a higher average principal balance under the Company’s senior secured credit facilities. See Note 7 to the consolidated financial statements included in “Part Ifacilities (see “Liquidity and Capital Resources — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for more information on the refinancing of the Company’s senior secured credit facilities.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 | | Increase (Decrease) in
Adjusted Operating Income |
| | September 30, | |
| | 2020 | | 2019 | |
| 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) | |
|
| | | | | | | | | | | | |
| | | Three Months Ended | | Decrease in Adjusted Operating Income |
| | | December 31, | |
| | | 2019 | | 2018 | |
| Operating income | | $ | 69,963 |
| | $ | 78,350 |
| | $ | (8,387 | ) |
| Share-based compensation | | 5,440 |
| | 5,611 |
| | (171 | ) |
| Depreciation and amortization | | 1,680 |
| | 1,800 |
| | (120 | ) |
| Adjusted operating income | | $ | 77,083 |
| | $ | 85,761 |
| | $ | (8,678 | ) |
Adjusted operating income for the three months ended December 31, 2019September 30, 2020 decreased $8,678,$269, or 10%less than 1%, to $77,083$74,391 as compared with the prior year period primarily due to (as discussed above) the decrease in revenues higher direct operating expenses and, to a lesser extent, higher selling, general and administrative expenses (excluding share-based compensation expense).
Results of Operations
Comparison of the Six Months Ended December 31, 2019 versus the Six Months Ended December 31, 2018
The table below sets forth, for the periods presented, certain historical financial information and the percentage that those items bear to revenues.
|
| | | | | | | | | | | | | | | | | | |
| | | Six Months Ended December 31, | | Increase (Decrease) in Net Income |
| | | 2019 | | 2018 | |
| | | Amount | | % of Revenues | | Amount | | % of Revenues | |
| Revenues | | $ | 348,711 |
| | 100 | % | | $ | 357,378 |
| | 100 | % | | $ | (8,667 | ) |
| | | | | | | | | | | |
| Direct operating expenses | | 152,725 |
| | 44 | % | | 148,125 |
| | 41 | % | | (4,600 | ) |
| Selling, general and administrative expenses | | 54,342 |
| | 16 | % | | 48,197 |
| | 13 | % | | (6,145 | ) |
| Depreciation and amortization | | 3,407 |
| | 1 | % | | 3,845 |
| | 1 | % | | 438 |
|
| Operating income | | 138,237 |
| | 40 | % | | 157,211 |
| | 44 | % | | (18,974 | ) |
| Other income (expense): | | | | | | | | | | |
| Interest income | | 2,834 |
| | 1 | % | | 3,014 |
| | 1 | % | | (180 | ) |
| Interest expense | | (20,749 | ) | | (6 | )% | | (23,615 | ) | | (7 | )% | | 2,866 |
|
| Debt refinancing expense | | (2,764 | ) | | (1 | )% | | — |
| | NM |
| | (2,764 | ) |
| Other components of net periodic benefit cost | | (516 | ) | | NM |
| | (818 | ) | | NM |
| | 302 |
|
| | | (21,195 | ) | | (6 | )% | | (21,419 | ) | | (6 | )% | | 224 |
|
| Income from operations before income taxes | | 117,042 |
| | 34 | % | | 135,792 |
| | 38 | % | | (18,750 | ) |
| Income tax expense | | (34,011 | ) | | (10 | )% | | (45,024 | ) | | (13 | )% | | 11,013 |
|
| Net income | | $ | 83,031 |
| | 24 | % | | $ | 90,768 |
| | 25 | % | | $ | (7,737 | ) |
_________________
NM – Percentage is not meaningful
Revenues
Revenues for the six months ended December 31, 2019 decreased $8,667, or 2%, to $348,711 as compared with the prior year period. The net decrease was attributable to the following:
|
| | | |
| Decrease in affiliation fee revenue | $ | (5,183 | ) |
| Decrease in advertising revenue | (2,044 | ) |
| Other net decreases | (1,440 | ) |
| | $ | (8,667 | ) |
The decrease in affiliation fee revenue was primarily due to the impact of a decrease in subscribers of approximately 8%, partiallylargely offset by the impact of higher affiliation rates and, to a lesser extent, a net favorable $1,700 affiliate adjustment recorded in the current year period.
The decrease in advertising revenue was primarily due to a lower net decrease in deferred revenue related to ratings guarantees and the impact of fewer live professional sports telecasts as compared with the prior year period, partially offset by higher per-game sales from the telecast of live professional sports programming and other net advertising increases, primarily from the Company’s non-ratings based advertising initiatives.
Other net decreases were largely due to the absence in the current year period of revenues associated with certain services provided to Fuse Media, Inc.
Direct operating expenses
Direct operating expenses for the six months ended December 31, 2019 increased $4,600, or 3%, to $152,725 as compared with the prior year period due to higher rights fees expense of $4,251, principally as a result of contractual rate increases under the Company’s media rights agreements with professional sports teams.
Selling, general and administrative expenses
Selling, general and administrative expenses for the six months ended December 31, 2019 increased $6,145 or 13%, to $54,342 as compared with the prior year period primarily due to higher advertising and marketing costs and professional fees. The overall increase includes approximately $1,600 in expenses in the current year period that are not indicative of the Company’s core expense base.
Operating income
Operating income for the six months ended December 31, 2019 decreased $18,974, or 12%, to $138,237 as compared with the prior year period primarily due to (as discussed above) the decrease in revenues, higher selling, general and administrative expenses (including share-based compensation expense) and, to a lesser extent, higher direct operating expenses.
Interest expense
Interest expense for the six months ended December 31, 2019 decreased $2,866, or 12%, to $20,749 as compared with the prior year period primarily due to a lower average principal balance under the Company’s senior secured credit facilities (see “Financing Agreements”), as well as lower average interest rates for the six months ended December 31, 2019 (3.5% as compared with 3.7% in the prior year).
Debt refinancing expense
Debt refinancing expense was approximately $2,764 for the six months ended December 31, 2019 related to refinancing of the Company’s senior secured credit facilities. See Note 7 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for more information on the refinancing of the Company’s senior secured credit facilities.
Income taxes
See Note 15 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for more information on income taxes.
Adjusted operating income
The Company has presented the components that reconcile operating income, a GAAP measure, to adjusted operating income:
|
| | | | | | | | | | | | |
| | | Six Months Ended | | Increase (Decrease) in Adjusted Operating Income |
| | | December 31, | |
| | | 2019 | | 2018 | |
| Operating income | | $ | 138,237 |
| | $ | 157,211 |
| | $ | (18,974 | ) |
| Share-based compensation | | 10,099 |
| | 9,287 |
| | 812 |
|
| Depreciation and amortization | | 3,407 |
| | 3,845 |
| | (438 | ) |
| Adjusted operating income | | $ | 151,743 |
| | $ | 170,343 |
| | $ | (18,600 | ) |
Adjusted operating income for the six months ended December 31, 2019 decreased $18,600, or 11%, to $151,743 as compared with the prior year period primarily due to (as discussed above) the decrease in revenues, higher selling, general and administrative expenses (excluding share-based compensation expense) and, to a lesser extent, higher direct operating expenses.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash and cash equivalents, cash flows from the operations of our business and available borrowing capacity under our revolving credit facility. The Company amended and restated its prior credit agreement, dated September 28, 2015 (the “Former Credit Agreement”), in its entirety on October 11, 2019.2019 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, the optimalits view of a favorable allocation of cash resources, and the timing of cash flow generation.
We believe we have sufficient liquidity, including $115,914$254,380 in cash and cash equivalents, as of December 31, 2019,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. On October 3, 2019, the Company settled its modified Dutch auction tender offer and repurchased approximately 15 million shares of its Class A Common Stock, at a price of $16.70 per share, for an aggregate purchase price of $250,168. As of December 31, 2019,September 30, 2020, the Company had $185,997$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 December 31, 2019,September 30, 2020, there was $1,100,000$1,079,375 outstanding under the Term Loan Facility, and no borrowings under the Revolving Credit Facility. As of December 31, 2019,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 and the Former Credit Agreement.
Contractual Obligations
As more fully described in Note 9 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019,2020, the Company’s contractual obligations not reflected on the consolidated balance sheets consist primarily of its obligations under media rights agreements.
In addition, see NoteNotes 7 and 8 to the consolidated financial statements included in “Part I — Item 1. Financial Statements”Statements” of this Quarterly Report on Form 10-Q for the principal repayments required under the Company’s Term Loan Facility.Facility and maturities of the Company's operating lease liabilities, respectively.
Cash Flow Discussion
Operating Activities
Net cash provided by operating activities for the sixthree months ended December 31, 2019 decreasedSeptember 30, 2020 increased by $16,434$11,110 to $74,021$68,259 as compared with the prior year period. This decreaseincrease was primarily driven by lowerdue to the impact of certain working capital items and higher income from operations before income taxes, partially offset by other net increaseshigher income taxes paid as compared with the prior year period.
Investing Activities
Net cash used in investing activities for the sixthree months ended December 31, 2019 decreasedSeptember 30, 2020 increased by $1,916$508 to $1,758$1,741 as compared with the prior year period primarily due to an investment made in a nonconsolidated entityhigher capital expenditures in the priorcurrent year period.
Financing Activities
Net cash used in financing activities for the sixthree months ended December 31, 2019 increased by $65,272 to $182,772September 30, 2020 was $8,975 as compared with net cash provided by financing activities in the prior year period.period of $78,024. This increase waschange is primarily due to repurchasesthe absence of the Company’s Class A Common Stock, partially offset by the proceeds received in the prior year period from borrowings under the Company’s senior secured credit facilities, during the current year period, as well aspartially offset by lower principal repayments on the Company’sCompany's term loan facilities made inas compared with the currentprior year period.
Recently Issued Accounting Pronouncements Not Yet Adopted and Critical Accounting Policies
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016,See Note 2 to the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments — Credit Losses, and subsequent ASUs that amended the application of ASU No. 2016-13, which introduces a new impairment model for most financial assets and certain other instruments. For trade and other receivables, the Company will be required to use a forward-looking “expected loss” model that will replace the current “incurred loss” model and generally will result in earlier recognition of allowances for losses. This standard will be effective for the Company beginning in the first quarter of fiscal year 2021, with early adoption permitted. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, Compensationstatements included in “Part I — Retirement Benefits — Defined Benefit Plans — General (Topic 715-20): Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans, which removes, adds, or clarifies disclosure requirements relating to defined benefit plans to improve disclosure effectiveness. This standard will be effective for the Company beginning in the fourth quarter of fiscal year 2021, with early adoption permitted. The standard is to be applied retroactively to all periods presented. The adoptionItem 1. Financial Statements” of this standard isQuarterly Report on Form 10-Q for information regarding recently issued accounting pronouncements not expected to have a material impact on the Company’s consolidated financial statements.
In March 2019, the FASB issued ASU No. 2019-02, Entertainment-Films-Other Assets-Film Costs (Subtopic 926-20) and Entertainment-Broadcasters-Intangibles-Goodwill and Other (Subtopic 920-350): Improvements to Accounting for Costs of Films and License Agreements for Program Materials, which amends Accounting Standards Codification (“ASC”) Subtopic 920-350 to align the accounting for production costs of an episodic television series with that for the costs of producing films. This standard will be effective for the Company beginning in the first quarter of fiscal year 2021, with early adoption permitted. The standard is to be applied prospectively to all periods presented. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU eliminates certain exceptions to the general approach in ASC Topic 740 and includes methods of simplification to the existing guidance. This standard will be effective for the Company beginning in the first quarter of fiscal year 2022, with early adoption permitted. The standard is to be applied prospectively to all periods presented. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.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 2020.2021. 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, 2019.2020.
Goodwill
The goodwill balance reported on the Company’s consolidated balance sheet as of December 31, 2019September 30, 2020 is $424,508. Goodwill is tested annually for impairment as of August 31st31st and at any time upon the occurrence of certain events or substantive changes in circumstances. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. If the Company can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company does not need to perform the quantitative goodwill impairment test for that reporting unit. If the Company cannot support such a conclusion or the Company does not elect to perform the qualitative assessment then the Company would perform the quantitative goodwill impairment test. The quantitative goodwill impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
The Company has one reporting unit for evaluating goodwill impairment. During the first quarter of fiscal year 2020,2021, 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In October 2019, the Company amended and restated its prior credit agreement, dated September 28, 2015, in its entirety. As such, we are providing an updateThere were no material changes to the disclosures made in the Company's Annual Report on Form 10-K regarding quantitative and qualitative disclosures about market risk affected by this refinancing.
Our market risk exposure to interest rate risk relates to any borrowings we may incur.
Borrowings under our Credit Agreement bear interest, based on our election, at a floating rate based upon LIBOR, the New York Fed Bank Rate or the U.S. Prime Rate, plus, in each case, an additional rate which is fixed for an initial period of time and thereafter dependent upon our total leverage ratio at the time. Accordingly, we are subject to interest rate risk with respect to the tenor of any borrowings we may incur under the Credit Agreement. The effect of a hypothetical 100 basis point increase in floating interest rates prevailing at December 31, 2019 and continuing for a full year would increase interest expense related to the amount outstanding under our $1.1 billion term loan facility provided under the Credit Agreement by $10,823. If appropriate, we may seek to reduce such exposure through the use of interest rate swaps or similar instruments that qualify for hedge accounting treatment. See “Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Financing Agreements” for more information on our Credit Agreement.
There were no other material changes to the disclosures made in the Company’s Annual Report on Form 10-K regarding quantitative and qualitative disclosures about market risk for the year ended June 30, 2019.2020.
Item 4. Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2019September 30, 2020 the Company’s disclosure controls and procedures were effective.
There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2019September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a defendant in various lawsuits. Although the outcome of these matters cannot be predicted with certainty, management does not believe that resolution of these lawsuits will have a material adverse effect on the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information about the Company’s repurchases of Class A Common Stock that were made during the three months ended December 31, 2019 (amounts are presented in thousands except per share data):
|
| | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased (a) | | Average Price Paid per Share (b) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (b) |
| October 1, 2019 - October 31, 2019 | | 14,980 |
| | $ | 16.70 |
| | 14,980 |
| | $ | 185,997 |
|
| November 1, 2019 - November 30, 2019 | | — |
| | $ | — |
| | — |
| | $ | — |
|
| December 1, 2019 - December 31, 2019 | | — |
| | $ | — |
| | — |
| | $ | — |
|
| | | 14,980 |
| | $ | 16.70 |
| | 14,980 |
| | |
________________(a) On December 7, 2017, 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. As of December 31, 2019, the Company had remaining authorization of $185,997 for future repurchases. 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, with the timing and amount of purchases depending on market conditions and other factors. The Company has been funding and expects to continue to fund stock repurchases through a combination of cash on hand and cash generated by operations. The Company may also choose to fund its stock repurchase program through other funding sources including utilizing its revolving credit facility. Total number of shares purchased are determined based on the settlement date of such trades.
(b) The amounts do not give effect to any fees, commissions or other costs associated with repurchases of shares.
Item 6. Exhibits
(a) Index to Exhibits
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| | | | | | | |
EXHIBIT
NO.
| | DESCRIPTION |
31.110.1 | | |
| 31.1 | | |
| 31.2 | | |
| 32.1 | | |
| 32.2 | | |
| 101.INS | | XBRL Instance Document — the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH | | XBRL Taxonomy Extension Schema. |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase. |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase. |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase. |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase. |
| 104 | | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2019,September 30, 2020, formatted in Inline XBRL and contained in Exhibit 101. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 4th2nd day of February,November, 2020.
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| | | | | | | |
| MSG Networks Inc. |
| |
| By: | /S/ BRET RICHTER |
| Name: | Bret Richter |
| Title: | Executive Vice President, |
| | Chief Financial Officer and Treasurer |