OREANDA-NEWS. MSG Networks Inc. (NYSE:MSGN) today reported financial results for the fourth quarter and fiscal year ended June 30, 2016. 

For fiscal 2016, MSG Networks Inc. generated revenues of $658.2 million, an increase of 4% as compared with the prior year.  In addition, the Company generated operating income of $273.6 million, adjusted operating cash flow (“AOCF”) of $297.4 million and income from continuing operations of $163.3 million.(1)

For the fiscal 2016 fourth quarter, MSG Networks Inc. generated revenues of $160.5 million, an increase of 5% as compared with the prior year quarter.   In addition, the Company generated operating income of $74.3 million, AOCF of $79.8 million and income from continuing operations of $43.2 million.

For each quarter of fiscal 2015, as well as the first quarter of fiscal 2016, the reported financial results of MSG Networks Inc. reflect the results of the sports and entertainment businesses of The Madison Square Garden Company as discontinued operations.  Please note that results from continuing operations for these periods include certain corporate overhead expenses that MSG Networks Inc. did not incur in the fiscal 2016 second, third and fourth quarters and does not expect to incur in future periods, but do not meet the criteria for inclusion in discontinued operations.  The reported financial results of MSG Networks Inc. for the three months ended June 30, 2016 reflect the Company's results on a standalone basis, including the Company’s actual corporate overhead.

President and CEO Andrea Greenberg said, “As we look back at our first fiscal year as a pure-play, publicly traded media company, we are pleased with what we have been able to accomplish financially, strategically and operationally.  We delivered strong revenue and AOCF results for the fourth quarter and full fiscal year, and entered into important rights agreements that secure all of our NBA and NHL content for the long-term, while continuing to deliver award-winning, must-have programming for sports fans.  Looking ahead, we believe our unique position as a provider of exclusive live sports content in the nation’s largest television market will enable us to continue generating significant value for our shareholders.”

Fiscal Year 2016 Fourth Quarter Results  
(In thousands, except per share data) Three Months Ended
  June 30,
  2016
Revenues $ 160,524  
Operating income 74,328  
Adjusted operating cash flow 79,829  
Income from continuing operations 43,207  
Diluted EPS from continuing operations $ 0.57  
   
1. See definition of adjusted operating cash flow (“AOCF”) included in the discussion of non-GAAP financial measures on page 3 of this earnings release.
   

Summary of Reported Fiscal 2016 Fourth Quarter Results from Continuing Operations
Fiscal 2016 fourth quarter total revenues of $160.5 million increased 5%, or $7.4 million, as compared with the prior year period.  Affiliation fee revenue increased $7.3 million, primarily due to higher affiliation rates and, to a lesser extent, the absence of an unfavorable affiliate adjustment recorded in the prior year period, partially offset by the impact of a low single digit percentage decrease in subscribers versus the prior year period.  Advertising revenue increased $0.4 million, primarily driven by higher average per game sales from the telecast of live professional sports programming and other net increases, partially offset by the timing of regular season telecasts as compared with the prior year period.  Excluding the impact of the unfavorable affiliate adjustment recorded in the prior year quarter, fiscal 2016 fourth quarter affiliation fee revenue increased $3.4 million and total company revenues increased $3.5 million, or 2%, both as compared with the prior year period.  

Direct operating expenses of $63.0 million increased 22%, or $11.2 million, as compared with the prior year period.  The increase was primarily due to higher rights fees expense, slightly offset by other programming-related cost decreases.  Higher rights fees expense primarily reflects a $12.3 million increase related to the new long-term media rights agreements with the New York Knicks and New York Rangers.  Assuming the new media rights fees with the New York Knicks and New York Rangers were in place during the prior year fourth quarter, direct operating expenses of $63.0 million in the current year period would have represented a decrease of 2%, or $1.1 million.

Selling, general and administrative expenses of $18.9 million decreased 55%, or $22.8 million, as compared with the prior year period, primarily due to the absence of certain corporate overhead expenses included in the results of the prior year fourth quarter.  As noted above, fiscal 2015 fourth quarter reported results from continuing operations include certain corporate expenses that MSG Networks Inc. did not incur during the current year fourth quarter and does not expect to incur in future periods.  Partially offsetting this decrease in expenses are corporate costs which were incurred during the fiscal 2016 fourth quarter by MSG Networks Inc. as a standalone public company.

Operating income of $74.3 million increased 35% or $19.2 million, and adjusted operating cash flow of $79.8 million increased 31%, or $18.7 million, both as compared with the prior year period, primarily due to lower selling, general and administrative expenses and higher revenues, partially offset by higher direct operating expenses.

About MSG Networks Inc.
An industry leader in sports production, and content development and distribution, MSG Networks Inc. owns and operates two award-winning regional sports and entertainment networks, MSG Network (MSG) and MSG+, and a live streaming and video on demand platform, MSG GO. The networks are home to 10 professional sports teams, delivering live games of the New York Knicks; New York Rangers; New York Islanders; New Jersey Devils; Buffalo Sabres; New York Liberty; New York Red Bulls and the Westchester Knicks, as well as coverage of the New York Giants and Buffalo Bills.  Each year, MSG and MSG+ collectively telecast approximately 500 live professional games, along with a comprehensive lineup of other sporting events, including college football and basketball, and critically-acclaimed original programming.  The gold standard for regional broadcasting, MSG Networks has won 145 New York Emmy Awards over the past nine years.

Non-GAAP Financial Measures
We define adjusted operating cash flow (“AOCF”), which is a non-GAAP financial measure, as operating income before 1) depreciation, amortization and impairments of property and equipment and intangible assets, 2) share-based compensation expense or benefit, 3) restructuring charges or credits and 4) gains or losses on sales or dispositions of businesses.  The Company excluded the gain on sale of Fuse from AOCF as it is not indicative of the Company’s ongoing operating performance.  Because it is based upon operating income, AOCF 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 either the distortive effects of fluctuating stock prices or the settlement of an obligation that is not expected to be made in cash.

We believe AOCF is an appropriate measure for evaluating the operating performance of our Company.  AOCF and similar measures with similar titles are common performance measures used by investors and analysts to analyze our performance. Internally, we use revenues and AOCF measures as the most important indicators of our business performance, and evaluate management’s effectiveness with specific reference to these indicators. AOCF 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 AOCF 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. For a reconciliation of operating income to AOCF, please see page 6 of this release.

The Company defines Free Cash Flow (“Free Cash Flow”), which is a non-GAAP financial measure, as net cash provided by operating activities from continuing operations less capital expenditures, both of which are reported in our Consolidated Statement of Cash Flows.  Net cash provided by operating activities from continuing operations excludes net cash provided by operating activities of discontinued operations. The Company believes the most comparable GAAP financial measure is net cash provided by operating activities. The Company believes that Free Cash Flow is useful as an indicator of its overall ability to generate liquidity, as the amount of Free Cash Flow generated in any period is representative of cash that is generated for debt repayment, investment, and other discretionary and non-discretionary cash uses. The Company also believes that Free Cash Flow is one of several benchmarks used by analysts and investors for comparison of the Company’s generation of liquidity with other companies in the industry, although the Company’s measure of Free Cash Flow may not be directly comparable to similar measures reported by other companies.  For a reconciliation of Free Cash Flow to net cash provided by operating activities from continuing operations, please see page 8 of this release.

 

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
         
    Three Months Ended   Twelve Months Ended
    June 30,   June 30,
    2016   2015   2016   2015
Revenues   $ 160,524     $ 153,162     $ 658,198     $ 631,010  
Direct operating expenses   63,046     51,859     268,024     217,233  
Selling, general and administrative expenses   18,939     41,727     102,005     155,003  
Depreciation and amortization   4,211     4,437     14,583     17,641  
Gain on sale of Fuse   —     —     —     (186,178 )
Operating income   74,328     55,139     273,586     427,311  
Other income (expense):                
Interest expense, net   (9,028 )   (467 )   (29,317 )   (1,976 )
Income from continuing operations before income taxes   65,300     54,672     244,269     425,335  
Income tax expense   (22,093 )   (11,399 )   (80,971 )   (176,905 )
Income from continuing operations   43,207     43,273     163,298     248,430  
Income (loss) from discontinued operations, net of taxes   5,530     2,413     (155,664 )   6,271  
Net income (loss)   $ 48,737     $ 45,686     $ 7,634     $ 254,701  
Earnings (loss) per share:                
Basic                
Income from continuing operations   $ 0.58     $ 0.57     $ 2.17     $ 3.22  
Income (loss) from discontinued operations   0.07     0.03     (2.07 )   0.08  
Net income (loss)   0.65     0.60     0.10     3.30  
Diluted                
Income from continuing operations   $ 0.57     $ 0.56     $ 2.16     $ 3.20  
Income (loss) from discontinued operations   0.07     0.03     (2.06 )   0.08  
Net income (loss)   0.65     0.60     0.10     3.28  
Weighted-average number of common shares outstanding:                
Basic   75,087     76,186     75,152     77,138  
Diluted   75,475     76,617     75,527     77,687  
                         

Note: For the three months ended September 30, 2015 and for the twelve months ended June 30, 2015, the reported financial results of MSG Networks Inc. reflect the results of the sports and entertainment businesses of The Madison Square Garden Company as discontinued operations.  Please note that results from continuing operations for these periods include certain corporate overhead expenses that MSG Networks Inc. did not incur in the fiscal 2016 second, third and fourth quarters and does not expect to incur in future periods, but do not meet the criteria for inclusion in discontinued operations.

ADJUSTMENTS TO RECONCILE OPERATING INCOME
TO ADJUSTED OPERATING CASH FLOW

The following is a description of the adjustments to operating income in arriving at adjusted operating cash flow as described in this earnings release:

  • Share-based compensation expense. This adjustment eliminates the compensation expense relating to restricted stock units granted under our employee stock plans and non-employee director plans in all periods.
  • Depreciation and amortization.  This adjustment eliminates depreciation, amortization and impairments of property and equipment and intangible assets in all periods.
  • Gain on sale of Fuse.  This adjustment eliminates the pre-tax gain on the sale of Fuse.
    Three Months Ended   Twelve Months Ended
    June 30,   June 30,
    2016   2015   2016   2015
Operating income   $ 74,328     $ 55,139     $ 273,586     $ 427,311  
Share-based compensation   1,290     1,530     9,266     10,211  
Depreciation and amortization   4,211     4,437     14,583     17,641  
Gain on sale of Fuse   —     —     —     (186,178 )
Adjusted operating cash flow   $ 79,829     $ 61,106     $ 297,435     $ 268,985  
                                 
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
         
    June 30,
 2016		   June 30,
 2015
ASSETS        
Current Assets:        
Cash and cash equivalents   $ 119,568     $ 203,768  
Restricted cash   —     9,003  
Accounts receivable, net   101,427     85,610  
Net related party receivables   15,492     27,324  
Prepaid income taxes   28,384     30,375  
Prepaid expenses   13,188     12,863  
Other current assets   3,053     3,514  
Current assets of discontinued operations   —     125,896  
Total current assets   281,112     498,353  
Property and equipment, net   14,154     19,514  
Amortizable intangible assets, net   44,123     47,583  
Goodwill   424,508     424,508  
Other assets   42,645     46,274  
Non-current assets of discontinued operations   —     1,983,597  
Total assets   $ 806,542     $ 3,019,829  
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)        
Current Liabilities:        
Accounts payable   $ 2,043     $ 11,359  
Net related party payables   4,302     420  
Current portion of long-term debt   64,914     —  
Income taxes payable   8,662     —  
Accrued liabilities:        
Employee related costs   10,340     19,504  
Other accrued liabilities   15,991     18,101  
Deferred revenue   6,143     4,971  
Current liabilities of discontinued operations   —     520,179  
Total current liabilities   112,395     574,534  
Long-term debt, net of current portion   1,412,845     —  
Defined benefit and other postretirement obligations   31,827     28,476  
Other employee related costs   5,550     5,318  
Related party payable   1,710     —  
Other liabilities   5,612     5,951  
Deferred tax liability   356,561     351,734  
Non-current liabilities of discontinued operations   —     330,294  
Total liabilities   1,926,500     1,296,307  
Commitments and contingencies (see Notes 9, 10 and 11)        
Stockholders' Equity (Deficiency):        
Class A common stock, par value $0.01, 360,000 shares authorized; 61,354 and 62,207 shares outstanding as of June 30, 2016 and 2015, respectively   643     643  
Class B common stock, par value $0.01, 90,000 shares authorized; 13,589 shares outstanding as of June 30, 2016 and 2015   136     136  
Preferred stock, par value $0.01, 45,000 shares authorized; none outstanding   —     —  
Additional paid-in capital   —     1,084,002  
Treasury stock, at cost, 2,905 and 2,052 shares as of June 30, 2016 and 2015, respectively   (207,796 )   (143,250 )
Retained earnings (accumulated deficit)   (905,352 )   807,563  
Accumulated other comprehensive loss   (7,589 )   (25,572 )
Total stockholders' equity (deficiency)   (1,119,958 )   1,723,522  
Total liabilities and stockholders' equity (deficiency)   $ 806,542     $ 3,019,829  
                 
SUPPLEMENTAL FINANCIAL INFORMATION
(Dollars in thousands)
(Unaudited)
 
Summary Data from the Statements of Cash Flows
     
    Twelve Months Ended
    June 30,
    2016   2015
Net cash provided by operating activities from continuing operations   $ 181,848     $ 22,651  
Net cash provided by (used in) investing activities from continuing operations   (3,323 )   221,427  
Net cash used in financing activities from continuing operations   (93,541 )   (148,256 )
Net cash provided by continuing operations   84,984     95,822  
Net cash provided by (used in) discontinued operations   (184,101 )   30,612  
Cash and cash equivalents at beginning of period   218,685     92,251  
Cash and cash equivalents at end of period   $ 119,568     $ 218,685  
         
Free Cash Flow    
     
    Twelve Months Ended
    June 30,
    2016   2015
Net cash provided by operating activities from continuing operations   $ 181,848     $ 22,651  
Less: Capital expenditures   (3,323 )   (6,663 )
Free cash flow   $ 178,525     $ 15,988  
         
Capitalization    
     
    June 30, 2016
     
Cash and cash equivalents   $ 119,568  
Credit facility debt(a)   1,488,750  
Net debt   $ 1,369,182  
     
Annualized AOCF(b)   $ 328,348  
     
Leverage ratio(c)     4.2x  
     
(a)Represents aggregate principal amount of the debt outstanding.
(b)Represents reported AOCF for the fiscal 2016 second, third and fourth quarters, multiplied by four-thirds.
(c)Represents net debt divided by Annualized AOCF. This ratio differs from the covenant calculation contained in the Company's credit facility.
Note: MSG Networks Inc. made principal payments of $61.25 million during fiscal 2016.