Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to
Commission File Number: 1-34434
________________________ 
MSG Networks Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
27-0624498
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
_______________________ 
11 Pennsylvania Plaza
New York, NY 10001
(212) 465-6400
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
_______________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock
MSGN 
New York Stock Exchange
Number of shares of common stock outstanding as of April 30, 2019:  
Class A Common Stock par value $0.01 per share
 —
61,286,747
Class B Common Stock par value $0.01 per share
 —
13,588,555


Table of Contents



MSG NETWORKS INC.
INDEX TO FORM 10-Q
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
MSG NETWORKS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)

 
 
March 31,
2019
 
June 30,
2018
ASSETS
 
(unaudited)
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
182,261

 
$
205,343

Accounts receivable, net
 
110,619

 
110,657

Related party receivables, net
 
30,880

 
12,100

Prepaid income taxes
 
2,411

 
1,134

Prepaid expenses
 
4,574

 
4,489

Other current assets
 
6,157

 
4,719

Total current assets
 
336,902

 
338,442

Property and equipment, net
 
8,653

 
10,029

Amortizable intangible assets, net
 
34,608

 
37,203

Goodwill
 
424,508

 
424,508

Other assets
 
39,978

 
39,430

Total assets
 
$
844,649

 
$
849,612

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
 
 
 
 
Current Liabilities:
 
 
 
 
Accounts payable
 
$
427

 
$
1,460

Related party payables
 
1,130

 
785

Current portion of long-term debt
 
98,664

 
72,414

Income taxes payable
 
5,593

 
8,460

Accrued liabilities:
 
 
 
 
Employee related costs
 
13,214

 
15,342

Other accrued liabilities
 
10,209

 
8,129

Deferred revenue
 
2,196

 
4,626

Total current liabilities
 
131,433

 
111,216

Long-term debt, net of current portion
 
937,457

 
1,118,017

Defined benefit and other postretirement obligations
 
26,026

 
28,170

Other employee related costs
 
4,602

 
4,560

Other liabilities
 
3,928

 
3,974

Deferred tax liability
 
244,544

 
241,417

Total liabilities
 
1,347,990

 
1,507,354

Commitments and contingencies (see Note 8)
 

 

Stockholders' Deficiency:
 
 
 
 
Class A Common stock, par value $0.01, 360,000 shares authorized; 61,287 and 61,017 shares outstanding as of
March 31, 2019 and June 30, 2018, respectively
 
643

 
643

Class B Common stock, par value $0.01, 90,000 shares authorized; 13,589 shares outstanding as of March 31, 2019 and June 30, 2018
 
136

 
136

Preferred stock, par value $0.01, 45,000 shares authorized; none outstanding
 

 

Additional paid-in capital
 
5,487

 
4,067

Treasury stock, at cost 2,972 and 3,242 shares as of March 31, 2019 and June 30, 2018, respectively
 
(179,561
)
 
(195,881
)
Accumulated deficit
 
(323,593
)
 
(460,007
)
Accumulated other comprehensive loss
 
(6,453
)
 
(6,700
)
Total stockholders' deficiency
 
(503,341
)
 
(657,742
)
Total liabilities and stockholders' deficiency
 
$
844,649

 
$
849,612




See accompanying notes to consolidated financial statements.
MSG NETWORKS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (in thousands, except per share data)
 
 
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2019
 
2018
 
2019
 
2018
Revenues
 
$
195,105

 
$
186,568

 
$
552,483

 
$
525,246

 
 
 
 
 
 
 
 
 
Direct operating expenses (including related party expenses of $38,283 and $37,344 for the three months ended March 31, 2019 and 2018, respectively, and $114,586 and $111,357 for the nine months ended March 31, 2019 and 2018, respectively)
 
82,085

 
80,322

 
230,210

 
222,315

Selling, general and administrative expenses (including related party expenses of $9,739 and $8,719 for the three months ended March 31, 2019 and 2018, respectively, and $21,464 and $18,871 for the nine months ended March 31, 2019 and 2018, respectively)
 
28,734

 
23,383

 
76,931

 
63,255

Depreciation and amortization
 
1,805

 
2,279

 
5,650

 
7,153

Operating income
 
82,481

 
80,584

 
239,692

 
232,523

Other income (expense):
 
 
 
 
 
 
 
 
Interest income
 
1,557

 
1,195

 
4,571

 
3,072

Interest expense
 
(11,658
)
 
(10,932
)
 
(35,273
)
 
(31,817
)
Other components of net periodic benefit cost
 
(413
)

(407
)
 
(1,231
)
 
(1,221
)
 
 
(10,514
)
 
(10,144
)
 
(31,933
)
 
(29,966
)
Income from operations before income taxes
 
71,967

 
70,440

 
207,759

 
202,557

Income tax benefit (expense)
 
(17,732
)
 
(23,505
)
 
(62,756
)
 
41,103

Net income
 
$
54,235

 
$
46,935

 
$
145,003

 
$
243,660

Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
 
Net income
 
$
0.72

 
$
0.62

 
$
1.93

 
$
3.23

Diluted
 
 
 
 
 
 
 
 
Net income
 
$
0.72

 
$
0.62

 
$
1.92

 
$
3.21

Weighted-average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
75,152

 
75,540

 
75,041

 
75,427

Diluted
 
75,739

 
76,017

 
75,712

 
75,844




See accompanying notes to consolidated financial statements.



1

Table of Contents


MSG NETWORKS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (in thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2019
 
2018
 
2019
 
2018
Net income
 
$
54,235

 
$
46,935

 
$
145,003

 
$
243,660

Other comprehensive income (loss) before income taxes:
 
 
 
 
 
 
 
 
Pension plans and postretirement plan:
 
 
 
 
 
 
 
 
Amounts reclassified from accumulated other comprehensive loss:
 
 
 
 
 
 
 
 
Amortization of net actuarial loss included in net periodic benefit cost
 
119

 
149

 
357

 
447

Amortization of net prior service credit included in net periodic benefit cost
 
(2
)
 
(3
)
 
(6
)
 
(9
)
Settlement gain
 

 

 
(8
)
 

Other comprehensive income before income taxes
 
117

 
146

 
343

 
438

Income tax expense related to items of other comprehensive income
 
(32
)
 
(42
)
 
(96
)
 
(164
)
Other comprehensive income

85

 
104

 
247

 
274

Comprehensive income

$
54,320

 
$
47,039

 
$
145,250

 
$
243,934




See accompanying notes to consolidated financial statements.


2

Table of Contents

MSG NETWORKS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)

 
 
Nine Months Ended
 
 
March 31,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
145,003

 
$
243,660

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
5,650

 
7,153

Amortization of deferred financing costs
 
2,252

 
2,252

Share-based compensation expense
 
13,658

 
10,581

Provision for doubtful accounts
 
(756
)
 
183

Change in assets and liabilities:
 
 
 
 
Accounts receivable, net
 
932

 
(4,266
)
Related party receivables, net
 
(18,918
)
 
(9,016
)
Prepaid expenses and other assets
 
377

 
53

Accounts payable
 
(1,033
)
 
(587
)
Related party payables, including payable to MSG
 
466

 
(2,003
)
Prepaid/payable for income taxes
 
(4,144
)
 
22,568

Accrued and other liabilities
 
(1,856
)
 
1,194

Deferred revenue
 
(2,430
)
 
1,929

Deferred income taxes
 
2,879

 
(108,850
)
Net cash provided by operating activities
 
142,080

 
164,851

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(1,912
)
 
(1,470
)
Investment in nonconsolidated entity
 
(2,000
)
 

Net cash used in investing activities
 
(3,912
)
 
(1,470
)
Cash flows from financing activities:
 
 
 
 
Principal repayments on Term Loan Facility (see Note 7)
 
(156,250
)
 
(106,250
)
Taxes paid in lieu of shares issued for share-based compensation
 
(5,000
)
 
(3,644
)
Net cash used in financing activities
 
(161,250
)
 
(109,894
)
Net increase (decrease) in cash and cash equivalents
 
(23,082
)
 
53,487

Cash and cash equivalents at beginning of period
 
205,343

 
141,087

Cash and cash equivalents at end of period
 
$
182,261

 
$
194,574




See accompanying notes to consolidated financial statements.

3

Table of Contents


MSG NETWORKS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2019 AND 2018
(Unaudited) (in thousands)
 
 
Common
Stock
Issued
 
Additional
Paid-In
Capital
 
Treasury
Stock
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Balance as of December 31, 2018
 
$
779

 
$
1,116

 
$
(179,561
)
 
$
(377,828
)
 
$
(6,538
)
 
$
(562,032
)
Net income
 

 

 

 
54,235

 

 
54,235

Other comprehensive income
 

 

 

 

 
85

 
85

Comprehensive income
 

 

 

 

 

 
54,320

Share-based compensation expense
 

 
4,371

 

 

 

 
4,371

Balance as of March 31, 2019
 
$
779

 
$
5,487

 
$
(179,561
)
 
$
(323,593
)
 
$
(6,453
)
 
$
(503,341
)

 
 
Common
Stock
Issued
 
Additional
Paid-In
Capital
 
Treasury
Stock
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Balance as of December 31, 2017
 
$
779

 
$
349

 
$
(184,449
)
 
$
(553,535
)
 
$
(6,386
)
 
$
(743,242
)
Net income
 

 

 

 
46,935

 

 
46,935

Other comprehensive income
 

 

 

 

 
104

 
104

Comprehensive income
 

 

 

 

 

 
47,039

Share-based compensation expense
 

 
2,862

 

 

 

 
2,862

Reclassification of stranded tax effects
 

 

 

 
1,391

 
(1,391
)
 

Balance as of March 31, 2018
 
$
779

 
$
3,211

 
$
(184,449
)
 
$
(505,209
)
 
$
(7,673
)
 
$
(693,341
)





































4

Table of Contents

MSG NETWORKS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY (continued)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2019 AND 2018
(Unaudited) (in thousands)
 
 
Common
Stock
Issued
 
Additional
Paid-In
Capital
 
Treasury
Stock
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Balance as of June 30, 2018
 
$
779

 
$
4,067

 
$
(195,881
)
 
$
(460,007
)
 
$
(6,700
)
 
$
(657,742
)
Net income
 

 

 

 
145,003

 

 
145,003

Other comprehensive income
 

 

 

 

 
247

 
247

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
145,250

Share-based compensation expense
 

 
13,658

 

 

 

 
13,658

Tax withholding associated with shares issued for share-based compensation
 

 
(4,879
)
 

 

 

 
(4,879
)
Shares issued upon distribution of Restricted Stock Units
 

 
(7,359
)
 
16,320

 
(8,961
)
 

 

Cumulative effect of adoption of ASC 606
 

 

 

 
372

 

 
372

Balance as of March 31, 2019
 
$
779

 
$
5,487

 
$
(179,561
)
 
$
(323,593
)
 
$
(6,453
)
 
$
(503,341
)
 
 
 
Common
Stock
Issued
 
Additional
Paid-In
Capital
 
Treasury
Stock
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Balance as of June 30, 2017
 
$
779

 
$
6,909

 
$
(198,800
)
 
$
(746,539
)
 
$
(6,556
)
 
$
(944,207
)
Net income
 

 

 

 
243,660

 

 
243,660

Other comprehensive income
 

 

 

 

 
274

 
274

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
243,934

Share-based compensation expense
 

 
10,581

 

 

 

 
10,581

Tax withholding associated with shares issued for share-based compensation
 

 
(3,649
)
 

 

 

 
(3,649
)
Shares issued upon distribution of Restricted Stock Units
 

 
(10,630
)
 
14,351

 
(3,721
)
 

 

Reclassification of stranded tax effects
 

 

 

 
1,391

 
(1,391
)
 

Balance as of March 31, 2018
 
$
779

 
$
3,211

 
$
(184,449
)
 
$
(505,209
)
 
$
(7,673
)
 
$
(693,341
)


See accompanying notes to consolidated financial statements.



5

Table of Contents

MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
All amounts included in the following Notes to Consolidated Financial Statements are presented in thousands, except per share data or as otherwise noted.
Note 1. Description of Business and Basis of Presentation
Description of Business
MSG Networks Inc. (together with its subsidiaries, the “Company”), incorporated on July 29, 2009, owns and operates two regional sports and entertainment networks, MSG Network and MSG+.
On September 30, 2015, the Company distributed to its stockholders all of the outstanding common stock of The Madison Square Garden Company (“MSG”) (the “Distribution”). Following the Distribution, the Company no longer consolidates the financial results of MSG for purposes of its own financial reporting.
The Company operates and reports financial information in one 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.
Unaudited Interim Financial Statements
The accompanying interim consolidated unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and the instructions to Rule 10-01 of Regulation S-X, and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2018. The financial statements as of March 31, 2019 and for the three and nine months ended March 31, 2019 and 2018 presented in this Quarterly Report on Form 10-Q are unaudited; however, in the opinion of management such financial statements reflect all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the periods presented are not necessarily indicative of the results that might be expected for future interim periods or for the full year.
Note 2. Accounting Policies
Principles of Consolidation
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.
Use of Estimates
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, income tax benefit (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, including the general economic environment and actions it may take in the future. The Company adjusts such estimates when facts and circumstances dictate. However, these estimates may involve significant uncertainties and judgments and cannot be determined with precision. In addition, these estimates are based on management’s best judgment at a point in time and as such, 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 could be material and would be reflected in the Company’s financial statements in future periods.
Investment in Nonconsolidated Entity
The Company’s investment in a nonconsolidated entity, which is included in other assets in the accompanying consolidated balance sheet, 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 March 31, 2019, the Company did not identify any potential adjustments to the cost of its investment.

6

Table of Contents
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)


Accounts Receivable
Accounts receivable is recorded at net realizable value. The Company maintains an allowance for doubtful accounts to reserve for potentially uncollectible receivables. The allowance for doubtful accounts is estimated based on the Company’s analysis of receivables aging, specific identification of certain receivables that are at risk of not being paid, past collection experience and other factors. The Company’s allowance for doubtful accounts was $1,215 and $509 as of March 31, 2019 and June 30, 2018, respectively.
Recently Adopted Accounting Pronouncements
The Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the subsequent ASUs that amended and/or clarified the application of ASU No. 2014-09 (collectively, “Topic 606”) on July 1, 2018 (“Adoption Date”). Topic 606 superseded the revenue recognition requirements in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition. The Company applied the modified retrospective approach for all contracts not completed as of the Adoption Date, and as a result, recorded a decrease to the opening accumulated deficit of $372, net of tax.
The reported results as of and for the three and nine months ended March 31, 2019 reflect the application of Topic 606, while the reported results for prior periods have not been adjusted to reflect Topic 606, and continue to be presented under the prior revenue recognition accounting guidance. The amount by which each financial statement line item has been affected in the current reporting period by the application of Topic 606 compared to historical policies is not material, therefore, comparative disclosures have been omitted. The adoption of Topic 606 did not result in significant changes in the way the Company records revenues. However, as a result of adopting Topic 606, there are certain components of the Company’s revenues where Topic 606 generally results in different recognition of revenue compared to the Company’s historical policies.
The following table provides changes to each applicable opening balance on the Company’s consolidated balance sheet resulting from the adoption of Topic 606:
 
 
June 30,
2018
 
Impact of Adoption
 
July 1,
2018
Current assets
 
$
338,442

 
$
585

 
$
339,027

Total assets
 
849,612

 
760

 
850,372

Current liabilities
 
111,216

 

 
111,216

Total liabilities
 
1,507,354

 
388

 
1,507,742

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which amends ASC Topic 230, Statement of Cash Flows to eliminate the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows by adding or clarifying guidance on various cash flow issues. This standard was adopted by the Company in the first quarter of fiscal year 2019, and was applied retrospectively. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses, which will effect various areas of accounting including, but not limited to, goodwill and consolidation. This standard was adopted by the Company in the first quarter of fiscal year 2019, and was applied prospectively. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the measurement of goodwill impairment by eliminating the requirement of performing a hypothetical purchase price allocation. Instead, impairment will be measured using the difference between the carrying amount and fair value of the reporting unit, not to exceed the carrying amount of goodwill. The amended guidance also eliminates the requirement for any reporting unit with a zero or a negative carrying amount to perform a qualitative assessment, and will require disclosure of the amount of goodwill allocated to each reporting unit with a zero or a negative carrying amount of net assets. This standard was early adopted by the Company in the first quarter of fiscal year 2019, and was applied prospectively. Based on the Company’s most recent annual goodwill impairment test completed in the first quarter of fiscal year 2019, the adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

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Table of Contents
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)


In May 2017, the FASB issued ASU No. 2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This standard does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions or award classification, and would not be required if the changes are considered non-substantive. This standard was adopted by the Company in the first quarter of fiscal year 2019, and will be applied prospectively to any changes to the terms and conditions of share-based payment awards made on or after the adoption date should they occur. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), and subsequent ASUs that amended and/or clarified the application of ASU No. 2016-02, which supersedes the current guidance in ASC Topic 840, Leases. This ASU generally requires the recognition of all lease assets and lease liabilities on the balance sheet, including those leases classified as operating leases under previous GAAP. The amended guidance also requires additional quantitative and qualitative disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases in order to provide additional information about the nature of an organization’s leasing activities. This standard will be effective for the Company beginning in the first quarter of fiscal year 2020, with early adoption permitted, and the modified retrospective approach required. The Company does not plan to early adopt this standard. The Company is compiling the necessary data and is in the process of determining which practical expedients to apply upon adoption. The adoption of this standard will result in the recognition of right of use assets and lease liabilities related to the Companys identified leases.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses, 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, Compensation — 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 2020, with early adoption permitted. The standard is to be applied retroactively to all periods presented. The adoption of this standard is 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 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.
Note 3. Revenue Recognition
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, 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
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.

8

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MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)


Historically, affiliation fee revenue has constituted at least 90% of the Company’s consolidated revenues on a full fiscal year basis, however, given the timing of its advertising revenue as stated above, affiliation fee revenue constituted less than 90% of its consolidated revenues for the three and nine months ended March 31, 2019. Substantially all of the Company’s affiliation agreements are sales-based and usage-based royalty arrangements, which are recognized as the sale or usage occurs. The transaction price is represented by affiliation fees that are generally based upon contractual rates applied to the number of the Distributor’s subscribers who receive or can receive the Company’s programming. Such subscriber information is generally not received until after the close of the reporting period, and in these cases, the Company estimates the number of subscribers. Historical adjustments to recorded estimates have not been material.
The Company’s payment terms vary and are generally within 30-60 days after revenue is earned.
Advertising Revenue
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’s payment terms vary by the type of customer. Generally, payment terms are 30-60 days after revenue is earned.
Principal versus Agent Revenue Recognition
The Company has an advertising sales representation agreement with MSG that provides for MSG to act as its advertising sales representative and includes the exclusive right and obligation to sell certain advertising availabilities on the Company’s behalf for a commission. The Company reports advertising revenue on a gross basis as it is primarily responsible for the fulfillment of advertising orders.
Noncash Consideration
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.
Transaction Price Allocated to Future Performance Obligations
Topic 606 requires 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 March 31, 2019. However, the guidance provides certain practical expedients that allow companies to omit this disclosure requirement for (i) sales-based or usage-based royalty arrangements, (ii) contracts with an original expected length of one year or less, (iii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed, and (iv) variable consideration related to a wholly unsatisfied performance obligation.
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.
As of March 31, 2019, other than contracts for which the Company has applied the practical expedients, the aggregate amount of transaction price allocated to remaining performance obligations under these contracts was approximately $18,700 to be recognized over the next ten years.

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Table of Contents
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)


Contract Balances from Contracts with Customers
An account receivable is recorded when there is an unconditional right to consideration based on a contract with a customer. When consideration 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.
For certain types of contracts with customers, the Company may recognize revenue in advance of the contractual right to invoice the customer, resulting in an amount recorded to contract assets as required by Topic 606. Once the Company has an unconditional right to consideration under these contracts, the contract assets are reclassified to accounts receivable.
Deferred revenue is recognized as revenue when, or as, control of the services is transferred to the customer and all revenue recognition criteria have been met. As noted above, the primary source of the Company’s deferred revenue relates to the Company not meeting viewer rating guarantees on advertising sales arrangements.
The following table provides information about current contract balances from contracts with customers:
 
 
March 31,
2019
 
June 30,
2018
Accounts receivable (including advertising receivable included in related party receivables, net)
 
$
151,456

 
$
125,982

Contract asset, short-term (included in other current assets)
 
1,779

 

Deferred revenue, short-term
 
2,196

 
4,626

Deferred revenue, long-term (included in other liabilities)
 
270

 

The amount of revenue recognized for the nine months ended March 31, 2019 related to deferred revenue (contract liability) recorded at the Adoption Date was approximately $4,588.
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.
The following table presents a reconciliation of the weighted-average number of shares used in the calculations of basic and diluted EPS:
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2019
 
2018
 
2019
 
2018
Weighted-average number of shares for basic EPS
 
75,152

 
75,540

 
75,041

 
75,427

Dilutive effect of shares issuable under share-based compensation plans
 
587

 
477

 
671

 
417

Weighted-average number of shares for diluted EPS
 
75,739

 
76,017

 
75,712

 
75,844

Anti-dilutive shares
 
992

 
426

 
618

 
544

Note 5. Goodwill and Amortizable Intangible Assets
During the first quarter of fiscal year 2019, the Company performed its annual impairment test of goodwill. As the Company’s one reporting unit had a negative carrying value of net assets, there was no impairment of goodwill identified.

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Table of Contents
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)


The Company’s intangible assets subject to amortization are as follows: 
 
 
March 31, 2019
 
June 30,
2018
Affiliate relationships
 
$
83,044

 
$
83,044

Less accumulated amortization
 
(48,436
)
 
(45,841
)
 
 
$
34,608

 
$
37,203

Affiliate relationships have an estimated useful life of 24 years. Amortization expense for intangible assets was $865 for the three months ended March 31, 2019 and 2018, and $2,595 for the nine months ended March 31, 2019 and 2018.
Note 6. Property and Equipment
As of March 31, 2019 and June 30, 2018, property and equipment consisted of the following assets: 
 
 
March 31,
2019
 
June 30,
2018
Equipment
 
$
37,887

 
$
36,027

Furniture and fixtures
 
1,757

 
1,728

Leasehold improvements
 
19,320

 
19,297

Construction in progress
 
494

 
727

 
 
59,458

 
57,779

Less accumulated depreciation and amortization
 
(50,805
)
 
(47,750
)
 
 
$
8,653

 
$
10,029

Depreciation and amortization expense on property and equipment was $940 and $1,414 for the three months ended March 31, 2019 and 2018, respectively, and $3,055 and $4,558 for the nine months ended March 31, 2019 and 2018, respectively.
Note 7. Debt
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 “Credit Agreement”) with a syndicate of lenders.
The Credit Agreement provides MSGN L.P. with senior secured credit facilities (the “Senior Secured Credit Facilities”) consisting of: (a) an initial $1,550,000 term loan facility (the “Term Loan Facility”) and (b) a $250,000 revolving credit facility (the “Revolving Credit Facility”), each with a term of five years. In connection with the Distribution, $1,450,000 of the proceeds from the Term Loan Facility was contributed to MSG immediately following the closing of the Senior Secured Credit Facilities. 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 (a) base rate, representing the higher of: (i) the New York Fed Bank Rate plus 0.50%; (ii) the U.S. Prime Rate; or (iii) the one-month London Interbank Offered Rate, or LIBOR, plus 1.00% (the “Base Rate”), plus an additional rate ranging from 0.50% to 1.25% per annum (determined based on a total leverage ratio), or (b) a Eurodollar rate (the “Eurodollar Rate”) plus an additional rate ranging from 1.50% to 2.25% per annum (determined based on a total leverage ratio), provided that for the period until the delivery of the compliance certificate for the period ending March 31, 2016, the additional rate used in calculating both floating rates was (i) 1.00% per annum for borrowings bearing interest at the Base Rate, and (ii) 2.00% per annum for borrowings bearing interest at 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 of 0.30% in respect of the average daily unused commitments, as well as fronting fees, to banks that issue letters of credit pursuant to the Revolving Credit Facility.

11

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MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)


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 6.00:1.00 from the closing date until September 30, 2016 and a maximum total leverage ratio of 5.50:1.00 from October 1, 2016 until maturity, subject, in each case, to upward adjustment during the continuance of certain events. In addition, there is 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 March 31, 2019, 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. 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 March 31, 2019, there were no letters of credit issued and outstanding under the Revolving Credit Facility, which provides full borrowing capacity of $250,000. For the nine months ended March 31, 2019, the Company made principal repayments of $156,250, including voluntary payments of $100,000, of which $25,000 was made in the third quarter of fiscal year 2019. The Company has made principal payments aggregating $510,000 through March 31, 2019. The Term Loan Facility amortizes quarterly in accordance with its terms through June 30, 2020 with a final maturity date on September 28, 2020.
As of March 31, 2019, the principal repayments required under the Term Loan Facility are as follows:
Remainder of fiscal year ending June 30, 2019
 
$
18,750

Fiscal year ending June 30, 2020
 
114,375

Fiscal year ending June 30, 2021
 
906,875

 
 
$
1,040,000

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 contain certain customary representations and warranties, affirmative covenants, and events of default. The Credit Agreement contains certain restrictions on the ability of the Holdings Entities and 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.

12

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MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)


The Company is amortizing its deferred financing costs on a straight-line basis over the five-year term of the Senior Secured Credit Facilities which approximates the effective interest method. The following table summarizes the presentation of the Term Loan Facility and the related deferred financing costs in the accompanying consolidated balance sheets as of March 31, 2019 and June 30, 2018:
 
 
Term Loan Facility
 
Deferred Financing Costs
 
Net
March 31, 2019
 
 
 
 
 
 
Current portion of long-term debt
 
$
101,250

 
$
(2,586
)
 
$
98,664

Long-term debt, net of current portion
 
938,750

 
(1,293
)
 
937,457

Total
 
$
1,040,000

 
$
(3,879
)
 
$
1,036,121

June 30, 2018
 
 
 
 
 
 
Current portion of long-term debt
 
$
75,000

 
$
(2,586
)
 
$
72,414

Long-term debt, net of current portion
 
1,121,250

 
(3,233
)
 
1,118,017

Total
 
$
1,196,250

 
$
(5,819
)
 
$
1,190,431

In addition, the Company has deferred financing costs related to the Revolving Credit Facility recorded in the accompanying consolidated balance sheets as summarized in the following table:
 
 
March 31, 2019
 
June 30, 2018
Other current assets
 
$
417

 
$
417

Other assets
 
209

 
521

The Company made interest payments under the Credit Agreement of $32,879 and $29,303 during the nine months ended March 31, 2019 and 2018, respectively.
Note 8. 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, 2018, the Company’s contractual obligations not reflected on the consolidated balance sheet 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.
Note 9. 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. 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.

13

Table of Contents
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)


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
March 31, 2019
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Money market accounts
 
$
18,488

 
$

 
$

 
$
18,488

Time deposits
 
162,376

 

 

 
162,376

Total assets measured at fair value
 
$
180,864

 
$

 
$

 
$
180,864

June 30, 2018
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Money market accounts
 
$
20,398

 
$

 
$

 
$
20,398

Time deposits
 
184,945

 

 

 
184,945

Total assets measured at fair value
 
$
205,343

 
$

 
$

 
$
205,343

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 $1,019,000 as of March 31, 2019. 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. 
Note 10. 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, 2018, 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 nine months ended March 31, 2019 and 2018 are as follows: 
 
 
Pension Plans
 
Postretirement Plan
 
 
Three Months Ended
 
Three Months Ended
 
 
March 31,
 
March 31,
 
 
2019
 
2018
 
2019
 
2018
Service cost
 
$
111

 
$
128

 
$
18

 
$
17

Other components of net periodic benefit cost:
 
 
 
 
 
 
 
 
Interest cost
 
402

 
358

 
38

 
30

Expected return on plan assets
 
(144
)
 
(127
)
 

 

Recognized actuarial loss (a)
 
119

 
149

 

 

Amortization of unrecognized prior service credit (a)
 

 

 
(2
)
 
(3
)
Net periodic benefit cost
 
$
488

 
$
508

 
$
54

 
$
44


14

Table of Contents
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)


 
 
Pension Plans
 
Postretirement Plan
 
 
Nine Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2019
 
2018
 
2019
 
2018
Service cost
 
$
333

 
$
384

 
$
54

 
$
51

Other components of net periodic benefit cost:
 
 
 
 
 
 
 
 
Interest cost
 
1,206

 
1,074

 
114

 
90

Expected return on plan assets
 
(432
)
 
(381
)
 

 

Recognized actuarial loss (a)
 
357

 
447

 

 

Amortization of unrecognized prior service credit (a)
 

 

 
(6
)
 
(9
)
Settlement gain (a)
 
(8
)
 

 

 

Net periodic benefit cost
 
$
1,456

 
$
1,524

 
$
162

 
$
132

(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, 2018, 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”). Expenses related to the Savings Plans included in the accompanying consolidated statements of operations were $254 and $232 for the three months ended March 31, 2019 and 2018, respectively, and $762 and $691 for the nine months ended March 31, 2019 and 2018, respectively.
Note 11. 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, 2018 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 For Non-Employee Directors, as amended (the “Non-Employee Director Plan”).
Share-based compensation expense, presented within selling, general and administrative expenses and direct operating expenses, was $4,371 and $2,862 for the three months ended March 31, 2019 and 2018, respectively, and $13,658 and $10,581 for the nine months ended March 31, 2019 and 2018, respectively.
Non-Qualified Stock Options (“NQSOs”) Award Activity
The following table summarizes activity relating to holders of the Company’s NQSOs for the nine months ended March 31, 2019:
 
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, 2018
961

 
961

 
$
19.49

 
6.14
 
$
8,567

Granted
316

 
316

 
25.05

 
 
 
 
Balance as of March 31, 2019
1,277

 
1,277

 
$
20.87

 
5.77
 
4,340

Exercisable as of March 31, 2019
498

 

 
$
18.89

 
5.24
 
$
1,425

In August 2018, the Company granted 632 NQSOs, of which 50% are subject to three-year ratable vesting and the remaining 50% 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 $7.60 per NQSO.

15

Table of Contents
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)


The following were the key assumptions used to calculate the fair value of this award:
Risk-free interest rate
2.76
%
Expected term
5.25 years
 
Expected volatility
27.44
%
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.
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 March 31, 2019 and June 30, 2018, as applicable.
Restricted Share Units Award Activity
The following table summarizes activity relating to holders of the Company’s RSUs for the nine months ended March 31, 2019:
 
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, 2018
376

 
779

 
$
20.46

Granted
390

 
342

 
25.61

Vested
(225
)
 
(285
)
 
20.65

Unvested award balance as of March 31, 2019
541

 
836

 
23.08

Nonperformance based vesting RSUs granted during the nine months ended March 31, 2019 included 104 RSUs granted under the Employee Stock Plan that are subject to three-year ratable vesting, 240 RSUs granted under the Employee Stock Plan that are subject to four-year ratable vesting, and 46 RSUs granted under the Non-Employee Director Plan which vested upon date of grant. Performance based vesting RSUs granted under the Employee Stock Plan during the nine months ended March 31, 2019 included 118 RSUs that are subject to three-year ratable vesting, and 224 RSUs that 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 ceases or, if earlier, upon the director’s death.
The fair value of RSUs that vested during the nine months ended March 31, 2019 was $12,779. 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, 194 of these RSUs, with an aggregate value of $4,879 were retained by the Company and the taxes paid during the nine months ended March 31, 2019 are reflected as a financing activity in the accompanying consolidated statement of cash flows.
Note 12. Stock Repurchase Program
On December 7, 2017, the Company’s Board of Directors authorized the repurchase of up to $150,000 of the Company’s Class A Common Stock. Under the authorization, shares of Class A Common Stock may be purchased from time to time in open market or private transactions, block trades or such other manner as the Company may determine, in accordance with applicable insider trading and other securities laws and regulations. The timing and amount of purchases will depend on market conditions and other factors. As of March 31, 2019, the Company had $136,165 of availability remaining under its stock repurchase authorization. The Company did not repurchase shares during the nine months ended March 31, 2019.

16

Table of Contents
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)


Note 13. Related Party Transactions
As of March 31, 2019, 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 3.2% 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 69.9% 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 has an arrangement with the Dolan Family Office, LLC (“DFO”), MSG, and AMC Networks providing for the sharing of certain expenses associated with executive office space which is available to Charles F. Dolan (a director of the Company and MSG, and the Executive Chairman and a director of AMC Networks), James L. Dolan (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.
The Company also agreed to share certain executive support costs, including office space, executive assistants, security and transportation costs for (i) the Company’s Executive Chairman with MSG and (ii) the Company’s Vice Chairman with MSG and AMC Networks.
The Company and MSG are also party to an aircraft time sharing agreement, pursuant to which MSG has agreed from time to time to make its aircraft available to the Company for lease on a “time sharing” basis. Additionally, the Company, MSG and AMC Networks 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, including media rights agreements covering the New York Knicks (the “Knicks”) and the New York Rangers (the “Rangers”) games, 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. These services currently 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 MSG pursuant to the Services Agreement.
The Company has entered into various agreements with AMC Networks with respect to a number of ongoing commercial relationships.
Related party transactions
Rights fees
The Company’s media rights agreements with the Knicks and the Rangers, effective as of July 1, 2015, provide the Company with exclusive media rights to team games in their local markets. Rights fees included in the accompanying consolidated statements of operations for the three months ended March 31, 2019 and 2018 were $37,094 and $35,631, respectively, and $110,746 and $106,414 for the nine months ended March 31, 2019 and 2018, respectively.
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 March 31, 2019 and 2018 were $1,161 and $1,581, respectively, and $3,471 and $4,574 for the nine months ended March 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 MSG 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 March 31, 2019 and 2018 were $6,880 and $6,273, respectively, and $13,325 and $11,840 for the nine months ended March 31, 2019 and 2018, respectively.

17

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MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)


General and Administrative Expenses
Amounts incurred by the Company for expenses associated with the Services Agreement, net, amounted to $2,590 and $2,210 for the three months ended March 31, 2019 and 2018, respectively, and $7,735 and $6,631 for the nine months ended March 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 $297 and $368 for the three months ended March 31, 2019 and 2018, respectively, and $773 and $769 for the nine months ended March 31, 2019 and 2018, respectively.
Note 14. Income Taxes
On December 22, 2017, the enactment of the Tax Cuts and Jobs Act significantly changed the U.S. tax laws and included a reduction in the corporate federal tax rate from 35% to 21%, effective January 1, 2018.
Income tax expense for the three months ended March 31, 2019 of $17,732 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 $6,131, partially offset by a tax benefit relating to a tax return to book provision adjustment in connection with the filing of the Company’s prior year income tax return of $3,939.
Income tax expense for the three months ended March 31, 2018 of $23,505 differs from the income tax expense derived from applying the blended statutory federal rate of 28% to pre-tax income due principally to the impact of state and local income taxes (net of federal benefit) of $5,135 and other items of $240. These increases were partially offset by the impact of the tax benefits related to the domestic production activities deduction of $1,635.
Income tax expense for the nine months ended March 31, 2019 of $62,756 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 $17,683, and changes in the applicable state rate used to measure deferred taxes of $2,062, partially offset by a net tax benefit relating to tax return to book provision adjustments in connection with the filing of the Company’s prior year income tax returns of $2,489.
Income tax benefit for the nine months ended March 31, 2018 of $41,103 differs from the income tax expense derived from applying the blended statutory federal rate of 28% to pre-tax income due principally to a deferred income tax benefit of $106,446 related to the reduction of the Company’s net deferred tax liabilities based upon the new federal rate. Other decreases included the impact of the tax benefits related to the domestic production activities deduction of $4,668, changes in the applicable state rate used to measure deferred taxes of $1,062, tax return to book provision adjustments in connection with the filing of the Company’s prior year income tax returns of $676, and other items of $253. These decreases were partially offset by the impact of state and local income taxes (net of federal benefit) of $15,165.
The Company made cash income tax payments (net) of $64,025 and $45,194 for the nine months ended March 31, 2019 and 2018, respectively.
During the fourth quarter of fiscal year 2017, the Company was notified that the City of New York was initiating a review of the Company’s 2014 and 2015 Unincorporated Business Tax Returns. In August 2018, the Company received a summary notice that the audit has been completed. The audit did not result in a material change to the tax returns.
The Company was also 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. The Company does not expect the examination, when finalized, to result in material changes to the tax returns.
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.
The federal and state statute of limitations are currently open with regard to the Company’s 2014 through 2018 and 2013 through 2018 calendar year tax returns, respectively.

18

Table of Contents
MSG NETWORKS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)


Note 15. Concentrations of Risk
Accounts receivable, net on the accompanying consolidated balance sheets as of March 31, 2019 and June 30, 2018 include amounts due from the following individual customers, which accounted for the noted percentages of the gross balance:
 
March 31,
2019
 
June 30,
2018
Customer A
25
%
 
24
%
Customer B
24
%
 
24
%
Customer C
23
%
 
23
%
Customer D
15
%
 
15
%
Revenues in the accompanying consolidated statements of operations for the three and nine months ended March 31, 2019 and 2018 include amounts from the following individual customers, which accounted for the noted percentages of the total:
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2019
 
2018
 
2019
 
2018
Customer 1
23
%
 
23
%
 
23
%
 
24
%
Customer 2
21
%
 
22
%
 
22
%
 
23
%
Customer 3
19
%
 
21
%
 
21
%
 
21
%
Customer 4
10
%
 
10
%
 
11
%
 
10
%
The accompanying consolidated balance sheets as of March 31, 2019 and June 30, 2018 include the following approximate amounts that are recorded in connection with the Company’s license agreement with the New Jersey Devils:
Reported in
March 31, 2019
 
June 30,
2018
Prepaid expenses
$
1,000

 
$
3,000

Other current assets
4,000

 
3,000

Other assets
37,000

 
39,000

 
$
42,000

 
$
45,000


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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 contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 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 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 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, and the operating and financial performance thereof (including those that we do not control);
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;
our dependence on The Madison Square Garden Company, AMC Networks Inc., and other third-party providers for the provision of certain services;
cybersecurity and similar risks which could result in the disclosure of confidential information, disruption of our business or damage to our brands and reputation;
our substantial debt and high leverage;
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; 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, 2018.

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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, 2018 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+. The Company operates and reports financial information in one segment.
This MD&A is organized as follows:
Results of Operations. This section provides an analysis of our unaudited consolidated results of operations for the three and nine months ended March 31, 2019 as compared with the three and nine months ended March 31, 2018.
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 nine months ended March 31, 2019 as compared with the nine months ended March 31, 2018.
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 2019. This section should be read together with our critical accounting policies, which are discussed in our Annual Report on Form 10-K for the year ended June 30, 2018 under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recently Issued Accounting Pronouncements Not Yet Adopted and Critical Accounting Policies — Critical Accounting Policies” and in the notes to the consolidated financial statements included therein.

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Table of Contents

Results of Operations
Comparison of the Three Months Ended March 31, 2019 versus the Three Months Ended March 31, 2018
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 March 31,
 
Increase
(Decrease)
in Net
Income
 
 
2019
 
2018
 
 
 
Amount
 
% of
Revenues
 
Amount
 
% of
Revenues
 
Revenues
 
$
195,105

 
100
 %
 
$
186,568

 
100
 %
 
$
8,537

 
 
 
 
 
 
 
 
 
 
 
Direct operating expenses
 
82,085

 
42
 %
 
80,322

 
43
 %
 
(1,763
)
Selling, general and administrative expenses
 
28,734

 
15
 %
 
23,383

 
13
 %
 
(5,351
)
Depreciation and amortization
 
1,805

 
1
 %
 
2,279

 
1
 %
 
474

Operating income
 
82,481

 
42
 %
 
80,584

 
43
 %
 
1,897

Other income (expense):
 
 
 
 
 
 
 
 
 
 
Interest income
 
1,557

 
1
 %
 
1,195

 
1
 %
 
362

Interest expense
 
(11,658
)
 
(6
)%
 
(10,932
)
 
(6
)%
 
(726
)
Other components of net periodic benefit cost
 
(413
)
 
NM

 
(407
)
 
NM

 
(6
)
 
 
(10,514
)
 
(5
)%
 
(10,144
)
 
(5
)%
 
(370
)
Income from operations before income taxes
 
71,967

 
37
 %
 
70,440

 
38
 %
 
1,527

Income tax expense
 
(17,732
)
 
(9
)%
 
(23,505
)
 
(13
)%
 
5,773

Net income
 
$
54,235

 
28
 %
 
$
46,935

 
25
 %
 
$
7,300

_________________ 
NM – Percentage is not meaningful

In the first quarter of fiscal year 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the subsequent ASUs that amended and/or clarified the application of ASU No. 2014-09 (collectively, “Topic 606”). See Note 2 to the consolidated financial statements included in “Part I Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for more information. The standard was applied using the modified retrospective approach. The amount by which each financial statement line item has been affected in the current reporting period by the application of Topic 606 compared to historical policies is not material, therefore, comparative disclosures have been omitted.
Revenues
Revenues for the three months ended March 31, 2019 increased $8,537, or 5%, to $195,105 as compared with the prior year period. The net increase was attributable to the following:
Increase in affiliation fee revenue
$
3,162

Increase in advertising revenue
6,063

Other net decreases
(688
)
 
$
8,537

The increase in affiliation fee revenue was primarily due to higher affiliation rates, partially offset by the impact of a decrease in subscribers of less than 4% as compared with the prior year period. The increase in advertising revenue was primarily due to a lower net increase in deferred revenue related to ratings guarantees, higher per-game sales from the telecast of live professional sports programming and higher sales from the Company’s branded content initiatives, partially offset by the impact of fewer live professional sports telecasts as compared with the prior year period.
Direct operating expenses
Direct operating expenses for the three months ended March 31, 2019 increased $1,763, or 2%, to $82,085 as compared with the prior year period due to higher rights fees expense of $2,554, principally as a result of contractual rate increases, partially offset by a decrease in other programming-related costs of $791.

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Table of Contents

Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended March 31, 2019 increased $5,351, or 23%, to $28,734 as compared with the prior year period primarily due to higher employee compensation and related benefits (including share-based compensation expense), higher advertising and marketing costs, as well as a higher provision for doubtful accounts.
Operating income
Operating income for the three months ended March 31, 2019 increased $1,897, or 2%, to $82,481 as compared with the prior year period primarily due to (as discussed above) higher revenues partially offset by 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 three months ended March 31, 2019 increased $726, or 7%, to $11,658 as compared with the prior year period primarily due to higher average interest rates in the third quarter of fiscal year 2019 (4.0% as compared with 3.1%), partially offset by a lower average principal balance under the Company’s term loan facility (see “Financing Agreements”).
Income taxes
See Note 14 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
 
 
March 31,
 
 
 
2019
 
2018
 
Operating income
 
$
82,481

 
$
80,584

 
$
1,897

Share-based compensation
 
4,371

 
2,862

 
1,509

Depreciation and amortization
 
1,805

 
2,279

 
(474
)
Adjusted operating income
 
$
88,657

 
$
85,725

 
$
2,932

Adjusted operating income for the three months ended March 31, 2019 increased $2,932, or 3%, to $88,657 as compared with the prior year period primarily due to (as discussed above) higher revenues, partially offset by higher selling, general and administrative expenses (excluding share-based compensation expense) and, to a lesser extent, higher direct operating expenses.

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Table of Contents

Results of Operations
Comparison of the Nine Months Ended March 31, 2019 versus the Nine Months Ended March 31, 2018
The table below sets forth, for the periods presented, certain historical financial information and the percentage that those items bear to revenues. 
 
 
Nine Months Ended March 31,
 
Increase
(Decrease)
in Net
Income
 
 
2019
 
2018
 
 
 
Amount
 
% of
Revenues
 
Amount
 
% of
Revenues
 
Revenues
 
$
552,483

 
100
 %
 
$
525,246

 
100
 %
 
$
27,237

 
 
 
 
 
 
 
 
 
 
 
Direct operating expenses
 
230,210

 
42
 %
 
222,315

 
42
 %
 
(7,895
)
Selling, general and administrative expenses
 
76,931

 
14
 %
 
63,255

 
12
 %
 
(13,676
)
Depreciation and amortization
 
5,650

 
1
 %
 
7,153

 
1
 %
 
1,503

Operating income
 
239,692

 
43
 %
 
232,523

 
44
 %
 
7,169

Other income (expense):
 
 
 
 
 
 
 
 
 
 
Interest income
 
4,571

 
1
 %
 
3,072

 
1
 %
 
1,499

Interest expense
 
(35,273
)
 
(6
)%
 
(31,817
)
 
(6
)%
 
(3,456
)
Other components of net periodic benefit cost
 
(1,231
)
 
NM

 
(1,221
)
 
NM

 
(10
)
 
 
(31,933
)
 
(6
)%
 
(29,966
)
 
(6
)%
 
(1,967
)
Income from operations before income taxes
 
207,759

 
38
 %
 
202,557

 
39
 %
 
5,202

Income tax benefit (expense)
 
(62,756
)
 
(11
)%
 
41,103

 
8
 %
 
(103,859
)
Net income
 
$
145,003

 
26
 %
 
$
243,660

 
46
 %
 
$
(98,657
)
_________________ 
NM – Percentage is not meaningful

In the first quarter of fiscal year 2019, the Company adopted Topic 606. See Note 2 to the consolidated financial statements included in “Part I Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for more information. The standard was applied using the modified retrospective approach. The amount by which each financial statement line item has been affected in the current reporting period by the application of Topic 606 compared to historical policies is not material, therefore, comparative disclosures have been omitted.
Revenues
Revenues for the nine months ended March 31, 2019 increased $27,237, or 5%, to $552,483 as compared with the prior year period. The net increase was attributable to the following:
Increase in affiliation fee revenue
$
17,439

Increase in advertising revenue
9,376

Other net increases
422

 
$
27,237

The increase in affiliation fee revenue was primarily due to higher affiliation rates, partially offset by the impact of a low single-digit percentage decrease in subscribers as compared with the prior year period.
The increase in advertising revenue was primarily due to the favorable impact of a net decrease in deferred revenue related to ratings guarantees in the current year as compared with a net increase in the prior year period. This increase also reflects higher per-game sales from the telecast of live professional sports programming and, to a lesser extent, higher sales from the Company’s branded content initiatives.
Direct operating expenses
Direct operating expenses for the nine months ended March 31, 2019 increased $7,895, or 4%, to $230,210 as compared with the prior year period due to higher rights fees expense of $8,072, principally as a result of contractual rate increases, partially offset by a decrease in other programming-related costs of $177.

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Table of Contents

Selling, general and administrative expenses
Selling, general and administrative expenses for the nine months ended March 31, 2019 increased $13,676, or 22%, to $76,931 as compared with the prior year period primarily due to higher advertising and marketing costs, higher employee compensation and related benefits (including share-based compensation expense) and, to a lesser extent, higher advertising sales commissions.
Operating income
Operating income for the nine months ended March 31, 2019 increased $7,169, or 3%, to $239,692 as compared with the prior year period primarily due to (as discussed above) higher revenues partially offset by 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 nine months ended March 31, 2019 increased $3,456, or 11%, to $35,273 as compared with the prior year period primarily due to higher average interest rates in fiscal year 2019 (3.8% as compared with 2.9%), partially offset by a lower average principal balance under the Company’s term loan facility (see “Financing Agreements”).
Income taxes
See Note 14 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:
 
 
Nine Months Ended
 
Increase (Decrease)
in Adjusted Operating Income
 
 
March 31,
 
 
 
2019
 
2018
 
Operating income
 
$
239,692

 
$
232,523

 
$
7,169

Share-based compensation
 
13,658

 
10,581

 
3,077

Depreciation and amortization
 
5,650

 
7,153

 
(1,503
)
Adjusted operating income
 
$
259,000

 
$
250,257

 
$
8,743

Adjusted operating income for the nine months ended March 31, 2019 increased $8,743, or 3%, to $259,000 as compared with the prior year period primarily due to (as discussed above) higher revenues, partially offset by higher selling, general and administrative expenses (excluding share-based compensation expense) and 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 $250,000 revolving credit facility with a syndicate of lenders which was undrawn as of March 31, 2019 (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 optimal allocation of cash resources, and the timing of cash flow generation.
We believe we have sufficient liquidity, including $182,261 in cash and cash equivalents, as of March 31, 2019, 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) over 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.
On December 7, 2017, the Company’s Board of Directors authorized the repurchase of up to $150,000 of the Company’s Class A Common Stock. Under the authorization, shares of Class A Common Stock may be purchased from time to time in open market

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or private transactions, block trades or such other manner as the Company may determine, in accordance with applicable insider trading and other securities laws and regulations. The timing and amount of purchases will depend on market conditions and other factors. As of March 31, 2019, the Company had $136,165 of availability remaining under its stock repurchase authorization. The Company did not repurchase shares during the nine months ended March 31, 2019.
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., and certain subsidiaries of MSGN L.P. entered into a credit agreement with a syndicate of lenders.
See Note 7 to the consolidated financial statements included in “Part I — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q for more information on the credit agreement.
Contractual Obligations
As more fully described in Note 9 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2018, the Company’s contractual obligations not reflected on the consolidated balance sheet consist primarily of its obligations under media rights agreements.
In addition, 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 the principal repayments required under the Company’s term loan facility.
Cash Flow Discussion
Operating Activities
Net cash provided by operating activities for the nine months ended March 31, 2019