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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
_______________________
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

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 No
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 such files). Yes No
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
Accelerated filer 
Non-accelerated filer 
Smaller reporting company
Emerging growth company
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
Number of shares of common stock outstanding as of October 31, 2019:  
Class A Common Stock par value $0.01 per share
 —
46,560,251
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)
 
 
September 30,
2019
 
June 30,
2019
ASSETS
 
(unaudited)
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
360,363

 
$
226,423

Accounts receivable, net
 
107,988

 
108,349

Related party receivables, net
 
2,549

 
16,091

Prepaid income taxes
 
3,545

 
1,968

Prepaid expenses
 
2,950

 
2,003

Other current assets
 
4,552

 
5,286

Total current assets
 
481,947

 
360,120

Property and equipment, net
 
9,031

 
9,302

Amortizable intangible assets, net
 
32,878

 
33,743

Goodwill
 
424,508

 
424,508

Operating lease right-of-use assets
 
15,095

 

Other assets
 
38,472

 
39,226

Total assets
 
$
1,001,931

 
$
866,899

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
 
 
 
 
Current Liabilities:
 
 
 
 
Accounts payable
 
$
412

 
$
907

Related party payables
 
996

 
941

Current portion of long-term debt
 
23,065

 
111,789

Current portion of operating lease liabilities
 
4,926

 

Income taxes payable
 
7,898

 

Share repurchase obligation
 
253,078



Accrued liabilities:
 
 
 
 
Employee related costs
 
7,350

 
15,466

Other accrued liabilities
 
6,770

 
13,898

Deferred revenue
 
907

 
185

Total current liabilities
 
305,402

 
143,186

Long-term debt, net of current portion
 
1,076,849

 
906,228

Long-term operating lease liabilities
 
12,433

 

Defined benefit and other postretirement obligations
 
24,485

 
25,834

Other employee related costs
 
4,826

 
4,713

Other liabilities
 
190

 
2,310

Deferred tax liability
 
244,995

 
243,396

Total liabilities
 
1,669,180

 
1,325,667

Commitments and contingencies (see Note 9)
 

 

Stockholders' Deficiency:
 
 
 
 
Class A Common Stock, par value $0.01, 360,000 shares authorized; 61,540 and 61,287 shares outstanding as of
September 30, 2019 and June 30, 2019, respectively
 
643

 
643

Class B Common Stock, par value $0.01, 90,000 shares authorized; 13,589 shares outstanding as of September 30, 2019 and June 30, 2019
 
136

 
136

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

 

Additional paid-in capital
 

 
9,916

Treasury stock, at cost 2,719 and 2,972 shares as of September 30, 2019 and June 30, 2019, respectively
 
(417,691
)
 
(179,561
)
Accumulated deficit
 
(242,946
)
 
(282,414
)
Accumulated other comprehensive loss
 
(7,391
)
 
(7,488
)
Total stockholders' deficiency
 
(667,249
)
 
(458,768
)
Total liabilities and stockholders' deficiency
 
$
1,001,931

 
$
866,899


See accompanying notes to consolidated financial statements.

1

Table of Contents

MSG NETWORKS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (in thousands, except per share data)
 
 
 
Three Months Ended
 
September 30,
 
2019
 
2018
Revenues
 
$
160,981

 
$
164,464

 
 
 
 
 
Direct operating expenses (including related party expenses of $39,003 and $38,092, respectively)
 
68,660

 
66,655

Selling, general and administrative expenses (including related party expenses of $3,191 and $3,080, respectively)
 
22,320

 
16,903

Depreciation and amortization
 
1,727

 
2,045

Operating income
 
68,274

 
78,861

Other income (expense):
 
 
 
 
Interest income
 
1,928

 
1,592

Interest expense
 
(10,815
)
 
(11,922
)
Other components of net periodic benefit cost
 
(258
)

(405
)
 
 
(9,145
)
 
(10,735
)
Income from operations before income taxes
 
59,129

 
68,126

Income tax expense
 
(16,062
)
 
(21,196
)
Net income
 
$
43,067

 
$
46,930

 
 
 
 
 
Earnings per share:
 
 
 
 
Basic
 
$
0.57

 
$
0.63

Diluted
 
$
0.57

 
$
0.62

Weighted-average number of common shares outstanding:
 
 
 
 
Basic
 
75,063

 
74,895

Diluted
 
75,464

 
75,693




See accompanying notes to consolidated financial statements.



2

Table of Contents


MSG NETWORKS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (in thousands)
 
 
Three Months Ended
 
 
September 30,
 
 
2019
 
2018
Net income
 
$
43,067

 
$
46,930

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
 
134

 
119

Amortization of prior service credit included in net periodic benefit cost
 
(1
)
 
(2
)
Settlement gain
 

 
(8
)
Other comprehensive income before income taxes
 
133

 
109

Income tax expense related to items of other comprehensive income
 
(36
)
 
(32
)
Other comprehensive income

97

 
77

Comprehensive income

$
43,164

 
$
47,007




See accompanying notes to consolidated financial statements.


3

Table of Contents

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

 
 
Three Months Ended
 
 
September 30,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
43,067

 
$
46,930

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
1,727

 
2,045

Amortization of deferred financing costs
 
751

 
751

Share-based compensation expense
 
4,659

 
3,676

Provision for doubtful accounts
 
(167
)
 
(6
)
Change in assets and liabilities:
 
 
 
 
Accounts receivable, net
 
509

 
1,144

Related party receivables, net
 
13,562

 
9,755

Prepaid expenses and other assets
 
330

 
1,095

Accounts payable
 
(495
)
 
(1,159
)
Related party payables, including payable to MSG
 
55

 
373

Prepaid/payable for income taxes
 
6,320

 
5,408

Accrued and other liabilities
 
(15,455
)
 
(11,311
)
Deferred revenue
 
722

 
(168
)
Deferred income taxes
 
1,564

 
4,445

Net cash provided by operating activities
 
57,149

 
62,978

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(1,233
)
 
(830
)
Net cash used in investing activities
 
(1,233
)
 
(830
)
Cash flows from financing activities:
 
 
 
 
Principal repayments on Term Loan Facility (see Note 7)
 
(18,750
)
 
(93,750
)
Proceeds from Revolving Credit Facility (see Note 7)
 
100,000

 

Share repurchase costs
 
(367
)
 

Taxes paid in lieu of shares issued for share-based compensation
 
(2,859
)
 
(3,658
)
Net cash provided by (used in) financing activities
 
78,024

 
(97,408
)
Net increase (decrease) in cash and cash equivalents
 
133,940

 
(35,260
)
Cash and cash equivalents at beginning of period
 
226,423

 
205,343

Cash and cash equivalents at end of period
 
$
360,363

 
$
170,083




See accompanying notes to consolidated financial statements.

4

Table of Contents


MSG NETWORKS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(Unaudited) (in thousands)

 
 
Common
Stock
Issued
 
Additional
Paid-In
Capital
 
Treasury
Stock
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Balance as of June 30, 2019
 
$
779

 
$
9,916

 
$
(179,561
)
 
$
(282,414
)
 
$
(7,488
)
 
$
(458,768
)
Net income
 

 

 

 
43,067

 

 
43,067

Other comprehensive income
 

 

 

 

 
97

 
97

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
43,164

Share-based compensation expense
 

 
4,659

 

 

 

 
4,659

Repurchases of Class A Common Stock
 

 

 
(253,445
)
 

 

 
(253,445
)
Tax withholding associated with shares issued for share-based compensation
 

 
(2,859
)
 

 

 

 
(2,859
)
Shares issued upon distribution of Restricted Stock Units
 

 
(11,716
)
 
15,315

 
(3,599
)
 

 

Balance as of September 30, 2019
 
$
779

 
$

 
$
(417,691
)
 
$
(242,946
)
 
$
(7,391
)
 
$
(667,249
)



 
 
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
 

 

 

 
46,930

 

 
46,930

Other comprehensive income
 

 

 

 

 
77

 
77

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
47,007

Share-based compensation expense
 

 
3,676

 

 

 

 
3,676

Tax withholding associated with shares issued for share-based compensation
 

 
(3,537
)
 

 

 

 
(3,537
)
Shares issued upon distribution of Restricted Stock Units
 

 
(4,206
)
 
13,167

 
(8,961
)
 

 

Cumulative effect of adoption of ASC 606
 

 

 

 
372

 

 
372

Balance as of September 30, 2018
 
$
779

 
$

 
$
(182,714
)
 
$
(421,666
)
 
$
(6,623
)
 
$
(610,224
)
 



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 1Description 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”).
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, 2019. The financial statements as of September 30, 2019 and for the three months ended September 30, 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 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 September 30, 2019, the carrying amount of the Company’s equity investment in the nonconsolidated entity was $2,000, and the Company did not identify any potential adjustments to the cost of its investment.

6

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

Recently Adopted Accounting Pronouncements
The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 842, Leases, on July 1, 2019 (“Adoption Date”), which superseded the lease recognition requirements in ASC Topic 840, Leases. The Company applied the modified retrospective approach and effective date method. The Company elected the package of practical expedients, permitted under the transition guidance in the new standard, which among other things allowed for the carry forward of the historical classification of leases. The adoption of ASC 842 resulted in the recognition of operating lease liabilities of approximately $18,700 and operating lease right-of-use assets of the same amount. The historical net lease liabilities balances as of Adoption Date were eliminated as an offset to the operating lease right-of-use assets, resulting in net lease assets of approximately $16,300. The new standard did not impact the Company’s consolidated net income or cash flows. See Note 8 for further discussion regarding leases.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments — Credit Losses, and subsequent ASUs that amended the application of ASU No. 2016-13, which introduces a new impairment model for most financial assets and certain other instruments. For trade and other receivables, the Company will be required to use a forward-looking “expected loss” model that will replace the current “incurred loss” model and generally will result in earlier recognition of allowances for losses. This standard will be effective for the Company beginning in the first quarter of fiscal year 2021, with early adoption permitted. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, 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 2021, 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.
Affiliation fee revenue constituted at least 90% of the Company’s consolidated revenues for the three months ended September 30, 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.

7

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

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
Substantially all of the Company’s affiliation agreements are licenses of functional intellectual property where revenue is derived from sales-based and usage-based royalty arrangements, and generally the Company’s advertising arrangements either do not exceed one year or are primarily multi-year media banks, the elements of which are agreed upon each year. For these types of arrangements, the Company applies a practical expedient that allows it to omit disclosure of the aggregate amount of consideration the Company expects to receive in exchange for transferring services to a customer (transaction price) that is allocated to performance obligations that have not yet been satisfied. As of September 30, 2019, the aggregate amount of transaction price allocated to remaining performance obligations, other than for contracts that the Company has applied the practical expedient, was approximately $15,970 to be recognized over the next nine years.
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. 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. Historically, the primary source of the Company’s deferred revenue has related to the Company not meeting viewer rating guarantees on advertising sales arrangements.

8

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

The following table provides information about current contract balances from contracts with customers:
 
 
September 30,
2019
 
June 30,
2019
Accounts receivable (including advertising receivable included in related party receivables, net)
 
$
112,073

 
$
130,422

Contract asset, short-term (included in other current assets)
 
40

 
839

Deferred revenue, short-term
 
907

 
185

Deferred revenue, long-term (included in other liabilities)
 
190

 
230


The amount of revenue recognized for the three months ended September 30, 2019 related to deferred revenue (contract liability) recorded as of June 30, 2019 was approximately $173.
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
 
 
September 30,
 
 
2019
 
2018
Weighted-average number of shares for basic EPS
 
75,063

 
74,895

Dilutive effect of shares issuable under share-based compensation plans
 
401

 
798

Weighted-average number of shares for diluted EPS
 
75,464

 
75,693

Anti-dilutive shares
 
2,223

 
573


Refer to Note 13 for a discussion of the Company’s modified Dutch auction tender offer (the “Tender Offer”).
Note 5. Goodwill and Amortizable Intangible Assets
During the first quarter of fiscal year 2020, 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.
The Company’s intangible assets subject to amortization are as follows: 
 
 
September 30, 2019
 
June 30,
2019
Affiliate relationships
 
$
83,044

 
$
83,044

Less accumulated amortization
 
(50,166
)
 
(49,301
)
 
 
$
32,878

 
$
33,743


Affiliate relationships have an estimated useful life of 24 years. Amortization expense for intangible assets was $865 for the three months ended September 30, 2019 and 2018.

9

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

Note 6. Property and Equipment
As of September 30, 2019 and June 30, 2019, property and equipment consisted of the following assets: 
 
 
September 30,
2019
 
June 30,
2019
Equipment
 
$
36,795

 
$
35,642

Furniture and fixtures
 
1,726

 
1,726

Leasehold improvements
 
18,584

 
18,505

Construction in progress
 
417

 
1,058

 
 
57,522

 
56,931

Less accumulated depreciation and amortization
 
(48,491
)
 
(47,629
)
 
 
$
9,031

 
$
9,302

Depreciation and amortization expense on property and equipment was $862 and $1,180 for the three months ended September 30, 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 “2015 Credit Agreement”) with a syndicate of lenders.
On October 11, 2019, the Company amended and extended the 2015 Credit Agreement in its entirety (the “2019 Credit Agreement”). Refer to Note 17 for further details.
The 2015 Credit Agreement provided MSGN L.P. with senior secured credit facilities (the “2015 Senior Secured Credit Facilities”) consisting of: (a) an initial $1,550,000 term loan facility (the “2015 Term Loan Facility”) and (b) a $250,000 revolving credit facility (the “2015 Revolving Credit Facility”), each with a term of five years. In connection with the Distribution, $1,450,000 of the proceeds from the 2015 Term Loan Facility was contributed to MSG immediately following the closing of the 2015 Senior Secured Credit Facilities. Up to $35,000 of the 2015 Revolving Credit Facility was available for the issuance of letters of credit. Subject to the satisfaction of certain conditions and limitations, the 2015 Credit Agreement allowed for the addition of incremental term and/or revolving loan commitments and incremental term and/or revolving loans.
Borrowings under the 2015 Credit Agreement bore interest at a floating rate, which at the option of MSGN L.P. may have been 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 2015 Credit Agreement or related loan documents, default interest would have accrued on all overdue amounts at an additional rate of 2.00% per annum. The 2015 Credit Agreement required 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 issued letters of credit pursuant to the 2015 Revolving Credit Facility.
The 2015 Credit Agreement generally required 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 was 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 September 30, 2019, the Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis were in compliance with the applicable financial covenants. All borrowings under the 2015 Credit Agreement were subject to the satisfaction of customary conditions, including absence of a default and accuracy of representations and warranties. As of September 30, 2019, there were no letters

10

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

of credit issued and outstanding under the 2015 Revolving Credit Facility. During the three months ended September 30, 2019, the Company borrowed $100,000 under the 2015 Revolving Credit Facility. The remaining available borrowing capacity under the 2015 Revolving Credit Facility as of September 30, 2019 was $150,000. Subsequent to quarter-end, the Company repaid the $100,000 borrowed under the 2015 Revolving Credit Facility in connection with entering into the 2019 Credit Agreement.
During the three months ended September 30, 2019, the Company made principal repayments of $18,750 under the 2015 Credit Agreement. The Company has made principal payments aggregating to $547,500 through September 30, 2019 under the 2015 Credit Agreement. The 2015 Term Loan Facility amortized quarterly in accordance with its terms.
All obligations under the 2015 Credit Agreement were 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 2015 Credit Agreement, including the guarantees of those obligations, were 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. was permitted to voluntarily prepay outstanding loans under the 2015 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. was 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 2015 Credit Agreement and the related security agreement contained certain customary representations and warranties, affirmative covenants, and events of default. The 2015 Credit Agreement contained 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 2015 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 were also subject to customary passive holding company covenants.
The Company was amortizing deferred financing costs associated with the 2015 Senior Secured Credit Facilities on a straight-line basis over its initial five-year term, which approximated the effective interest method. The following table summarizes the presentation of the 2015 Term Loan Facility, and the related deferred financing costs, as well as the outstanding borrowings under the 2015 Revolving Credit Facility in the accompanying consolidated balance sheets as of September 30, 2019 and June 30, 2019:
 
 
2015 Term Loan Facility
 
Deferred Financing Costs for 2015 Term Loan Facility
 
2015 Revolving Credit Facility
 
Net
September 30, 2019
 
 
 
 
 
 
 
 
Current portion of long-term debt
 
$
23,125

 
$
(60
)
 
$

 
$
23,065

Long-term debt, net of current portion
 
979,375

 
(2,526
)
 
100,000

 
1,076,849

Total
 
$
1,002,500

 
$
(2,586
)
 
$
100,000

 
$
1,099,914

June 30, 2019
 
 
 
 
 
 
 
 
Current portion of long-term debt
 
$
114,375

 
$
(2,586
)
 
$

 
$
111,789

Long-term debt, net of current portion
 
906,875

 
(647
)
 

 
906,228

Total
 
$
1,021,250

 
$
(3,233
)
 
$

 
$
1,018,017



11

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

In addition, the Company has deferred financing costs related to the 2015 Revolving Credit Facility recorded in the accompanying consolidated balance sheets as summarized in the following table:
 
 
September 30, 2019
 
June 30, 2019
Other current assets
 
$
417

 
$
417

Other assets
 

 
104


The Company made interest payments under the 2015 Credit Agreement of $10,299 and $11,122 during the three months ended September 30, 2019 and 2018, respectively.
Note 8. Leases
The Company has various operating leases for office and studio space, as well as equipment, expiring at various dates through 2024. The Company currently has no finance leases. Some leases include options to extend the lease term or terminate the lease prior to the end of the lease term. The exercise of lease renewal options is generally at the Company’s discretion. The depreciable life of assets and leasehold improvements are limited by the expected lease term unless there is a transfer of title or purchase option reasonably certain of exercise.
The leases generally provide for fixed annual rentals plus certain other costs. Certain leases include variable payments based on the Company’s use of the respective assets. The Company’s lease agreements do not include any material residual value guarantees or material restrictive covenants. Since the Company’s leases do not provide an implicit interest rate, the Company used its incremental borrowing rate as of Adoption Date to determine the present value of future lease payments for all operating leases that commenced prior to that date.
Operating lease cost consists of the following:
 
 
Three Months Ended
 
 
September 30,
2019
Operating lease cost
 
$
1,372

Variable lease cost
 
53

Total operating lease cost
 
$
1,425


The following table summarizes the weighted average remaining lease term and discount rate for operating leases:
 
 
September 30,
2019
Weighted average discount rate for operating leases
 
3.29
%
Weighted average remaining operating lease term in years
 
3.99


As of September 30, 2019, the maturities of the Company’s operating lease liabilities are as follows:
Remainder of fiscal year ending June 30, 2020
 
$
4,280

Fiscal year ending June 30, 2021
 
4,374

Fiscal year ending June 30, 2022
 
3,672

Fiscal year ending June 30, 2023
 
3,379

Fiscal year ending June 30, 2024
 
2,816

Thereafter
 

Total undiscounted operating lease payments
 
18,521

Less: imputed interest
 
1,162

Total operating lease liabilities
 
17,359

Less: current portion of operating lease liabilities
 
4,926

Non-current operating lease liabilities
 
$
12,433



12

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

Supplemental cash flow information related to operating leases:
 
 
Three Months Ended
 
 
September 30,
2019
Cash paid for amounts included in the measurement of operating lease liabilities
 
$
1,468


Note 9. Commitments and Contingencies
Commitments
As more fully described in Note 9 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019, 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 17 for the principal repayments required under the Company’s 2019 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 10. Fair Value Measurements
The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs are developed using market data, such as publicly available information about actual events or transactions, and reflect the assumptions that market participants would use when pricing the asset or liability. Unobservable inputs are inputs for which market data is not available and that are developed using the best information available about the assumptions that market participants would use when pricing the asset or liability. 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
September 30, 2019
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Money market accounts
 
$
28,721

 
$

 
$

 
$
28,721

Time deposits
 
322,906

 

 

 
322,906

Total assets measured at fair value
 
$
351,627

 
$

 
$

 
$
351,627

June 30, 2019
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Money market accounts
 
$
17,619

 
$

 
$

 
$
17,619

Time deposits
 
201,524

 

 

 
201,524

Total assets measured at fair value
 
$
219,143

 
$

 
$

 
$
219,143


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 $1,086,000 as of September 30, 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 11. Pension Plans and Other Postretirement Benefit Plan
As more fully described in Note 12 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019, 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 months ended September 30, 2019 and 2018 are as follows: 
 
 
Pension Plans
 
Postretirement Plan
 
 
Three Months Ended
 
Three Months Ended
 
 
September 30,
 
September 30,
 
 
2019
 
2018
 
2019
 
2018
Service cost
 
$
121

 
$
111

 
$
13

 
$
18

Other components of net periodic benefit cost:
 
 
 
 
 
 
 
 
Interest cost
 
354

 
402

 
15

 
38

Expected return on plan assets
 
(244
)
 
(144
)
 

 

Recognized actuarial loss (a)
 
134

 
119

 

 

Amortization of unrecognized prior service credit (a)
 

 

 
(1
)
 
(2
)
Settlement gain (a)
 

 
(8
)
 

 

Net periodic benefit cost
 
$
365

 
$
480

 
$
27

 
$
54


(a) Reflects amounts reclassified from accumulated other comprehensive loss to other components of net periodic benefit cost in the accompanying consolidated statements of operations.
In addition, as more fully described in Note 12 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019, the Company sponsors the MSGN Holdings, L.P. Excess Savings Plan

14

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

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 $245 and $229 for the three months ended September 30, 2019 and 2018, respectively.
Note 12. Share-based Compensation
See Note 13 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019 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.
Share-based compensation expense, presented within selling, general and administrative expenses and direct operating expenses, was $4,659 and $3,676 for the three months ended September 30, 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 three months ended September 30, 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, 2019
1,277

 
1,277

 
$
20.87

 
5.52
 
$
3,132

Granted(a)
556

 
557

 
14.33

 
 
 
 
Balance as of September 30, 2019
1,833

 
1,834

 
$
18.88

 
5.92
 
2,111

Exercisable as of September 30, 2019
924

 
536

 
$
19.07

 
4.79
 
$


(a) Includes incremental shares of performance based NQSOs that were historically reported at a target payout of 100%. Upon meeting the performance objective, the number of performance based NQSOs vested at a payout of 100.3% of target.
Nonperformance based vesting NQSOs granted under the Employee Stock Plan during the three months ended September 30, 2019 are subject to three-year ratable vesting. Performance based vesting NQSOs granted under the Employee Stock Plan during the three months ended September 30, 2019 are subject to three-year cliff vesting and the achievement of certain Company performance criteria. These NQSOs have an expiration period of 7.5 years. The Company calculated the fair value of these NQSOs on the date of grant using the Black-Scholes option pricing model, which resulted in a grant date fair value of $4.32 per NQSO.
The following were the key assumptions used to calculate the fair value of this award:
Risk-free interest rate
1.4
%
Expected term
5.25 years
 
Expected volatility
30.68
%

The Company’s computation of expected term was calculated using the simplified method (the average of the vesting period and option term) as prescribed in ASC Topic 718-10-S99. The Company’s computation of expected volatility was based on historical volatility of its common stock.
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 September 30, 2019 and June 30, 2019, as applicable.

15

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

Restricted Share Units Award Activity
The following table summarizes activity relating to holders of the Company’s RSUs for the three months ended September 30, 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, 2019
541

 
836

 
$
23.08

Granted(a)
317

 
316

 
14.32

Vested
(154
)
 
(279
)
 
21.39

Unvested award balance as of September 30, 2019
704

 
873

 
20.03


(a) Includes incremental shares of performance based RSUs that were historically reported at a target payout of 100%. Upon meeting the performance objective, the number of performance based RSUs vested at a payout of 100.3% of target.
Nonperformance based vesting RSUs granted under the Employee Stock Plan during the three months ended September 30, 2019 are subject to three-year ratable vesting. Performance based vesting RSUs granted under the Employee Stock Plan during the three months ended September 30, 2019 are subject to three-year cliff vesting. RSUs granted under the Employee Stock 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.
The fair value of RSUs that vested during the three months ended September 30, 2019 was $6,851. 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, 179 of these RSUs, with an aggregate value of $2,859 were retained by the Company and the taxes paid during the three months ended September 30, 2019 are reflected as a financing activity in the accompanying consolidated statement of cash flows.
Note 13. Stock Repurchase Program
On December 7, 2017, the Company’s Board of Directors (the “Board”) authorized the repurchase of up to $150,000 of the Company’s Class A Common Stock. On August 29, 2019, the Board authorized a $300,000 increase to the stock repurchase authorization, which had $136,165 of availability remaining, bringing the total available repurchase authorization for Class A Common Stock to $436,165. Under the authorization, shares of Class A Common Stock may be purchased from time to time in open market or private transactions, block trades or such other manner as the Company may determine, in accordance with applicable insider trading and other securities laws and regulations. The timing and amount of purchases will depend on market conditions and other factors.
On August 30, 2019, the Company commenced the Tender Offer to purchase up to $250,000 in value of shares of its Class A Common Stock at a price not greater than $17.50 nor less than $15.00 per share. The Tender Offer expired on September 27, 2019. Subsequently, the Company accepted for purchase 14,980 shares of its Class A Common Stock, at a price of $16.70 per share, for an aggregate cost of $250,168. The cost of these shares, and the fees relating to the Tender Offer, have been classified in Treasury stock in the accompanying consolidated balance sheet as of September 30, 2019. These shares are considered legally outstanding until the date that the transaction settled, which was October 3, 2019. The settlement of the Tender Offer reduced the availability under the repurchase authorization to $185,997.
Note 14. Related Party Transactions
As of September 30, 2019 (which was prior to the settlement of the Tender Offer), 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 4.8% 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 70.3% 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”).

16

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

The Company had 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. Effective September 2018, the Company is no longer party to this arrangement.
The Company shares 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 aircraft time sharing agreements, pursuant to which MSG has agreed from time to time to make certain aircraft available to the Company for use 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. In connection with the expiration of the Services Agreement on June 30, 2019, the Company entered into an interim agreement with MSG, pursuant to which each party provides the other with the services on the same terms. The Company expects to enter into a new services agreement which will be retroactive to July 1, 2019.
The Company has also 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 the teams’ games in their local markets. Rights fees included in the accompanying consolidated statements of operations for the three months ended September 30, 2019 and 2018 were $38,020 and $36,558, 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 September 30, 2019 and 2018 were $1,161 and $1,520, 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 September 30, 2019 and 2018 were $336 and $407, respectively.
General and Administrative Expenses
Amounts incurred by the Company for expenses associated with the Services Agreement, net, amounted to $2,657 and $2,572 for the three months ended September 30, 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 $20 and $115 for the three months ended September 30, 2019 and 2018, respectively.

17

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

Note 15. Income Taxes
Income tax expense for the three months ended September 30, 2019 of $16,062 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 $4,840, partially offset by excess tax benefit related to share based-payments awards of $1,663.
Income tax expense for the three months ended September 30, 2018 of $21,196 differs from the income tax expense derived from applying the statutory federal rate of 21% to pre-tax income due principally to the impact of state and local income taxes (net of federal benefit) of $5,602.
The Company made cash income tax payments (net) of $8,182 and $11,343 for the three months ended September 30, 2019 and 2018, respectively.
The Company was notified during the fourth quarter of fiscal year 2017 that the State of New York was commencing an examination of the Company’s New York State income tax returns as filed for the tax years ended December 31, 2013 and 2014. The Company does not expect the examination, when finalized, to result in material changes to the tax returns as filed.
The Company was notified during the first quarter of fiscal year 2019 that the City of New York was commencing an examination of the Company’s New York City general corporate income tax returns as filed for the tax years ended December 31, 2015 and 2016. The Company does not expect the examination, when finalized, to result in material changes to the tax returns as filed.
The Company was notified during the fourth quarter of fiscal year 2019 that the City of New York was commencing an examination of the Company’s Unincorporated Business Tax Returns as filed for the tax years ended December 31, 2016 and 2017, and June 30, 2018. In October 2019, the Company closed the examination with no material changes to the tax returns as filed.
The Company was notified during the fourth quarter of fiscal year 2019 that the State of New Jersey initiated an examination of the Company’s income tax returns for the tax years ended December 31, 2015 through December 31, 2017. The Company does not expect the examination, when finalized, to result in material changes to the tax returns as filed.
The federal and state statute of limitations are currently open on the Company’s tax returns for 2016 and 2013, respectively, and forward.
Note 16. Concentrations of Risk
Accounts receivable, net on the accompanying consolidated balance sheets as of September 30, 2019 and June 30, 2019 include amounts due from the following individual customers, which accounted for the noted percentages of the gross balance:
 
September 30,
2019
 
June 30,
2019
Customer A
25
%
 
25
%
Customer B
25
%
 
25
%
Customer C
23
%
 
23
%
Customer D
14
%
 
14
%
Revenues in the accompanying consolidated statements of operations for the three months ended September 30, 2019 and 2018 include amounts from the following individual customers, which accounted for the noted percentages of the total:
 
Three Months Ended September 30,
 
2019
 
2018
Customer 1
27
%
 
25
%
Customer 2
26
%
 
25
%
Customer 3
23
%
 
23
%
Customer 4
11
%
 
13
%


18

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

The accompanying consolidated balance sheets as of September 30, 2019 and June 30, 2019 include the following approximate amounts that are recorded in connection with the Company’s license agreement with the New Jersey Devils:
Reported in
September 30, 2019
 
June 30,
2019
Prepaid expenses
$
1,000

 
$
1,000

Other current assets
4,000

 
4,000

Other assets
36,000

 
36,000

 
$
41,000

 
$
41,000


As of September 30, 2019, approximately 620 full-time and part-time employees, who represent approximately 76% of the
Company’s workforce, are subject to collective bargaining agreements (“CBAs”). As of September 30, 2019, approximately 58% of the Company’s workforce that is subject to a CBA is covered by a CBA that has expired. In addition, as of September 30, 2019, approximately 9% of the Company’s workforce that is subject to a CBA is covered by a CBA that expires within the next year.
Note 17. Subsequent Events
On October 11, 2019, MSGN L.P. entered into the 2019 Credit Agreement, which amended and restated the 2015 Credit Agreement in its entirety. The 2019 Credit Agreement provides MSGN L.P. with senior secured credit facilities consisting of: (i) an initial $1,100,000 term loan facility (the “2019 Term Loan Facility”) and (ii) a $250,000 revolving credit facility (the “2019 Revolving Credit Facility”). The borrowings outstanding under the 2015 Revolving Credit Facility as of September 30, 2019 were refinanced on a long-term basis with proceeds from the 2019 Credit Agreement. The maturity date of the 2019 Credit Agreement is October 11, 2024. Borrowings under the 2019 Credit Agreement bear interest at a floating rate, which at the option of MSGN L.P. may be either (i) a base rate plus an additional rate ranging from 0.25% to 1.25% per annum (determined based on a total net leverage ratio) (the “2019 Base Rate”), or (ii) a Eurodollar rate plus an additional rate ranging from 1.25% to 2.25% per annum (determined based on a total net leverage ratio) (the “2019 Eurodollar Rate”), provided that for the period following the effective date of the 2019 Credit Agreement until the delivery of the compliance certificate for the second full fiscal quarter of MSGN L.P. following the effective date, the additional rate used in calculating the floating rate will be (i) 0.50% per annum for borrowings bearing the 2019 Base Rate, and (ii) 1.50% per annum for borrowings bearing the 2019 Eurodollar Rate.
The principal repayments required under the 2019 Term Loan Facility are as follows:
Remainder of fiscal year ending June 30, 2020
 
$
13,750

Fiscal year ending June 30, 2021
 
38,500

Fiscal year ending June 30, 2022
 
49,500

Fiscal year ending June 30, 2023
 
66,000

Fiscal year ending June 30, 2024
 
82,500

Thereafter
 
849,750

 
 
$
1,100,000



19

Table of Contents

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, or minimize declines in, subscriber levels;
the impact of subscribers selecting Distributors’ packages that do not include our networks or Distributors that do not carry our networks at all;
the security of our program signal and electronic data;
general economic conditions especially in the New York City metropolitan area where we conduct the majority of our operations;
the on-ice and on-court performance of the professional sports teams whose games we carry;
the demand for advertising and sponsorship arrangements and viewer ratings for our networks;
competition, for example, from other regional sports networks;
the relocation or insolvency of professional sports teams with which we have a media rights agreement;
our ability to maintain, obtain or produce content, together with the cost of such content;
our ability to renew or replace our media rights agreements with professional sports teams;
the acquisition or disposition of assets and/or the impact of, and our ability to successfully pursue, acquisitions or other strategic transactions;
the costs associated with, and the outcome of, litigation and other proceedings to the extent uninsured;
the impact of governmental regulations or laws and changes in such regulations or laws, including with respect to the legalization of sports gaming;
the impact of sports league rules, regulations and/or agreements and changes thereto;
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, 2019.

20

Table of Contents

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, 2019 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 months ended September 30, 2019 as compared with the three months ended September 30, 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 three months ended September 30, 2019 as compared with the three months ended September 30, 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 2020. 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, 2019 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.

21

Table of Contents

Results of Operations
Comparison of the Three Months Ended September 30, 2019 versus the Three Months Ended September 30, 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 September 30,
 
Increase
(Decrease)
in Net
Income
 
 
2019
 
2018
 
 
 
Amount
 
% of
Revenues
 
Amount
 
% of
Revenues
 
Revenues
 
$
160,981

 
100
 %
 
$
164,464

 
100
 %
 
$
(3,483
)
 
 
 
 
 
 
 
 
 
 
 
Direct operating expenses
 
68,660

 
43
 %
 
66,655

 
41
 %
 
(2,005
)
Selling, general and administrative expenses
 
22,320

 
14
 %
 
16,903

 
10
 %
 
(5,417
)
Depreciation and amortization
 
1,727

 
1
 %
 
2,045

 
1
 %
 
318

Operating income
 
68,274

 
42
 %
 
78,861

 
48
 %
 
(10,587
)
Other income (expense):
 
 
 
 
 
 
 
 
 
 
Interest income
 
1,928

 
1
 %
 
1,592

 
1
 %
 
336

Interest expense
 
(10,815
)
 
(7
)%