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xbrli:pure iso4217:USD
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 December 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)
_______________________
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 January 31, 2020:  



Class A Common Stock par value $0.01 per share
 —
46,577,807
Class B Common Stock par value $0.01 per share
 —
13,588,555





MSG NETWORKS INC.
INDEX TO FORM 10-Q
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
MSG NETWORKS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 
 
December 31,
2019
 
June 30,
2019
ASSETS
 
(unaudited)
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
115,914

 
$
226,423

Accounts receivable, net
 
107,477

 
108,349

Related party receivables, net
 
21,018

 
16,091

Prepaid income taxes
 
12,235

 
1,968

Prepaid expenses
 
6,161

 
2,003

Other current assets
 
4,449

 
5,286

Total current assets
 
267,254

 
360,120

Property and equipment, net
 
8,503

 
9,302

Amortizable intangible assets, net
 
32,013

 
33,743

Goodwill
 
424,508

 
424,508

Operating lease right-of-use assets
 
13,852

 

Other assets
 
38,631

 
39,226

Total assets
 
$
784,761

 
$
866,899

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
 
 
 
 
Current Liabilities:
 
 
 
 
Accounts payable
 
$
569

 
$
907

Related party payables
 
1,161

 
941

Current portion of long-term debt
 
26,237

 
111,789

Current portion of operating lease liabilities
 
4,689

 

Accrued liabilities:
 
 
 
 
Employee related costs
 
9,490

 
15,466

Other accrued liabilities
 
11,485

 
13,898

Deferred revenue
 
826

 
185

Total current liabilities
 
54,457

 
143,186

Long-term debt, net of current portion
 
1,067,902

 
906,228

Long-term operating lease liabilities
 
11,438

 

Defined benefit and other postretirement obligations
 
24,480

 
25,834

Other employee related costs
 
4,981

 
4,713

Other liabilities
 
148

 
2,310

Deferred tax liability
 
244,367

 
243,396

Total liabilities
 
1,407,773

 
1,325,667

Commitments and contingencies (see Note 9)
 

 

Stockholders' Deficiency:
 
 
 
 
Class A Common Stock, par value $0.01, 360,000 shares authorized; 46,578 and 61,287 shares outstanding as of
December 31, 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 December 31, 2019 and June 30, 2019
 
136

 
136

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

 

Additional paid-in capital
 
3,650

 
9,916

Treasury stock, at cost, 17,681 and 2,972 shares as of December 31, 2019 and June 30, 2019, respectively
 
(417,162
)
 
(179,561
)
Accumulated deficit
 
(202,982
)
 
(282,414
)
Accumulated other comprehensive loss
 
(7,297
)
 
(7,488
)
Total stockholders' deficiency
 
(623,012
)
 
(458,768
)
Total liabilities and stockholders' deficiency
 
$
784,761

 
$
866,899


See accompanying notes to consolidated financial statements.

1


MSG NETWORKS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (in thousands, except per share data)
 
 
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2019
 
2018
 
2019
 
2018
Revenues
 
$
187,730

 
$
192,914

 
$
348,711

 
$
357,378

 
 
 
 
 
 
 
 
 
Direct operating expenses (including related party expenses of $39,884 and $38,211 for the three months ended December 31, 2019 and 2018, respectively, and $78,887 and $76,303 for the six months ended December 31, 2019 and 2018, respectively)
 
84,065

 
81,470

 
152,725

 
148,125

Selling, general and administrative expenses (including related party expenses of $8,826 and $8,645 for the three months ended December 31, 2019 and 2018, respectively, and $12,017 and $11,725 for the six months ended December 31, 2019 and 2018, respectively)
 
32,022

 
31,294

 
54,342

 
48,197

Depreciation and amortization
 
1,680

 
1,800

 
3,407

 
3,845

Operating income
 
69,963

 
78,350

 
138,237

 
157,211

Other income (expense):
 
 
 
 
 
 
 
 
Interest income
 
906

 
1,422

 
2,834

 
3,014

Interest expense
 
(9,934
)
 
(11,693
)
 
(20,749
)
 
(23,615
)
Debt refinancing expense

(2,764
)



(2,764
)


Other components of net periodic benefit cost
 
(258
)

(413
)
 
(516
)
 
(818
)
 
 
(12,050
)
 
(10,684
)
 
(21,195
)
 
(21,419
)
Income from operations before income taxes
 
57,913

 
67,666

 
117,042

 
135,792

Income tax expense
 
(17,949
)
 
(23,828
)
 
(34,011
)
 
(45,024
)
Net income
 
$
39,964

 
$
43,838

 
$
83,031

 
$
90,768

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.66

 
$
0.58

 
$
1.23

 
$
1.21

Diluted
 
$
0.66

 
$
0.58

 
$
1.22

 
$
1.20

Weighted-average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
60,452

 
75,079

 
67,758

 
74,987

Diluted
 
60,825

 
75,737

 
68,144

 
75,715




See accompanying notes to consolidated financial statements.



2



MSG NETWORKS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (in thousands)
 
 
Three Months Ended
 
Six Months Ended
 
 
December 31,
 
December 31,
 
 
2019
 
2018
 
2019
 
2018
Net income
 
$
39,964

 
$
43,838

 
$
83,031

 
$
90,768

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

 
268

 
238

Amortization of prior service credit included in net periodic benefit cost
 
(1
)
 
(2
)
 
(2
)
 
(4
)
Settlement gain
 

 

 

 
(8
)
Other comprehensive income before income taxes
 
133

 
117

 
266

 
226

Income tax expense related to items of other comprehensive income
 
(39
)
 
(32
)
 
(75
)
 
(64
)
Other comprehensive income

94

 
85

 
191

 
162

Comprehensive income

$
40,058

 
$
43,923

 
$
83,222

 
$
90,930




See accompanying notes to consolidated financial statements.


3


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

 
 
Six Months Ended
 
 
December 31,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
83,031

 
$
90,768

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
3,407

 
3,845

Amortization of deferred financing costs
 
1,188

 
1,501

Debt refinancing expense
 
455

 

Share-based compensation expense
 
10,099

 
9,287

Provision for doubtful accounts
 
(104
)
 
12

Change in assets and liabilities:
 
 
 
 
Accounts receivable, net
 
969

 
1,672

Related party receivables, net
 
(4,920
)
 
(8,675
)
Prepaid expenses and other assets
 
(3,134
)
 
(1,266
)
Accounts payable
 
(338
)
 
(838
)
Related party payables, including payable to MSG
 
220

 
371

Prepaid/payable for income taxes
 
(10,267
)
 
(5,379
)
Accrued and other liabilities
 
(8,122
)
 
(4,934
)
Deferred revenue
 
641

 
(2,720
)
Deferred income taxes
 
896

 
6,811

Net cash provided by operating activities
 
74,021

 
90,455

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(1,758
)
 
(1,674
)
Investment in nonconsolidated entity
 

 
(2,000
)
Net cash used in investing activities
 
(1,758
)
 
(3,674
)
Cash flows from financing activities:
 
 
 
 
Principal repayments on term loan facilities (see Note 7)
 
(21,250
)
 
(112,500
)
Proceeds from senior secured credit facilities (see Note 7)
 
100,000

 

Payments for financing costs
 
(3,969
)
 

Share repurchase costs
 
(253,318
)
 

Taxes paid in lieu of shares issued for share-based compensation
 
(4,235
)
 
(5,000
)
Net cash used in financing activities
 
(182,772
)
 
(117,500
)
Net decrease in cash and cash equivalents
 
(110,509
)
 
(30,719
)
Cash and cash equivalents at beginning of period
 
226,423

 
205,343

Cash and cash equivalents at end of period
 
$
115,914

 
$
174,624




See accompanying notes to consolidated financial statements.

4



MSG NETWORKS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 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 September 30, 2019
 
$
779

 
$

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

 

 

 
39,964

 

 
39,964

Other comprehensive income
 

 

 

 

 
94

 
94

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
40,058

Share-based compensation expense
 

 
5,440

 

 

 

 
5,440

Repurchases of Class A Common Stock
 

 

 
115

 

 

 
115

Tax withholding associated with shares issued for share-based compensation
 

 
(1,376
)
 

 

 

 
(1,376
)
Shares issued upon distribution of Restricted Stock Units
 

 
(414
)
 
414

 

 

 

Balance as of December 31, 2019
 
$
779

 
$
3,650

 
$
(417,162
)
 
$
(202,982
)
 
$
(7,297
)
 
$
(623,012
)




 
 
Common
Stock
Issued
 
Additional
Paid-In
Capital
 
Treasury
Stock
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Balance as of September 30, 2018
 
$
779

 
$

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

 

 

 
43,838

 

 
43,838

Other comprehensive income
 

 

 

 

 
85

 
85

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
43,923

Share-based compensation expense
 

 
5,611

 

 

 

 
5,611

Tax withholding associated with shares issued for share-based compensation
 

 
(1,342
)
 

 

 

 
(1,342
)
Shares issued upon distribution of Restricted Stock Units
 

 
(3,153
)
 
3,153

 

 

 

Balance as of December 31, 2018
 
$
779

 
$
1,116

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














5


MSG NETWORKS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY (continued)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 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, 2019
 
$
779

 
$
9,916

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

 

 

 
83,031

 

 
83,031

Other comprehensive income
 

 

 

 

 
191

 
191

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
83,222

Share-based compensation expense
 

 
10,099

 

 

 

 
10,099

Repurchases of Class A Common Stock
 

 

 
(253,330
)
 

 

 
(253,330
)
Tax withholding associated with shares issued for share-based compensation
 

 
(4,235
)
 

 

 

 
(4,235
)
Shares issued upon distribution of Restricted Stock Units
 

 
(12,130
)
 
15,729

 
(3,599
)
 

 

Balance as of December 31, 2019
 
$
779

 
$
3,650

 
$
(417,162
)
 
$
(202,982
)
 
$
(7,297
)
 
$
(623,012
)



 
 
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
 

 

 

 
90,768

 

 
90,768

Other comprehensive income
 

 

 

 

 
162

 
162

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
90,930

Share-based compensation expense
 

 
9,287

 

 

 

 
9,287

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 December 31, 2018
 
$
779

 
$
1,116

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




See accompanying notes to consolidated financial statements.


6


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 December 31, 2019 and for the three and six months ended December 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 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 sheets, does not have a readily determinable fair value. As such, the Company has elected to account for it at cost, which would be adjusted for impairment and changes resulting from observable price fluctuations in orderly transactions for an identical or a similar investment of the same issuer (referred to as the measurement alternative method). Investments accounted for under the measurement alternative method are classified within Level III of the fair value hierarchy. As of December 31, 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.

7

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.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU eliminates certain exceptions to the general approach in ASC Topic 740 and includes methods of simplification to the existing guidance. This standard will be effective for the Company beginning in the first quarter of fiscal year 2022, with early adoption permitted. The standard is to be applied prospectively to all periods presented. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
Note 3. Revenue 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 six months ended December 31, 2019, however, given the timing of advertising revenue as stated above, affiliation fee revenue constituted less

8

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

than 90% of consolidated revenues for the three months ended December 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
Substantially all of the Company’s affiliation agreements are licenses of functional intellectual property where revenue is derived from sales-based and usage-based royalty arrangements, and generally the Company’s advertising arrangements either do not exceed one year or are primarily multi-year media banks, the elements of which are agreed upon each year. For these types of arrangements, the Company applies a practical expedient that allows it to omit disclosure of the aggregate amount of consideration the Company expects to receive in exchange for transferring services to a customer (transaction price) that is allocated to performance obligations that have not yet been satisfied. As of December 31, 2019, the aggregate amount of transaction price allocated to remaining performance obligations, other than for contracts that the Company has applied the practical expedient, was $12,567, of which $11,191 will be recognized through fiscal year 2023 and $1,376 thereafter.
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.

9

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

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.
The following table provides information about current contract balances from contracts with customers:
 
 
December 31,
2019
 
June 30,
2019
Accounts receivable (including advertising receivable included in related party receivables, net)
 
$
135,382

 
$
130,422

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

 
839

Deferred revenue, short-term
 
826

 
185

Deferred revenue, long-term (included in other liabilities)
 
150

 
230


The amount of revenue recognized for the six months ended December 31, 2019 related to deferred revenue (contract liability) recorded as of June 30, 2019 was approximately $25.
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
 
Six Months Ended
 
 
December 31,
 
December 31,
 
 
2019
 
2018
 
2019
 
2018
Weighted-average number of shares for basic EPS
 
60,452

 
75,079

 
67,758

 
74,987

Dilutive effect of shares issuable under share-based compensation plans
 
373

 
658

 
386

 
728

Weighted-average number of shares for diluted EPS
 
60,825

 
75,737

 
68,144

 
75,715

Anti-dilutive shares
 
2,981

 
316

 
2,602

 
444


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: 
 
 
December 31,
2019
 
June 30,
2019
Affiliate relationships
 
$
83,044

 
$
83,044

Less: accumulated amortization
 
(51,031
)
 
(49,301
)
 
 
$
32,013

 
$
33,743


Affiliate relationships have an estimated useful life of 24 years. Amortization expense for intangible assets was $865 for the three months ended December 31, 2019 and 2018, and $1,730 for the six months ended December 31, 2019 and 2018.

10

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

Note 6. Property and Equipment
As of December 31, 2019 and June 30, 2019, property and equipment consisted of the following assets: 
 
 
December 31,
2019
 
June 30,
2019
Equipment
 
$
37,280

 
$
35,642

Furniture and fixtures
 
1,726

 
1,726

Leasehold improvements
 
18,624

 
18,505

Construction in progress
 
179

 
1,058

 
 
57,809

 
56,931

Less: accumulated depreciation and amortization
 
(49,306
)
 
(47,629
)
 
 
$
8,503

 
$
9,302

Depreciation and amortization expense on property and equipment was $815 and $935 for the three months ended December 31, 2019 and 2018, respectively, and $1,677 and $2,115 for the six months ended December 31, 2019 and 2018.
Note 7. Debt
Former Senior Secured Credit Facilities
On September 28, 2015, MSGN Holdings L.P. (“MSGN L.P.”), an indirect wholly-owned subsidiary of the Company through which the Company conducts substantially all of its operations, MSGN Eden, LLC, an indirect subsidiary of the Company and the general partner of MSGN L.P., Regional MSGN Holdings LLC, a direct subsidiary of the Company and the limited partner of MSGN L.P. (collectively with MSGN Eden, LLC, the “Holdings Entities”), and certain subsidiaries of MSGN L.P. entered into a credit agreement (the “Former Credit Agreement”) with a syndicate of lenders. The Former Credit Agreement provided MSGN L.P. with senior secured credit facilities (the “Former Senior Secured Credit Facilities”) that consisted of: (a) an initial $1,550,000 term loan facility (the “Former Term Loan Facility”) and (b) a $250,000 revolving credit facility (the “Former Revolving Credit Facility”).
Amended and Restated Senior Secured Credit Facilities
On October 11, 2019, MSGN L.P., the Holdings Entities and certain subsidiaries of MSGN L.P. amended and restated the Former Credit Agreement in its entirety (the “Credit Agreement”). The Credit Agreement provides MSGN L.P. with senior secured credit facilities (the “Senior Secured Credit Facilities”) consisting of: (i) an initial $1,100,000 term loan facility (the “Term Loan Facility”) and (ii) a $250,000 revolving credit facility (the “Revolving Credit Facility”), each with a term of five years. Proceeds from the Term Loan Facility were used by MSGN L.P. to repay outstanding indebtedness under the Former Credit Agreement. Up to $35,000 of the Revolving Credit Facility is available for the issuance of letters of credit. Subject to the satisfaction of certain conditions and limitations, the Credit Agreement allows for the addition of incremental term and/or revolving loan commitments and incremental term and/or revolving loans.
Borrowings under the Credit Agreement bear interest at a floating rate, which at the option of MSGN L.P. may be either (i) a base rate plus an additional rate ranging from 0.25% to 1.25% per annum (determined based on a total net leverage ratio) (the “Base Rate”), or (ii) a Eurodollar rate plus an additional rate ranging from 1.25% to 2.25% per annum (determined based on a total net leverage ratio) (the “Eurodollar Rate”), provided that for the period following the effective date of the Credit Agreement until the delivery of the compliance certificate for the second full fiscal quarter of MSGN L.P. following the effective date, the additional rate used in calculating the floating rate will be (i) 0.50% per annum for borrowings bearing the Base Rate, and (ii) 1.50% per annum for borrowings bearing the Eurodollar Rate. Upon a payment default in respect of principal, interest or other amounts due and payable under the Credit Agreement or related loan documents, default interest will accrue on all overdue amounts at an additional rate of 2.00% per annum. The Credit Agreement requires that MSGN L.P. pay a commitment fee ranging from 0.225% to 0.30% (determined based on a total net leverage ratio) in respect of the average daily unused commitments under the Revolving Credit Facility. MSGN L.P. will also be required to pay customary letter of credit fees, as well as fronting fees, to banks that issue letters of credit.



11

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 5.50:1.00, subject, at the option of MSGN L.P. to an upward adjustment to 6.00:1.00 during the continuance of certain events. In addition, the Credit Agreement requires a minimum interest coverage ratio of 2.00:1.00 for the Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis. As of December 31, 2019, the Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis were in compliance with the applicable financial covenants. All borrowings under the Credit Agreement are subject to the satisfaction of customary conditions, including absence of a default and accuracy of representations and warranties. As of December 31, 2019, there were no letters of credit issued and outstanding under the Revolving Credit Facility, which provides full borrowing capacity of $250,000.
The Term Loan Facility amortizes quarterly in accordance with its terms beginning March 31, 2020 through September 30, 2024 with a final maturity date on October 11, 2024.
As of December 31, 2019, the principal repayments required under the 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


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 contains certain customary representations and warranties, affirmative covenants, and events of default. The Credit Agreement contains certain restrictions on the ability of MSGN L.P. and its restricted subsidiaries to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the Credit Agreement, including the following: (i) incurring additional indebtedness and contingent liabilities; (ii) creating liens on certain assets; (iii) making investments, loans or advances in or to other persons; (iv) paying dividends and distributions or repurchasing capital stock; (v) changing their lines of business; (vi) engaging in certain transactions with affiliates; (vii) amending specified material agreements; (viii) merging or consolidating; (ix) making certain dispositions; and (x) entering into agreements that restrict the granting of liens. The Holdings Entities are also subject to customary passive holding company covenants.







12

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

The Company is amortizing deferred financing costs of the Term Loan Facility using the effective interest method over its five-year term. The following table summarizes the presentation of the Term Loan Facility and the Former Term Loan Facility, and the related deferred financing costs, in the accompanying consolidated balance sheets as of December 31, 2019 and June 30, 2019:
 
 
Term Loan Facilities
 
Deferred Financing Costs
 
Net
December 31, 2019
 
 
 
 
 
 
Current portion of long-term debt
 
$
27,500

 
$
(1,263
)
 
$
26,237

Long-term debt, net of current portion
 
1,072,500

 
(4,598
)
 
1,067,902

Total
 
$
1,100,000

 
$
(5,861
)
 
$
1,094,139

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

 
$
(2,586
)
 
$
111,789

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

 
(647
)
 
906,228

Total
 
$
1,021,250

 
$
(3,233
)
 
$
1,018,017


In addition, the Company has recorded deferred financing costs related to the Revolving Credit Facility and the Former Revolving Credit Facility in the accompanying consolidated balance sheets as summarized in the following table:
 
 
December 31, 2019
 
June 30, 2019
Other current assets
 
$
344

 
$
417

Other assets
 
1,289

 
104


Total amortization expense was $1,188 and $1,501 during the six months ended December 31, 2019 and 2018, respectively, and is included in interest expense in the accompanying consolidated statements of operations.
The Company made interest payments under the Credit Agreement and Former Credit Agreement of $19,405 and $22,243 during the six months ended December 31, 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 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
 
Six Months Ended
 
 
December 31,
2019
 
December 31,
2019
Operating lease cost
 
$
1,372

 
$
2,744

Variable lease cost
 
728

 
781

Total operating lease cost
 
$
2,100

 
$
3,525



13

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

The following table summarizes the weighted-average remaining lease term and discount rate for operating leases:
 
 
December 31,
2019
Weighted-average discount rate for operating leases
 
3.29
%
Weighted-average remaining operating lease term in years
 
3.82


As of December 31, 2019, the maturities of the Company’s operating lease liabilities are as follows:
Remainder of fiscal year ending June 30, 2020
 
$
2,919

Fiscal year ending June 30, 2021
 
4,374

Fiscal year ending June 30, 2022
 
3,672

Fiscal year ending June 30, 2023
 
3,379

Fiscal year ending June 30, 2024
 
2,816

Thereafter
 

Total undiscounted operating lease payments
 
17,160

Less: imputed interest
 
1,033

Total operating lease liabilities
 
16,127

Less: current portion of operating lease liabilities
 
4,689

Non-current operating lease liabilities
 
$
11,438


Supplemental cash flow information related to operating leases:
 
 
Six Months Ended
 
 
December 31,
2019
Cash paid for amounts included in the measurement of operating lease liabilities
 
$
2,830

Cash paid for variable lease payments not included in measurement of operating lease liabilities
 
481

Total
 
$
3,311


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 sheets consist primarily of its obligations under media rights agreements.
In addition, see Note 7 for the principal repayments required under the Company’s Term Loan Facility.
Legal Matters
The Company is a defendant in various lawsuits. Although the outcome of these matters cannot be predicted with certainty, management does not believe that resolution of these lawsuits will have a material adverse effect on the Company.
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.



14

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

The fair value hierarchy consists of the following three levels:
Level I — Quoted prices for identical instruments in active markets.
Level II — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level III — Instruments whose significant value drivers are unobservable.
The following table presents for each of these hierarchy levels, the Company’s assets that are measured at fair value on a recurring basis, which include cash equivalents: 
 
 
Level I
 
Level II
 
Level III
 
Total
December 31, 2019
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Money market accounts
 
$
17,817

 
$

 
$

 
$
17,817

Time deposits
 
96,452

 

 

 
96,452

Total assets measured at fair value
 
$
114,269

 
$

 
$

 
$
114,269

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

 
$

 
$

 
$
17,619

Time deposits
 
201,524

 

 

 
201,524

Total assets measured at fair value
 
$
219,143

 
$

 
$

 
$
219,143


Money market accounts and time deposits are classified within Level I of the fair value hierarchy as they are valued using observable inputs that reflect quoted prices for identical assets in active markets. The carrying amount of the Company’s money market accounts and time deposits approximates fair value due to their short-term maturities.
Other Financial Instruments
The fair value of the Company’s long-term debt (see Note 7) was approximately $1,089,000 as of December 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 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 and six months ended December 31, 2019 and 2018 are as follows: 
 
 
Pension Plans
 
Postretirement Plan
 
 
Three Months Ended
 
Three Months Ended
 
 
December 31,
 
December 31,
 
 
2019
 
2018
 
2019
 
2018
Service cost
 
$
121

 
$
111

 
$
13

 
$
18

Other components of net periodic benefit cost:
 
 
 
 
 
 
 
 
Interest cost
 
354

 
402

 
15

 
38

Expected return on plan assets
 
(244
)
 
(144
)
 

 

Recognized actuarial loss (a)
 
134

 
119

 

 

Amortization of unrecognized prior service credit (a)
 

 

 
(1
)
 
(2
)
Net periodic benefit cost
 
$
365

 
$
488

 
$
27

 
$
54



15

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

 
 
Pension Plans
 
Postretirement Plan
 
 
Six Months Ended
 
Six Months Ended
 
 
December 31,
 
December 31,
 
 
2019
 
2018
 
2019
 
2018
Service cost
 
$
242

 
$
222

 
$
26

 
$
36

Other components of net periodic benefit cost:
 
 
 
 
 
 
 
 
Interest cost
 
708

 
804

 
30

 
76

Expected return on plan assets
 
(488
)
 
(288
)
 

 

Recognized actuarial loss (a)
 
268

 
238