msgn-20201231

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, 2020


			☐			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 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 29, 2021:


Class A Common Stock par value $0.01 per share	—	43,459,880
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
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of December 3 1 , 2020 (unaudited) and June 30, 2020			1

Consolidated Statements of Operations for the three and six months ended December 31, 2020 and 2019 (unaudited)			2

Consolidated Statements of Comprehensive Income for the three and six months ended December 3 1 , 2020 and 2019 (unaudited)			3

Consolidated Statements of Cash Flows for the six months ended December 3 1 , 2020 and 2019 (unaudited)			4

Consolidated Statements of Stockholders' Deficiency for the three and six months ended December 3 1 , 2020 and 2019 (unaudited)			5

Notes to Consolidated Financial Statements (unaudited)			7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			21

Item 3. Quantitative and Qualitative Disclosures About Market Risk			30

Item 4. Controls and Procedures			30

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			31

Item 6. Exhibits			31

Signature			32

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

MSG NETWORKS INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)


	December 31, 2020		June 30, 2020
ASSETS	(unaudited)
Current Assets:
Cash and cash equivalents	$	283,660	$	196,837
Accounts receivable, net	95,526		105,549
Related party receivables, net	6,978		14,190
Prepaid income taxes	225		461
Prepaid expenses	20,010		11,063
Other current assets	4,150		4,541
Total current assets	410,549		332,641
Property and equipment, net	7,912		8,758
Amortizable intangible assets, net	28,553		30,283
Goodwill	424,508		424,508
Operating lease right-of-use assets	14,538		17,153
Other assets	35,641		37,460
Total assets	$	921,701	$	850,803

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable	$	309	$	2,115
Related party payables	2,203		1,472
Current portion of long-term debt	48,234		37,229
Current portion of operating lease liabilities	5,405		5,492
Income taxes payable	2,438		641

Accrued liabilities:
Employee related costs	10,159		14,187
Other accrued liabilities	7,716		10,116
Deferred revenue	2,172		2,753
Total current liabilities	78,636		74,005
Long-term debt, net of current portion	1,019,660		1,043,780
Long-term operating lease liabilities	11,037		13,780
Defined benefit and other postretirement obligations	25,208		25,860
Other employee related costs	5,470		5,149
Other liabilities	1,498		1,536
Deferred tax liability	248,064		239,542
Total liabilities	1,389,573		1,403,652
Commitments and contingencies (see Note 9)
Stockholders' Deficiency:
Class A Common Stock, par value $0.01, 360,000 shares authorized; 43,460 and 43,122 shares outstanding as of December 31, 2020 and June 30, 2020, respectively	643		643
Class B Common Stock, par value $0.01, 90,000 shares authorized; 13,589 shares outstanding as of December 31, 2020 and June 30, 2020	136		136
Preferred stock, par value $0.01, 45,000 shares authorized; none outstanding	—		—
Additional paid-in capital	14,166		12,731
Treasury stock, at cost, 20,799 and 21,137 shares as of December 31, 2020 and June 30, 2020, respectively	(450,053)		(457,363)
Accumulated deficit	(24,738)		(100,792)
Accumulated other comprehensive loss	(8,026)		(8,204)
Total stockholders' deficiency	(467,872)		(552,849)
Total liabilities and stockholders' deficiency	$	921,701	$	850,803

See accompanying notes to consolidated financial statements.

MSG NETWORKS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited) (in thousands, except per share data)


	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2020		2019		2020		2019
Revenues	$	146,239	$	187,730	$	303,602	$	348,711

Direct operating expenses (including related party expenses of $35,529 and $39,884 for the three months ended December 31, 2020 and 2019, respectively, and $76,160 and $78,887 for the six months ended December 31, 2020 and 2019, respectively)	57,033		84,065		122,105		152,725
Selling, general and administrative expenses (including related party expenses of $3,239 and $8,826 for the three months ended December 31, 2020 and 2019, respectively, and $7,248 and $12,017 for the six months ended December 31, 2020 and 2019, respectively)	21,692		32,022		44,219		54,342
Depreciation and amortization	1,802		1,680		3,630		3,407
Operating income	65,712		69,963		133,648		138,237
Other income (expense):
Interest income	488		906		965		2,834
Interest expense	(5,143)		(9,934)		(10,362)		(20,749)
Debt refinancing expense	—		(2,764)		—		(2,764)
Other components of net periodic benefit cost	(206)		(258)		(413)		(516)
	(4,861)		(12,050)		(9,810)		(21,195)
Income from operations before income taxes	60,851		57,913		123,838		117,042
Income tax expense	(19,328)		(17,949)		(47,304)		(34,011)


Net income	$	41,523	$	39,964	$	76,534	$	83,031
Earnings per share:


Basic	$	0.72	$	0.66	$	1.34	$	1.23


Diluted	$	0.72	$	0.66	$	1.33	$	1.22
Weighted-average number of common shares outstanding:
Basic	57,415		60,452		57,287		67,758
Diluted	57,721		60,825		57,550		68,144

See accompanying notes to consolidated financial statements.

MSG NETWORKS INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited) (in thousands)


	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2020		2019		2020		2019
Net income	$	41,523	$	39,964	$	76,534	$	83,031
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	126		134		252		268
Amortization of prior service credit included in net periodic benefit cost	—		(1)		—		(2)
Other comprehensive income before income taxes	126		133		252		266
Income tax expense related to items of other comprehensive income	(37)		(39)		(74)		(75)
Other comprehensive income	89		94		178		191
Comprehensive income	$	41,612	$	40,058	$	76,712	$	83,222

See accompanying notes to consolidated financial statements.

MSG NETWORKS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (in thousands)


	Six Months Ended
	December 31,
	2020		2019
Cash flows from operating activities:
Net income	$	76,534	$	83,031
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	3,630		3,407
Amortization of deferred financing costs	807		1,188
Debt refinancing expense	—		455
Share-based compensation expense	10,893		10,099
Provision for doubtful accounts	(275)		(104)
Change in assets and liabilities:
Accounts receivable, net	7,475		969
Related party receivables, net	7,318		(4,920)
Prepaid expenses and other assets	(6,909)		(3,134)
Accounts payable	(308)		(338)
Related party payables, including payable to MSGS and MSGE	731		220
Prepaid/payable for income taxes	2,033		(10,267)
Accrued and other liabilities	(4,744)		(8,122)
Deferred revenue	(581)		641
Deferred income taxes	8,650		896
Net cash provided by operating activities	105,254		74,021
Cash flows from investing activities:
Capital expenditures	(2,533)		(1,758)

Net cash used in investing activities	(2,533)		(1,758)
Cash flows from financing activities:
Principal repayments on term loan facilities (see Note 7)	(13,750)		(21,250)
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	(2,148)		(4,235)
Net cash used in financing activities	(15,898)		(182,772)
Net increase (decrease) in cash and cash equivalents	86,823		(110,509)
Cash and cash equivalents at beginning of period	196,837		226,423
Cash and cash equivalents at end of period	$	283,660	$	115,914

See accompanying notes to consolidated financial statements.

MSG NETWORKS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2020 AND 2019

(Unaudited) (in thousands)


	Common Stock Issued		Additional Paid-In Capital		Treasury Stock		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total
Balance as of September 30, 2020	$	779	$	7,948	$	(450,053)	$	(66,261)	$	(8,115)	$	(515,702)
Net income	—		—		—		41,523		—		41,523
Other comprehensive income	—		—		—		—		89		89
Comprehensive income											41,612

Share-based compensation expense	—		6,266		—		—		—		6,266

Tax withholding associated with shares issued for share-based compensation	—		(48)		—		—		—		(48)

Balance as of December 31, 2020	$	779	$	14,166	$	(450,053)	$	(24,738)	$	(8,026)	$	(467,872)


	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)

MSG NETWORKS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY (continued)

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2020 AND 2019

(Unaudited) (in thousands)


	Common Stock Issued		Additional Paid-In Capital		Treasury Stock		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total
Balance as of June 30, 2020	$	779	$	12,731	$	(457,363)	$	(100,792)	$	(8,204)	$	(552,849)
Net income	—		—		—		76,534		—		76,534
Other comprehensive income	—		—		—		—		178		178
Comprehensive income											76,712
Cumulative effect of adoption of ASU 2016-13, credit losses	—		—		—		(480)		—		(480)
Share-based compensation expense	—		10,893		—		—		—		10,893

Tax withholding associated with shares issued for share-based compensation	—		(2,148)		—		—		—		(2,148)
Shares issued upon distribution of Restricted Stock Units	—		(7,310)		7,310		—		—		—
Balance as of December 31, 2020	$	779	$	14,166	$	(450,053)	$	(24,738)	$	(8,026)	$	(467,872)


	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)

See accompanying notes to consolidated financial statements.

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MSG NETWORKS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

All amounts included in the following Notes to Consolidated Financial Statements are presented in thousands, except per share data or as otherwise noted.

Note 1. Description of Business and Basis of Presentation

Description of Business

MSG Networks Inc. (together with its subsidiaries, the “Company”), incorporated on July 29, 2009, owns and operates two regional sports and entertainment networks, MSG Network and MSG+, collectively “MSG Networks.” MSG Networks feature a wide range of compelling sports content, including exclusive live local games and other programming of the New York Knicks (the “Knicks”) of the National Basketball Association (“NBA”); the New York Rangers (the “Rangers”), New York Islanders (the “Islanders”), New Jersey Devils (the “Devils”) and Buffalo Sabres of the National Hockey League (“NHL”); as well as significant coverage of the New York Giants and Buffalo Bills of the National Football League.

On September 30, 2015, the Company distributed to its stockholders all of the outstanding common stock of Madison Square Garden Sports Corp. (formerly, The Madison Square Garden Company) (together with its subsidiaries, “MSGS”) (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, 2020. The financial statements as of December 31, 2020 and for the three and six months ended December 31, 2020 and 2019 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, rights fees expense, income tax expense, performance and share-based compensation, depreciation and amortization, litigation matters, and other matters. Management believes its use of estimates in the consolidated financial statements to be reasonable.

Management evaluates its estimates on an ongoing basis using historical experience and other factors. Due to the novel coronavirus (“COVID-19”) pandemic, in March 2020, the 2019-20 NHL and NBA seasons were suspended. The leagues resumed play several months later, with the Rangers and Islanders participating in the NHL's return to play. The NHL and NBA subsequently completed their seasons in September and October 2020, respectively, which impacted each league’s 2020-21 regular season. The NBA started its regular season on December 22, 2020 with a reduced schedule of 72 games, while the NHL regular season began on January 13, 2021 and has been reduced to a 56-game schedule.

Our estimates have been prepared based on these facts, and we will continue to monitor updates made by the NBA and NHL with regards to league play and the impact on the Company’s use of estimates. The Company adjusts such estimates when facts and circumstances dictate. However, these estimates may involve significant uncertainties and judgments and cannot be

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MSG NETWORKS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Continued)

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, including government and league actions taken to contain or mitigate the COVID-19 pandemic, could be material and would be reflected in the Company’s financial statements in future periods.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments — Credit Losses and the 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, including accounts receivable. Under the new standard, the Company is required to use a forward looking “expected loss” model that has replaced the former “incurred loss” model, which generally will result in earlier recognition of allowances for losses. The Company adopted this standard on July 1, 2020 on a modified retrospective basis, recording $480, net of tax, as a cumulative effect adjustment to accumulated deficit.

In March 2019, the FASB issued ASU No. 2019-02, Entertainment — Films — Other Assets — Film Costs (Subtopic 926-20) and Entertainment — Broadcasters — Intangibles — Goodwill and Other (Subtopic 920-350): Improvements to Accounting for Costs of Films and License Agreements for Program Materials, which amends Accounting Standards Codification (“ASC”) Subtopic 920-350 to align the accounting for production costs of an episodic television series with that for the costs of producing films. The Company adopted this standard on a prospective basis, effective July 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

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 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 adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU, and the subsequent ASU that amended its application, provide temporary optional expedients and exceptions to the guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate and other interbank offered rates to alternative reference rates. This standard was effective upon issuance, and may be applied prospectively through December 31, 2022. The Company is currently evaluating the impact this standard will have on its consolidated financial statements, if elected.

Note 3. Revenue and Accounts Receivable

The Company generates revenues principally from affiliation fees charged to cable, satellite, telephone and other platforms (“Distributors”) for the right to carry its networks, as well as from the sale of advertising. The Company’s advertising revenue is largely derived from the sale of inventory in its live professional sports programming, and as such, a disproportionate share of this revenue has historically been earned in the Company’s second and third fiscal quarters. Due to the COVID-19 pandemic, the NBA and NHL 2020-21 regular seasons were delayed and are scheduled to primarily occur during the third and fourth quarters of fiscal year 2021. 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.

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MSG NETWORKS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Continued)

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 and six months ended December 31, 2020. 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.

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.

Principal versus Agent Revenue Recognition

The Company has an advertising sales representation agreement with Madison Square Garden Entertainment Corp. (together with its subsidiaries, “MSGE”) that provides for MSGE 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 (see Note 14). 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, 2020, the aggregate amount of transaction price allocated to remaining performance obligations, other than for contracts that the Company has applied the practical expedient, was $9,160, of which $8,066 will be recognized through fiscal year 2023 and $1,094 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. The Company’s payment terms generally do not exceed 60 days after revenue is earned. 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

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MSG NETWORKS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Continued)

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.

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. 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, 2020		June 30, 2020
Accounts receivable (including advertising receivables, which are included in related party receivables, net)	$	105,673	$	124,325
Contract asset, short-term (included in other current assets)	$	102	$	—
Contract asset, long-term (included in other assets)	$	73	$	37
Deferred revenue, short-term	$	2,172	$	2,753
Deferred revenue, long-term (included in other liabilities)	$	—	$	69

Accounts receivable is presented net of an estimate for lifetime expected credit losses. The Company analyzes historical losses, economic conditions, receivables aging, customer specific risks, and other factors to estimate its allowance for credit losses. The Company’s allowance for credit losses was $1,825 and $1,418 as of December 31, 2020 and June 30, 2020, respectively.

The amount of revenue recognized during the six months ended December 31, 2020 related to deferred revenue (contract liability) recorded as of June 30, 2020 was $1,058.

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,
	2020	2019	2020	2019
Weighted-average number of shares for basic EPS	57,415	60,452	57,287	67,758
Dilutive effect of shares issuable under share-based compensation plans	306	373	263	386
Weighted-average number of shares for diluted EPS	57,721	60,825	57,550	68,144
Anti-dilutive shares	3,228	2,981	3,088	2,602

Note 5. Goodwill and Amortizable Intangible Assets

During the first quarter of fiscal year 2021, the Company performed its annual impairment test of goodwill. As the Company’s one reporting unit had a negative carrying value of net assets, there was no impairment of goodwill identified.

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The Company’s intangible assets subject to amortization are as follows:


	December 31, 2020		June 30, 2020
Affiliate relationships	$	83,044	$	83,044
Less: accumulated amortization	(54,491)		(52,761)
	$	28,553	$	30,283

Affiliate relationships have an estimated useful life of 24 years. Amortization expense for intangible assets was $865 for the three months ended December 31, 2020 and 2019, and $1,730 for the six months ended December 31, 2020 and 2019.

Note 6. Property and Equipment

As of December 31, 2020 and June 30, 2020, property and equipment consisted of the following assets:


	December 31, 2020		June 30, 2020
Equipment	$	29,867	$	28,902
Furniture and fixtures	1,764		1,726
Leasehold improvements	18,617		18,585
Construction in progress	296		277
	50,544		49,490
Less: accumulated depreciation and amortization	(42,632)		(40,732)
	$	7,912	$	8,758

Depreciation and amortization expense on property and equipment was $937 and $815 for the three months ended December 31, 2020 and 2019, respectively, and $1,900 and $1,677 for the six months ended December 31, 2020 and 2019, respectively.

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 that consisted of: (a) an initial $1,550,000 term loan facility and (b) a $250,000 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”). 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

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additional rate of 2.00% per annum. The Credit Agreement requires that MSGN L.P. pay a commitment fee ranging from 0.225% to 0.30% (determined based on a total net leverage ratio) in respect of the average daily unused commitments under the Revolving Credit Facility. MSGN L.P. will also be required to pay customary letter of credit fees, as well as fronting fees, to banks that issue letters of credit.

The Credit Agreement generally requires the Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis to comply with a maximum total leverage ratio of 5.50:1.00, subject, at the option of MSGN L.P. to an upward adjustment to 6.00:1.00 during the continuance of certain events. In addition, the Credit Agreement requires a minimum interest coverage ratio of 2.00:1.00 for the Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis. As of December 31, 2020, the Holdings Entities and MSGN L.P. and its restricted subsidiaries on a consolidated basis were in compliance with the applicable financial covenants. All borrowings under the Credit Agreement are subject to the satisfaction of customary conditions, including absence of a default and accuracy of representations and warranties. As of December 31, 2020, 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, 2020, the principal repayments required under the Term Loan Facility are as follows:


Remainder of fiscal year ending June 30, 2021	$	24,750
Fiscal year ending June 30, 2022	49,500
Fiscal year ending June 30, 2023	66,000
Fiscal year ending June 30, 2024	82,500
Fiscal year ending June 30, 2025	849,750
	$	1,072,500

All obligations under the Credit Agreement are guaranteed by the Holdings Entities and MSGN L.P.’s existing and future direct and indirect domestic subsidiaries that are not designated as excluded subsidiaries or unrestricted subsidiaries (the “Subsidiary Guarantors,” and together with the Holdings Entities, the “Guarantors”). All obligations under the Credit Agreement, including the guarantees of those obligations, are secured by certain assets of MSGN L.P. and each Guarantor (collectively, “Collateral”), including, but not limited to, a pledge of the equity interests in MSGN L.P. held directly by the Holdings Entities and the equity interests in each Subsidiary Guarantor held directly or indirectly by MSGN L.P.

Subject to customary notice and minimum amount conditions, MSGN L.P. may voluntarily prepay outstanding loans under the Credit Agreement at any time, in whole or in part, without premium or penalty (except for customary breakage costs with respect to Eurodollar loans). MSGN L.P. is required to make mandatory prepayments in certain circumstances, including without limitation from the net cash proceeds of certain sales of assets (including Collateral) or casualty insurance and/or condemnation recoveries (subject to certain reinvestment, repair or replacement rights) and the incurrence of certain indebtedness, subject to certain exceptions.

In addition to the financial covenants discussed above, the Credit Agreement and the related security agreement contain certain customary representations and warranties, affirmative covenants, and events of default. The Credit Agreement contains certain restrictions on the ability of 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.

The Company is amortizing deferred financing costs of the Term Loan Facility using the effective interest method over its five-year term.

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The following table summarizes the presentation of the Term Loan Facility, and the related deferred financing costs, in the accompanying consolidated balance sheets as of December 31, 2020 and June 30, 2020:


	Term Loan Facilities		Deferred Financing Costs		Net
December 31, 2020
Current portion of long-term debt	$	49,500	$	(1,266)	$	48,234
Long-term debt, net of current portion	1,023,000		(3,340)		1,019,660
Total	$	1,072,500	$	(4,606)	$	1,067,894
June 30, 2020
Current portion of long-term debt	$	38,500	$	(1,271)	$	37,229
Long-term debt, net of current portion	1,047,750		(3,970)		1,043,780
Total	$	1,086,250	$	(5,241)	$	1,081,009

In addition, the Company has recorded deferred financing costs related to the Revolving Credit Facility in the accompanying consolidated balance sheets as summarized in the following table:


	December 31, 2020		June 30, 2020
Other current assets	$	343	$	343
Other assets	951		1,123

Total amortization of deferred financing costs was $807 and $1,188 for the six months ended December 31, 2020 and 2019, 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 $9,584 and $19,405 during the six months ended December 31, 2020 and 2019, respectively.

Note 8. Leases

The Company has various operating leases for office and studio space, as well as equipment, expiring at various dates through fiscal year 2025. The Company currently has no finance leases. Some leases include options to extend the lease term, 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 uses its incremental borrowing rate as of the lease commencement date to determine the present value of future lease payments. Upon the adoption of ASC Topic 842, Leases, the Company used the incremental borrowing rate on July 1, 2019 for all operating leases that commenced prior to that date.

Lease cost consists of the following:


	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2020		2019		2020		2019
Operating lease cost	$	1,381	$	1,372	$	2,779	$	2,744
Variable lease cost	44		728		44		781
Total lease cost	$	1,425	$	2,100	$	2,823	$	3,525

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The following table summarizes the weighted-average remaining lease term and discount rate for operating leases:


	December 31,
	2020		2019
Weighted-average discount rate for operating leases	3.33	%	3.29	%
Weighted-average remaining operating lease term in years	3.17		3.82

As of December 31, 2020, the maturities of the Company’s operating lease liabilities are as follows:


Remainder of fiscal year ending June 30, 2021	$	2,971
Fiscal year ending June 30, 2022	5,241
Fiscal year ending June 30, 2023	4,949
Fiscal year ending June 30, 2024	4,135
Fiscal year ending June 30, 2025	17
Total undiscounted operating lease payments	17,313
Less: imputed interest	871
Total operating lease liabilities	16,442
Less: current portion of operating lease liabilities	5,405
Non-current operating lease liabilities	$	11,037

Supplemental cash flow information related to operating leases:


	Six Months Ended
	December 31,
	2020		2019
Cash paid for amounts included in the measurement of operating lease liabilities	$	2,989	$	2,830
Cash paid for variable lease payments not included in measurement of operating lease liabilities	—		481
Total	$	2,989	$	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, 2020, the Company’s contractual obligations not reflected on the consolidated balance sheets consist primarily of its obligations under media rights agreements.

In addition, see Note 7 for the principal repayments required under the Company’s Term Loan Facility.

Legal Matters

The Company is a defendant in various lawsuits. Although the outcome of these matters cannot be predicted with certainty, management does not believe that resolution of these lawsuits will have a material adverse effect on the Company.

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.

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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, 2020
Assets:
Money market accounts	$	164,130	$	—	$	—	$	164,130
Time deposits	105,822		—		—		105,822
Total assets measured at fair value	$	269,952	$	—	$	—	$	269,952
June 30, 2020
Assets:
Money market accounts	$	129,609	$	—	$	—	$	129,609
Time deposits	65,713		—		—		65,713
Total assets measured at fair value	$	195,322	$	—	$	—	$	195,322

Money market accounts and time deposits are classified within Level I of the fair value hierarchy as they are valued using observable inputs that reflect quoted prices for identical assets in active markets. The carrying amount of the Company’s money market accounts and time deposits approximates fair value due to their short-term maturities.

Other Financial Instruments

The fair value of the Company’s long-term debt (see Note 7) was approximately $1,061,775 as of December 31, 2020. The Company’s long-term debt is classified within Level II of the fair value hierarchy as it is valued using quoted prices of such securities for which fair value can be derived from inputs that are readily observable, including activity in and the state of the capital markets.

Investment in Nonconsolidated Entity

The Company’s investment in a nonconsolidated entity, which is included in other assets in the accompanying consolidated balance sheets, does not have a readily determinable fair value. As such, the Company has elected to account for it at cost, which would be adjusted for impairment and changes resulting from observable price fluctuations in orderly transactions for an identical or a similar investment of the same issuer (referred to as the measurement alternative method). Investments accounted for under the measurement alternative method are classified within Level III of the fair value hierarchy. As of December 31, 2020, the carrying amount of the Company’s equity investment in the nonconsolidated entity was $2,000, and the Company did not identify any potential adjustments to the cost of its investment through December 31, 2020.

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, 2020, the Company sponsors (i) a non-contributory, qualified defined benefit pension plan covering certain of its union employees, (ii) an unfunded non-contributory, non-qualified frozen excess cash balance plan covering certain employees who participated in an underlying qualified plan, and (iii) an unfunded non-contributory, non-qualified frozen defined benefit pension plan for the benefit of certain employees who participated in an underlying qualified plan (collectively the “Pension Plans”). The Company also sponsors a contributory welfare plan which provides certain postretirement healthcare benefits to certain employees hired prior to January 1, 2001 (the “Postretirement Plan”).

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Components of net periodic benefit cost for the three and six months ended December 31, 2020 and 2019 are as follows:


	Pension Plans				Postretirement Plan
	Three Months Ended				Three Months Ended
	December 31,				December 31,
	2020		2019		2020		2019
Service cost	$	101	$	121	$	9	$	13
Other components of net periodic benefit cost:
Interest cost	256		354		9		15
Expected return on plan assets	(185)		(244)		—		—
Recognized actuarial loss (a)	126		134		—		—
Amortization of unrecognized prior service credit (a)	—		—		—		(1)
Net periodic benefit cost	$	298	$	365	$	18	$	27


	Pension Plans				Postretirement Plan
	Six Months Ended				Six Months Ended
	December 31,				December 31,
	2020		2019		2020		2019
Service cost	$	202	$	242	$	18	$	26
Other components of net periodic benefit cost:
Interest cost	513		708		18		30
Expected return on plan assets	(370)		(488)		—		—
Recognized actuarial loss (a)	252		268		—		—
Amortization of unrecognized prior service credit (a)	—		—		—		(2)
Net periodic benefit cost	$	597	$	730	$	36	$	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, 2020, the Company sponsors the MSGN Holdings, L.P. Excess Savings Plan and participates in The Madison Square Garden 401(k) Savings Plan, a multiple employer plan (together, the “Savings Plans”). The Madison Square Garden 401(k) Savings Plan was sponsored by MSGS until the Entertainment Distribution (as defined in Note 14), and thereafter by MSGE. Expenses related to the Savings Plans included in the accompanying consolidated statements of operations were $215 and $284 for the three months ended December 31, 2020 and 2019, respectively, and $430 and $529 for the six months ended December 31, 2020 and 2019, 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, 2020 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 (the “Non-Employee Director Plan”), as amended.

Share-based compensation expense, presented within selling, general and administrative expenses and direct operating expenses, was $6,266 and $5,440 for the three months ended December 31, 2020 and 2019, respectively, and $10,893 and $10,099 for the six months ended December 31, 2020 and 2019, respectively.

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Non-Qualified Stock Options (“NQSOs”) Award Activity

The following table summarizes activity relating to holders of the Company’s NQSOs for the six months ended December 31, 2020:


	Number of		Weighted- Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term (In Years)	Aggregate Intrinsic Value
	Nonperformance Based Vesting NQSOs	Performance Based Vesting NQSOs
Balance as of June 30, 2020	1,833	1,834	$	18.88	5.17	$	—
Adjustment upon final determination of level of performance objective(a)	—	(2)	21.60
Balance as of December 31, 2020	1,833	1,832	$	18.88	4.66	$	467
Exercisable as of December 31, 2020	1,357	961	$	19.58	3.97	$	78

(a) Includes an adjustment of awards issued with respect to performance based NQSOs granted in fiscal year 2018 upon certification of the level of achievement of the performance targets for such awards.

The aggregate intrinsic value is calculated for in-the-money NQSOs as the difference between (i) the exercise price of the underlying award and (ii) the quoted price of the Company’s Class A common stock, par value $0.01 per share (“Class A Common Stock”) at December 31, 2020 and June 30, 2020, as applicable.

Restricted Share Units Award Activity

The following table summarizes activity relating to holders of the Company’s RSUs for the six months ended December 31, 2020:


	Number of
	Nonperformance Based Vesting RSUs	Performance Based Vesting RSUs	Weighted-Average Fair Value Per Share At Date of Grant
Unvested award balance as of June 30, 2020	595	870	$	20.01
Granted	851	720	10.44
Vested