The Hornets' Financial Statements: The Hornets have been unprofitable for a long time
by Brian Ball on Dec 7, 2010 4:31 PM CST
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PrintIn a Wikileaks-like dump, Deadspin released the Hornets' financial statements from the fiscal year ending 2009. I'll be going through these statements for the next couple of days off and on, but I can share some of my preliminary analysis with you right now. I'm happy to finally be putting my finance major to good use.
The short version of the story is that the Hornets were not profitable from 2008 to 2009, and it doesn't appear that they were particularly profitable before that. The NBA was keeping them on life support, giving them loans, letting them get cheap credit, and deferring payment of the Hornets' liabilities to the NBA. Follow me beneath the jump for some of the details.
A couple of quick notes:
1) The Hornets have their fiscal year end on June 30 of every year (befitting an NBA franchise), so when I say "2008," I mean the financial results of the 2007-2008 season. Deadspin only released a financial statement that has results from 2008 and 2009, so the 2009-2010 season is not included in this analysis (presumably, with the Chris Paul injury, that season went even worse for the Hornets financially).
2) I'm going to be focusing on the Hornets' cash flows, since that's where the money is. As long as the team can generate positive cash flows, they can continue operating. If they have a hard time doing that, then they won't. It's that simple.
So, on to the analysis. If you'll go to page 11 of the Deadspin dump, you'll find the Hornets' statement of operations This tells us what in the Hornets' organization is making how much money, and whether their revenue is able to cover their expenses.
In 2008, just on operations, the Hornets lost money. A lot of it, in fact - $7 Million. That's a -7% operating margin, which is terrible. In the end, they reported a Net Income of -$16 Million, which, again, looks really bad. The next year, 2009, the Hornets were able to significantly boost their Net Income to the point that it was positive - nearly $2 Million. Why is that? Well, there are two big causes for the jump. The first is a nearly $10 Million jump in home ticket revenue, and the second is a strange $4 Million "Gain on modification of relocation obligation." Without that strange $4 Million addition, the Hornets would have lost $2 Million in 2009, even with the huge spike in ticket revenue and a $3 Million cut in expenses.
Now what was the "Gain on modification of relocation obligation?" The bottom of page 25 and all of page 26 gives us the answer. The Hornets owed the NBA a $30 Million for moving from Charlotte to New Orleans. They decided to pay that over a 7-year installment plan. However, the Hornets were having such a hard time paying the fee, the NBA allowed them to push back their payment of the fee until they were more profitable. So in 2009, the Hornets were able to log a "Gain" of $4 Million, since the NBA wasn't making them pay their existing liabilities. Without that charity from the NBA, the Hornets would have lost $2 Million in 2009.
Now let's look at the Hornets' statement of cash flows. That tells us how much cash the company is currently taking in. It's the most important measure of a company's health. We see under the line "Net Cash used in operating activities" that the Hornets bled cash due to their operations in both years, even with the NBA's creative bookkeeping (creative bookkeeping, by the way, doesn't mean anything untoward was being done. It just means the NBA was doing all it could to keep the Hornets afloat).
To make sure that the Hornets could keep doing business, they had to rely on borrowing money from other people. Look at "Proceeds from related-party notes payable" under "Cash flows from financing activities." We can learn on Page 29 of the Deadspin dump under note 15 that Shinn and Chouest gave short-term loans to the Hornets to make sure that they could keep operating. In 2009, we see that those short-term loans had been paid back, and the Hornets had issued $14.5 Million of long-term debt to cover that payment back to the owners, and had drawn $8 Million from their revolvers (a standing line of credit from the NBA). These revolvers are the lines of credit that David Stern said the team had maxed out.
To summarize: The Hornets were losing significant amounts of money as a team. To cover their losses, they were borrowing from anybody they could get money from – their owners, issuing long-term debt, and credit from the NBA. Finally, this year, the Hornets finally ran out of places they could get money from to cover their losses, and the NBA had to take over.
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Are These Numbers
More indicative of the owner and him not having enough money to stabilize his finances with the team? I know the attendance numbers and even the arena don’t do wonders for the team in general, but these seem like a lot of matters (taking loans from the NBA, deferring payments on the relocation) that are indicative of the owner not paying out.
"You play to win the game."
The owner would have to keep injecting money into the team to keep the Hornets afloat
When you say “paying out” that usually means owners taking fewer profits from the operations of the team. In this case Shinn and Chouest were already floating the team dubious loans in last-gasp attempts to keep operations going.
Well, So That Means
New Orleans is like a leech sucking the profitability out of the Hornets franchise?
I wish I had a firmer grasp around this. Because they’re a somewhat succesful operation and they’re not in the bottom of attendance categories. I just don’t get how they don’t make money unless the Arena isn’t up to NBA standards and isn’t profitable either (as was the case with KeyArena in Seattle).
"You play to win the game."
by MrWayneKeller on Dec 7, 2010 5:12 PM CST up reply actions
Pretty much.
The Hornets had over 98% attendance in 2008-2009, and they still lost $2 Million from operations and and had a negative $1 Million cash flow. That means that even with really, really strong attendance, the Hornets can’t find a way to make money.
I think the problem stems from two areas. First, the New Orleans Arena has low ticket prices and relatively few luxury suites. As a result, the revenue per customer is lower than in other arenas. Second, they have the worst TV deal in the league. Since CST broadcasts so few of the Hornets’ games, they don’t get as much money as other teams. Because of these two factors, the Hornets have lower revenues with the same attendance.
How much do you think the new TV deal changes things?
Reportedly, the team has a new deal covering all (?) games through 2012.
All games?
I just heard that Cox had reached a deal with Charter to provide CST on Charter. Would put Hornets on TVs for most of the Northshore. All 82 games would be great.
Yeah, I thought it was just expanding who got to see the games.
I’m not sure how that will impact matters, but I doubt it’s worth all that much. It probably does more to expand the fanbase than to really drive revenues.
I feel like
These numbers are interesting, but only truly valuable in relation to the other teams. Are the Hornets unique in these problems? Obviously no other team was taken over by the NBA, so that says something about their situation. However, NBA owners have been painting a picture of teams hemorrhaging money, which was widely disputed by the NBAPA. This report lends credence to the owners’ statements. Again, the key is whether the Hornets were an extreme outlier, or one of several struggling franchises, albeit with an owner less able to deal with repeated losses. Stern stated that he believes the new CBA will allow struggling franchises to be profitable. If the team is indeed sold after a new, owner-friendly CBA is in place, it’s valuable will be much higher than it is today. My gut reaction is that the league will try to sell the team after this and possibly a new long-term (and profitable) lease are in place to a local owner (perhaps even Chouest) for a premium on their purchase price. The NBA will have bailed out a struggling team in the short term, as well as turned a profit. Now, could they make more money without a lease in place and to a owner that wants to move the team? Probably, but I don’t think Stern wants that PR so soon after Sonicsgate. This may be a overly optimistic view, but I think it makes sense with the info we have so far. Sorry for the ramblings.
Remember
It was not the price of the sale that scared Chouest away. We can’t say he wouldn’t pay a premium for a more economically valuable Hornets team.
Golden State sold for a ridiculous amount this summer
Franchises, as a whole, aren’t hurting right now. If they were, they would be selling for less, not more. I think the Hornets are unique in their set of problems (really bad TV deal, poor ticket revenues, etc.) and I doubt other teams are having problems this serious currently. But that’s entirely speculation on my part; we’ll see if the Hornets’ failure changes the balance of power during the CBA negotiations.
Right, but
Charlotte’s sale was nowhere near that high. Wasn’t GS artificially raised due to a bidding war with a couple of eager billionaires who were dead set on obtaining a team, not to mention one of the best markets (fan wise) in the league? Hornets may very well be in the worst shape, but I’m not sure if other franchises aren’t far behind.
True.
My gut says that if billionaires are willing to have a bidding war over a property, then the property is likely to be pretty darn valuable.
However: Yikes. MJ bought the Bobcats for a price that valued the franchise at $175M. That’s… insanely low. So I’m not sure what to make of the state of the NBA anymore. This is all very confusing.
If I'm not mistaken Charlotte was rumored to be losing money when he bought it too
Maybe that played into it?
And I guess another overall question: the NBA either has to be anticipating a move or a reversal of the negative cash flows, right? How long could they reasonably expect to stay in the market if they aren’t projecting a turnaround (esp. given that its other owners’ investment in question now)?
Exactly.
Either the Hornets will become profitable (dubious without government support or a restructuring of the CBA) or the Hornets will move. Otherwise, I can’t imagine the franchise selling for over $300M.
Didn't that exclude debt to make the price lower?
MJ did pay more when you add on the debt.
"The ability to speak does not make you intelligent"- Qui-Gon Jinn
Im not perturbed by these numbers
Two reasons:
1) The financials improved year over year. Thats a good thing. We also dont know what the numbers were like for the years previous.
2) We dont know what the numbers MEAN. If you were running say a gas station, youd say you were doing horribly with these numbers and might have to close. But after spending 11 years in the casino industry, I know that ‘profitability’ is sometimes only a theory. The casino corporation I worked for never had a ‘profit’ but had a strong balance sheet and was great for investors. They used non-GAAP measures to determine worth.
OK, 3…. This may not be the whole enchilada. We dont know what does and what does NOT go into the numbers. There may be profit centers that dont show up on these books. Alternately, there may be liabilities we dont see.
Im looking at these and just not seeing anything to panic over.
I am perturbed by these numbers
1) They improved almost entirely due to a one-year spike in attendance to almost full capacity. And they still weren’t profitable. Since then, the Hornets saw their attendance decline to less than 90% capacity.
2) The balance sheet doesn’t provide value for investors, only cash flows provide value. I was analyzing how much cash the operation generates, and it’s a money-loser. Cash from operations is less than expenses. That’s why the NBA had to step in and buy the franchise. Clearly the NBA saw that there was something very, very wrong with the Hornets’ operations. There’s obviously something here to worry about.
3) Yes, assets and liabilities can be hidden off-balance sheet. That’s why the balance sheet isn’t very useful in valuing a company, and that’s why I looked at the statements of operations and the cash flow statements, which can’t be fudged easily (legally, really). Cash flows don’t lie.
im not referring to off balance sheet
There may be more than one organization involved.
Plus limited partnerships are weird creatures to value anyways since from a FS perspective, they exist year-to-year with little carry-over.
TP chimed in
http://www.nola.com/hornets/index.ssf/2010/12/audit_shows_losses_by_george_s.html
Hmm. Not exactly sure what they are getting at saying that the problem is the long term debt, so the team is in good shape. Obviously the debt was incurred to offset operating losses, so the team wasn’t thriving. I suppose that upon selling their shares, Shinn and Chouest can pay off the debt of their respective entities and the team itself has a clean slate. Maybe this type of debt can be avoided with a favorable lease and CBA? That’s what I’ve come up with after digesting this awhile.
Yeah
The Saints are kept in NO because of the state of Louisiana paying them. I think the Hornets might require the same kind of treatment to stay here, unless the new CBA is suddenly waaay kinder to small-market teams. It looks bleak to me.
The Times-Pic is trying to say that even though the operations in 2009 were profitable, they were wiped out by the interest payments. Obviously, operating profits have to cover your cost of financing. That’s not exactly a rare issue, really. Restructuring the debt might fix some of these problems, but they’re going to have to find ways to drive revenue, either through ticket sales (tough to get higher than the 98% attendance in 2009) or in TV contract revenue (have to wait until contract expires). No easy answers right now.
Maybe
Some kind of sliding scale would be appropriate. The deal now has the State paying a large sum (2008) or nothing (2009). While I like the idea of the State helping when the team needs it, maybe different degrees of assistance are necessary as opposed to the all or nothing deal that is in place now.
If the rumored Cox/Charter agreement comes to fruition the TV revenues will go up even before the current deal with Cox is done. This would hopefully pave the way for a more favorable TV deal in the future (good rating could possibly even get another network into the bidding). Even if the new CBA only helps marginally, things are moving in the right direction, and as always, wins solve a lot of problems. (Yes, my rose-colored glasses are firmly duct-taped to my head right now.)
Good to see somebody optimistic
You’re making me happier, haha. I guess all the Hornets really need is to find a way to make $10 to $15 million more in revenues each year, which I guess could happen with a better TV deal. Not sure when the current contract is up, but that would be something interesting to research.
For what it's worth
Stern maintains that the new CBA will allow all teams to have profits in the $10Mil range (I suppose this is IF the owners mostly get their way). Now that could be totally BS posturing on his part, but even if he’s telling a half-truth, that’s big step.
nr 2
Nr 2 is basically creative accounting however. Non-GAAP accounting is bascially, “whatever you want it to be” accounting.
There are plenty of companies that are going nowhere that are great for investors from time to time, but in the end, if a company is taking in more than it is giving out, the onyl way to prolong the inevitable collapse is through debt (or creative accounting).
also
They cant have maxxed out their credit. Capital One is a sponsor and would give them a line of credit to the ceiling if they asked for it.
You might know more about this than me
But just because a lending organization sponsors a team doesn’t mean that they’d be willing to provide them loans. They might be willing to provide a loan, but the interest rate might be so high that the team can’t afford it.
In addition, the “maxed out their credit” comments refer to their revolving lines of credit with the NBA – David Stern said the Hornets had completely used those up during his press conference.
I Need To Stop
Paying attention to all of this. I have a hugely important final in the morning and all I can do is look at the Hornets financial situation.
"You play to win the game."
Were the Hornets an Anomaly?
The NBA says it’s losing about $380m a year. That would mean each team would be expected to lose $13m each year at this pace. Clearly not all franchises are losing money at that rate, but as a basis for comparison, is the problem the Hornets? Or was the problem Shinn’s inability to pay back debt from moving etc. due to his own shallow pockets (relatively speaking) and not saving up for the winter (at least in his Hornets account)?
Such debts are real and need to considered, but they are not part of operating a franchise in New Orleans in the the long term. They are not part of the economics of the region and market; they are transient details. Those details have real effects, yes, but they are not a black eye on the city. Other stuff is, sure. But this looks like it rests on Shinn.
Not trying to be a dick, but...
Would love to have the NBA in Missouri. I would prefer STL, but I’ll settle for KC…. Kings, Hornets, whatever…. Personally I think it would make the most sense for the franchise to move to KC, but we all know New Orleans has been Stern’s personal charity project for 5 years now….. It’s time to get back to the business of making money, winning, and not wasting CP3’s talent….
"I’m tired of hearing about money, money, money, money, money. I just want to play the game, drink Pepsi, wear Reebok." ~Shaq
by Max_in_Missouri on Dec 7, 2010 10:26 PM CST reply actions
you weren't trying to be a dick?
perhaps you should try harder.
Nah, I’m good. If I was trying to be a dick, I would have said “New Orleans is a rathole and doesn’t deserve a franchise, much less the All-Star game and constant league pity it has gotten post-Katrina”….but that’s if I was trying to be a dick.
"I’m tired of hearing about money, money, money, money, money. I just want to play the game, drink Pepsi, wear Reebok." ~Shaq
by Max_in_Missouri on Dec 9, 2010 10:44 PM CST up reply actions
Watch Out Y'all
We got an anonymous tough guy behind a keyboard. Everyone’s favorite.
"You play to win the game."
by MrWayneKeller on Dec 10, 2010 1:49 PM CST up reply actions 1 recs
financial situation
It’s obvious that Shin really was not making money from the Hornets (at least the Hornets themselves).
Actually, these numbers tell a rather grim story. At the very least the arena lease might be broken. Worst case is relocation.
Very worst case would be a winding down of the Hornets by the NBA. Unlikely, but Stern has threatneed it if there is no new profit sharing arrangement and it would be a lot easier for the NBA to wind down a team that is already in its hands then to unwind another team.
I don’t expect the very worst case scenario, but … you never know.
Go Hornets!
If anyone has ever done accounting they'd know these numbers are seriously concerning.
This means the team needed a lot of external funding to keep them operational and it was only a matter of time before someone stepped in. It’s no surprise that Chouest didn’t want to be the owner, seeing as he was paying out a tonne of money to them consistently and they were running down the gutter.
To me this team once they are back making positive operational cash flow, will draw a big incentive for Chouest to reconsider his position on the team.
It all begins to make sense, even if it sucks…
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What they need
is a good internal auditor.
Hmmmm……
More red flags than a Communist rally
Totally agree with Grayson. While I don’t have much experience with NBA financial, I do work in corporate finance and have seen the financials of many a troubled company- those owned by private equity firms are particularly scary- and this does NOT look good. The problem here appears to be twofold- first, George Shinn is an undercapitalized hack that mismanaged his franchise, and second, as has been said many times before, the city of New Orleans is simply unable to support two major sports franchises. It’s totally unfair to look at the support the Saints receive in the area- football-crazy SEC country- and assume that the Hornet can achieve anything close to that. The NBA is probably just throwing good money after bad.
http://hardwoodhype.blogspot.com/2010/12/new-orleans-hornets-books-are-open-and.html
Louisiana should step up.
Governor Jindal spends most of his time raising money for future political campaigns in other states, and then has the nerve to say his help to the Hornets is conditioned on not cutting health care and education? That’s just about all he HAS cut in his years in office. He’s an absolute joke.
If Jindal thinks he can skate along under the Saints’ success, he’s wrong. The Hornets bolt and he’s the governor who let it happen. Mayor Landrieu should mercilessly pressure him to commit funds. This is just how it works. Sports franchises bring money into the city, and, thus, the state, as both benefit from having the Hornets stay. To say it can’t be done here is crazy. It can. Everyone just needs to come together: the players to provide quality entertainment, the fans to pay to see it, and the local businesses and governments to provide sustainable partnerships.
by m-W on Dec 8, 2010 12:15 PM CST reply actions 1 recs
Interest on much of that debt was due on December 7th.
The ~23 million had interest due December 7th. I’m not sure if the old 11 million loan was due then or back in July, the financials don’t say, but I would assume December which would have been the 7th also as this was the same interest date.
Meanwhile, the team had already reached its maximum secured borrowings (125 million) under terms of its nba loans.
Its possible Shinn and Chouset had significant cash just waiting to further lend to the Hornets, but more likely, on December 7th the team was going to default on its loans to the league.
Stern didn’t choose to buy the Hornets, he basically foreclosed on them.
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