Sphere Entertainment (SPHR) - 2020 Q4 - Annual Report

PART I Item 1. Business Madison Square Garden Entertainment Corp. leads in live experiences through its Entertainment and Tao Group Hospitality segments, significantly impacted by COVID-19 and marked by the sale of the Forum - The company became a separate public entity on April 17, 2020, after its distribution from MSG Sports[11] - Operations are structured into two segments: Entertainment and Tao Group Hospitality[13][14] - The COVID-19 pandemic has materially impacted operations, leading to business suspension and reduced capacity for Tao Group Hospitality[15] - The company sold the Forum for $400 million on May 1, 2020, realizing a $240.8 million gain on the sale[80] Business Overview and Strategy The company's strategy centers on delivering world-class live experiences through iconic venues, proprietary content, and hospitality expertise, including the MSG Sphere expansion - The company's strategy aims to create world-class live experiences leveraging its iconic venues, exclusive content, and expertise in venue management and hospitality[22] - A key growth initiative involves developing MSG Spheres, with the first in Las Vegas and a second planned for London[25] - Proprietary content is being developed via MSG Sphere Studios to reduce touring reliance and create unique immersive attractions[30] - The company utilizes its controlling interest in Tao Group Hospitality to enhance food and hospitality offerings and integrate premium experiences across its venues[31] Entertainment Segment The Entertainment segment produces and hosts diverse live events, including the successful 'Christmas Spectacular,' leveraging iconic venues and agreements with MSG Sports - The segment hosts events at multiple venues including The Garden and Radio City Music Hall, with capacities from 2,800 to 21,000[33] - The 2019 'Christmas Spectacular' was the most successful in its 87-year history, selling over one million tickets[46] - Long-term Arena License Agreements with MSG Sports ensure the Knicks and Rangers play home games at The Garden[40] - The segment holds a controlling interest in Boston Calling Events, LLC, operator of the Boston Calling Music Festival[34][50] Performance Venues The company operates five iconic venues and is developing the MSG Sphere project, with the Las Vegas venue expected to open in 2023 after COVID-19 related delays - The Garden, Radio City Music Hall, Hulu Theater, and The Chicago Theatre are ranked among the highest-grossing venues globally by Billboard's 2020 mid-year rankings[53][59][60][68] - The MSG Sphere in Las Vegas is a complex project featuring a fully-programmable LED exterior, the world's largest high-resolution LED screen, and an advanced acoustics system[69][71] - Construction of the MSG Sphere in Las Vegas was suspended due to COVID-19 supply chain issues, has resumed, and is now expected to open in calendar year 2023[74][107] - Land has been purchased in London for a second MSG Sphere, pending approvals, leveraging learnings from the Las Vegas project design[73] Tao Group Hospitality Segment The company holds a 77.5% controlling interest in Tao Group Hospitality, which operates 28 venues globally and integrates hospitality expertise into live entertainment offerings - The company increased its ownership in Tao Group Hospitality from 62.5% to 77.5% in January 2020[75] - Tao Group Hospitality operates 28 venues across six major markets including New York City and Las Vegas[76] - Tao Group Hospitality is a strategic partner for the MSG Sphere in Las Vegas, leveraging its 15-year market history to enhance guest experience[78][79] Regulation, Competition, and Employees The company faces extensive regulations, intense competition, and as of June 30, 2020, had approximately 1,500 full-time and 6,100 part-time employees, with 62% unionized - Business operations are subject to extensive regulation, including COVID-19 mandated closures and assembly limitations, which have suspended events and reduced capacity[89][90][91] - The company competes with a wide array of live performances, sporting events, movies, and home entertainment in highly competitive markets like New York City[95] - As of June 30, 2020, the company had approximately 1,500 full-time and 6,100 part-time employees, a reduction primarily due to the Forum sale and COVID-19 impacts[99] - Approximately 62% of employees were union-represented as of June 30, 2020[99] Item 1A. Risk Factors The company faces significant risks from the COVID-19 pandemic, substantial MSG Sphere project costs, intense competition, geographic concentration, and control by the Dolan Family - The COVID-19 pandemic is the most significant risk, causing near-total business suspension, substantial revenue loss, and future uncertainty[101][102][103] - MSG Sphere projects pose substantial financial risk, with the Las Vegas venue estimated at $1.66 billion, facing potential delays, cost overruns, and technological challenges[114][115][116] - Business operations are highly concentrated in New York City, Las Vegas, and Los Angeles, increasing vulnerability to adverse local events and economic conditions[123] - The Dolan Family Group controls the company, holding approximately 70.9% of total voting power, enabling control over stockholder decisions and preventing changes in control[201] - The company is materially dependent on MSG Sports' performance under various agreements, including Arena License Agreements for the Knicks and Rangers at The Garden[185][186] Item 2. Properties The company owns the Madison Square Garden Complex and The Chicago Theatre, leases other iconic venues, and holds land for MSG Sphere developments in Las Vegas and London - Owned properties include the Madison Square Garden Complex and The Chicago Theatre[216] - Leased properties include Radio City Music Hall and the Beacon Theatre in New York City[217] - The company leases property in Las Vegas and owns property in Stratford, London, for MSG Sphere venue development[217] Item 3. Legal Proceedings The company is involved in a derivative lawsuit concerning Executive Chairman James L. Dolan's compensation, with a settlement reached in June 2020 pending court approval - A derivative lawsuit was filed on behalf of former parent MSG Sports against directors concerning Executive Chairman James L. Dolan's compensation[220] - A settlement was reached in June 2020, pending court approval, where Mr. Dolan agreed to relinquish certain one-time equity awards[221] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A Common Stock (MSGE) began trading on NYSE on April 20, 2020, with no dividends paid and a $350 million share repurchase program authorized but not yet utilized - Class A Common Stock is listed on the NYSE under symbol "MSGE" and began trading on April 20, 2020[226] - A share repurchase program for up to $350 million of Class A Common Stock is authorized, with no repurchases to date[230] - No dividends were paid in Fiscal Year 2020, with no current plans for future cash dividends[229] Item 6. Selected Financial Data Selected financial data for FY2017-2020 shows FY2020 revenues of $762.9 million, a decrease from FY2019's $1.05 billion, and net income of $17.2 million driven by the Forum sale Selected Financial Data (in thousands of USD) | | 2020 | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | :--- | | Revenues (in thousands of USD) | $762,936 | $1,048,909 | $988,990 | $711,022 | | Net income (loss) (in thousands of USD) | $(14,687) | $(30,138) | $1,887 | $(112,611) | | Net Income (loss) attributable to MSGE stockholders (in thousands of USD) | $17,234 | $(17,894) | $6,898 | $(108,545) | | Diluted EPS attributable to MSGE stockholders (in USD) | $0.72 | $(0.75) | $0.29 | $(4.52) | | Total assets (in thousands of USD) | $3,719,206 | $3,315,759 | $3,287,771 | $3,271,497 | | Long-term debt (including current portion), net (in thousands of USD) | $33,555 | $54,598 | $105,700 | $105,433 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the COVID-19 pandemic's significant impact on operations, leading to a 27% revenue decrease in FY2020, an adjusted operating loss of $43.3 million, and details liquidity management for the MSG Sphere project - The COVID-19 pandemic materially impacted operations, suspending events, canceling the 2020 Christmas Spectacular, and reducing Tao Group Hospitality venue capacity[248][249] - The estimated monthly operational cash burn rate for FY2021 is approximately $25 million, a reduction from Q4 FY2020[411] - Due to COVID-19 disruptions, the company recorded a total impairment charge of $105.8 million for the Tao Group Hospitality reporting unit[257] - The company maintains sufficient liquidity with approximately $907 million in cash and $337 million in short-term investments as of June 30, 2020[413] Results of Operations (FY2020 vs. FY2019) FY2020 consolidated revenues decreased 27% to $762.9 million due to COVID-19, resulting in an operating loss of $59.8 million and an adjusted operating loss of $43.3 million, despite a $17.2 million net income from the Forum sale Consolidated Results of Operations (FY2020 vs. FY2019, in thousands of USD) | Metric | FY 2020 | FY 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues (in thousands of USD) | $762,936 | $1,048,909 | (27)% | | Operating loss (in thousands of USD) | $(59,756) | $(45,597) | (31)% | | Net income (loss) attributable to MSGE stockholders (in thousands of USD) | $17,234 | $(17,894) | NM | | Adjusted operating income (loss) (in thousands of USD) | $(43,266) | $103,911 | NM | - The Entertainment segment's revenues decreased 27% to $585.2 million, with adjusted operating income falling by $123.9 million to a $44.3 million loss[333][350] - The Tao Group Hospitality segment's revenues decreased 29% to $180.2 million, and its adjusted operating income decreased 94% to $1.5 million[352][363] - A non-cash impairment charge of $105.8 million was recorded in FY2020 for the Tao Group Hospitality reporting unit due to COVID-19 impacts[317] Results of Operations (FY2019 vs. FY2018) FY2019 combined revenues increased 6% to $1.05 billion, but operating loss widened to $45.6 million, and adjusted operating income decreased 8% to $103.9 million Consolidated Results of Operations (FY2019 vs. FY2018, in thousands of USD) | Metric | FY 2019 | FY 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues (in thousands of USD) | $1,048,909 | $988,990 | 6% | | Operating loss (in thousands of USD) | $(45,597) | $(31,282) | (46)% | | Net income (loss) attributable to MSGE stockholders (in thousands of USD) | $(17,894) | $6,898 | NM | | Adjusted operating income (in thousands of USD) | $103,911 | $112,830 | (8)% | - Entertainment segment revenue grew 7% to $797.1 million, driven by increased concerts, Christmas Spectacular revenue, and sponsorship sales[384][386] - Tao Group Hospitality segment revenue grew 4% to $253.7 million, primarily from new venue sales from Tao Chicago, which opened in September 2018[401][402] Liquidity and Capital Resources The company has strong liquidity with $907 million in cash and $337 million in short-term investments, managing cash burn through cost-saving measures and financing the $1.66 billion MSG Sphere project - As of June 30, 2020, the company held approximately $907 million in cash and cash equivalents and $337 million in short-term investments[413] - The estimated cost for MSG Sphere at The Venetian is approximately $1.66 billion, with $453 million incurred by June 30, 2020, to be financed by cash, operating cash flow, and up to $500 million in new debt[421][426] - To preserve cash, the company revised the MSG Sphere construction schedule, reduced its workforce by approximately 350 full-time positions, and furloughed approximately 6,000 venue employees[414] Cash Flow Summary (in thousands of USD) | Cash Flow Activity | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities (in thousands of USD) | $96,031 | $91,724 | $144,385 | | Net cash used in investing activities (in thousands of USD) | $(389,657) | $(228,063) | $(169,624) | | Net cash provided by (used in) financing activities (in thousands of USD) | $122,938 | $(8,621) | $15,356 | Critical Accounting Policies Critical accounting policies involve significant estimates, including impairment testing of long-lived assets and goodwill, with a $88.6 million goodwill impairment for Tao Group Hospitality in FY2020 due to COVID-19 - The company's long-lived and indefinite-lived assets, including goodwill, property, and equipment, comprised approximately 58% of total assets as of June 30, 2020[453] - Due to COVID-19, an interim goodwill impairment test for the Tao Group Hospitality reporting unit resulted in a non-cash impairment charge of $88.6 million in FY2020[457][461] - The company adopted ASU No. 2017-04, simplifying goodwill impairment accounting by removing Step 2 of the test[452] - The company adopted ASC Topic 842 on July 1, 2019, recognizing initial operating right-of-use assets of $259.8 million and corresponding lease liabilities[653][655] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from Tao Group Hospitality's variable-rate debt and foreign currency exposure from the London MSG Sphere, with a 10% GBP/USD fluctuation impacting net asset value by $28.0 million - The company has interest rate risk exposure through Tao Group Hospitality's floating-rate Senior Secured Credit Facilities borrowings[479][480] - The company is exposed to foreign currency risk, primarily from the British pound sterling, related to the London MSG Sphere development, where a 10% GBP/USD fluctuation would change net asset value by approximately $28.0 million[481] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of June 30, 2020, with no material changes in Q4 FY2020 - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[484] - Management concluded that the company's internal control over financial reporting was effective as of June 30, 2020[488] PART III Items 10, 11, 12, 13, and 14 Information for Items 10-14, covering directors, executive compensation, security ownership, and related transactions, is incorporated by reference from the 2020 proxy statement - Information on directors, executive officers, corporate governance, executive compensation, security ownership, related party transactions, and principal accountant fees is incorporated by reference from the forthcoming 2020 proxy statement[493][494][495][496][497] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed with the Form 10-K, including key agreements for the MSG Sphere project and Tao Group Hospitality - This section provides an index of all financial statements, schedules, and exhibits filed with the 10-K[499]