Sphere Entertainment (SPHR) - 2024 Q1 - Quarterly Report

FORM 10-Q PART I. FINANCIAL INFORMATION This section presents unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls Item 1. Financial Statements This section provides unaudited condensed consolidated financial statements, covering balance sheets, operations, cash flows, and detailed notes Condensed Consolidated Balance Sheets Total assets decreased to $4,864,654 thousand, driven by reduced investments and deferred tax liabilities, increasing stockholders' equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Item | September 30, 2023 | June 30, 2023 | Change | | :------------------------------------ | :------------------- | :---------------- | :------- | | Total current assets | $674,022 | $623,913 | +$50,109 | | Investments in nonconsolidated affiliates | $50,788 | $394,519 | -$343,731 | | Property and equipment, net | $3,471,141 | $3,307,161 | +$163,980 | | Total assets | $4,864,654 | $4,973,015 | -$108,361 | | Total current liabilities | $642,915 | $692,141 | -$49,226 | | Deferred tax liabilities, net | $285,852 | $379,552 | -$93,700 | | Total liabilities | $2,228,766 | $2,389,150 | -$160,384 | | Total stockholders' equity | $2,635,888 | $2,583,865 | +$52,023 | Condensed Consolidated Statements of Operations Net income reached $66,425 thousand, a significant improvement from a prior-year loss, driven by tax benefits and a litigation settlement Condensed Consolidated Statements of Operations Highlights (in thousands) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Change | | :------------------------------------ | :------------------------------ | :------------------------------ | :---------------- | | Revenues | $118,007 | $123,129 | -$5,122 (-4%) | | Direct operating expenses | $(84,499) | $(75,420) | -$9,079 (+12%) | | Selling, general, and administrative expenses | $(87,144) | $(94,631) | +$7,487 (-8%) | | Operating loss | $(69,789) | $(51,055) | -$18,734 (+37%) | | Other income (expense), net | $42,196 | $(415) | +$42,611 (NM) | | Income tax benefit | $90,287 | $1,834 | +$88,453 (NM) | | Net income (loss) | $66,425 | $(44,043) | +$110,468 (NM) | | Basic earnings (loss) per common share | $1.90 | $(1.30) | +$3.20 (NM) | | Diluted earnings (loss) per common share | $1.89 | $(1.30) | +$3.19 (NM) | Condensed Consolidated Statements of Comprehensive Income (Loss) Comprehensive income reached $60,380 thousand, a significant improvement from a prior-year loss, primarily due to net income Condensed Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Change | | :------------------------------------ | :------------------------------ | :------------------------------ | :---------------- | | Net income (loss) | $66,425 | $(44,043) | +$110,468 (NM) | | Other comprehensive loss, before income taxes | $(8,160) | $(15,570) | +$7,410 (-48%) | | Comprehensive income (loss) | $60,380 | $(56,669) | +$117,049 (NM) | Condensed Consolidated Statements of Cash Flows Net cash increased by $22,628 thousand, a significant improvement, driven by investing and financing activities Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Change | | :------------------------------------ | :------------------------------ | :------------------------------ | :---------------- | | Net cash used in operating activities | $(94,641) | $(81,183) | $(13,458) | | Net cash provided by (used in) investing activities | $66,498 | $(285,218) | +$351,716 (NM) | | Net cash provided by (used in) financing activities | $50,854 | $(20,023) | +$70,877 (NM) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $22,628 | $(387,117) | +$409,745 (NM) | | Cash, cash equivalents, and restricted cash at end of period | $451,742 | $458,893 | -$7,151 (-2%) | Condensed Consolidated Statements of Stockholders' Equity and Redeemable Noncontrolling Interests Total stockholders' equity increased to $2,635,888 thousand, primarily driven by net income, despite other comprehensive loss Condensed Consolidated Statements of Stockholders' Equity Highlights (in thousands) | Item | Balance as of June 30, 2023 | Net Income | Other Comprehensive Loss | Share-based Compensation | Tax Withholding | Balance as of Sep 30, 2023 | | :------------------------------------ | :-------------------------- | :--------- | :----------------------- | :----------------------- | :-------------- | :-------------------------- | | Total Sphere Entertainment Co. Stockholders' Equity | $2,583,865 | $66,425 | $(6,045) | $5,789 | $(14,146) | $2,635,888 | Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations and disclosures for the unaudited condensed consolidated financial statements Note 1. Description of Business and Basis of Presentation Sphere Entertainment Co. operates two segments: Sphere (next-generation entertainment) and MSG Networks (regional sports and entertainment) - Sphere Entertainment Co. is comprised of two reportable segments: Sphere (next-generation entertainment medium, with its first venue opened in Las Vegas in September 2023) and MSG Networks (regional sports and entertainment networks, including MSG Network, MSG Sportsnet, and MSG+ streaming product)[23][24] - The company distributed approximately 67% of MSG Entertainment's common stock to its stockholders on April 20, 2023, and subsequently sold its retained interest, no longer holding any MSG Entertainment stock as of September 30, 2023[26][27] - The company completed the sale of its 66.9% majority interest in Tao Group Hospitality on May 3, 2023. Both MSG Entertainment and Tao Group Hospitality businesses are presented as discontinued operations for all periods[29][30] Note 2. Accounting Policies Financial statements adhere to GAAP, relying on estimates; MSG Entertainment and Tao Group Hospitality are discontinued operations - The financial statements are prepared using GAAP for interim information, requiring management to make estimates and assumptions, which are evaluated on an ongoing basis[31][38][39] - The company's primary sources of liquidity are cash and cash equivalents and cash flows from operations, with substantial expected uses including working capital, capital spending for Sphere content, and debt service[42] - Funding operations and refinancing MSG Networks Credit Facilities depends on Sphere in Las Vegas generating significant positive cash flow in Fiscal Year 2024; management plans to refinance MSG Networks Credit Facilities prior to maturity in October 2024[43][45] Note 3. Discontinued Operations MSG Entertainment and Tao Group Hospitality are discontinued operations; a $647 thousand loss was recognized from Tao Group disposition - MSG Entertainment and Tao Group Hospitality businesses are classified as discontinued operations due to their distributions/dispositions in April and May 2023[46] Loss from Discontinued Operations (in thousands) | Period | Loss from Discontinued Operations, net of taxes | | :------------------------------------ | :---------------------------------------------- | | Three months ended September 30, 2023 | $(647) | Operating Results of Discontinued Operations (Three Months Ended September 30, 2022, in thousands) | Item | MSGE | Tao | Eliminations | Total | | :------------------------------------ | :------- | :------- | :----------- | :------- | | Revenues | $146,075 | $132,576 | $(562) | $278,089 | | Operating income | $697 | $5,234 | $276 | $6,207 | | Net (loss) income | $(1,770) | $3,754 | $276 | $2,260 | Note 4. Revenue Recognition Total revenues were $118,007 thousand, primarily from MSG Networks' affiliation agreements and Sphere's event-related activities Disaggregated Revenue by Segment and Source (Three Months Ended September 30, 2023, in thousands) | Source | Sphere | MSG Networks | Total | | :------------------------------------ | :------- | :----------- | :------- | | Event-related | $4,059 | $0 | $4,059 | | Sponsorship, signage, Exosphere advertising, and suite licenses | $2,560 | $218 | $2,778 | | Media related, primarily from affiliation agreements | $0 | $109,795 | $109,795 | | Other | $431 | $215 | $646 | | Revenues from subleases | $729 | $0 | $729 | | Total revenues | $7,779 | $110,228 | $118,007 | Disaggregated Revenue by Segment and Source (Three Months Ended September 30, 2022, in thousands) | Source | Sphere | MSG Networks | Total | | :------------------------------------ | :------- | :----------- | :------- | | Sponsorship, signage, Exosphere advertising, and suite licenses | $0 | $244 | $244 | | Media related, primarily from affiliation agreements | $0 | $121,812 | $121,812 | | Other | $0 | $423 | $423 | | Revenues from subleases | $650 | $0 | $650 | | Total revenues | $650 | $122,479 | $123,129 | Contract Balances (in thousands) | Item | September 30, 2023 | June 30, 2023 | | :------------------------------------ | :------------------- | :---------------- | | Receivables from contracts with customers, net | $114,247 | $115,039 | | Deferred revenue, including non-current portion | $70,904 | $27,397 | Note 5. Restructuring Charges The company incurred $3,391 thousand in restructuring charges for executive and employee termination benefits in the Sphere segment Restructuring Charges (in thousands) | Period | Restructuring Charges | | :------------------------------------ | :-------------------- | | Three months ended September 30, 2023 | $3,391 | | Three months ended September 30, 2022 | $0 | Changes to Restructuring Liability (in thousands) | Item | Amount | | :------------------------------------ | :------- | | June 30, 2023 | $8,891 | | Restructuring charges | $3,391 | | Payments | $(6,804) | | September 30, 2023 | $5,478 | Note 6. Investments in Nonconsolidated Affiliates Total investments in nonconsolidated affiliates significantly decreased to $50,788 thousand due to MSG Entertainment investment disposition Investments in Nonconsolidated Affiliates (in thousands) | Investment | September 30, 2023 | June 30, 2023 | | :------------------------------------ | :------------------- | :---------------- | | SACO Technologies Inc. | $20,074 | $22,246 | | Holoplot Loan | $20,576 | $20,971 | | Holoplot | $1,417 | $1,542 | | MSG Entertainment | $0 | $341,039 | | Equity investments without readily determinable fair values | $8,721 | $8,721 | | Total investments in nonconsolidated affiliates | $50,788 | $394,519 | - The company no longer holds any outstanding common stock of MSG Entertainment as of September 30, 2023, following sales and repayment of a delayed draw term loan[62] Realized and Unrealized (Loss) Gain on Equity Investments (in thousands) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | | :------------------------------------ | :------------------------------ | :------------------------------ | | Unrealized gain | $0 | $1,969 | | Realized loss from shares of MSG Entertainment Class A common stock sold | $(19,027) | $0 | | Total realized and unrealized (loss) gain on equity investments | $(19,027) | $1,969 | Note 7. Property and Equipment, net Property and equipment, net, increased to $3,471,141 thousand, primarily due to Sphere in Las Vegas assets placed into service Property and Equipment, net (in thousands) | Item | September 30, 2023 | June 30, 2023 | | :------------------------------------ | :------------------- | :---------------- | | Land | $77,617 | $80,878 | | Buildings | $2,300,506 | $69,049 | | Equipment, furniture, and fixtures | $1,090,194 | $159,786 | | Construction in progress | $85,469 | $3,066,785 | | Total property and equipment, gross | $3,572,277 | $3,394,989 | | Less accumulated depreciation and amortization | $(101,136) | $(87,828) | | Property and equipment, net | $3,471,141 | $3,307,161 | - During the three months ended September 30, 2023, the company placed $3,130,028 thousand of construction in progress assets related to Sphere in Las Vegas into service, initiating depreciation[66] Depreciation Expense on Property and Equipment (in thousands) | Period | Depreciation Expense | | :------------------------------------ | :------------------- | | Three months ended September 30, 2023 | $13,480 | | Three months ended September 30, 2022 | $5,354 | Note 8. Goodwill and Intangible Assets Goodwill remained stable at $456,807 thousand with no impairment, while intangible assets, net, slightly decreased due to amortization Goodwill by Segment (in thousands) | Segment | September 30, 2023 | June 30, 2023 | | :------------------------------------ | :------------------- | :---------------- | | Sphere | $32,299 | $32,299 | | MSG Networks | $424,508 | $424,508 | | Total Goodwill | $456,807 | $456,807 | - The company performed its annual impairment test of goodwill during the first quarter of Fiscal Year 2024 and determined no impairment was identified[68] Intangible Assets Subject to Amortization (in thousands) | Item | September 30, 2023 | June 30, 2023 | | :------------------------------------ | :------------------- | :---------------- | | Gross carrying amount | $83,044 | $83,044 | | Accumulated amortization | $(65,913) | $(65,134) | | Intangible assets, net | $17,131 | $17,910 | Note 9. Commitments and Contingencies Two Networks Merger litigations settled: $85,000 thousand paid to the company, $48,500 thousand to plaintiffs - As of June 30, 2023, the company had $3,134,884 thousand in contract obligations, mainly from media rights agreements, with no material changes during the quarter[70][71] - The MSG Entertainment Litigation, alleging fiduciary breaches, was settled for $85,000 thousand paid to the company, fully funded by insurers, resulting in a $62,647 thousand realized gain[75][76] - The MSG Networks Litigation, also alleging fiduciary breaches, was settled for $48,500 thousand to the plaintiffs, with $28,000 thousand paid and $20,500 thousand accrued as of September 30, 2023, and an ongoing dispute with insurers[78][79] Note 10. Credit Facilities Total debt was $1,207,250 thousand; MSG Networks' term loan requires refinancing by October 2024, LV Sphere Term Loan matures December 2027 Outstanding Debt Balances (in thousands) | Facility | September 30, 2023 | June 30, 2023 | | :------------------------------------ | :------------------- | :---------------- | | MSG Networks Term Loan (Current Portion) | $103,125 | $82,500 | | MSG Networks Term Loan (Non-Current Portion, net of deferred financing costs) | $827,940 | $848,267 | | LV Sphere Term Loan Facility (Non-Current Portion, net of deferred financing costs) | $270,395 | $270,120 | | Total Long-term debt (carrying value) | $1,207,250 | $1,207,250 | - The MSG Networks Term Loan Facility amortizes quarterly and matures on October 11, 2024, requiring refinancing of the remaining $829,125 thousand as operating cash flows will be insufficient[84][45][196] - The LV Sphere Term Loan Facility, a $275,000 thousand senior secured term loan, matures on December 22, 2027, with no amortization payments prior to maturity and includes financial covenants[88][90][91] - The company drew down the full $65,000 thousand Delayed Draw Term Loan Facility on July 14, 2023, and repaid it on August 9, 2023, using MSG Entertainment Class A common stock[95][96] Note 11. Pension Plans and Other Postretirement Benefit Plan Net periodic benefit costs for pension plans and postretirement plans decreased, with a $500 thousand contribution to the Networks 1212 Plan Net Periodic Benefit Cost (in thousands) | Item | Pension Plans (Sep 30, 2023) | Pension Plans (Sep 30, 2022) | Postretirement Plan (Sep 30, 2023) | Postretirement Plan (Sep 30, 2022) | | :------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------------- | :--------------------------------- | | Service cost | $61 | $123 | $5 | $15 | | Interest cost | $439 | $1,189 | $17 | $19 | | Expected return on plan assets | $(213) | $(1,719) | $0 | $0 | | Recognized actuarial loss (gain) | $(224) | $501 | $(17) | $9 | | Net periodic benefit cost | $63 | $94 | $5 | $43 | - The company contributed $500 thousand to the Networks 1212 Plan, a qualified defined benefit pension plan, during the three months ended September 30, 2023[103] Total Savings Plan Expenses (in thousands) | Period | Continuing Operations | Discontinued Operations | Total | | :------------------------------------ | :-------------------- | :---------------------- | :------ | | Three months ended September 30, 2023 | $1,210 | $0 | $1,210 | | Three months ended September 30, 2022 | $1,387 | $1,178 | $2,565 | Note 12. Share-based Compensation Share-based compensation expense decreased to $4,883 thousand, with $55,963 thousand of unrecognized cost remaining for unvested awards Share-based Compensation Expense (in thousands) | Period | Share-based Compensation Expense | | :------------------------------------ | :------------------------------- | | Three months ended September 30, 2023 | $4,883 | | Three months ended September 30, 2022 | $11,490 | - As of September 30, 2023, there was $55,963 thousand of unrecognized compensation cost related to unvested RSUs and PSUs, expected to be recognized over approximately 2.47 years[109] Award Activity (Units) | Award Type | Granted (Sep 30, 2023) | Vested (Sep 30, 2023) | Granted (Sep 30, 2022) | Vested (Sep 30, 2022) | | :------------------------------------ | :--------------------- | :-------------------- | :--------------------- | :-------------------- | | RSUs | 449 | 564 | 598 | 493 | | PSUs | 404 | 241 | 566 | 82 | Note 13. Stockholders' Equity The company has a re-authorized share repurchase program for up to $350,000 thousand of Class A Common Stock, with no repurchases to date - The company has a re-authorized share repurchase program for up to $350,000 thousand of Class A Common Stock, but no shares have been repurchased to date[115][198] Accumulated Other Comprehensive Loss (in thousands) | Item | Balance as of June 30, 2023 | Other Comprehensive Loss, total | Balance as of Sep 30, 2023 | | :------------------------------------ | :-------------------------- | :------------------------------ | :-------------------------- | | Pension Plans and Postretirement Plan | $(5,138) | $(178) | $(5,316) | | Cumulative Translation Adjustments | $200 | $(5,867) | $(5,667) | | Total Accumulated Other Comprehensive Loss | $(4,938) | $(6,045) | $(10,983) | Note 14. Related Party Transactions Dolan Family Group controls 72.1% voting power; company engages in significant related party transactions for services and media rights - The Dolan Family Group beneficially owned 100% of Class B Common Stock and approximately 5.6% of Class A Common Stock, collectively representing about 72.1% of the company's aggregate voting power as of September 30, 2023[118] Related Party Revenues and Operating Expenses (in thousands) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | | :------------------------------------ | :------------------------------ | :------------------------------ | | Revenues | $390 | $0 | | Media rights fees (Operating expenses) | $44,185 | $42,767 | | Corporate general and administrative expenses, net - MSG Entertainment Transition Services Agreement (Operating expenses) | $30,337 | $0 | | Total operating expenses, net | $76,323 | $34,471 | - Revenues from related parties primarily stem from advertising agreements between MSG Networks and MSG Sports[125] Note 15. Segment Information The company operates Sphere and MSG Networks segments, evaluating performance using adjusted operating income (loss) (AOI) - The company evaluates segment performance primarily using adjusted operating income (loss) (AOI), a non-GAAP measure that excludes items like depreciation, share-based compensation, and restructuring charges[127][128] Segment Operating Performance (Three Months Ended September 30, 2023, in thousands) | Item | Sphere | MSG Networks | Total | | :------------------------------------ | :------- | :----------- | :------- | | Revenues | $7,779 | $110,228 | $118,007 | | Operating (loss) income | $(98,447) | $28,658 | $(69,789) | | Adjusted operating (loss) income | $(83,066) | $25,185 | $(57,881) | | Capital expenditures | $183,163 | $1,408 | $184,571 | Segment Operating Performance (Three Months Ended September 30, 2022, in thousands) | Item | Sphere | MSG Networks | Total | | :------------------------------------ | :------- | :----------- | :------- | | Revenues | $650 | $122,479 | $123,129 | | Operating (loss) income | $(79,056) | $28,001 | $(51,055) | | Adjusted operating (loss) income | $(64,083) | $33,268 | $(30,815) | | Capital expenditures | $260,239 | $1,227 | $261,466 | Note 16. Additional Financial Information Cash, cash equivalents, and restricted cash totaled $451,742 thousand; other income (expense), net, was positive due to a litigation settlement Cash, Cash Equivalents and Restricted Cash (in thousands) | Item | September 30, 2023 | June 30, 2023 | | :------------------------------------ | :------------------- | :---------------- | | Cash and cash equivalents | $433,507 | $131,965 | | Restricted cash | $18,235 | $297,149 | | Total cash, cash equivalents and restricted cash | $451,742 | $429,114 | Prepaid Expenses and Other Current Assets (in thousands) | Item | September 30, 2023 | June 30, 2023 | | :------------------------------------ | :------------------- | :---------------- | | Prepaid expenses | $18,812 | $22,616 | | Note and other receivables | $28,441 | $21,453 | | Inventory | $2,388 | $0 | | Current deferred production costs | $11,624 | $6,524 | | Other | $4,990 | $5,492 | | Total prepaid expenses and other current assets | $66,255 | $56,085 | Other Income (Expense), net (in thousands) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | | :------------------------------------ | :------------------------------ | :------------------------------ | | Gain on litigation settlement | $62,647 | $0 | | Realized loss on equity method investments | $(19,027) | $(2,247) | | Other | $(1,424) | $1,832 | | Total other income (expense), net | $42,196 | $(415) | Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Sphere Entertainment Co.'s financial condition and operating results, covering segment performance, liquidity, and dispositions Introduction This introduction outlines the MD&A's purpose, supplementing financial statements and including forward-looking statements on future performance - The MD&A contains forward-looking statements concerning future operating and financial performance, including plans to refinance MSG Networks' debt and the success of Sphere[140] - Investors are cautioned that forward-looking statements are not guarantees of future performance and involve risks and uncertainties, with actual results potentially differing materially[140][143] Business Overview Sphere Entertainment Co. operates Sphere, a new entertainment medium, and MSG Networks, providing regional sports and entertainment programming - Sphere Entertainment Co. is a live entertainment and media company with two segments: Sphere (next-generation entertainment medium, first venue in Las Vegas opened September 2023) and MSG Networks (regional sports and entertainment networks, including MSG+ streaming)[146][147] - The Sphere segment hosts original immersive productions, concerts, residencies, and sporting/corporate events, supported by Sphere Studios for in-house creative and production services[147] - MSG Networks broadcasts live local games for NBA (Knicks) and NHL (Rangers, Islanders, Devils, Sabres) teams, along with NFL coverage, serving the New York designated market area and surrounding regions[147] MSG Entertainment Distribution The company distributed approximately 67% of MSG Entertainment's common stock and no longer holds any shares as of September 30, 2023 - On April 20, 2023, the company distributed approximately 67% of MSG Entertainment's common stock to its stockholders, retaining about 33% (MSGE Retained Interest)[151] - As of September 30, 2023, the company no longer holds any outstanding common stock of MSG Entertainment, following sales and debt repayment[152] - The MSG Entertainment business has been classified as a discontinued operation since April 20, 2023[152] Tao Group Hospitality Disposition The company completed the sale of its 66.9% majority interest in Tao Group Hospitality, which is now classified as a discontinued operation - The company completed the sale of its 66.9% majority interest in Tao Group Hospitality on May 3, 2023[153] - The Tao Group Hospitality segment has been classified as a discontinued operation since March 31, 2023[154] Factors Affecting Operating Results Operating results depend on Sphere's audience attraction and MSG Networks' affiliation agreements, subscriber numbers, and advertising rates - Sphere segment's operating results are dependent on attracting audiences to The Sphere Experience, and advertisers, marketing partners, guests, and artists to events[155] - MSG Networks' operating results rely on affiliation agreements with Distributors, subscriber numbers, success of its direct-to-consumer product, and advertising rates, influenced by professional sports teams' popularity[155] - General economic conditions, competition, and investments in new immersive productions are key factors affecting the company's future performance[156][157] Condensed Consolidated Results of Operations Net income reached $66,425 thousand, a significant improvement from a prior-year loss, driven by tax benefits and a litigation settlement Consolidated Results of Operations (in thousands) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Change (Amount) | Change (Percentage) | | :------------------------------------ | :------------------------------ | :------------------------------ | :---------------- | :------------------ | | Revenues | $118,007 | $123,129 | $(5,122) | (4)% | | Operating loss | $(69,789) | $(51,055) | $(18,734) | 37 % | | Other income (expense), net | $42,196 | $(415) | $42,611 | NM | | Income tax benefit | $90,287 | $1,834 | $88,453 | NM | | Net income (loss) | $66,425 | $(44,043) | $110,468 | NM | - Depreciation and amortization increased by $8,126 thousand (132%) primarily due to Sphere in Las Vegas assets being placed in service[161] - Other income (expense), net, increased by $42,611 thousand, mainly due to a $62,647 thousand realized gain from the Networks Merger litigation settlement, partially offset by a $19,027 thousand realized loss from the sale of MSGE Retained Interest[165] - Income tax benefit of $90,287 thousand reflects an effective tax rate of 389%, primarily due to a $64,401 thousand benefit from a state rate change and a $15,655 thousand benefit from the nontaxable gain on DDTL Facility repayment[167] Business Segment Results This section details operating results for Sphere and MSG Networks segments, highlighting revenue changes and operating income/loss Sphere Segment Sphere segment revenues increased significantly to $7,779 thousand, but operating loss also increased due to venue opening and content expenses Sphere Segment Operating Performance (in thousands) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Change (Amount) | Change (Percentage) | | :------------------------------------ | :------------------------------ | :------------------------------ | :---------------- | :------------------ | | Revenues | $7,779 | $650 | $7,129 | NM | | Direct operating expenses | $(7,805) | $0 | $(7,805) | NM | | Selling, general, and administrative expenses | $(84,150) | $(77,191) | $(6,959) | 9 % | | Depreciation and amortization | $(12,377) | $(4,515) | $(7,862) | 174 % | | Operating loss | $(98,447) | $(79,056) | $(19,391) | (25)% | | Adjusted operating loss | $(83,066) | $(64,083) | $(18,983) | (30)% | - The increase in Sphere's revenues was primarily due to $4,059 thousand from concerts and $2,560 thousand from sponsorship, signage, and Exosphere advertising, reflecting the opening of Sphere in Las Vegas on September 29, 2023[173][174] - Direct operating expenses increased by $7,805 thousand, driven by venue operating expenses, event-related direct operating expenses (concerts), and advertising expenses for "The Sphere Experience"[177][178][179] MSG Networks Segment MSG Networks' revenues decreased by $12,251 thousand due to subscriber decline, but operating income increased from reduced SG&A expenses MSG Networks Segment Operating Performance (in thousands) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Change (Amount) | Change (Percentage) | | :------------------------------------ | :------------------------------ | :------------------------------ | :---------------- | :------------------ | | Revenues | $110,228 | $122,479 | $(12,251) | (10)% | | Direct operating expenses | $(76,694) | $(75,420) | $(1,274) | 2 % | | Selling, general, and administrative expenses | $(2,994) | $(17,440) | $14,446 | (83)% | | Operating income | $28,658 | $28,001 | $657 | 2 % | | Adjusted operating income | $25,185 | $33,268 | $(8,083) | (24)% | - Affiliation fee revenue decreased by $11,746 thousand, primarily due to an approximate 11.5% decrease in subscribers, partially offset by higher affiliation rates[188] - Selling, general, and administrative expenses decreased by $14,446 thousand, mainly due to lower professional fees ($8,050 thousand, including litigation-related insurance recoveries) and reduced employee compensation and benefits ($3,739 thousand)[190] Liquidity and Capital Resources Unrestricted cash increased to $433,507 thousand; liquidity depends on Sphere's cash flow and refinancing MSG Networks' $829,125 thousand debt Cash and Debt Balances (in thousands) | Item | September 30, 2023 | June 30, 2023 | | :------------------------------------ | :------------------- | :---------------- | | Unrestricted cash and cash equivalents | $433,507 | $131,965 | | Restricted cash | $18,235 | $297,149 | | Total debt outstanding | $1,207,250 | $1,207,250 | - The company's liquidity is dependent on Sphere in Las Vegas generating significant positive cash flow in Fiscal Year 2024 and the successful refinancing of MSG Networks Credit Facilities, as MSG Networks will be unable to generate sufficient operating cash flows to settle its $829,125 thousand outstanding borrowings maturing within one year[195][196] Cash Flow Activities (in thousands) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Change | | :------------------------------------ | :------------------------------ | :------------------------------ | :---------------- | | Net cash used in operating activities | $(94,641) | $(81,183) | $(13,458) | | Net cash provided by (used in) investing activities | $66,498 | $(285,218) | $351,716 | | Net cash provided by (used in) financing activities | $50,854 | $(20,023) | $70,877 | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $22,628 | $(387,117) | +$409,745 (NM) | Seasonality of Our Business MSG Networks' revenues are seasonal, with higher proportions in the second and third fiscal quarters due to live NBA and NHL programming - MSG Networks segment earns a higher share of its annual revenues in the second and third fiscal quarters[215] - This seasonality is attributed to MSG Networks' advertising revenue being largely derived from the sale of inventory in live NBA and NHL professional sports programming[215] Recently Issued Accounting Pronouncements and Critical Accounting Estimates No material changes to critical accounting policies, and no goodwill impairment was identified during the annual test for Fiscal Year 2024 - No material changes to critical accounting policies, other than those noted in Item 1[217] - The annual impairment test for goodwill was performed during the first quarter of Fiscal Year 2024, and no impairment was identified for the Sphere or MSG Networks reporting units[218][219] Goodwill Balance by Reporting Unit (in thousands) | Reporting Unit | September 30, 2023 | | :------------------------------------ | :------------------- | | Sphere | $32,299 | | MSG Networks | $424,508 | | Total Goodwill | $456,807 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk (200 bps increase: $24,145 thousand annual interest) and foreign currency risk from London Sphere development - A hypothetical 200 basis point increase in floating interest rates would increase the company's annual interest payments on outstanding credit facilities by $24,145 thousand[224] - The company is exposed to foreign currency exchange rate risk, primarily with the British pound sterling, due to its investment in land for future Sphere development in London[225] - A hypothetical 9.42% fluctuation in the GBP/USD exchange rate would result in a change of approximately $19,700 thousand in the company's net asset value[225] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of September 30, 2023, with no material changes in internal control over financial reporting - The company's disclosure controls and procedures were evaluated and concluded to be effective as of September 30, 2023[226] - There were no material changes in the company's internal control over financial reporting during the fiscal quarter ended September 30, 2023[227] PART II. OTHER INFORMATION This section provides additional information, including legal proceedings, equity security sales, and a list of exhibits Item 1. Legal Proceedings The company settled two Networks Merger litigations, with an $85 million payment to the company and a $48.5 million payment to plaintiffs - Fifteen complaints were filed in connection with the Networks Merger, with nine disclosure actions voluntarily dismissed[229][230] - The MSG Entertainment Litigation, alleging fiduciary breaches, was settled for $85 million paid to the company, fully funded by insurers, and approved on August 14, 2023[232][233] - The MSG Networks Litigation, also alleging fiduciary breaches, was settled for $48.5 million to the plaintiffs, with $28 million paid and $20.5 million accrued as of September 30, 2023, and an ongoing dispute with insurers[234][235] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities The company has a re-authorized share repurchase program for up to $350 million of Class A Common Stock, but no shares have been repurchased - The company has a re-authorized share repurchase program for up to $350 million of its Class A Common Stock[238] - No shares have been repurchased under the share repurchase program to date[238] Item 6. Exhibits This section lists exhibits filed as part of the Form 10-Q, including agreements, certifications, and iXBRL financial statements - The exhibits include Form of Sphere Entertainment Co. Off-Cycle Performance Stock Option Agreement, Separation Agreement, and certifications by the Principal Executive Officer and Principal Financial Officer[241] - Financial statements are provided in Inline Extensible Business Reporting Language (iXBRL) format[241]