Sphere Entertainment (US:SPHR)2023-08-22 20:50PART I Item 1. Business Sphere Entertainment Co. operates two segments, Sphere and MSG Networks, following significant corporate restructuring and asset dispositions - Sphere Entertainment Co. operates two reportable segments: Sphere (next-generation entertainment) and MSG Networks (regional sports and entertainment networks)14 - The Company completed the distribution of approximately 67% of MSG Entertainment's common stock on April 20, 2023, retaining approximately 17% after further sales and debt repayment1257 - The sale of its 66.9% majority interest in Tao Group Hospitality was completed on May 3, 202313 - The first Sphere venue in Las Vegas is expected to open in September 2023, featuring a 16K x 16K LED screen, Sphere Immersive Sound, and 4D multi-sensory technologies1523 - MSG Networks launched MSG+, a direct-to-consumer streaming product, in June 2023, offering authenticated access and single-game purchases for NBA and NHL teams3247 - The company holds a 30% interest in SACO Technologies Inc. (LED video lighting) and a 25% interest in Holoplot GmbH (3D audio technology), extending a €18.8 million convertible loan to Holoplot in January 20235556 - As of June 30, 2023, approximately 29% of the company's employees were represented by unions, with 10% subject to expired collective bargaining agreements and 67% expiring by June 30, 2024102 Item 1A. Risk Factors The company faces significant risks from new entertainment technologies, intense competition, substantial indebtedness, and controlled ownership - The success of the Sphere business is highly dependent on the popularity of 'The Sphere Experience' and the ability to attract advertisers, marketing partners, and artists, with no assurance of success for its cutting-edge technologies115118 - The estimated final construction costs for Sphere in Las Vegas are approximately $2.3 billion, net of $75 million from The Venetian, with actual costs paid through August 18, 2023, at approximately $2.25 billion119 - MSG Networks' business is vulnerable to declining subscriber numbers, non-renewal of affiliation agreements (e.g., Comcast non-renewal reduced subscribers by ~10%), and competition from new direct-to-consumer streaming platforms129137 - The company has substantial indebtedness, totaling $1.1 billion as of June 30, 2023, with $82.5 million maturing in Fiscal Year 2024, and faces risks in refinancing the MSG Networks Credit Facilities by October 2024190192 - The Dolan family controls approximately 72.3% of the total voting power of the company's common stock, enabling them to prevent or cause a change in control and influence corporate actions224225 Item 1B. Unresolved Staff Comments The company has no unresolved staff comments to report - No unresolved staff comments236 Item 2. Properties The company's properties include leased offices and studios in New York City, a Las Vegas Sphere venue lease, and owned land in London for future development - The company leases approximately 64,000 square feet for MSG Networks' administrative offices and 18,000 square feet of studio space in New York City237 - Approximately 810,000 square feet are leased in Las Vegas, Nevada, for the Sphere venue, and 205,000 square feet are owned in Stratford, London, for a future Sphere venue238 - Leased office space (67,000 sq ft) and content creation/testing facilities (153,000 sq ft) are located in Burbank, California238 Item 3. Legal Proceedings Fifteen Networks Merger complaints were consolidated into two litigations, both settled and approved by the Court in August 2023 - Fifteen complaints related to the Networks Merger were filed, consolidated into two litigations: In re Madison Square Garden Entertainment Corp. Stockholders Litigation and In re MSG Networks Inc. Stockholder Class Action Litigation240242243245 - The MSG Entertainment Litigation was settled for $85 million, to be fully funded by the other defendants' insurers, and was approved by the Court on August 14, 2023244 - The MSG Networks Litigation was settled for $48.5 million, recorded as a liability, with MSG Networks disputing insurance coverage; the settlement was approved on August 14, 2023247 Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable249 PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Class A Common Stock (SPHR) is NYSE-listed, with no dividends paid in FY2023, and a re-authorized $350 million share repurchase program remains unused - Class A Common Stock (SPHR) is listed on the New York Stock Exchange; Class B Common Stock is not publicly traded3252257 - As of June 30, 2023, there were 687 holders of record for Class A Common Stock and 15 for Class B Common Stock257 - No dividends were paid on common stock during Fiscal Year 2023, and there are no current plans for future cash dividends257 - A share repurchase program for up to $350 million of Class A Common Stock was re-authorized on March 29, 2023, with no shares repurchased to date258 Stock Performance Comparison (April 20, 2020 - June 30, 2023) | Index | 4/20/20 | 6/30/20 | 6/30/21 | 6/30/22 | 6/30/23 | | :----------------------------- | :------ | :------ | :------ | :------ | :------ | | Sphere Entertainment Co. | $100.00 | $114.80 | $128.53 | $80.54 | $90.81 | | Russell 2000 Index | 100.00 | 119.13 | 193.03 | 144.39 | 162.16 | | Russell 3000 Index | 100.00 | 111.76 | 161.11 | 138.77 | 165.07 | | Bloomberg Americas Entertainment Index | 100.00 | 123.07 | 283.23 | 149.70 | 177.25 | Item 6. [Reserved] This item is reserved and contains no information - This item is reserved260 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Sphere Entertainment Co.'s financial condition and results for FY2023-2021, covering segment performance, liquidity, and the impact of recent corporate restructuring - The MSGE Distribution (April 20, 2023) and Tao Group Hospitality Disposition (May 3, 2023) are classified as discontinued operations, significantly impacting comparability of financial results269271294 - The Sphere segment is in its pre-opening phase and has not yet generated material revenue, while MSG Networks' revenue primarily comes from affiliation fees and advertising279281 Consolidated Results of Operations (FY2023 vs FY2022) | Metric | FY2023 (in thousands) | FY2022 (in thousands) | Change (Amount) | Change (%) | | :------------------------------------------ | :-------------------- | :-------------------- | :-------------- | :--------- | | Revenues | $573,831 | $610,055 | $(36,224) | (6)% | | Direct operating expenses | $(342,211) | $(320,278) | $(21,933) | 7% | | Selling, general and administrative expenses| $(452,142) | $(419,793) | $(32,349) | 8% | | Depreciation and amortization | $(30,716) | $(22,562) | $(8,154) | 36% | | Restructuring charges | $(27,924) | $(13,404) | $(14,520) | 108% | | Operating loss | $(273,042) | $(165,737) | $(107,305) | 65% | | Other income (expense), net | $536,887 | $(5,518) | $542,405 | NM | | Net income (loss) | $505,680 | $(190,147) | $695,827 | NM | Adjusted Operating Loss (FY2023 vs FY2022) | Segment | FY2023 (in thousands) | FY2022 (in thousands) | Change (Amount) | Change (%) | | :-------------------------- | :-------------------- | :-------------------- | :-------------- | :--------- | | Sphere segment | $(292,409) | $(231,167) | $(61,242) | 26% | | MSG Networks segment | $169,889 | $206,699 | $(36,810) | (18)% | | Consolidated Adjusted Operating Loss | $(122,520) | $(24,468) | $(98,052) | NM | - Net cash provided by operating activities increased by $12.3 million to $153.6 million in FY2023, while net cash used in investing activities decreased by $150.2 million to $653.9 million, primarily due to proceeds from dispositions and investment sales395397 - The company's total debt outstanding as of June 30, 2023, was $1.2 billion, with $82.5 million maturing in FY2024. The MSG Networks Credit Facilities mature in October 2024, and refinancing is expected371374680 Contractual Obligations as of June 30, 2023 (in thousands) | Obligation Type | Total | Year 1 | Years 2-3 | Years 4-5 | More Than 5 Years | | :---------------- | :---------- | :---------- | :---------- | :---------- | :---------------- | | Leases | $184,711 | $10,489 | $31,831 | $22,952 | $119,439 | | Debt repayments | $1,207,250 | $82,500 | $849,750 | $275,000 | — | | Total | $1,391,961| $92,989 | $881,581| $297,952| $119,439 | Item 7A. Quantitative and Qualitative Disclosures about Market Risk The company faces market risks from interest rate fluctuations, foreign currency exchange rates, and actuarial assumptions for benefit plans - A hypothetical 200 basis point increase in floating interest rates would increase the company's annual interest expense by $24.1 million419 - The company is exposed to British pound sterling (GBP) fluctuations; a uniform hypothetical 10% fluctuation in the GBP/USD exchange rate would result in a $17.7 million change in net asset value420421 - A 25 basis point decrease in assumed discount rates for pension and postretirement plans would increase projected benefit obligations by $890,000 and $30,000, respectively424 Item 8. Financial Statements and Supplementary Data This section incorporates by reference the company's audited consolidated financial statements and supplementary data, which begin on page F-1 of the Annual Report on Form 10-K - The financial statements and supplementary data are located starting on page F-1 of this Annual Report on Form 10-K429 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure matters - No changes in and disagreements with accountants on accounting and financial disclosure430 Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of June 30, 2023, after remediating a prior material weakness - The company's disclosure controls and procedures were effective as of June 30, 2023431 - Management concluded that internal control over financial reporting was effective as of June 30, 2023, having remediated a material weakness identified in Fiscal Year 2022 related to capitalized interest costs206434 Item 9B. Other Information The company has no other information to disclose under this item - No other information to disclose436 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable437 PART III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive proxy statement for the 2023 annual meeting of stockholders - Information is incorporated by reference to the proxy statement for the 2023 annual meeting of stockholders439 Item 11. Executive Compensation Details on executive compensation are incorporated by reference from the company's definitive proxy statement for the 2023 annual meeting of stockholders - Information is incorporated by reference to the proxy statement for the 2023 annual meeting of stockholders440 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information concerning the beneficial ownership of common stock by certain owners and management, along with related stockholder matters, is incorporated by reference from the company's definitive proxy statement for the 2023 annual meeting of stockholders - Information is incorporated by reference to the proxy statement for the 2023 annual meeting of stockholders441 Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's definitive proxy statement for the 2023 annual meeting of stockholders - Information is incorporated by reference to the proxy statement for the 2023 annual meeting of stockholders442 Item 14. Principal Accountant Fees and Services Information detailing principal accountant fees and services is incorporated by reference from the company's definitive proxy statement for the 2023 annual meeting of stockholders - Information is incorporated by reference to the proxy statement for the 2023 annual meeting of stockholders443 PART IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the 10-K report, including various agreements and corporate documents - The section includes financial statements, Schedule II – Valuation and Qualifying Accounts, and separate financial statements of Madison Square Garden Entertainment Corp. and subsidiaries446 - Numerous exhibits are filed, including distribution agreements, contribution agreements, credit agreements, employment agreements, and equity compensation plans447448449450451452 Item 16. Form 10-K Summary The company has elected not to provide a summary of the Form 10-K information - The Company has elected not to provide summary information for Form 10-K453